Admittedly, Asian-focused lender Standard Chartered (STAN) hasn't had the easiest ride of late. Its recent performance has been hit by such issues as local currency weakness in some of its markets and, especially, by soaring defaults in South Korea. But these are all short-term problems. In the longer term, the economies of Standard's Asian markets are expected to grow at a pace that's well above those of the west, which should drive superior earnings growth at the bank. Yet Standard's shares are inexpensively rated for its sector and offer an attractive dividend yield.
- Exposed to high-growth emerging markets
- Credit quality still robust
- Impressive capital cushion
- Decent dividend yield
- Troubled South Korean unit
- Hit by currency weakness
Reflecting recent hiccups, Standard's figures aren't exactly pretty. South Korea is proving especially problematic and, at the full-year stage, loan impairments there jumped 67 per cent to $371m (£220m). That's down to increased use of a government-sponsored debt forgiveness programme for struggling consumers (the Personal Debt Rehabilitation Scheme) and, last year, the bank wrote down the value of its South Korean operation by $1bn. This was the main driver behind the slide in the bank's reported earnings during 2013. There hasn't been much respite from such pressures since, either, and management said this month that "the difficult market conditions that began last year have continued into the first quarter of 2014 and remain through April and into May". Specifically, Standard has seen performance hit by local currency weakness, mainly the Indian rupee and Indonesian rupiah. South Korea remains troubled and first-quarter income there fell $110m year on year.
But such challenges have already been well flagged and, crucially, there's plenty of good news to take on board. In particular, credit quality remains resilient: first-quarter loan impairments rose by a low single-digit percentage, but management says there are "no new areas of material pressure". In fact, Standard's overall loan impairment situation needs some context. Despite recent pressures, and a 35 per cent hike in the bad debt charge last year, total impaired loans at end-2013 represented a mere 2.5 per cent of the loan book. In contrast, the figure is 9 per cent at RBS (RBS) and almost 6 per cent at Lloyds (LLOY). "Impairments really are tiny," points out analyst Ian Gordon of broker Investec Securities.
STANDARD CHARTERED (STAN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,290p | MARKET VALUE: | £31.4bn | |
| TOUCH: | 1,289.5-1,290p | 12-MONTH HIGH: | 1,630p | LOW: 1,177p |
| FORWARD DIVIDEND YIELD: | 4.3% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 1,902¢ | |||
| Year to 31 Dec | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|
| 2011 | 6.78 | 201 | 76 |
| 2012 | 6.85 | 200 | 84 |
| 2013 | 6.06 | 164 | 86 |
| 2014* | 7.22 | 209 | 89 |
| 2015* | 8.05 | 232 | 94 |
| % change | +11 | +11 | +6 |
*Investec Securities forecasts Normal market size: 1,500 Matched bargain trading Beta: 1.11 £1=$1.69 | |||
Standard's emerging markets focus leave its longer-term earnings prospects looking good, too. After all, the IMF expects the emerging economies of Asia to grow by nearly 7 per cent overall for this year and next, which is well ahead of the 2 per cent or so overall growth forecast by the IMF for the developed economies. In fact, analysts think that Standard's return to growth, following its difficult recent patch, should begin in second half of this year. Mr Gordon expects the bank's earnings to jump 27 per cent this year, followed by 11 per cent earnings growth in both 2015 and 2016.
Worries about capital adequacy have been firmly squashed, too, after the bank reported an end-year Basel III-basis core tier-one capital ratio of 10.9 per cent. That leaves Standard as the best capitalised of the big UK-listed banks - HSBC (HSBA) and Lloyds come next, both with ratios of 10.7 per cent, while RBS's is just 9.4 per cent. What's more, the bank's capital cushion is also "significantly and materially ahead of [the regulator's] guidance", pointed out chief executive Peter Sands back in February.
Despite recent drags on performance, the bank's return on equity (RoE) - 11.2 per cent at end-2013 - is smart for its sector as well. True, HSBC's first-quarter RoE was better, at 11.7 per cent, but UK-focused peers still lag well behind - Lloyds' end-2013 RoE, for example, was still in negative territory. Costs are also under control. First-quarter expenses were held flat compared with 2013's first quarter and Mr Gordon expects cost growth of just 1 per cent for 2014.
