Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) has hit the skids after long years of impressive annual growth. The top brass at the Asia-focused bank are on the defensive, with rumblings of shareholder discontent that are as welcome as thunder and rain on a bank holiday weekend.Â
Just how far the market has fallen out of love with Standard Chartered can be seen by the share performance relative to its peers in the table below.
| Â | Share price | 1 year performance |
|---|---|---|
| Royal Bank of Scotland | 358p | +4% |
| Lloyds | 76p | +2% |
| HSBC | 644p | -7% |
| Barclays | 223p | -15% |
| Standard Chartered | 1,216p | -18% |
Turnaround potential
At first glance, Standard Chartered deserves the opprobrium being heaped upon it. The headline figures in the company’s half-year results, released earlier this month, didn’t read well.
Operating income was down 5% on last year’s first half and profit dived 20% from $4.1bn to $3.3bn. The interim dividend was held flat.
However, looking beyond the bullet-pointed ‘highlights’, Standard Chartered told us: “Financial Markets and Korea accounted for much of the profit shortfall”. Specifically, Financial Markets income fell by $432m, while Korea went into the red with a $264m reversal.
The Financial Markets business was hurt by low interest rates and low volatility, which meant “less corporate hedging, tighter spreads and more challenging conditions for market making”. Negative sentiment towards emerging markets also reduced activity.
Much of this is cyclical rather than structural, and signs of a return to more benign conditions in due course would provide a fillip to Standard Chartered’s shares.
The bank is restructuring its business in Korea, and management says that while there’s no “quick fix”, progress is already being made. Early confirmation that the fix is on track could be enough to re-ignite the interest of jaded investors.
Takeover potential
The heavy slump in Standard Chartered’s shares has seen the price-to-tangible book value fall from 1.5 a year ago to 1.2 today. The bank also now trades on just 11 times current-year forecast earnings, falling to 10 times 2015 forecasts.
As well as providing a nice base for an upwards re-rating of the shares, if the scenario of an improving outlook in Financial Markets and Korea pans out, the current lowly valuation could attract a takeover bid.
Even when Standard Chartered was one of the most richly-valued banks, it was regularly touted as a potential target, due to its attractive positioning in Asia, Africa and the Middle East.
While no bank has expressed a public interest in acquiring Standard Chartered, it hasn’t stopped analysts pointing out the value to be had for a predator and what a good fit the Footsie bank could be for rivals as far afield as Spain (Banco Santander), Canada (Bank of Nova Scotia), and Australasia (Australia and New Zealand Banking).