Even as HSBC beat expectations with its first quarter results on Tuesday, one strategist says its Hong Kong-listed subsidiary Hang Seng Bank is a better bet for investors given its more attractive return on equity and lower cost base.
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The HSBC logo is displayed on the exterior of an HSBC bank branch March 2, 2009 in San Francisco, California. After taking a financial hit with sub-prime mortgage-backed securities, HSBC Holdings PLC reported that due to a 70 percent drop in 2008 net profits it plans to slash 6,100 jobs and close its consumer loan business in the U.S.
Louis Wong, Head of Research at Phillip Securities Hong Kong told CNBC Asia's "The Call," that Hang Seng Bank’s focus on the Greater China region had helped it give a return on equity (ROE) of 22.4 percent last year.
“In the last three years its ROE held very stable at above 22 percent," Wong said. In comparison HSBC's ROE stood at 10.9 percent for the fiscal year ended December 2011. For the first quarter annualized return on equity came in at 6.4 percent. HSBC wants to lift ROE above 12 percent by the end of 2013.
HSBC said its underlying pofit in the first quarter was $6.8 billion, up 25 percent year on year and more than the $5.8 billion expected by analysts, thanks to a rebound in investment banking and a fall in U.S. bad debts.
The bank said it had made "good progress" on all areas of strategy, including cost savings, as part of Chief Executive Stuart Gulliver's plan to boost profitability by cutting costs. The bank's underlying cost efficiency ratio improved from 58.7 percent a year ago to 55.5 percent in the first quarter of this year.
But according to Wong, Hang Seng Bank has done a better job at keeping costs under control.
"The cost-to-income ratio (of Hang Seng Bank) is an enviable 35 percent, while most other banks are reporting more than 50 percent cost-to-income ratio," he said.
Wong is optimistic on the overall financial sector saying he expects a recovery for financial stocks this year.
"They were heavily sold down last year. So of course there are headwinds that financials are facing at the moment, but it's more like a risk-on, risk-off scenario, and financials are still undervalued," he said.