Six years ago this week, on 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection starting the financial crisis that still overshadows the world today. Since this date and the subsequent market panic many investors have been afraid of banks, staying away from the sector in fear of a repeat of 2008.
But the sector is recovering, albeit slowly, and banks are now starting to feature heavily within value and recovery focused funds around the world.
Better positioned
Banks are no longer the uncontrollable beasts they were before the financial crisis. The sector is now heavily regulated and banks are required to keep hefty capital cushions in place, to absorb any losses resulting from poor investments.
While nothing is certain, the regulatory burden now being imposed on banks is reigning in risk taking, making the prospect of another financial crisis less likely. Nevertheless, the sector’s recovery will take time, so the best way to play the recovery is via banks that support an attractive dividend yield.
With this in mind, Standard Chartered (LSE: STAN) and Santander (LSE: BNC) appear to be solid recovery plays thanks to their international exposure. What’s more, the two banks pay the majority of their dividends in script form, reducing pressure on cash flows and safeguarding the payout to some degree.
Plenty of capital secure payout
Santander pays out around 80% of its lofty dividend in shares, as a scrip dividend. This does reduce the impact on the bank’s balance sheet, although a higher number of shares in issue does depress earnings per share. However, the bank’s impressive dividend yield of 7.4% can hardly be turned down.
That being said, Santander is reducing its dividend payout to a more sustainable level over the next few years. The bank’s yield is set to drop to only 6.6% next year.
Standard’s current dividend yield of 4.3% is less attractive than they payout being offered by Santander but just like Santander, Standard’s management has stated that the hefty payout is here to stay. Once again, historically, most shareholders have chosen to take their dividend payout from Standard in script form, reducing the pressure on the bank’s cash flow.
And it’s not as if the two banks are struggling to boost their capital position. Standard reported a capital cushion of 10.5% at the end of the second quarter. Santander reported a common equity tier one capital ratio of 11.8% at the end of the second half of this year.
Room for growth
Aside from their attractive dividend yields, both Santander and Standard make great plays on the banking sector’s recovery due to their international exposure. For example, Santander currently generates around 40% of its profit from South America, Brazil in particular.
Meanwhile, Santander is an Asia-focused bank and although this has attracted some criticism recently, there’s no denying that Asian economies still have plenty of room left to grow. Further, due to tough trading conditions, many of Standard’s Western peers have started to leave the region, giving Standard the edge.
Recovery plays
So, Santander and Standard could be great plays on the recovering banking sector. However, I strongly recommend that you do your own research before making any trading decision.
