Why I’d Avoid HSBC Holdings Plc & Choose 60%+ Outperformer Virgin Money Holdings (UK) Plc

Why I’m picking Virgin Money Holdings (UK) Plc (LON: VM) to continue racing ahead of 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.

Banking giant HSBC (LSE: HSBA) may garner all the headlines, but shares of the Asian-focused lender have dramatically underperformed those of under-the-radar challenger bank Virgin Money (LSE: VM) since the latter went public. Since its IPO in late 2014, Virgin Money shares have increased by 27% while HSBC’s have fallen by 34%.

Like nearly all of the UK’s large banks, HSBC has struggled mightily since the Financial Crisis due to high costs and increasing regulatory requirements. Unfortunately, unlike Barclays or Lloyds that can rely on the strengthening domestic economy to keep the top line in rude health, HSBC is now facing down a potentially dramatic slowdown in its key Asian markets of China and Hong Kong.

This slowdown will be creating major headaches in the C-suite as a full 83% of 2015 pre-tax profits came from Asian operations. And, the bank’s return on equity falling to 7.2% from 7.3% the year before and 9.2% in 2013 underlines the need for dramatic restructuring in non-core divisions. The failed sale of Turkish operations and management backpedalling on a proposed company-wide pay freeze will do little to bring down out of control costs, though.

The good news for shareholders is that core capital buffers rose to 11.9% from 11.1% and the $5.2bn sale of struggling Brazilian operations was arranged. Furthermore, while earnings only cover the staggering 8.2% divided 1.27 times, earnings are expected to finally begin growing again in 2017.

However, I believe HSBC is still years away from finally rewarding shareholders with share price appreciation. February’s announcement of a company-wide hiring freeze and the targetting of more than $4.5bn in annual cost-cutting shows just how unfocused and cost-insensitive the bank became in the boom years of the Commodity Supercycle in emerging markets. Righting these past wrongs will take time, and for now I believe there are better places for investors to park their money.

Quiet challenger

Virgin Money may not be as sexy as HSBC, but the relatively boring domestic lender brings to the table high growth prospects, a history of good management and a steadily growing top and bottom line. Virgin bought the government’s remaining stake in failed lender Northern Rock in 2011 and set about quickly and substantially cutting costs while simultaneously expanding market share.

Since the Northern Rock purchase in 2011, revenue has increased 223% while pre-tax profits have exploded an incredible 487%. Looking ahead, the company has ample prospects to continue this trend. While RoE of 10.9% in 2015 is 50% better than HSBC’s, Virgin is targeting RoE in the mid teens by 2017.

Furthermore, with only 2.5% of the domestic credit card market and 3.4% of the mortgage market, Virgin has considerable room to grow its top line in the years to come. With shares trading at a relatively sedate 11.2 times forward earnings, the company doesn’t trade at a pricey valuation. Add in a 1.8% yielding dividend covered more than five times by earnings, which tells us there’s considerable room to grow this payment, and Virgin Money is looking to me like a much cheaper, safer, and higher potential investment than HSBC.

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.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »