Today’s first quarter results from TSB Banking Group (LSE: TSB) are hugely encouraging and show that the bank is making excellent progress. For example, pre-tax profit has quadrupled from the previous quarter, with it reaching £34m from £8.6m in the fourth quarter of 2014. Of course, the previous quarter included significant marketing spend that did not recur at the same level in the first quarter of the year, so the improvement is perhaps not as exceptional as it first appears.
Despite the improved earnings, shares in TSB are flat today, which indicates that the upbeat results are priced in. As such, is there greater scope for a significant return with Standard Chartered (LSE: STAN)? Or, is TSB a better buy?
Clearly, the present time is a rather uncertain one for investors in TSB. That’s because it is currently the subject of a £1.7bn takeover approach by Spanish bank, Banco de Sabadell. As such, if the deal does come off then there is little scope for share price gains, since TSB is currently trading close to the offer price.
However, there are no guarantees that the takeover will complete, since authorisation is required from multiple regulators including the Prudential Regulation Authority and the European Commission. As such, and while TSB is making good progress in establishing itself as a standalone entity (as today’s results highlight), there is significant downside risk if the takeover does not complete, with the current bid premium likely to be erased. And, with its shares trading just 5p lower than the 340p per share offer price, there is very limited upside, too.
A Turnaround Play
Therefore, it seems logical to look elsewhere in the banking sector at the present time. And, with its shares having fallen by 17% in the last year, Standard Chartered appears to offer excellent value for money. For example, it currently trades on a price to book (P/B) ratio of just 0.85, and this indicates that its share price could move significantly higher. Certainly, Standard Chartered is forecast to post a fall in earnings of 2% this year, but is expected to bounce back strongly with 15% growth next year. That’s twice the rate of growth of the wider index and makes its current valuation difficult to justify.
Although the UK economy is going from strength to strength at the moment, there is considerably more potential in Asia for the banking sector. For example, China is currently transitioning from a capital expenditure-led economy to one focused on consumer spending, which means that consumer credit is likely to rise significantly over the medium to long term.
And, while demand for new loans in the UK remains high due to low interest rates, they will inevitably have to rise, which means that Standard Chartered’s current growth rate could last, while UK-focused TSB’s may falter as the macroeconomic outlook shifts to a more ‘normal’ situation. As such, Standard Chartered appears to be the stronger long term buy of the two banks.
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Peter Stephens owns shares of Standard Chartered. 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.