Which Bank Offers The Most Potential For Profit: Lloyds Banking Group PLC or Standard Chartered PLC?

Which bank offers the most upside, Lloyds Banking Group PLC (LON: LLOY), or Standard Chartered PLC (LON: STAN)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) are both recovery plays with the potential for impressive capital gains as they return to growth.

But which bank has the most recovery potential for investors? 

Recovery in the east

Standard Chartered used to be the City’s Asian darling as the bank flourished in East, reporting many years of double-digit earnings growth. However, Standard recently came out and revealed to investors that they would have to get used to a slower, single-digit annual growth rate in the near future and the market did not react well to this change of speed.

As a result of this new guidance, Standard’s shares have slumped around 9% so far this year and the bank is now trading at a valuation not seen since the financial crisis.

Nevertheless, Standard’s management remains proactive and continues to seek ways of bolstering growth. In particular, the bank is leaving some countries where the prospects of future growth are low and cutting hundreds of jobs. In addition, Standard is expanding within two major growth markets, Africa and India.  

Surprisingly, despite these plans to boost profitability, recent declines have left Standard’s shares looking astonishingly cheap. Indeed, present City figures show that Standard is currently trading at a forward P/E of 9.6; the only time the bank has traded at a lower valuation than this was during the financial crisis.

Will Standard turn out to be a profitable investment? It would appear so as the bank has traded at an average forward P/E of 13 during the last ten years. If the bank were to return to this average valuation then its shares would be trading at 1,695p, up 37% from current levels. Including the company’s dividend this implies a total return of 41%.

Regaining trust

In comparison to Standard, Lloyds continues to grow in leaps and bounds, helped along by the recovering UK housing market. As one of the UK’s largest mortgage lenders, Lloyds has been given a shot in the arm by the UK’s housing recovery as new customers continue to come to the bank for financing.

What’s more, Lloyds continues to restructure operations and reduce the company’s international foot print as the bank looks to lower costs and increase profits. Lloyds aims to have operations in 10 countries or fewer by the end of 2014, although this does mean the bank is heavily reliant upon the performance of the UK economy, unlike Standard.

Unfortunately, when compared to Standard, Lloyds is also undercapitalised as, at the end of last year, Lloyds has a tier one capital ratio of 10.3%, less than Standard’s ratio of 11.2%, making Lloyds look like the riskier investment.

Nevertheless, the question remains will Lloyds be the more profitable investment over the long-term? Well, having clocked up a 61% rally during the space of the last year, I believed that the banks share price looks rather stretched. Still, Lloyds’ management has promised a token dividend this year and a yield of 4.1% is currently on the cards for 2015. On the other hand, Lloyds is currently more expensive than Standard, trading at a forward P/E of 11.1.

In conclusion

So overall, it would appear that Standard looks to offer the better opportunity for profit with a possible 41% upside. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in Standard Chartered. 

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

1 delicious penny stock I reckon can deliver juicy returns and growth

This food delivery penny stock has experienced a surge in performance and uptake recently. Our writer is excited by its…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares the day Tufan Erginbilgiç joined here’s what I’d have now

Harvey Jones is startled by just how fast the Rolls-Royce share price has risen since its transformative CEO took over.…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

How much do I need to invest in Lloyds shares to earn income of £1,000 a year?

Harvey Jones is getting income and growth from his Lloyds shares but wished he'd bought more of them. So he's…

Read more »

Illustration of flames over a black background
Investing Articles

Down 75%! Will the Saga share price ever be loved again?

The last few years have been incredibly difficult for those watching the Saga share price. But what does the future…

Read more »

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »