For investors wanting to invest in a bank recovery situation with a reliable dividend income, there are only really two choices: Barclays (LSE: BARC) (NYSE: BCS.US) and Standard Chartered (LSE: STAN).
Both banks look cheap despite recent gains, but which offers the best opportunity to investors in today’s market?
I’ve put together a three-point checklist to help identify the most appealing buy.
1. Book value
When looking for value investing opportunities in banks, book value is very important — the goal is to buy the bank’s assets for less than their current market value. In other words, we’re looking for a price to book ratio of less than 1.
I’ve listed two values below — book value and the more conservative tangible book value, which ignores intangible assets such as brands:
|
Barclays |
Standard Chartered |
|
|
Price to book ratio |
0.77 |
0.78 |
|
Price to tangible book ratio |
0.91 |
0.90 |
There’s nothing to choose between these two banks in this department — both trade at almost identical discounts to book value.
2. Forecast earnings
What do current City consensus forecasts suggest about earnings per share and dividend payments for Barclays and Standard Chartered for 2015?
|
2015 forecasts |
Barclays |
Standard Chartered |
|
P/E |
9.7 |
9.3 |
|
Dividend yield |
3.8% |
5.2% |
Both banks have very similar 2015 forecast P/E ratios, but Standard Chartered is the clear leader on dividend yield, despite analysts forecasting a 6% cut in the Asia-focused bank’s payout this year.
3. Return on Equity
Although return on equity sounds complex, it isn’t really — it’s simply a bank’s post-tax profit as a percentage of its book value.
RoE is a key measure of profitability for banks, and is always worth considering:
|
Barclays |
Standard Chartered |
|
|
Return on average shareholders’ equity |
5.1% (group) / 9.2% (core, excluding ‘bad bank’) |
10.4% |
Standard Chartered has a clear lead in terms of return on equity, although analysts remain concerned about the bank’s potential exposure to bad debt in China, which could reduce returns.
Which bank to buy?
Barclay’ 2014 results were slightly disappointing, as earnings per share from the bank’s core operations came in below forecasts. However, the bank does appear to be making steady progress towards a full recovery.
In contrast, Standard Chartered has just appointed a new chief executive, Bill Winters, who will take charge after the firm has reported its 2014 results. We don’t yet know what changes Mr Winters will make, but he is widely expected to carry out a rights issue to strengthen the bank’s capital position.
In my view, both shares are a buy, but Standard Chartered may require a slightly longer timeframe than Barclays to deliver decent gains for today’s buyers.
What’s more, banks’ complexity and track record of dodgy behaviour means they are still quite risky investments.