The EU referendum result hit banking stocks hard on Friday morning. Barclays (LSE: BARC) fell to a low of 131p before steadying at about 150p, a drop of 18%.
Standard Chartered (LSE: STAN) was initially a big faller, hitting a low of 471p when markets opened. However, the shares soon bounced back strongly and as I write are down by just 6% at about 540p.
This difference means that while Barclays shares are worth 10% less than they were at the start of this week, Standard Chartered shares are actually worth slightly more than on Monday. This is because Standard Chartered does virtually all of its business in Asia. The UK’s decision to leave the EU is not expected to affect banking relationships between London and key Asian financial centres.
The outlook for Barclays is more uncertain. EU regulations currently allow UK banks to trade freely throughout the EU. Investors fear that the loss of these agreements could cause major disruption and a loss of income. The increased risk of a UK recessions is also a concern.
I suspect the UK recession is more of a risk than EU trading arrangements, which won’t change for at least two years anyway. Barclays’ focus is increasingly on UK-US banking. The company was already scaling back its operations in the EU before yesterday’s referendum vote.
Barclays boss Jes Staley issued a statement this morning which appeared to support my view. Mr Staley reminded investors that Barclays has been “in service of our customers and clients for over 325 years” and said that Barclays has been through “equally profound changes before”. He said yesterday’s vote would have no impact on the bank’s turnaround strategy.
Which bank is the better buy?
For value investors looking for turnaround buys with a 3-5 year horizon, I think Barclays and Standard Chartered could be attractive.
Barclays shares currently trade almost 50% below their net tangible asset value of 286p per share. For Standard Chartered, the equivalent discount is about 40%. These discounts are available because both banks are struggling to generate a decent level of profit from their assets.
Here’s how each bank is currently valued on three key measures:
| Barclays | Standard Chartered |
|
| Price/tangible book value | 0.5 | 0.6 |
| 2016 forecast P/E | 11.8 | 25.5 |
| 2016 forecast yield | 2% | 0% |
Barclays appears much cheaper in terms of forecast earnings. But these forecasts have been falling steadily in recent months. Since March, Barclays’ 2016 forecast earnings have fallen from 18.3p to 12.7p, a 30% drop.
In contrast, forecasts for Standard Chartered have been more stable. They’ve fallen by just 3% since March. This stability could be a sign that the bank’s turnaround is starting to deliver results. I have to admit that I’m attracted by Standard Chartered’s lack of direct exposure to the UK and EU economies.
However, I’m not sure it’s possible to choose between Standard Chartered and Barclays at this time. In my view, they offer a fairly equal mixture of potential upside and possible problems.
I believe that both banks have the potential to deliver decent gains. But it’s worth remembering that even if things go well, a full recovery may be several years away.
