Standard Chartered (LSE: STAN) has hit a wall this year. Falling commodity prices have bruised the bank’s loan book and income while regulators have continued to chase the bank for failings in its client background checks.
As a result, Standard has been forced to take drastic action. A new management team has been brought in, and the bank is now targeting cost savings of $1.8bn by 2017. 5% of Standard’s global workforce is set to go as part of this restructuring.
However, Standard’s turnaround is unlikely to yield results any time soon. You see, Standard’s loan book is in a terrible state after years of aggressive lending, something Standard’s new CEO, Bill Winters, has called a legacy of “growth over risk discipline”, which was born under the leadership of Peter Sands. This policy of quantity over quality is now coming back to haunt the bank. A spike in losses on legacy loans is eating away at Standard’s capital reserves. The bank has already been forced to cut its dividend payout to try and save cash.
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The bad news is that Standard’s financial situation could be deteriorating faster than many investors realise. Indeed, the bank has made tens of billions of dollars in loans to the commodity sector, and as commodity prices fall, these loans are quickly turning bad.
During the first half of the year, Standard was forced to write off $1.7bn worth of loans due to the deterioration in Indian economic growth and continued commodity market weakness. Unfortunately, since the bank reported this figure, the number of commodity companies falling into administration has only increased.
So overall, it looks as if Standard is going to struggle to return to growth in the near-term. On the other hand, OneSavings (LSE: OSB) and Virgin Money (LSE: VM) are surging ahead as customers flock to these two banking upstarts.
Putting the customer first
Virgin Money has been trying to shake up the UK banking market over the past ten years with a customer-focused approach to banking. For example, the bank’s branches stay open later to help customers fit visits into busy schedules. And, so far, customers seem to appreciate the bank’s differentiated offering. For the six months to 30 June 2015 Virgin’s underlying pre-tax profit jumped 37% year-on-year to £81.8m.
Meanwhile, OneSavings has concentrated its efforts on lending to the small and medium-sized business market, as well as buy to let lending.
By using a more personal approach to banking than its larger peers, and by targeting two relatively overlooked sections of the lending market, OneSavings’ growth has taken off. The bank reported a fourfold increase in underlying profit before taxation during the first half of this year.
Numbers don’t lie
The best way to show that OneSavings and Virgin are superior to Standard is to compare the return on equity (ROE) figures of the three banks. Simply put, ROE measures a bank’s profitability by revealing how much profit a company generates with the money shareholders have invested.
City analysts believe that Standard’s ROE will be in the region of 6% to 8% for full-year 2015. The bank’s medium term ROE target is 10%. In comparison, for the first half of 2015 Virgin Money reported a ROTE of 10.2% and OneSavings’ ROE came in at a staggering 31%!
The bottom line
All in all, as Standard struggles, Virgin and OneSavings continue to grow rapidly. What’s more, these two banking upstarts are generating impressive returns for investors.
