Although the wider banking sector has been hit extremely hard over the last few years, it seems as though investors continue to back its future potential.
Indeed, the banking sector currently trades on a price to earnings (P/E) ratio of 16.3, which seems to be quite generous when the FTSE 100 P/E is 13.8.
However, Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) seems to be something of an anomaly, since it has a P/E of just 10.8. This represents a discount of one-third when compared to the rest of the banking sector.
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But such a discount seems unjustified, with Standard Chartered having had a relatively smooth run over the last handful of years and being exposed to the faster growing markets of the world.
Indeed, if Standard Chartered were to trade on a narrower discount to the banking sector, it could mean significant gains for investors.
For instance, if the discount narrowed to 20%, it would mean Standard Chartered trading on a P/E of 13. This would provide upside of 21% versus the current share price of 1,440p and would still mean that Standard Chartered was relatively cheap versus its sector.
Of course, such gains are unlikely to be achieved overnight, but a one-third discount to the sector seems difficult to argue in favour of — especially when Standard Chartered appears to be in relatively good shape.
In addition, Standard Chartered has the potential to pay out a far higher dividend than is currently the case. Its dividend payout ratio is just 41% and, with Lloyds targeting a payout ratio of up to 70%, Standard Chartered seems to be slightly mean when it comes to paying profits out to shareholders.
Still, it currently yields a very impressive 3.8%, which is higher than the FTSE 100 yield of 3.5% and above and beyond most of its banking rivals. However, the scope exists for the yield to be in excess in 4% without putting undue risk on the bank’s future stability and profitability.
So, with shares offering upside of over 20%, as well as an above-average yield and the potential for a significantly higher payout ratio, Standard Chartered looks as though it could deliver relatively strong returns for investors over the medium to long term.
