Here’s Why I’d Dump HSBC Holdings plc And Buy Lloyds Banking Group PLC

Sometimes, companies can become too big for their own good… and HSBC (LSE: HSBA) is a prime example. Indeed, I believe the world’s second largest bank is on the verge of collapsing under its own weight. 

Even after a four-year drive — which has seen the bank shed 77 business, reduce its head count by 50,000 and slash operating costs — HSBC’s management is still “on a journey to simplify the firm”. 

What’s more, the mounting pile of legal issues facing HSBC — everything from money-laundering to tax evasion and UK customer redress — implies that even the bank’s management is having trouble keeping an eye on what’s going on at the group. 

And for investors, this should serve as a warning. If HSBC’s own management is having trouble keeping an eye on the group’s activities around the world, what chance do shareholders have? 

A simple business

In contrast to HSBC, Lloyds (LSE: LLOY) is a simple business. The bank’s operations are confined to less than 10 countries around the world, and Lloyds’ balance sheet is less than half the size of HSBC’s, reducing the bank’s exposure to risky credit assets. 

Furthermore, unlike HSBC — which has a complex and risky global investment bank — Lloyds’ investment banking arm is almost non-existent. In fact, Lloyds’ investment bank is so small that the group is seeking exemption from the Financial Services (Banking Reform) Act 2013. The Act calls for the ring fencing of retail and commercial banking operations to separate them from investment banking activities.

Rapid growth

Unfortunately, even though Lloyds’ UK focus has made the bank easier to understand, City analysts believe that Lloyds’ growth will lag that of HSBC over the next two years. 

Specifically, analysts believe that HSBC’s earnings per share are set to grow 19% during 2015 followed by growth of 5% during 2016. On the other hand, analysts believe that Lloyds’ earnings will remain relatively constant over the same period. 

Still, these forecasts are subject to change. As HSBC struggles with rising legal costs and an increasing bill for putting in place the strict cross-board controls that regulators now demand, the bank could disappoint. Meanwhile, Lloyds is slashing costs and switching to a UK focused low-cost digital model. This could help the bank surprise to the upside.

China

Finally, there’s also China to consider.

Indeed, HSBC is highly exposed to the Chinese credit market, through its Asian operations. Chinese credit conditions have been deteriorating for some time and some analysts have warned of an impending credit crisis in the region.

A Chinese credit crisis would cripple HSBC, although Lloyds would come off relatively unscathed.