Barclays (LSE: BARC) and Standard Chartered (LSE: STAN) have been the banking sector’s worst performers this year. Indeed, year to date Standard has seen its share price decline by more than 10% and Barclays’ share price has fallen 10% — both excluding dividends.
However, after these declines the two banks appear cheap on many metrics and it could be time to buy. The questions is, which bank is the better recovery play, Standard or Barclays?
Changing strategy
There’s no denying that both Barclays and Standard are going through trying times right now. Standard is struggling within Asia and Barclays is facing the wrath of regulators on both sides of the Atlantic.
Nevertheless, only Barclays is trying to clean up its act, while Standard is promising more of the same. The Asia-focused lender has posted losses for several quarters now and management has not unveiled any ground breaking strategy to turn things around. As a result, many investors have started to question the suitability of CEO, Peter Sands.
Meanwhile, Barclays is going through a significant period of transition, involving the creation of a bad bank, up to 17,000 job cuts and drastic cuts to operating costs.
Regional focus
Standard’s troubles can be traced to one region; Korea. The Korean banking market has been a thorn in the side of Standard for some years now, with profitability and return on equity within the region collapsing. Korea is one of Standard’s key markets, so the bank has really suffered as a result of this poor performance.
To some extent, Barclays has faced the same problem with its European arm. However, Barclays’ investment banking arm and its leading credit card brand, Barclaycard, have helped the bank avoid the worst of the crisis. Management’s recent sale of Barclays’ Spanish division has also reduced exposure to Europe.
Regulatory overhang
Unfortunately, fines and demands from regulators have become an everyday occurrence within the banking sector and Barclays has become an easy target. Along with being found guilty of manipulating the gold market, the bank is facing a lawsuit regarding its dark pool trading venue and tax avoidance.
Some City analysts have suggested the in the ‘worst case’, Barclays could be facing total fines of £7bn during the next few years.
Standard is facing similar pressure, recently having to pay £180m to a New York regulators for failure to improve its money laundering controls.
Capital cushion
When it comes to the capital cushion, Barclays and Standard have been struggling. Specifically, Standard reported that its capital cushion had fallen to 10.5% at the end of the second quarter, down from 11.8% at the end of 2013.
Barclays’ capital position has improved over the past twelve months, although management is still seeking ‘leverage reduction’ opportunities. What’s more, with multiple fines heading Barclays’ way, the bank’s capital cushion could collapse, as cash goes to regulators.
Paid to wait
All in all, it’s difficult to choose between Standard and Barclays. Barclays’ pending regulatory storm concerns me, while Standard’s lack of direction is another worrying issue. Still, Standard offers a 4.3% dividend yield at present levels, so shareholders will be paid to wait for the bank’s turnaround to take place.
With the majority of the dividend paid in script form, management has stated that the payout is here to stay. For this reason, Standard has to be my recovery play of choice.
However, Standard may not fit in your portfolio, so I strongly suggest that you do your own research before making a trading decision.
