20150202-高盛-Asset_quality,_capital_position_cap_upside_despite_trough_valuation_18页_581kb

Standard Chartered Bank (2888.HK) Summary

Core Content

Standard Chartered Bank (STAN) is currently trading at a low valuation, with a price-to-book (P/B) ratio of 0.7X, price-to-tangible book value (P/TB) of 0.8X, and price-to-pre-provision operating profit (P/PPOP) of 4.7X. The stock is trading at approximately a 22% discount to its sum-of-the-parts valuation, which is near the trough level seen during the 2008 global financial crisis. Despite these undemanding valuations, the analysts maintain a Neutral rating, citing that a structural re-rating is unlikely without further clarity on the bank's asset quality and capital position.

Key Points

Asset Quality

• Commodity prices have declined by 15% year-to-date, affecting STAN's 9% credit exposure in the commodities sector.
• The NPL ratio has risen from 1.5% in 2H11 to 2.3% in 1H14, with the coverage ratio dropping from 64% to 53%.
• Bottom-up analysis suggests potential NPL/loan impairment charges (LIC) from commodity-related credit exposure could reach US$4.1bn in the worst-case scenario and US$2.3bn in a more moderate one.
• The third quarter IMS reported increased loan loss provisions, primarily from the Corporate and Institutional Clients segment.
• Management guidance suggests provisions will remain elevated at around US$536mn for the next few quarters.

Capital Position

• Capital measures are more likely due to deteriorating asset quality.
• STAN’s CET1 ratio is currently at 10.7%, which is well above the minimum requirement of 8.7% but below that of its UK peers.
• The UK stress test is expected to be a key constraint, with the potential to significantly impact capital ratios.
• STAN has the second lowest CET1 ratio among UK banks and the highest leverage ratio, but the leverage ratio is not expected to be a major constraint.
• Capital shortfall could be around US$3–4bn by 2017 if RoRWA remains low.

Valuation Analysis

• EPS revisions for 2014E–2016E have been lowered by 4%–22% due to lower revenue growth, slower net interest margin recovery, and higher loan loss provisions.
• The 12-month target price is revised down to HK$115 from HK$152, implying a 9% return potential (including a 6% dividend yield).
• The Residual Income Model (RIM) is used for valuation, with a sustainable RoRWA assumption lowered to 1.20% from 1.38%, reflecting operational challenges.
• In a bull-case scenario, RoRWA could rebound to 1.42%, leading to a potential valuation of HK$142.
• In a bear-case scenario, RoRWA may stay low at 1.03%, leading to a potential valuation of HK$94.

Key Risks

• Upside risks: Faster or substantial improvement in RoRWA.
• Downside risks: More than expected increase in loan loss provisions, stricter capital requirements, and prolonged commodity price weakness.

Financial Performance

Capital Position Analysis

Investment Profile

• Price (HK$): 104.90
• 12-Month Price Target (HK$): 115.00
• Market Cap (HK$ mn / US$ mn): 254,592.3 / 32,836.4
• Dividend Yield (%): 6.4 (2014E)
• PPOP Growth (%): -14.1 (2014E)

Earnings Growth Drivers

Summary

STAN's current valuation is at a trough level, but the stock is unlikely to see a structural re-rating without further clarity on its asset quality and capital position. The bank is heavily exposed to commodities, with a 9% credit exposure and a potential US$2.3bn in additional loan loss provisions. The CET1 ratio is currently at 10.7%, which is above the minimum requirement but below that of most UK peers. The UK stress test is expected to be a key constraint, with a 200 bp headroom to regulatory requirements. The RIM-based target price has been revised down to HK$115, with a 9% return potential. Analysts maintain a Neutral rating due to the uncertainty around future asset quality and capital measures.