2016 has not proved to be a picnic for the FTSE 100’s (INDEXFTSE: UKX) banks.
Flagging fortunes
Well, aside from Standard Chartered (LSE: STAN), that is, as those seeking to reduce their exposure to ‘Brexit Britain’ have jumped aboard the emerging market-focussed firm. Indeed, the stock’s value hit levels not visited since last October in recent sessions.
But those seeking bright earnings growth are in danger of suffering severe disappointment, in my opinion. Standard Chartered saw underlying operating income slump 20% year-on-year during January-June, to $6.8bn, as macroeconomic volatility in Asia and low interest rates took its toll.
And unsurprisingly the bank expects these problems to continue, advising that “we expect 2016 performance to remain subdued.” Standard Chartered’s long-running and extensive restructuring plan will have to ‘go gangbusters’ to turn around the firm’s flagging fortunes.
A forward P/E rating of 36.4 times is much, much higher than its banking rivals — Lloyds changes hands on a multiple of 7.6 times, for example — yet Standard Chartered’s outlook is also littered with plenty of trouble.
And I reckon this elevated rating leaves Standard Chartered in danger of a stunning retracement.
Crude concerns
A flurry of excitement over a possible OPEC output cap has sent investors piling back into Royal Dutch Shell (LSE: RDSB), the stock touching 21-month highs just last week.
However, I believe optimism that Shell’s earnings troubles could finally be over may be jumping the gun. Sure, Saudi Arabia and other key members may be doing their utmost to push a deal through, even exempting Iran, Nigeria and Libya from curtailing their own production goals.
But distributing the necessary cuts across the cartel will prove extremely difficult business. Indeed, Iraqi oil minister Jabar Al-Luaibi said just this week that he will fight any efforts to cut Baghdad’s allocated quota, citing the need for oil revenues to fight IS rebels in the country.
An accord at November 30th’s meeting is desperately needed to start taking chunks out of bloated global inventories, and particularly as other major producers ramp up their own operations. Latest data from oil services company Baker Hughes, for example, showed another 11 oil rigs added to the US count — the eighth straight weekly advance.
And these numbers are only likely to keep rising as oil prices remain around or above current levels of $50 per barrel, a situation that is likely to put any meaningful earnings recovery at Shell under severe strain.
And latest International Energy Agency (IEA) estimates on renewables cast a shadow over the long-term profitability of the oil industry. Thanks to rising environmental legislation and falling costs, global renewable energy capacity will surge by 42% by 2021, the IEA said, upgrading an estimate it made just last year by 13%.
Against this backcloth I believe Shell will struggle to return to the earnings-generating monster of previous years. And I reckon a forward P/E rating of 29 times fails to reflect the colossal challenges the driller must overcome to get the bottom line moving higher again.