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Should you buy Standard Chartered and Virgin Money ahead of results?

Do you think it would be madness to buy bank shares now, while we’re still waiting to find out how hard our Brexit will really be and whether UK banks are going to lose their precious passporting rights?

Well, you could buy them on a contrarian basis, on the grounds that pessimistic share price slumps are usually overdone. Or you could invest in banks that should be relatively safe from Brexit.

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A nice turnaround

Standard Chartered (LSE: STAN) is due to bring us a third quarter update on 1 November, and the bank’s shareholders have enjoyed a pretty good 2016 so far — since a low point on 11 February, Standard Chartered shares have climbed by 82% to 715p. And although there was a dip in the immediate aftermath of the Brexit result, it was quickly reversed and the price is now up 22% since referendum day.

The surge was due to a number of reasons, including the fall in the value of the pound — Standard Chartered’s earnings are international and are recorded in dollars, so they’re now worth more in Sterling terms. The receding of fears over a hard Chinese slowdown has helped too, with that country recording an annual growth rate of 6.7% for three consecutive quarters.

But on top of those external forces, Standard Chartered finally listened to the lengthy complaints from major shareholders and, following a top-level management shakeup, confidence has been returning.

The downside I see now, however, is that we’re looking at relatively high P/E valuations. It’s not very meaningful for this turnaround year of 2016, but even a strong growth in earnings per share forecast for 2017 would still give us a toppy P/E of over 17.

But it would only need one further year of decent growth for that to come down a lot, and Standard Chartered is nowhere near back up to pre-slump levels yet. And the dividend should be creeping back too — there’s a yield of only 2% on the cards for 2017, but that’s a good start

Challenger

Another way of beating a Brexit banking downturn would be to buy shares in Virgin Money (LSE: VM), which does 100% of its business within the UK’s retail banking industry and doesn’t depend on any EU-wide access.

Virgin is also due to bring us a Q3 update on Tuesday, and at the interim stage things were looking good. A 53% rise in underlying pre-tax profit was impressive, but what counts more for the longer term is the inroads that Virgin is making into the lending markets. Gross mortgage lending for the half rose by 19% to £4.3bn, and that represents a market share of a pretty modest 3.6% based on May figures.

Credit card balances climbed 31% to £2.1bn, with retail deposits 8% up at £27.1bn.

Those are good signs, but they only represent a small proportion of a very large market, and I could easily see Virgin doubling its share of the mortgage and credit card markets in the next few years.

The shares have gained a modest 16% since flotation, rising to 337p, and that gives us a forward P/E of a little under 11 for this year, dropping below 10 on 2017 forecasts — and with Virgin Money’s growth potential, I think that looks cheap.

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Alan Oscroft 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.

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