The strong growth outlook for Standard Chartered Bank, given its exposure to the faster-growing Asian and emerging markets, has fuelled its outperformance relative to other UK-based peers. This is also why its valuation of 1.4 times on a price to one-year forward adjusted book value is at a considerable premium to peers at HSBC, say analysts. Thus, analysts believe the stock is fully priced at current levels.
2011: India business slows
The revenue growth rate in 2011, at 10 per cent to $17.7 billion was about the same, as cost growth, even as net interest income growth was robust at nearly 20 per cent. While net interest margins (or NIMs) were stable at 2.3 per cent year-on-year, non-interest income was one per cent lower than the previous year and curbed top line growth.
The year (2011) saw a change in the geographic mix of contribution to pre-tax profits with Hong Kong, Singapore and emerging markets in Asia and Africa compensating for lower profit growth in India and Korea.
| HEALTHY GROWTH | |||
| In $ million | FY11 | FY12E | FY13E |
| Pre provisioning operating profits | 7,794 | 9,036 | 10,160 |
| Net profit | 4,849 | 5,452 | 6,174 |
| EPS ($) | 2.0 | 2.3 | 2.6 |
| % change | 3.6 | 11.8 | 13.2 |
| PE (x) | 13.0 | 11.6 | 10.3 |
| P/B (x) | 1.6 | 1.4 | 1.3 |
| RoE (%) | 12.3 | 12.8 | 13.2 |
| E: Estimates Source: Company, IIFL Research | |||
An exceptional charge of $200 million for the second half in its Korean business pulled down 2011 profits from the region of 56 per cent year-on-year. This was for an early retirement programme, implemented more successfully than expected, with almost 800 employees or 13 per cent of the staff opting for it. The exercise will improve the low operational efficiency (cost to income ratio) in the Korea business, a legacy from its acquisition of Korea First Bank in 2005. The management said this would result in cost savings of $95 million annually.
In terms of individual countries, India (a key market) contributed 12 per cent of total profit before taxes, even as profit declined 33 per cent year-on-year to $804 million on to lower non-interest income and higher provisioning costs. The bank’s management stated the corporate book has seen signs of stress from the ongoing government investigations triggering more early alerts but they don’t expect material impairment on these accounts. Other impairments increased from $64 million to $99 million, mainly because of other exposures taken in the first half in India.
On the other hand, among the key growth drivers in 2011, the Hong Kong business showed robust growth with profit before tax up 41 per cent year-on-year in CY11 led by a strong consumer and wholesale performance. The rise in non-interest income here reflected higher demand for hedging and investment RMB products with the internationalisation of the renminbi.
Singapore became the third geography, after Hong Kong and India, to record a profit before tax of over $1 billion, on strong second half performance. The bank is to open subsidiaries in Singapore as an adjunct to its rising consumer banking presence in the country. This step is in consultation with the Monetary Authority of Singapore and will translate to higher operating expenses in the near-term without added capital burden.
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Outlook
The outlook for 2012 looks comfortable according to IIFL Research although both Hong Kong and Singapore businesses are expected to grow at a slower rate on the strong 2011 base. However, this should be compensated by an improving scenario in India and Korea for pre-tax profits. The exceptional charges on the Korean business this year will provide a $300- million tailwind through relative cost savings and management expects a stable jaws ratio, which is operating cost growth against operating income growth. Overall asset quality is also expected to stay stable, according to IIFL Research, despite some concerns in India.
The company has a comfortable capital adequacy ratio and its return on equity (RoE) was 12.3 per cent. The proposed dividend at $0.76 per share is about 10 per cent higher than the previous year but the dividend payout ratio of 37 per cent is similar to the previous year.
The improved cost scenario is reflected in earnings upgrades of about two-three per cent for 2012-13. The management has guided strong double-digit growth with stable NIMs and marginally higher RoE in the mid-teens. However, it expects it will take a few more years to see a significant improvement in this metric (RoE), with capital demands from higher regulation being the key issue.
At current prices, Cantor Fitzgerald sees the stock as fully priced in. StanChart’s IDRs continue to trade at a discount on low demand, given its non-convertibility to regular shares.