Standard Chartered PLC

Investment thesis


With its centre of focus in Asia, Africa and the Middle East, Standard Chartered Bank (SCB) is a proxy for emerging market (EM) growth. Rising concerns about EM’s growth slowdown and currency fluctuations have raised concerns about the banks’ growth outlook but have given astute investors a good entry point. SCB’s ability to implement strategies in achieving its Return-on-Equity (ROE) target could support re-rating and attaining sustainable valuation.


- better than expected pre-provisios profit

- capital position within comfortable range

- buyback supportive of share price


Company description


Standard Chartered Bank (SCB) is a leading international banking group listed on the London and Hong Kong Stock Exchanges, as well as the Bombay and National Stock Exchanges in India. Headquartered in London, SCB operates in 63 markets worldwide, with more than 80 per cent of its income and profits coming from Asia, Africa and the Middle East.


SCB has more than 1,700 offices in more than 70 countries and operates four business segments: Corporate & Institutional Banking, Private Banking, Commercial Banking and Retail Banking. Their businesses serve four regions: Europe & Americas, Greater China & North Asia, Africa & Middle East, and ASEAN & South Asia. With more than 86,000 employees in more than 60 markets, they have over a 150-year history in some of the world’s most dynamic regions.


Investment summary


  • 1Q19 PPOP came in ahead of expectations with stable NIM – Revenue was in-line with consensus estimates and costs were 5% lower than expected. Management is cutting costs and is increasing leverage to drive improvement of the bank’s return on total equity (ROTE) against its strategic target of 10%+ by 2021. Net interest income was flat q/q, driven by stronger-than-expected loan growth of +3% q/q. Adjusted net interest margin (NIM) stayed flat sequentially. A US$1bn buyback, representing around 3.5% market cap, was announced earlier than the market expected and will commence soon.

  • Optimizing capital position – Common Equity Tier 1 (CET1) ratio edged down 30bps q/q to 13.9%. Proforma for the buyback CET1 is estimated to be at around 13.5%, at the mid-point of the company’s target range of 13-14%. Assuming SCB manages to achieve its FY19 risk-weighted assets (RWA) growth guidance of around 2% y/y, it could build capital further and make way for potential capital return in the future.

  • Buyback to provide technical support – SCB is trading below its historical average of price-to-book ratio. Share price could respond positively to the share buyback announcement. We think there could be further buybacks following anticipated disposals and RWA optimisation. We believe the ongoing buyback will be supportive of the share price performance.

Conclusion


The faster than expected macroeconomic growth and economic resilience of emerging markets should drive core earnings stronger than most analysts are anticipating. The cost control and capital allocation are in favor of future growth. Lastly, the potential mergers and acquisitions optionality of Standard Chartered furthers our these that Standard Chartered stock is heading higher.


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