Which Geographically-Diversified Banking Giant Is Better: Citigroup or HSBC?

Citigroup (NYSE:C) is a leading global financial services holding company which does business in over 160 countries. On the other hand, HSBC (NYSE:HSBC) is one of the largest banking and financial services organizations in the world with presence in 71 countries. Both banking giants provide a wide array of financial products and services ranging from retail banking, credit cards, corporate and investment banking, custody banking and wealth management. Their business model business model faces stiff challenges and competition from offerings by their global competitors like JPMorgan, Bank of America, Barclays, Goldman Sachs and Morgan Stanley among others.

Trefis has compared trends in key operating metrics for Citigroup vs HSBC over the last 4 years along with our forecast for 2019. Notably, while Global Consumer Banking has contributed more than 45% of Citigroup revenues over the last 3 years, its revenue streams are much more diversified compared to HSBC, which is heavily dependent on core banking (retail and commercial banking) operations. Core banking activities have contributed more than 64% of HSBC’s total revenues over the last three years. Trefis estimates Citigroup’s valuation to be $82 per share (15% more than the current market price) after incorporating changes based on latest Citigroup’s earnings. Additionally, you can see more Trefis data for financial companies here.

Citigroup is heavily dependent on its operations in North America, whereas HSBC is more reliant on Asia & EMEA (Europe, Middle East & Africa)

• Citigroup total revenues dropped by 8.5% in 2016 due to the bank’s divestment of its non-core Citi Holdings operations, but it grew at an average annual rate of 2.1% over the next two years to reach $72.9 billion in 2018. Further, it is expected to increase by 1.5% and cross $73.9 billion by the end of 2019.
• HSBC’s revenues dropped by 19.8% in 2016 as the bank reduced its geographical footprint to focus on high-growth regions, before improving at an average annual rate of 5.9% over the next two years to reach $53.8 billion in 2018. We expect it to report a growth of 8.8% in 2019.
• HSBC’s revenues grew at a faster pace than Citigroup due to increased focus on retail banking operations and expansion in emerging markets.
• However, Citigroup’s total revenues are much higher (roughly 35% more) than HSBC
• North America region is the highest revenue contributor for Citigroup with more than 46% revenue share over the last three years – followed by Asia with around 20% share.
• HSBC earns a bulk of its profits from its operations in Asia – more than 50% over the last three years.

HSBC reported the highest growth rate from Asia over the last three years, as compared to other regions. Similarly, EMEA topped the growth chart for Citigroup over the same period.

Average annual growth rate for both the banks (2016-2018):

                                Citigroup         HSBC

Asia                               3.2%                4.8%

EMEA                           6.4%               -3.9%

North America            1.3%                -4.2%

Latin America             2.3%                -14.7%

HSBC’s operating margin has been comfortably higher than Citigroup’s over the last 2 years

• Citigroup has maintained a healthy operating margin of more than 30% over the last 4 years. The same is true for HSBC (baring 2016).
• Although operating margins for both banks have increased over the last three years, HSBC has grown at a faster pace than Citigroup. We expect HSBC to improve its margins further to 38.2% in 2019, while Citigroup would remain around the current figure of 32.2%.
• This implies that HSBC’s operations are more efficient than Citigroup’s.

Per Employee Metrics

• HSBC has a wider branch banking presence across the globe, which is the main reason behind its higher employee count. It reported 235K employees in 2018 which was 15% higher than Citigroup’s figure.
• As Citigroup has higher revenues and lower employee count as compared to HSBC. Its revenue per employee figure of $357K in 2018 was 56% higher than its competitor.
• Compensation per employee figure for HSBC is on downward trajectory from the last three years, whereas Citigroup higher compensation per employee figure is also trending higher.
• Citigroup has higher compensation cost as compared to HSBC. It reported per employee compensation of $103.7K in 2018, which was 40% higher than the figure for HSBC.

Additionally, the comparison of metrics like net income margin, asset turnover ratio and return on assets for Citigroup vs HSBC  is available in our detailed interactive dashboard.

Conclusion

• Although Citigroup has a much diversified geographical presence, its revenues are highly dependent on North America region. On the other hand, HSBC’s revenues are not overtly dependent on any single region.
• HSBC shrunk its presence in North America & Latin America regions in the wake of the economic downturn, but it can potentially explore the option of refocusing its efforts on these key markets in the near future.
• HSBC has a better operating margin than Citigroup. Hence, its operations are more efficient.
• However, Citigroup is more efficient in using its assets and has better Return on Assets (RoA) figure.

Per Trefis, Citigroup’s Revenues (shows key revenue components) are expected to cross $73.9 billion in 2019 – leading to an EPS of $7.48 for the year. This EPS figure coupled with a P/E multiple of 10.9x, works out to a price estimate of $81.75 for Citigroup’s stock (shows cash and valuation analysis), which is 15% higher than the current market price.

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