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Summary of Standard Chartered Bank Analysis

Core Content

This report provides an analysis of Standard Chartered Bank's financial performance, capital structure, and valuation in 2015-2017, highlighting key trends and investment rationale.

Main Points

• Impairments: In 2017, the bank is expected to have 130bp of impairments, up from 86bp in 2016. This reflects the impact of weaker energy prices and Asian GDP growth. A significant portion of these impairments (nearly 50%) comes from assets no longer in the bank's portfolio, such as large corporate concentrations in South Asia and disposed consumer finance operations.

• Revenue Outlook: Revenue for 2016 is forecasted at US$15.5bn, down from the US$18bn implied by management. The revenue gap between the third quarter of 2015 and the full year 2015 has led to market uncertainty. The bank is expected to see a reduction in 2018 revenues to US$16.9bn, down by US$0.3bn from previous estimates.

• Capital Position: The bank has over US$39bn in CET1 capital at the end of 2015, with a CET1 ratio of 12.8%. The Price Objective is set at 650p, reflecting a 130bp cushion, which is seen as a conservative level. The bank is expected to have a break-even 2016 and a 70bp build in CET1 by 2017.

• Valuation: The report uses two valuation approaches:

  • Sum-of-Parts: This model suggests a fair value of £836 per share (or HK$98) in 2018, assuming the bank re-gears its capital and asset quality normalizes.
  • Gordon Growth Model: A more conservative approach values the shares at £6.50 (HK$72.58) based on a 10% cost of equity and 2018 earnings. This model assumes low near-term profitability but potential for growth.

• Investment Opinion: The bank is rated as a Buy due to its strong corporate and retail operations in Asia, Africa, and the Middle East, along with its position as one of the few full-service network banks in the region. The current valuation, discounted to tangible NAV, is seen as attractive with upside potential.

Key Financial Metrics (Dec)

Valuation Metrics (Dec)

Key Risks and Investment Rationale

Key Risks

• Macro-economic shocks in Asia
• Unexpected capital requirements
• Faster-than-expected deterioration in asset quality

Upside Risks

• M&A activities
• Strategic review to be concluded by year-end 2015

Investment Rationale

• Standard Chartered is one of the few full-service network banks in Asia, with strong corporate and retail operations across Asia, Africa, and the Middle East.
• Despite recent income challenges, the bank is currently trading at a discount to tangible NAV, which is seen as attractive.
• The bank has taken steps to reduce exposure to high-risk areas such as unsecured lending and has exited some operations, which should help reduce loan losses.

Key Changes

Business Performance

Capital and Balance Sheet

Key Metrics

Valuation Approach

Sum-of-Parts (2018E)

Gordon Growth Model (2018E)

Stock Data

Company Description

Standard Chartered is a multinational bank with headquarters in London. It has significant operations in Asia and Africa and a small exposure in Latin America. It operates in major financial hubs like Hong Kong, Singapore, Malaysia, Thailand, India, and the Middle East. The shares are listed in London and Hong Kong, with Indian Depositary Receipts available in India.

Investment Rationale

The bank is rated as a Buy due to its strong position in Asia and Africa, and the potential for re-gearing post restructuring. Despite recent challenges, the current valuation is seen as attractive, with the shares trading at a discount to tangible NAV. The report highlights the potential for upside in the long term.

Key Risks and Actions Taken

• Loan Losses: The bank has seen a significant increase in loan losses, particularly in South Asia. However, there are signs that these losses are beginning to normalize.
• Revenues: The revenue outlook is a key focus, with the bank expected to have a lower revenue in 2016 compared to the previous year.
• Capital Requirements: The bank has raised US$5.4bn in equity, and the Bank of England has confirmed the end of regulatory capital inflation, which should help stabilize the capital position.

Analyst Certification

Alastair Ryan certifies that the views expressed in this report accurately reflect his personal views about the subject securities and issuers. His compensation is not directly or indirectly related to the specific recommendations or views expressed in this report.

Special Disclosures

The report includes disclosures related to the registration of foreign portfolio investors and the restrictions on trading in Indian companies' GDRs and GDSs. It also notes that the bank may refuse to provide research reports to non-residents in India.