Fears of an impending eurozone meltdown, as Greece is forced towards the single currency's exit door, have hit bank shares hard. Given the potential economic pain that could strike Europe should such a crisis erupt - and with prospects for banks so closely linked to the economic fortunes of the markets in which they operate - then perhaps that's not surprising. What is surprising, though, is that Standard Chartered, which is largely exposed to fast-growth Asian markets, should be judged as harshly as Europe-focused lenders; its shares have tumbled by more than 20 per cent since mid-March.
- Focused on fast-growth Asia
- Credit quality looks good
- Well capitalised
- Decent dividend yield
- Indian operations under pressure
- Asian growth could stall
At a time when some UK-listed banks are still struggling with painful losses, Standard's performance looks enviably impressive. Combine the bank's consumer and wholesale operations, and Standard's operating profit from its core Hong Kong operation rose 41 per cent last year to $1.55bn (£994m). Profits on the same combined basis from Singapore increased 40 per cent in the 12-month period to $1bn and they were up a third to $1.37bn in the other Asia-Pacific business segment. Moreover, growth has continued into 2012, too, with last month's first-quarter trading update reporting "good income progression" in both the wholesale and consumer operations.
Credit quality looks good, too. While Standard's impairment charge did grow 3 per cent in 2011, at $908m it remains tiny compared with its end-2011 $264bn loan book. Compare that with, say, rival HSBC; its 2011 bad debt charge, at $12.1bn, represented a chunkier 1.3 per cent of that bank's loan book. And Standard's impairment charge is only really rising at all because the group loan book is growing - not because credit quality is deteriorating.
Neither is Standard overly exposed to potential funding problems. As the eurozone crisis grows, it's not inconceivable that banks could become reluctant to lend to each other - forcing a funding crisis for some banks. But Standard's commercial loan book is more than covered by a retail customer deposit book that stood at $342bn at end-2011. Few other lenders are so comfortable - Lloyds' customer deposit book at end-March, for example, was £418bn; notably lower than its £538bn loan book. What's more, with end-year core tier one capital equal to 11.8 per cent of its assets, weighted for risk, Standard is the best capitalised lender among the UK listed banks.
STANDARD CHARTERED (STAN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,315p | MARKET VALUE: | £32.5bn | |
| TOUCH: | 1,314-1,315p | 12-MONTH HIGH/LOW: | 1,684p | 1,142p |
| DIVIDEND YIELD: | 4.1% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 1,091p | |||
| Year to 31 Dec | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|
| 2008 | 4.57 | 185 | 59.4 |
| 2009 | 5.15 | 162 | 63.6 |
| 2010 | 6.12 | 196 | 69.2 |
| 2011 | 6.78 | 201 | 76.0 |
| 2012* | 7.45 | 216 | 84.0 |
| % change | - | - | +11 |
*Charles Stanley estimates (figures adjusted - not comparable) Normal market size:1,600 Matched bargain trading Beta:1.35 £1=$1.56 | |||
Admittedly, Standard does face challenges: last year's combined operating profit from India slumped a third to $804m. That largely reflects greater competition and a hit to demand following big hikes in interest rates as the Reserve Bank of India struggles against inflation. Standard also had a tough time in Korea, where costs and staff productivity issues held back performance - the consumer bank there suffered a £41m operating loss last year.
There's also the danger that Asia, which generates around 80 per cent of the bank's profits, could see growth stall should the region's main end markets of Europe and America deteriorate too much. This is a real risk with, for example, the World Bank having cut its Chinese growth forecast last month precisely because of sluggish US and European demand.
But it's an issue that also needs a little context. The World Bank is still expecting the Chinese economy to grow 8.2 per cent in 2012 - hardly a recession. And the US - Asia's biggest single end market - is showing signs of recovery, with the OECD expecting the US economy to grow 2.4 per cent this year. Prospects do look bleak for many of Europe's economies, but the region's largest economy - Germany - grew 0.5 per cent in the first quarter.
