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

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. 

Nevertheless, this analysis does not do Standard Chartered justice and there are many more reasons to invest in the bank. However, many investors like yourself may find the towering numbers and complex formulas used to value banks complicated.

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