Turmoil in emerging markets has weighed heavily on the shares of Santander (LSE: BNC) and Standard Chartered (LSE: STAN) this year. In the year-to-date, excluding dividends, Santander’s shares have fallen 33%, whilst Standard’s shares have dropped 27%.
But is now the time to buy these banks — or are there further declines to come?
Unfortunately, Standard Chartered has a very bleak outlook indeed. The bank is struggling with a rising level of loan losses across its emerging market operations, and these losses are eating away at the bank’s capital reserves. As a result, most City analysts agree that Standard will be forced to conduct a rights issue at some point in the near-future, to rebuild its battered balance sheet.
And with an impending rights issue on the cards, investors might want to stay away. Moreover, Standard’s valuation isn’t overly attractive. The bank currently trades at a forward P/E of 13.3 and yields 3.6%.
Unlike Standard, it seems as if the emerging markets crisis has yet to affect Santander.
The bank’s third-quarter profits rose by more than 17% during the first nine months of 2015. A drop in the overall number of bad loans on the company’s balance was a key contributor to the bank’s better-than-expected results. That said, Santander did reveal an increase in the number of delinquent loans at its Brazilian arm. Profits at this division fell 14.8% during the quarter to €385m, as the country’s recession deepened. Delinquent loans increased to 5.3% for the three months to the end of September.
Santander group net profit rose 17.1% to €5.1bn, and net interest income increased 11.3%, to €24.3bn.
Unlike Standard, Santander has a significant presence in Europe, the UK, and the US, so the bank isn’t really an emerging markets lender. If anything, Santander is a European bank with some exposure to emerging markets.
Three key concerns
Still, there are three key reasons why many City analysts are concerned about recommending Santander to clients.
Firstly, Santander’s Spanish revenues are under pressure. Smaller peers are stealing market share from the bank in its home market. Secondly, Brazil’s deteriorating economic situation is concerning many analysts. And thirdly, Santander’s capital position is worse than that of many of its peers. At the end of the third quarter Santander’s common equity tier one ratio, a measure of a bank’s financial strength came in at 9.85%, compared to the European average of around 10.5%.
So, there are three major factors that could be a drag on Standard. With this being the case, only you can decide if the bank is suitable for your portfolio.
Rupert Hargreaves 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.