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Does Barclays plc or Standard Chartered plc offer the best dividend growth potential?

Remember when the banking sector hosted a line-up of reliable dividend machines? If so, then you are pretty long in the tooth because those days are far behind us now. Could they return?

Banking punt

Hope springs eternal, even in the UK banking sector. Many investors will have taken a punt on the banks in the wake of the financial crisis, and too many will have lost their shirts. That will not stop others from trying their luck, especially at today’s reduced price levels. At today’s price of 211p, Barclays (LSE: BARC) is miles below its February 2007 peak of 721p.

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Asia-focused Standard Chartered (LSE: STAN) is a rarity in the banking sector in that its share price peaked after the crisis, hitting 1850p in November 2010, as emerging markets appeared to have weathered the meltdown. Unfortunately, they suffered a delayed reaction, and today Standard Chartered’s share price languishes at 632p.

Field of yield

Their dividends have been equally stricken. Barclays dropped its altogether in the immediate aftermath of the crisis, and cut it again in March, which will knock today’s headline yield from 3.08% to a forecast 1.4%. Standard Chartered halved its dividend last year, and now yields just 1.49%.

Barclays continues to send out negative signals with a 9% drop in profits over the nine months to September, even if it did generate £2.9bn before tax. The bank is trying to slim its way to success but still has to shed another £45bn of non-core assets before it can be declared fit and trim. Until then, costs and negative profits from these unloved operations will continue to punish the bottom line. The result: dividend mayhem in March, with the announcement that the 6.5p per share payment would be cut to just 3p this year and next, in a bid to bolster the bank’s capital reserves. 

Eternal flames

As well as an bottomless well of hope, Barclays’ investors also need huge reserves of patience. The Financial Conduct Authority recently set a PPI claims deadline for June 2019, so claims could continue to run up until that point, making it harder for Barclays to revive its dividends. However, reducing the bank to just two parts, Barclays UK for British retail customers and Barclays Corporate & International, should make it leaner and meaner, as should the bank’s cost-cutting regime. Earnings per share (EPS) are forecast to jump 58% next year, so Barclays should deliver income joy in the end. Think 2020.

Standard Chartered’s yield is forecast to hit 2.4% next year, largely due to an anticipated 131% leap in EPS, as revving with revenue forecast to leap from £1.13bn to around £1.95bn. The bank is picking up, with a $458m Q3 pre-tax profit, against a $139m loss in the same period last year. However, operating income continues to fall, although operating costs and loan impairments are both improving. This figures are positive but further progress is likely to be slow, as chief executive Bill Winters still has a major turnaround job his hands, and China’s debt mountain continues to cast a shadow. Again, you should be looking to 2020 and beyond.

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