After the recent market sell-off, many pundits have argued that the stock of Standard Chartered (LSE: STAN) is a hard bargain, particularly when its relative valuation is compared with that of Barclays (LSE: BARC) and Lloyds (LSE: LLOY). Is that true, though?
The Fall Of Barclays
As I recently argued, there are a few problems at Barclays. That’s not to say that its stock offers incredibly poor value for money, but I am still convinced that I’d be prepared to invest in it only at 220p rather than at its current valuation of 253p, which is almost 13% below its 52-week high of 289.9p.
I am eager to go through its next quarterly results in order to determine if the bank will have to set aside more capital for one-off provisions. This is a risk that is not reflected in its current valuation of about 15x forward earnings.
It traded 10p lower in the second half of August: given broader market volatility, and its rather rich price-to-tangible book value, I’d probably be right to wait a bit longer before investing in a bank that, anyway, is delivering sub-par returns.
Is Lloyds Less Defensive Than You Thought?
You might also be familiar with my view on Lloyds, which isn’t exactly a bargain at 75p a share. Perhaps surprisingly, it has been less resilient than Barclays, yet its shares are still priced at a premium of no less than 15% against those of its rival, at least based on their 2015 earnings multiples.
Its 52-week high of 89.35p was reached soon after the General Election in May, which implies a fall of 15.5% during the period. Wasn’t Lloyds meant to be the bet of the year? Where are the bulls projecting a steep growth rate in earnings and dividends?
Well, Lloyds may indeed deliver solid trading updates over the next few quarters, but the problem is how much you want to pay for that. Trust me: a soft uptick in interest rates won’t make much difference to the investment case — neither at Lloyds nor at Barclays.
Finally, the black sheep in the British banking world: Standard Chartered.
What It Takes To Invest In Standard Chartered
The market can be irrational at times, and that’s confirmed in Standard Chartered’s recent performance.
If we look at fundamentals, we know that the bank is still in restructuring mode, but only six months have gone since the announcement of the departure of Peter Sands, its previous chief executive! Ever since late February, its stock has lost about 250p in value, or about 26% — and now it’s very close to the lows that it hit in early 2009.
Its new boss Bill Winter, the former head of JP Morgan’s investment banking unit, needs time to get his own house in order. Some key announcements with regard to corporate governance and how the bank plans to deploy capital have already been made, and I have no doubt that more action will ensue.
What’s also certain is that you can bet against a meltdown scenario in China by betting on Standard Chartered’s recovery. But are its shares cheap enough?
Well, they trade at a discount of between 30% and 40% against those of Lloyds and Barclays — although that’s the price to pay for possible dilution risk, likely higher write-downs and rising impairment risk.
If you are tempted, though, you are in good company.
