Standard Chartered – down but Not out, at 1120p

By Robert Sutherland Smith  

Standard Chartered Bank (STAN) is a South-East Asian and African bank that had it origins in the old British Empire. For years it had a tremendous earnings growth track record, linked to the growth and emergence of China and the other South-Asian economies. Last year  – the year to 31st December 2014 – was poor as reflected in the following numbers: profit before taxation down 25%; ‘normalised’ earnings per share down 28%; return on equity down from 11.2% the year before, to 7.8%; and a plethora of bad and doubtful debts – what they prefer now to call by the less dramatic term “impairment.”

The causes of this depressing performance in the results of a banking group whose equity had sold at a premium to other banks, included a deterioration in sentiment towards emerging markets occasioned by the slow down in China’s GDP growth and the impact that had on neighbouring economies. This was aided and abetted by low interest rates and the inflow of competitive US and Japanese funds into the bank’s markets, as a result of US and Japanese quantitative easing. Moreover, these latest annual results were worsened by the management’s need to address its problems which involved more costs and lost income. However, there were brighter spots in this sorry scene.

First and foremost was the maintenance of the annual dividend at 86 cents. (The bank reports its activities in dollars.) This was done despite the fact that the bank chose (an example of Hobson’s choice) to increase its capital under the pressure of bank regulation. It explained that it was possible to do so because it considered it had other means of increasing capital. Thus, the dividend did not have to compete with capital. Translating the 86 cents into sterling to 54.4p a share gives an historic annual dividend yield of over 4.8%. Standard Chartered’s Tier I capital ratio came out at a reasonable 10.7%, although its adequacy at that ratio is being overtaken by the continuing pressures of bank regulation. HSBC for example, talks of increasing its own Tier I ratio to 12%. The world moves on.

The reasons behind the near 30% rise in the share price since February include the following: the fact that the outgoing, long serving CEO Peter Sands has already set in train measures intended to return the business to profitability, by getting out of capital intensive low return business (which contributed to the poor performance last year due to its costs and the dislocation of activities); the reallocation of capital to serve improved profitability and better capital ratios (including an objective to increase its tier I capital ratio from 10.6%); and increase investment in digital technology to improve margins in retail banking and more effective compliance with banking regulation and law. Finally, long serving Peter Sands is to be replaced by Bill Winters, a senior, much experienced banker with a big reputation for management. That has gone a long way to clear the air and improve sentiment towards the shares.

For the record, the market consensus estimates and forecasts for earning and dividends are as follows: an estimated 95p of earnings this year (down 3%) and 108p (up 14%) next year. Estimated dividend payments are for 50.6p this year (a reduction of 7%) and 52p next year. This puts the shares, at 1120p, on estimated prospective PERs of 11.3 and 9.8 and forward dividend yields of 4.5% and 4.6%. With net assets of an estimated £30 billion and a market capitalization of £26 billion, the shares are selling at a significant discount to equity. That further and reasonably implies that any rights issue would be some way off.

In conclusion, the share price looks as though it may be on the verge of breaking out into a new uptrend. It is reported that the bank may be looking to relocate somewhere in SE Asia, which should be good for the share price. With a new and impressive CEO, a share price at a considerable discount to assets and which looks as though it may be breaking out into a new uptrend – have a look – these shares strike me as interesting and attractive.