Grab opportunity from disappointment with Standard Chartered

The derating appears to have been party driven by an unexpectedly weak first quarter update. It reported that income growth in Hong Kong and Africa had been offset by weaker performances in Korea and Singapore and that first quarter operating profit was "slightly down" on 2012's first-quarter outcome. But the lender’s latest update, late last month, served-up better news - suggesting that the sluggish first-quarter performance had been temporary. Standard reported that the second quarter had shown an acceleration over the first and that income in the first six months of 2013 was set to grow at a mid single-digit rate. While, looking longer-term, broker Investec Securities expects Standard’s earnings to grow 19 per cent in 2013, followed by 10 per cent in both 2014 and 2015.

Standard is robustly capitalised, too. At end-2012, the core tier one capital ratio had reached 11.7 per cent - leaving it as one of the best capitalised UK banks. Bank regulators reckon that HSBC (HSBA) and Standard are the only UK-listed lenders that aren't facing capital shortfalls (using end-2012 figures, based on a 7 per cent capital ratio and using Basel III criteria). In contrast, regulators reckon RBS (RBS), Lloyds (LLOY) and Barclays (BARC) are facing capital shortfalls of £13.6bn, £8.6bn and £3bn, respectively.

True, when UK-focused peers have seen loan impairments generally fall, Standard’s have been rising. With its most recent trading update, management revealed that consumer banking's loan impairment charge was expected to be $120m (£78m) higher than 2012's half-year figure - largely reflecting a long-term asset quality problem in South Korea. That market accounts for almost 40 per cent of the division’s loan impairments. But this needs some context. At end-2012, just 4.6 per cent of the consumer loan book was impaired and the total group bad debt charge was $1.22bn - tiny compared with the lender’s $284bn loan book. Moreover, and when UK rivals are witnessing loan book contraction as they shed non-performing assets, Standard’s book grew 6 per cent in 2012 - more loans will inevitably generate more bad debts.

As with most other lenders, Standard has also suffered its share of sentiment-damaging business conduct issues. Specifically, last summer, the bank was accused by regulators in New York of having "schemed" to avoid US sanctions against Iran - Standard was eventually forced to cough-up $667m in fines. That’s now resolved, but the emergence of other conduct-related issues should never be ruled out - after all, the sector has been hit hard with a long list of expensive reputational issues lately, ranging from Libor-fixing to payment protection insurance mis-selling.

As a major Hong Kong player, the Chinese banking system's health is an issue that investors should also keep an eye on. Last month the sudden emergence of liquidity worries sent short-term Chinese interbank rates soaring to double-digit levels before the central bank pledged to provide support. That helped the seven-day bond repurchase rate - a key gauge of short-term liquidity in China - to fall back to a more normal 4 per cent or so. Moreover, with a retail deposit base of $378bn - more than enough to fund its loan book - Standard isn’t reliant on interbank markets anyway. But further liquidity fears in China could yet affect sentiment.