Why You Should Buy Lloyds Banking Group PLC And Sell HSBC Holdings plc

Here’s why Lloyds Banking Group PLC (LON: LLOY) is a better investment than HSBC Holdings plc (LON: HSBA).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

LloydsLloyds (LSE: LLOY) (NYSE: LYG.US) and HSBC (LSE: HSBA) (NYSE: HSBC.US) are two very different beasts. After working hard to recover from mistakes made during the financial crisis, Lloyds is now rapidly returning to health after selling off non-core assets and streamlining operations.

Meanwhile, HSBC remains a sprawling giant of the banking world, with an international network of more than 6,200 offices in 74 countries. However, HSBC’s size and operating structure could be its Achilles heel as regulators become increasingly sceptical of big banks and levy hefty fines on the sector.

Back to basics

Lloyds’ restructuring has seen the bank go back to basics, simplifying to the old, unofficial 3-6-3 banking business model. Simply put, this rule describes how bankers would give 3% interest on depositors’ accounts, lend the depositors money at 6% interest and then be playing golf at 3pm – a straightforward way of doing business. 

Should you invest £1,000 in Afc Energy right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Afc Energy made the list?

See the 6 stocks

A part of this return to basics, Lloyds has now exited, or announced the exit from over 20 countries so far, agreed to sell its asset management business, Scottish Widows to Aberdeen Asset Management and sold its stake in Sainsbury’s Bank. The group is on track to reduce its portfolio of businesses by approximately £10bn during 2014.

All in all, simplification means that Lloyds is now easier to understand and there are fewer things that can go wrong for the bank. Additionally, management has reduced the bank’s risk. Risk weighted assets fell to £263.9bn at the end of 2013, down from £310.3bn reported during 2012. Over the same period, total credit risk exposure also fell to £724.9bn at the end of 2013, down from £759bn. Lloyd should report a further reduction in risky assets this year. 

Bigger is not always better

On the other hand, HSBC is an extremely complicated company to understand.  For example, while management has been trying to sell non-core assets and simplify the business, HSBC still has approximately $2trn of assets on its balance sheet — an astronomical sum. 

Further, HSBC is suffering from an increasing regulatory burden as regulators around the world try and make an example of banks for mistakes made in the past. HSBC is now spending hundreds of millions every year trying to ensure that it complies with complex regulations. Unfortunately, this regulatory burden is putting a strain on HSBC’s operations and impacting profitability. 

Indeed, the bank now spends $750m to$800m a year on its compliance and risk programme, an increase of $150m to$200m from last year. Costs are expected to increase by a similar amount again next year and of course, these costs exclude one-off charges as a result of fines.

All in all, rising compliance costs pushed HSBC’s operating expenses up by a total of 4% to $18.2bn during the first half of this year. As a result, the bank’s cost efficiency ratio ticked up to 58.6% from 55.3%, above management’s targeted mid-50s level.

Should you invest £1,000 in Afc Energy right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Afc Energy made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

£10,000 invested in a FTSE 100 index fund in 2019 is now worth…

Charlie Carman analyses the FTSE 100's recent performance and reveals a higher-risk growth stock from the index for investors to…

Read more »

Investing Articles

The ITV share price is down 27% in 5 years. Can it recover?

ITV doubled its earnings per share last year. But the ITV share price is still well below where it stood…

Read more »

US Stock

This S&P 500 darling is down 25% in the past month! Here’s what’s going on

Jon Smith explains why a hot S&P 500 stock has dropped in the past few weeks -- and why his…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

The Greggs share price is too tasty for me to ignore!

Christopher Ruane has been nibbling a treat at what he hopes is a bargain price. Is the Greggs share price as…

Read more »

Investing Articles

How high can the Rolls-Royce share price go in 2025? Here’s what the experts say

The Rolls-Royce share price has smashed through even the most ambitious predictions, so where does the City think it'll go…

Read more »

Investing Articles

The 2025 Stocks and Shares ISA countdown is on! It’s time to plan

It's that time of year again, to close out our 2024-25 Stocks and Shares ISA strategy and make plans for…

Read more »

Investing Articles

Here’s the 12-month price forecast for ITV shares!

ITV shares have leapt after news of a large profits bump in 2024. Can the FTSE 250 share build on…

Read more »

photo of Union Jack flags bunting in local street party
Growth Shares

Why the FTSE 250 isn’t matching the all-time highs of the FTSE 100

Jon Smith flags a key reason why the FTSE 250 hasn't performed that well over the past year, but notes…

Read more »