Standard Chartered (LSE: STAN) has hit a wall this year. Falling commodity prices have bruised the banks loan book and incomewhile regulators have continued to chase the bank for failings in its client background checks.
As a result, Standard has been forced to take drastic action. A new management team has been brought in, and the bank is now targeting cost savings of $1.8bn by 2017. 5% of Standards global workforce is set to go as part of this restructuring.
However, Standards turnaround is unlikely to yield results any time soon. You see, Standards loan book is in a terrible state after years ofaggressive lending, something Standards new CEO,Bill Winters, has called a legacy of growth over risk discipline, which was born under the leadership of Peter Sands. This policy of quantity over quality is now coming back to haunt the bank. A spike in losses on legacy loans is eating away at Standards capital reserves. The bank has already been forced to cut its dividend payout to tryand save cash.
The bad news is that Standards financial situation could be deterioratingfaster than many investors realise. Indeed, the bank has made tens of billions of dollars in loans to the commodity sector, and as commodity prices fall, these loans are quicklyturning bad.
During the first half of the year, Standard was forced to write off $1.7bn worth of loans due to the deterioration in Indian economic growth and continued commodity market weakness. Unfortunately, since the bank reported this figure, the number of commodity companies falling into administration has only increased.
So overall, it looks as if Standard is going to struggle to return to growth in the near-term. On the other hand,OneSavings (LSE: OSB) andVirgin Money (LSE: VM) are surging ahead as customers flock to these two banking upstarts.
Putting the customer first
Virgin Money has been trying to shake up the UK banking market over the past ten years with a customer-focused approach to banking. For example, the banks branches stay open later to help customers fit visits into busy schedules. And, so far, customers seem to appreciate the banks differentiated offering.For the six months to 30June 2015 Virgins underlying pre-tax profit jumped 37% year-on-year to 81.8m.
Meanwhile, OneSavings has concentrated its efforts on lending to the small and medium-sized business market, as well as buyto let lending.
By using a more personal approach to banking than its larger peers, and by targeting two relatively overlooked sections of the lending market, OneSavings growth has taken off. The bank reported a fourfold increase in underlying profit before taxation during the first half of this year.
Numbers dont lie
The best way to show that OneSavings and Virgin are superior to Standard is to compare the return on equity (ROE) figures of the three banks. Simply put, ROEmeasures a banks profitability by revealing how much profit a company generates with the money shareholders have invested.
City analysts believe that Standards ROE will be in the region of 6% to 8% for full-year 2015. The banks medium term ROE target is 10%. In comparison, for the first halfof 2015 Virgin Money reported a ROTE of 10.2% and OneSavings ROE came in at a staggering 31%!
The bottom line
All in all, as Standard struggles, Virgin andOneSavingscontinue to grow rapidly. Whats more, these two banking upstarts are generating impressive returns for investors.
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