Ten years ago, banking stocks were exceptionally attractive. Investors were staring down the barrel of global prosperity, increasing property ownership and rising share markets. It was a sweet spot for the financial sector.
The Great Recession took that away for a year or two. Though the value knocked out of stocks then was not what would later rattle investors. Ultimately, it would be the degree to which these big financial institutions would be monitored — both in the US and the UK — by the authorities, and the restriction on growth that results from this (despite the fact this regulation is needed!).
It’s made choosing the right financial institution to invest in quite challenging. I’ve come up with a neat little checklist you might like to look at. I call it the three Cs: compliance, confidence and cash. I think a bank will look after your money if it ticks all three boxes. That is: it obeys the law; has the confidence of existing shareholders; and produces solid earnings.
Cash
This is a tough call. If you compare Standard Chartered (LSE: STAN) with its peers, it actually stacks up quite well. Looking at the numbers, Standard Chartered’s price earnings multiple (10.8) is less than that of HSBC (11.6) and RBS (12.6), and yet its projected earnings growth is superior to both. In addition, those after a dividend will be taking home a yield of around 4.2%. In terms of basic metrics, Standard Chartered also beats the pants off both Lloyds Bank and Barclays.
It’s just that the palms start to sweat a little when you look at the performance of the share price over the past 12 months. The stock is down around 14%.
Part of that slide can be blamed on both a profit warning and an actual disappointing earnings announcement by the company — last month posting a 20% drop in first-half pre-tax profit to $3.3 billion.
A particularly sore point for the firm is its financial markets business (which may well face more challenges in the medium term). Banks generally have been hit by reduced trading activity, and increasingly stringent demands from regulators’.
Compliance
Standard Chartered was sent to the naughty corner in 2012 when US regulators fined it £415 million for breaching sanctions with Iran. Chairman Sir John Peace later tried to keep the peace by issuing an apology to the US regulators. Incredulously, he had originally described the breaches as “administrative errors”. According to Reuters, Standard Chartered is now trying to sell part of its business in the United Arab Emirates.
Confidence
To be honest I can only find two obvious signs of a lack of confidence but, for my mind, that’s two too many. The first occurred when 41% of investors failed to back the pay of CEO Peter Sands and the other directors. I’ve been to plenty of Annual General Meetings (AGMs) and when investors are getting their money’s worth, there are rarely any complaints.
The second relates to a recent high-profile resignation. The media recently reported that Jaj Singh, Standard Chartered’s head of equity research on Southeast Asian banks, is leaving to join Nomura. Now normally you might just put this down to an unfortunate head-hunting exercise, but Standard Chartered actually derives around three-quarters of its earnings from Asia. It’s a big loss for the bank, it made the news, and you may well conclude that Mr Singh believes the grass really is greener at Nomura.
Standard deviation
Standard Chartered was once a standard investment. Now my standards compel me into charting a different course.
