Sometimes, companies can become too big fortheirown good and HSBC(LSE: HSBA) is a prime example. Indeed, I believe the worlds second largest bankis 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 HSBCs management is still on a journey to simplify the firm.
Whats more, the mounting pile of legal issues facing HSBC everything from money-laundering to tax evasion andUK customer redress implies that even the banks management is having trouble keeping an eye on whats going on at the group.
And for investors, this should serve as a warning. If HSBCs own management is having trouble keeping an eye on the groups activities around the world, what chance do shareholders have?
A simple business
In contrast to HSBC,Lloyds(LSE: LLOY) is a simple business. The banks operations are confined to less than 10countries around the world, and Lloyds balance sheet is less than half the size of HSBCs, reducing the banks 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 separatethem from investment banking activities.
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 HSBCs 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 forecastsare 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.
Finally, theres 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 timeand 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.
Nevertheless,before you make any trading decisionI strongly recommend that you do some additional research of your own — you may come to a different conclusion.
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