StanChart offers option to buy into a well-diversified business at fair valuations.
Standard Chartered’s (StanChart’s) Indian Depository Receipt (IDR) offer will be a first for the Indian capital markets. StanChart is ranked among the bigger global banks. It has operations in 71 countries and a network of 1,700 branches, with over 5,000 ATMs. It aims to raise Rs 2,400-2,760 crore by offering 240 million IDRs at Rs 100-115 each.
One IDR is equivalent to a tenth of a StanChart share. So, 10 IDRs are equivalent to one share of the bank. The capital raised from the issue will be used to grow consumer and wholesale businesses and expand the bank’s global footprint. It is also hoped that the listing on Indian exchanges should help improve visibility in India.
| ADVANTAGE DEVELOPING MARKETS | ||
| in % | Net income | Pre-tax profit |
| India | 11.90 | 20.60 |
| Hong Kong | 15.60 | 20.60 |
| South Korea | 10.20 | 6.30 |
| Singapore | 10.50 | 13.90 |
| Asia-Pacific | 19.00 | 14.90 |
| West Asia | 13.70 | 7.10 |
| Africa | 7.20 | 9.40 |
| US, UK & Europe | 11.90 | 7.30 |
| as proportion of total Source: RHP | ||
Right place, right time
Unlike developed markets, robust growth in the economies of the less developed or emerging markets is providing a good opportunity for players operating in these regions. In the overall business pie, StanChart gets only 10 per cent per cent from such developed markets as the US and UK. The rest of its business comes from Asia, Africa and West Asia. India accounted for about 20 per cent of the banks’ profits in 2009.
In fact, with around 70 per cent of its business coming from Asia, the bank was not only able to weather the crisis in the developed markets but also reported growth in profits. Over 2007-09, StanChart’s operating income grew by an average 17 per cent, while net profits increased eight per cent. For the calendar year 2009 (CY2009), although income growth was healthy and the bank was able to curb costs, StanChart made higher provisions even as its tax outgo jumped, restricting profit growth.
Diversified operations
StanChart’s operations are categorised into consumer and wholesale banking.
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In the consumer banking space, it provides banking, deposit-related services, credit cards, personal loans, mortgages, auto finance and wealth management to over 14 million customers, including individuals and small & medium enterprises in Asia, Africa and West Asia. While the bank slowed lending in this segment in 2008 due to the global economic turmoil, it lent more in 2009.
In 2010, lending is expected to gather more pace after growing at a modest seven-eight per cent in the last two years. In the same period, wholesale banking grew 20 per cent. One point of comfort is that about 75 per cent of consumer loans is secured.
Wholesale banking is a client-centred business. It caters to corporate and institutional clients. The bank has strong cross-border capabilities and is well positioned to capitalise on international trade flows as a result of its broad geographical footprint. It works with companies looking to expand across their domestic footprint, and those seeking to penetrate markets.
| STEADY GROWTH | ||
| in Rs crore | CY08 | CY09 |
| Net interest inc. | 34,483 | 35,584 |
| Non-interest inc. | 30,720 | 35,295 |
| Operating profit | 29,675 | 33,759 |
| Net profit | 15,610 | 16,231 |
| P/E(x) @ Rs100 | 11.20 | 12.80 |
| P/E(x) @ Rs115 | 12.80 | 14.70 |
| Source: RHP | ||
| ISSUE DETAILS | |
| Price band (Rs) | 100-115 * |
| Issue size (Rs cr) | 2,400-2,760 |
| Issue opens on | 25-May |
| Issue closes on | 28-May |
| * Retail investors will get a 5% discount on allotment price | |
Due to restricted lending in the consumer business, wholesale banking’s share in the overall pie increased from 47 per cent in 2007 to 61 per cent in 2009. Driven by financial markets and corporate finance segments, the operating profit of StanChart’s wholesale banking business grew 33 per cent in the last two years.
Investment rationale
Around 53 per cent of StanChart’s liabilities are low-cost deposits, higher than most of its Indian private peers, and this is an advantage. In terms of net interest margins (NIMs), they have come off from 2.5 per cent in 2008 to around 2.3 per cent in 2009, which is lower than HDFC Bank and Axis Bank.
With emerging economies seeing good revival, margins may improve, aided by the bank’s low funding costs, rising rates and a pick-up in credit off-take. Overall, the bank could see its operating income and net profit grow at about 18-20 per cent and 12-15 per cent, respectively over the next two years.
At the upper price band of Rs 115, the IDR issue is valued at 15 times its CY2009 earnings. It looks comparable vis-a-vis its Asian peers, like Hong Kong and Singapore. However, in comparison with smaller Indian peers like ICICI Bank and HDFC Bank, it is cheap.
Investors, though, have to bear in mind that sale of IDRs will attract capital gains tax, even as dividends received from StanChart will be taxable as income. Nevertheless, given the growth opportunity and reasonable valuations, investors can subscribe to the offer.