Beast of the East

Stanchart/HSBC: HSBC and Standard Chartered are battling to be Asia's favourite Western bank. Both weathered the financial crisis better than rivals in the developed world, and emerged with stronger balance sheets. In valuation terms, they are even - both trade at a multiple of 10 times estimated earnings for 2011. Despite the apparent tie, however, full-year results out this week suggest StanChart is in the lead.

Both banks trumpeted their exposure to fast-growing Asian markets, their main charm for investors. HSBC's exposure is bigger. It made five times the operating income of its rival, and has double StanChart's deposit base in emerging markets. HSBC's pre-tax profit in Hong Kong nearly matched what StanChart generated worldwide.

 

Yet size alone doesn't win a premium. Because it is smaller, StanChart may find it easier to maintain double-digit growth in operating income. Heft has other disadvantages: HSBC is stuck with some $250 billion of excess deposits it must reinvest - largely a result of its safe-haven image. A low-rate world has hammered its margins, even in racy emerging markets.

HSBC is pushing its China growth story, moving chief executive Mike Geoghegan to Hong Kong and pushing for a Shanghai listing. HSBC is ahead in the mainland, though not by as much as it might claim. Most of the $1.6 billion in pre-tax profit HSBC makes there comes from equity investments, such as its 20 percent stake in Bank of Communications. Strip that out, and StanChart's pre-tax profit in China, albeit flattered by private equity bets, was higher in 2009.

Moreover, the focus on China cannot hide HSBC's real centre of gravity, which is still in mature markets. Three quarters of HSBC's loan book lies in Europe and the United States. Bad debts in the United States actually picked up a bit in the fourth quarter of 2009.

The decider, though, may be StanChart's focus on India - where it makes more than twice as much pre-tax profit as its rival. HSBC cut back on its exposure to India during the crisis, while StanChart's loan book in the country has expanded by 15 percent since 2007. Regulators can have long memories. And while investors may not see it yet, that less-mentioned nation of a billion-plus consumers may yet give StanChart the edge.