Even for the City’s top banking analysts, the banking giants of the 21st century can be difficult to understand. It’s almost impossible for one person to comb through the trillions of dollars of assets that can be found on banks’ balance sheets around the world and for the average private investor, this task is all but impossible.
So, when trying to choose a bank for your portfolio, simplicity is the name of the game.
Simple is best
Even though investors might be attracted to Standard Chartered (LSE: STAN) for its emerging market exposure, the bank is an incredibly complex beast to understand.
You see, over the past decade, Standard Chartered has adopted a growth at any price mentality, which means the bank’s balance sheet is now full of questionable loans, something the new management team is trying to sort out. But even if the bank does manage to clean up its balance sheet, there’s still a bigger issue affecting the group.
Standard Chartered is an Asia-focused bank, and the organisation’s success depends on the health of China’s economy along with that of its regional peers. In other words, if China’s economic growth stumbles Standard Chartered will feel the pain. Many City analysts have already expressed concern about the state Standard Chartered’s balance sheet, and the bank could find itself high and dry if China’s economy hits the rocks.
Cloudy outlook
Like Standard Chartered, Santander (LSE: BNC) also has an extensive exposure to a country with a cloudy economic outlook.
Santander generates more than a third of its profits in Brazil, a country which is currently grappling with a severe economic slump and rising inflation. During the past two calendar quarters, Brazil’s economy has shrunk at a rate that has wiped out several years of economic growth — bad news for a bank like Santander, which has such a large exposure to the country.
Still, outside Brazil Santander’s operations are growing steadily. Spain’s economy is recovering, Santander’s UK operations are a jewel in the group’s crown, and Santander US is operating in line with peers.
That being said, if Brazil continues to deteriorate at its current pace, Santander is going to have plenty of problems to control.
A top pick
Compared to Standard Chartered and Santander, Virgin Money (LSE: VM) is an incredibly simple bank with bright prospects the growth. For this reason, Virgin Money is my pick in the banking sector.
While other bank stocks may offer more regarding income or even growth, Virgin Money’s simplicity and the bank’s popularity with customers are two traits that are difficult to find anywhere else in the sector.
Virgin Money currently trades at an extremely attractive forward P/E of 11.3 and City analysts expect the bank’s earnings per share to expand by 40% this year and then a further 31% during 2017. If the bank manages to make these forecasts, Virgin Money’s earnings per share will have doubled in the short space of three years — it’s worth paying a premium for that kind of growth.
