If you only looked at the share price movement triggered by recent third-quarter numbers from Standard Chartered (LSE: STAN) and Barclays (LSE: BARC), you’d probably say that Barclays was the clear winner.
Its shares have risen by 4% since its Q3 figures were released last Thursday. By contrast, Standard Chartered’s share price has fallen by almost 5% so far today, following the release of its Q3 figures.
Personally, I’m not sure these short-term movements tell the whole story. Having looked through each bank’s update, my view is that they’re both making progress.
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This is what I’m looking for
As a shareholder in both banks, I’m keen to see a return to earnings and dividend growth. But I also want to see evidence that management is fixing the problems that caused this mess in the first place.
My view is that once the right foundations have been laid, profits will naturally recover. I’m confident that big banks remain viable businesses, if they’re run correctly. Happily, management at both banks now seem to share this view.
Lower costs and stronger loans
Standard Chartered’s loan impairments fell by 5% to $596m during the third quarter. They’ve fallen by 41% to $1,692m so far in 2016. Reduced losses from bad debts should gradually help to lift profits.
So too should lower operating costs. Standard Chartered’s operating expenses and regulatory costs were $6,921m, during the first nine months of this year. That’s 8.2% less than during the same period last year.
A final attraction is that Standard Chartered’s balance sheet remains strong, with a CET1 ratio of 13%. That’s at the upper end of the bank’s target range, and well above regulatory requirements.
I’m confident that improvements such as these will eventually lead to higher profits. However, that doesn’t seem likely in 2016. Standard Chartered’s underlying pre-tax profit for the nine months to 30 September was $1,452m, 13.8% lower than during the same period last year.
Is it better at Barclays?
Recent figures from Barclays were in some ways quite similar. The group’s pre-tax profit for the first nine months of this year was £2,900m, 10% lower than for the same period last year. Although operating costs fell, this wasn’t enough to offset a 6% drop in income, and a rise in bad debt charges.
One small compensation is that unlike Standard Chartered, Barclays has maintained a small dividend payment. The bank will pay a third-quarter dividend of 1p per share, a 66% reduction from the 3p per share paid last year.
Barclays still faces some challenges. Its CET1 ratio of 11.6% is well below peers such as Standard Chartered. The sale of a majority stake in Barclays Africa is also taking time, with just 12.2% sold so far.
Is either bank a buy?
Both Barclays and Standard Chartered trade at a discount of about 30% to their net tangible asset value per share. But they also trade on fairly high P/E ratios. What this shows is that both banks are currently generating very little profit from their assets.
If this can be fixed, then I believe that shares in both banks could rise significantly from current levels. On that basis, I see both as a long-term recovery buy.
