Should I Swap HSBC Holdings plc For Legal & General Group Plc?

You might expect HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) and Legal & General Group (LSE: LGEN) to deliver fairly similar shareholder returns: a decent yield, steady earnings growth, but nothing too spectacular.

You’d be wrong.

Over the last five years, shareholder returns from Legal & General shares have hammered those of HSBC:

Of course, much of this is due to the impact of the financial crisis, and the bad debts and increased regulatory demands banks have had to deal with since then. Before the financial crisis, the returns from these two businesses were more similar.

However, this has made me wonder whether banks are worth owning at all, given high-quality financial alternatives such as Legal & General.

Results time

L&G published its full-year results for 2014 today, prompting a 3% fall in the firm’s share price.

However, there was nothing much to dislike in the numbers, which compare very well to HSBC’s recent full-year results:

Obviously part of the problem is that HSBC spent $3,012m on various legal settlements and compensation payouts in 2014, whereas L&G’s business manages to operate without incurring epic charges for misconduct, so is able to return more money to shareholders.

Is it too late to switch?

The question now is whether it’s too late to switch: will banks like HSBC soon have their day in the sun, while growth slows at L&G?

That’s definitely a possibility — and it could be the reason why L&G shares slipped lower today.

L&G depends on selling annuities for a large part of its income. Following the recent changes to the pension rules, which mean that individual retirees will no longer have to use their pension pots to buy an annuity, L&G has switched its focus to selling large-scale annuities to corporate pension schemes.

However, some analysts are warning that these sales are unlikely to be as profitable as individual annuities, because corporate annuity buyers will drive a much harder bargain than most individual annuity buyers.

There’s also the question of valuation: HSBC currently trades on just 10.6 times 2015 forecast profits, and offers a 5.9% prospective yield. That’s cheap, by any standards.

In contrast, L&G trades on 14.2 times 2015 forecast earnings and offers a 4.9% prospective yield. It may be that for investors in both firms, the best choice is to stay put: as an HSBC shareholder, that’s what I’m going to do.