After the FTSE 100 blue-chip index fell by more than 100 points on Monday, you may be wondering whether any shares are worth buying, never mind investing in a bank of all things.
But the facts are: the banking industry is going nowhere.
RBS (LSE: RBS) (NYSE: RBS) has been around since 1727, while Standard Chartered’s (LSE: STAN) (NASDAQOTH: SCBFF) roots stretch back to 1853.
When you invest in a company, if you’re like me, you aren’t looking at what’s “flavour of the month”.
Rather, you want the big picture, so let’s have a look:
RBS
We should start by looking at how RBS is going to fix things. Despite new boss Ross McEwan going for the kitchen sink approach — getting the bad news out early with a surprise £8bn profit warning in January — the shares still slumped 8% upon publication of its final results last week.
The market was already braced, but a £2.3bn operating loss was much worse than analysts expected, and the bank’s market value tumbled £1.5bn.
To achieve its capital targets, RBS will float its US subsidiary Citizens Bank this year. But what if the Citizens listing doesn’t meet expectations? How will the group plug that capital shortfall? A rights issue can be ruled out as the government won’t allow it.
You could have picked up shares in RBS for as low as 187p in 2011, selling them for over 100p more two years later. The worry is that the recovery has already happened, and that even for the most long-term focused investor, further growth at an appreciable pace will be negligible.
It all comes down to your expectations. You could always take a punt to be contrarian, or maybe it would be better to weigh up some other options.
Standard Chartered
One alternative is Standard Chartered. Unlike RBS, and the other part taxpayer-owned bank Lloyds, Standard Chartered pays out a dividend.
It’s a good one, too. Over the last five years the dividend has been steadily lifted and in 2015 a dividend yield of 5% is forecast. That’s against a forward average of 3.8% for the rest of the banking sector.
If that sounds pretty good, you may also like to know that Standard trades at a discount! This time last year shares would have cost you 1,782p, but today you can pick them up for 1,250p — 30% cheaper.
So, to sum up, Standard Chartered trades on a forward P/E below 10 and it has a mammoth dividend yield, backed up by strong cash generation.
