20151008-高盛-渣打集团-02888.HK-Trading_opportunity_as_isolated_credit_crisis_priced_in__upgrade_to_Buy_44页_1mb

Summary of Trading Opportunity for Standard Chartered Bank (STAN)

Core Content

This report outlines the investment opportunity in Standard Chartered Bank (STAN) by Goldman Sachs, upgrading the stock to Buy from Neutral. The analysis is based on the current market pricing of a potential credit crisis, particularly in the bank's non-mortgage credit book, and the expectation of improved capital clarity and strategic initiatives.

Main Points

• Market Pricing: The market is pricing in a c. 18% peak NPL (Non-Performing Loan) ratio for STAN’s non-mortgage credit book, which the analysts believe is unlikely without a broader systemic crisis in Asia or Emerging Markets (EM), which they do not expect.

• Capital Hole: The current share price implies a c. US$5+ bn capital hole, which the analysts consider excessive. They anticipate better clarity on STAN's capital position in December, which could lead to a positive surprise.

• Valuation: STAN is trading at 25-year lows, with a P/B (Price to Book) of 0.63X and P/TB (Price to Tangible Book) of 0.71X. It is also trading at a 10% discount to its SOTP (Sum of the Parts) value compared to peer P/Es.

• Upside Potential: Despite lowering the 12-month target price to HK$109 from HK$120, the new target still implies a 25% upside from the current price.

• Catalysts:

  • 3Q Results (November 3): Expected to demonstrate management's commitment to capital, with internal capital generation via RWA reduction and selective exits.
  • BOE Stress Test (December 1): Expected to provide clarity on STAN's capital position. The results could influence the amount of external capital needed.
  • New CEO Strategy Update: Expected in November-December, potentially leading to cost cuts and business streamlining.
  • Improved ROE: Anticipated to lift ROE toward the 10% hurdle through strategic changes.

Key Information

• Current Share Price: HK$87.15
• 12-Month Price Target: HK$109.00
• Market Cap: HK$221,971.1 mn / US$28,640.7 mn
• EPS Projections:
  • 12/14: HK$7.95
  • 12/15E: HK$7.00
  • 12/16E: HK$7.83
  • 12/17E: HK$11.14
• EPS Growth:
  • 12/15E: -17.5%
  • 12/16E: -25.7%
  • 12/17E: -7.3%
• Valuation Metrics:
  • P/B: 1.09X (current), 0.63X (12/15E), 0.61X (12/16E), 0.59X (12/17E)
  • P/E: 19.3X (current), 12.5X (12/15E), 11.1X (12/16E), 7.8X (12/17E)
  • P/PPOP: 3.9X (current), 4.3X (12/15E), 4.9X (12/16E), 4.1X (12/17E)
  • Dividend Yield: 4.4% (current), 3.8% (12/15E), 4.0% (12/16E), 4.4% (12/17E)
• Pretax Profit: HK$4,235.0 mn (12/14), HK$3,306.6 mn (12/15E), HK$3,770.1 mn (12/16E), HK$5,340.4 mn (12/17E)
• Net Profit: HK$2,512.0 mn (12/14), HK$2,263.3 mn (12/15E), HK$2,591.5 mn (12/16E), HK$3,737.6 mn (12/17E)
• ROE (Return on Equity):
  • 12/14: 5.6%
  • 12/15E: 5.0%
  • 12/16E: 5.6%
  • 12/17E: 7.6%
• ROA (Return on Assets):
  • 12/14: 0.36%
  • 12/15E: 0.31%
  • 12/16E: 0.34%
  • 12/17E: 0.48%

Risks

• Commodities Exposure: Potential for large losses due to asset quality deterioration.
• EM FX/Credit Exposure: Impact from weaker EM macroeconomic conditions and FX.
• Litigation Risks: Uncertainty around legal issues.
• Management Execution: Risk in the effectiveness of strategic changes.
• BOE Stress Test: Uncertainty in the outcome and regulatory response.

Investment Profile

• Investment List Membership: Asia Pacific Buy List
• Analyst Contributors:
  • Gurpreet Singh Sahi, CFA
  • Jonathan Lim
  • Martin Leitgeb, CFA
  • Vincent Chang

Strategic Outlook

• The analysts believe that STAN's current valuations are at a deep discount to its intrinsic value.
• ROE is expected to improve with cost-cutting and streamlining of business units.
• Capital clarity and strategic updates from the new CEO are seen as key catalysts for a re-rating.
• The capital hole is viewed as excessive, and a lower-than-expected recap plan could be positive for the stock.

Conclusion

Goldman Sachs believes that STAN is currently undervalued due to market concerns over a potential systemic crisis and its capital needs. However, the analysts do not expect such a crisis, and they see a positive outlook with the potential for a 25% upside from the current price. The report highlights the 3Q results, BOE stress test, and the new CEO's strategy update as key catalysts that could lead to a re-rating of the stock.