November 13, 2012 5:12 pm

StanChart – premium pricing

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Bank’s emerging markets-derived shine is fading

For years, Standard Chartered’s big attraction has been that it is not like other UK-based banks. Where they struggle with moribund western economies, StanChart derives 90 per cent of its operating income from emerging markets, mostly Asia. And as other banks were fined for past sins, StanChart painted itself as a paragon of virtue. The difference has been rewarded with a premium rating: its shares are on 1.5 times tangible book value.

But the shine has started to fade. Emerging markets have slowed, threatening the company’s target of double-digit earnings growth in the medium term. Credit Suisse recently cut its forecasts for the bank, and expects medium-term earnings growth of just 7 per cent. Bad loan charges are rising – they were 6.1 per cent of operating income in the first half of the year, up 140 basis points from a year ago. With investors nervous about growth and impairments, StanChart’s refusal to report full quarterly numbers does not help its cause. And its public image has taken a hit with the payment of a $340m fine in the US for sanctions breaches. Not only did the bank handle the accusation badly; it is also facing more fines for the issue from other regulators.

All of which makes the scale of its premium increasingly hard to justify. HSBC, its closest UK-based rival, trades on 1.2 times book value, while the likes of Barclays and RBS are on 0.6. In Spain, internationally diverse Santander and BBVA are on 1 times book value, to local rivals’ 0.6-0.8.

StanChart is still different. Its emerging markets exposure far outstrips HSBC and BBVA (which generate about half their income in emerging markets). And although growth there is slowing, Asia is still a better place to be a bank than Europe. So some premium is due. But StanChart is not as attractive as it once was. The size of the premium does not yet reflect that.

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