HSBC (LSE: HSBA) (NYSE: HSBC.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US) are two very different banks. One is an international giant and the FTSE 100’s second largest constituent. The other is a smaller UK focused bank, still recovering from the financial crisis.
Of the two, the larger HSBC is the better investment. Here’s why.
Income
One of HSBC’s most attractive qualities is its dividend yield. Indeed, at present levels HSBC’s shares support a dividend yield of 4.8%. This payout is covered nearly twice by earnings per share.
Lloyds on the other hand does not offer a dividend payout. However, management has stated that they are looking to recommence dividend payouts during the second half of this year, after seeking approval from regulators.
Nevertheless, it is likely that Lloyds will have to wait for the results of European stress tests before regulators allow the bank to return cash to investors. The results of these tests are not expected to be released until October of this year.
Of course, the bank will only be able to instigate a payout if the stress test results contain no nasty surprises.
Capital issues
Then there is the issue of capital adequacy. For example, Lloyds reported a tier one capital ratio (financial cushion) of 10.7% at the end of March this year. However, HSBC reported a ratio of 13.6% for the same period.
While a capital ratio of anything over 8% is considered adequate, a larger capital cushion gives a bank more time to put things right, if things go wrong.
It is likely that the capital ratios of both HSBC and Lloyds will have risen over the past few months, as both banks continue to reduce their exposure to risky assets.
International exposure
A key part of Lloyds’ business plan is to reduce the bank’s international footprint. The bank is now operating within ten countries, exiting around 20 international markets during the past few years. Depending on your outlook for the UK economy, this is either a good thing or a bad thing.
Indeed, Lloyds’ new UK focused business model, means that the bank is highly exposed to the fortunes of the UK economy. Meanwhile, HSBC is still very much an international bank with assets around the world, which reduces its dependence upon any one market.
This international exposure has really helped HSBC during the past five or so years. Specifically, while Western economies have been struggling the return to health since the financial crisis, Asia has been powering forward. HSBC has been able to profit from this.
Foolish summary
So overall, HSBC looks more attractive than Lloyds as it supports a hefty, well covered dividend payout, is well capitalized and has international exposure.
What’s more, HSBC has the backing of famed fund manager Neil Woodford who’s recently been buying the bank’s shares for his new income fund.
