2014 has been a rather mixed year for the banking sector. While the likes of Standard Chartered (LSE: STAN) have been the subject of various fines and profit warnings, with its shares falling by 28% since the turn of the year, other banks have delivered much better share price performance year-to-date.
For example, RBS (LSE: RBS) (NYSE: RBS.US) and Santander (LSE: BNC) (NYSE: SAN.US) have performed relatively well this year, being up 18% and 7% respectively, as their business performance has been relatively stable and given investors cause for optimism.
Looking ahead to 2015, all three of these banks could prove to be top performers. Here’s why they could be worth buying right now.
Profit Potential
When it comes to their bottom lines, all three banks appear to have excellent potential. For example, in the case of RBS, it is forecast to post its first profit since the start of the credit crunch in 2014, which seems to be causing an improvement in investor sentiment in the stock. This is expected to be followed by another year of impressive profitability, with RBS having seemingly turned its fortunes around so that it could be on the cusp of a period of relatively strong performance, which is likely to have a very positive impact on its share price.
Meanwhile, Santander is expected to post stunning earnings growth in 2015, with its bottom line due to rise by a whopping 20% next year. Although Standard Chartered is expected to see its profit rise by a relatively meagre 7% (in comparison to Santander’s expected 20% rise), this would still represent growth that is in-line with the wider market and would equate to a successful turnaround following recent profit warnings.
Valuation
In addition to their bottom lines offering excellent potential, the valuations of RBS, Santander and Standard Chartered seem to offer the chance for capital gains in 2015. For example, RBS trades on a price to earnings (P/E) ratio of just 10.6, while Standard Chartered’s P/E ratio is even lower at 9.3. Both of these figures indicate that there is significant scope for an upward adjustment to their ratings, which would clearly be great news for investors in the two banks.
In Santander’s case, its P/E ratio of 14.9 seems rather high at first glance – especially when compared to its two sector peers. However, when its stunning growth forecasts are taken into account, Santander’s price to earnings growth (PEG) ratio of 0.7 indicates that it also has considerable capital gain potential, too.
Looking Ahead
Clearly, there are risks ahead for all three banks, with weakness in the Eurozone, for instance, having the potential to hit their profitability moving forward. However, with such appealing valuations, there appears to be substantial margins of safety included in their current share prices.
This means that, even if the sector experiences a tough 2015 and the banks themselves disappoint when it comes to their bottom lines, there is enough value in their share prices to mean that 2015 could still be a great year for their investors. As a result, now could be a great time to buy a slice of RBS, Santander and Standard Chartered.
Of course, finding companies that are worth adding to your portfolio can be a challenging task. After all, it’s difficult to find the time to trawl the index looking for the best bargains.
