20150806-Maybank_KERPL-Worse_before_it_gets_better_11页_652kb

Standard Chartered Summary

Core Information

• Share Price: HKD117.00
• Target Price: HKD120.00 (+3%)
• Market Cap (USD): 37.3B
• Average Daily Trading Volume (USD): 18M
• Region: Hong Kong
• Sector: Banks
• Recommendation: HOLD (unchanged)

Key Financial Highlights

• 1H15 Earnings: Missed expectations, with pre-tax profit falling 35.5% YoY to USD2.1B, lower than Bloomberg's USD2.8B forecast.
• Dividend Policy Change: DPS cut by half to USD0.144 for 1H15, with a shift to a constant payout ratio (~45%), expected to result in a rebound to >5% by FY17.
• Revenue Outlook: Potential rebound in total revenue during 2016-17, with an estimated 3-5% annual growth.
• Credit Cost Increase: Credit costs rose from 0.54-0.64% to 0.70-1.09% for 2015-17, driven by weakening asset quality in key markets.
• ROE Adjustment: Lowered long-term ROE assumption to 8.75% in GGM.
• Target Price Justification: Revised TP of HKD120 based on a fair P/BV of 0.77x for FY16.

Performance Overview

• Share Price Performance:
  • 1 Month: -7.0%
  • 3 Months: -6.3%
  • 12 Months: -26.8%
• Relative to Index:
  • 1 Month: -1.1%
  • 3 Months: +6.1%
  • 12 Months: -26.4%

Financial Metrics

Key Operational Insights

• Total Loans: Declined 2.2% HoH in 1H15, due to de-risking and optimization of low-returning loans.
• NIM: Narrowed to 1.73% in 1H15, influenced by de-risking, low-yielding assets, and margin compression.
• Non-Interest Income: Rebounded by 3.5% YoY, driven by strong growth in client-driven Rates & FX and wealth management businesses.
• Cost-Income Ratio: Increased to 59.2% in 1H15, partly due to increased investment in compliance despite cost savings from reduced headcount.
• Loan Impairment Charges: Rose to USD1.2B in 2Q15, with NPL ratio increasing to 3.1% in Jun 2015.
• CET1 CAR: Increased to 11.5% in Jun 2015 under CRD IV rules, with risk-weighted assets falling 4.5% HoH.

Regional Performance

Key Risks

• Credit Costs: Concerns over rising credit costs in India due to difficult recovery of corporate NPLs.
• Currency and Economic Conditions: Potential impact from currency fluctuations and emerging market economic conditions.
• Dividend Yield: Lower yield in 2015-16 due to change in dividend policy.

Valuation and Forecast

• Net Profit Forecasts: Revised downward for FY15 and FY16 by 33.3% and 17.3%, respectively, due to lower NIM and net fees, and higher credit costs.
• Core Net Profit CAGR: Expected to grow at 8.6% during FY14-17.
• Core ROE: Projected to rebound to 6.8-8.8% in FY16-17.
• Target Price: Based on fair P/BV of 0.77x for Dec 2016, down from previous 0.8x.

Conclusion

Despite the challenges faced in 1H15, including a sharp decline in pre-tax profit and increased credit costs, Standard Chartered is expected to experience a rebound in revenue during 2016-17. The bank is shifting its focus towards new economy sectors and is expected to benefit from fee income growth and improved NIM through higher-yield securities. However, the revised target price and lower ROE assumptions reflect cautious outlook due to ongoing credit cost concerns and macroeconomic risks. The HOLD recommendation remains in place, with the potential for recovery in the future.