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Better Buy: HSBC Holdings vs. Bank of China

Motley Fool Staff, The Motley Fool

HSBC Holdings plc (SEHK: 0005) and Bank of China Ltd (NASDAQOTH: BACHF) (NASDAQOTH: BACHY), two banks operating in the Greater China region and popular with local Hong Kong investors, are both listed on the Hong Kong Stock Exchange. The two are constituent stocks of the benchmark Hang Seng Index and both also possess very similar market capitalisations of over HK$1.2 trillion (US$154 billion). In this article, I'll take a look at various features of these banking giants to assess which is the better pick for investors.

Profitability

First off, there's profitability. In its most recent earnings release for Q1 2019, HSBC beat net profit estimates with an increase of nearly 40% year-on-year to US$4.1 billion. The company largely attributes this growth to its strong Asian operations, which is bolstered by its commitment to reduce expenses. In fact, the company announced that it has already successfully reduced operating expenses by 12% year-on-year.

On the other hand, Bank of China's Q1 earnings disappointed investors, missing estimates with a comparatively smaller rise of 4% in net profit to RMB 50.9 billion (US$7.4 billion). In addition to a gradually weaker Chinese economy and heightened US-China trade tensions, banks in China are dealing with rising bad loans. For Bank of China specifically, these bad loans have risen by RMB 6.1 billion, to the highest level since 2006, impacting its profitability.

Both companies saw a decrease of year-on-year net interest margin (NIM), a key performance indicator of bank profitability. HSBC saw a decrease to 1.59% for the quarter from 1.67% in Q1 2018, while Bank of China's NIM dropped to 1.82% from 1.90% in Q1 2018.

Despite the decrease in NIM, HSBC's pre-tax profit increase suggests that HSBC has taken measures to increase its profitability: it has strengthened its revenue strategy to become less dependent on interest-based sources, and doubled down on cost reduction.

Winner: HSBC

Growth outlook

HSBC has laid out plans to grow its presence globally. It announced that it will expand its retail operations by hiring more than 300 employees in a bid to grow in the US; it also announced growing its Asia retail staff by a similar number by the end of 2019. HSBC also plans to add more than 1,000 jobs this year to its technology development centres in China, further boosting its presence in the Asia-Pacific region.

As a state-owned bank, China's "Belt and Road" initiative to ensure the increased global footprint of Chinese businesses can prove to be a major push for Bank of China's growth. This can be seen from the opening of its first global fintech innovation lab in Singapore in 2018, which it has been running to lead its R&D activities and training of its pipeline. The bank also became the first Chinese lender to issue perpetual bonds early this year, signalling it's willing to take on risk for growth.

While Bank of China has exhibited signs of willingness to grow, HSBC has actually announced solid plans for expansion worldwide which has thereby instilled greater confidence in investors.

Winner: HSBC

Global ambitions

With China's dedication to the "Belt and Road" initiative, a Chinese state-owned bank like Bank of China can possess a positive outlook. However, HSBC comes out on top thus far in 2019, with already stronger profitability and its well thought-out plan for further international expansion.

A version of article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en

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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.