Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Standard Chartered PLC (LSE: STAN) (NASDAQOTH: SCBFF.US) to ascertain if it can make £8 billion in profit.
Have we been here before?
A great place to start assessing whether or not Standard Chartered can make £8 billion in profit is to look at the company’s historic performance. Unfortunately, it would appear that Standard Chartered has never been able to make £8 billion in profit and it would seem as if the bank is going to struggle to do so over the next few years.
In particular, after making a pre-tax profit of just under £7 billion for 2012, City analysts expect Standard Chartered’s pre-tax profit to fall to around £4 billion for full-year 2013. This 40% decline in profitability is mainly due to writedowns Standard Chartered has been forced to take on its Korean division.
But what about the future?
However, despite these short-term issues Standard Chartered is well placed to churn out a £8 billion profit in the long term. For example, Standard Chartered’s weakest market right now is Korea, where income for full-year 2013 is expected to decline by a double-digit percentage. Still, Standard Chartered’s management has stated that its businesses in Hong Kong, Africa and India are all growing rapidly and profit in these territories is forecast to expand at double-digit rates for 2013.
That being said, there some speculation that Standard Chartered will have to tap the market for additional cash to boost capital ratios in the near future — this would be the third cash call in five years.
Fortunately, this is not a pressing issue as the bank currently has a Tier 1 capital ratio of around 11.4%, which is deemed to be adequate. Still, City analysts expect that this ratio is not likely to improve over the next few years as the bank reinvests profits to drive growth.
Nevertheless, City analysts at present remain upbeat on Standard Chartered’s future and expect the bank to rebound over the next few years. Specifically, current City forecasts predict that Standard Chartered’s pre-tax profit will reach £5.3 billion by 2015 — that’s 26% higher than 2013’s expected level.
Even so, if City forecasts prove true and Standard Chartered reports a pre-tax profit of £5.3 billion for 2015, the bank’s pre-tax income would have to grow around 10% per annum for profits to return to 2012 levels by the end of the decade.
Foolish summary
So overall, I feel that Standard Chartered cannot make £8 billion profit.