Barclays PLC And Standard Chartered PLC Are Just Not Cheap Enough

Barclays (LSE: BARC) and Standard Chartered (LSE: STAN) do not have much in common as banking peers go, but their shares are similarly overpriced. Here’s why. 


HSBC and Royal Bank of Scotland were among a group of five banks that were fined for fixing foreign exchange markets, it emerged on 12 November. The total bill stood at £3.2bn. 

Barclays was not included, yet its stock was the worst performer in the peer group that Wednesday. It also lost 1% in the previous five trading sessions. The shares of Standard Chartered outperformed those of Barclays both on the day and during last week.

By comparison, the shares of HBSC rose by 1.4%, while those of RBS were essentially flat in the last five trading sessions. 

Barclays: When Good News Is Bad News

At 232p, the shares of Barclays do not trade on fundamentals. You should pay little attention to trading multiples — read the news instead. 

Barclays surged 8% to 240.8p on October 31, when regulators said it would take longer for banks to lower their leverage ratios. Good news — is it, really, for investors hunting for value? — came only a couple of days after the bank reported interim results, which were not too bad, but failed to impress the market and left the stock virtually unchanged at 223p. Barclays stock has lost about 4% of value since October 31. 

Admittedly, interim results were encouraging. This is not good news, however.

In fact, Barclays will eventually disappoint investors, simply because estimates for earnings growth are unrealistic. If the stock doesn’t surge when the bank beats estimate, well, would you imagine what could be the outcome when and if Barclays disappoints investors? 

Just one bad trading update may push the shares down 5% to 10%. No matter how the bank’s core business is doing, or how the bank will perform in the next few quarters: the spotlight is on litigation and regulatory risks, both of which weigh heavily on the stock, but are not properly priced into the stock. For these reasons, I’d consider a Barclays investment only below 200p. 

Standard Chartered: On A Wing And A Prayer

The shares of Standard Chartered trade at multi-year lows, but this doesn’t mean they are cheap. The bulls argue that based on several trading metrics Standard Chartered stock offers terrific value at 957p, where it currently trades, but I’d point out that anybody willing to buy the bank’s shares would bet on relentless cost-cutting all the way through 2016. Moreover, I’d add that improvement in capital ratios is unlikely, while additional profit warnings should not be ruled out.

The bank has struggled to deliver value in recent times because growth in emerging markets is hard to achieve. Looking ahead, capital ratios may come under more strain. Management isn’t liked very much by investors, either — although changes are taking place. The shares of Standard Chartered have not bottomed out. Quite simply, its shares would be a risky cyclical buy at the wrong time in the business cycle.

The Perfect Buy Is Not Standard Chartered

Looking to buy cheap stuff offering high value? Then, our research will help you find the perfect buy outside the banking industry, which I believe is too risky at this point in time.

We strongly suggest you consider three stocks that have the potential to reward you with a 10% to 20% pre-tax return in 2015, excluding dividends. These three companies have different risk profiles, but they are similarly cheap right now. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.