Barclays(LSE: BARC) andStandard Chartered(LSE: STAN) have been the banking sectors worst performers this year. Indeed, year to date Standardhas seen its share price decline by more than 10% and Barclays share price has fallen 10% both excluding dividends.
However, after these declines thetwo banks appear cheap on many metrics and it could be time to buy. The questions is, which bank is the better recovery play, Standard or Barclays?
Theres no denying that both Barclays and Standard are both going through trying times right now. Standard is struggling within Asia and Barclays is facing the wrath of regulators on both sides of the Atlantic.
Nevertheless, only Barclays is trying to clean up its act, while Standard is promising more of the same. The Asia-focused lender has posted losses for several quarters now and management has not unveiled any ground breaking strategy to turn things around. As a result, many investors have started to question the suitability CEO, Peter Sands.
Meanwhile, Barclays is going through a significant period of transition, involving the creation of a bad bank, up to 17,000 job cuts and drastic cuts to operating costs.
Standards troubles can be traced to one region; Korea. The Korean banking market has been a thorn in the side of Standard for some years now, with profitability and return on equity within the region collapsing.Korea is one of Standards key markets, so the bank has really suffered as a result of this poor performance.
To some extent, Barclays has faced the same problem with its European arm. However, Barclays investment banking arm and its leading credit card brand, Barclaycard, have helped the bank avoid the worst of the crisis. Managements recent sale of Barclays Spanish division has also reduced exposure to Europe.
Unfortunately, fines and demands from regulators have become an everyday occurrence within the banking sector and Barclays has become an easy target. Along with being found guilty of manipulating the gold market, the bank is facing a lawsuit regarding its dark pool trading venue and tax avoidance.
Some City analysts have suggested the in the worst case, Barclays could be facing total fines of 7bn during the next few years.
Standard is facing similar pressure, recently having to pay 180m to a New York regulators for failure to improveits money laundering controls.
When it comes to the capital cushion, Barclays and Standard have been struggling. Specifically, Standard reported that its capital cushion had fallen to 10.5% at the end of the second quarter, down from 11.8% at the end of 2013.
Barclays capital position has improved over the past twelve months, although management is still seeking leverage reduction opportunities. Whats more, with multiple fines heading Barclays way, the banks capital cushion could collapse, as cash goes to regulators.
Paid to wait
All in all, its difficult to choose between Standard and Barclays. Barclays pending regulatory storm concerns me, while Standards lack of direction is another worrying issue. Still, Standard offers a 4.3% dividend yield at present levels, so shareholders will be paid to wait for the banks turnaround to take place.
With the majority of the dividend paid in script form, management has stated that the payout is here to stay. For this reason, Standard has to be my recovery play of choice.
However, Standard may not fit in your portfolio, so I strongly suggest that you do your own research before making a trading decision.
To help you conduct your own analysis, our analysts here at the Motley Fool have put together this free report entitled,“The Motley Fool’s Guide To Banking”.
ThisexclusiveFREE wealth reportprovidessix key ‘City insider’ valuation metrics for each bank traded in London. That’s right, the report is not just limited to HSBC — itgives a rundown of the whole industry.
The results are surprising — and revealing. This report isfreeandwithout obligation. To get your copy,click here.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Standard Chartered. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.