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Standard Chartered (OTCPK:SCBFF) may be headquartered in London, but the overwhelming majority of its revenues come from emerging markets. For the 2012 financial year, Europe (including the U.K.) and the Americas accounted for just 12% of operating income. The rest is generated from Asia, Africa and the Middle East; with the biggest markets being Hong Kong, Singapore, South Korea and India. Of all the banks in Europe and the U.S., only HSBC (HBC) and Citigroup (NYSE:C) have comparable operations in emerging markets; and even they generate a significantly larger proportion of their revenue from developed markets.

Emerging markets

Investing in emerging market is potentially more rewarding, but usually at a higher risk. Emerging markets are generally growing significantly faster than developed economies, and they are expected to continue to grow more quickly for the foreseeable future. Standard Chartered has positioned itself to take advantage of faster economic growth rates, and has seen its earnings grow more quickly than its many of its peers.

Of particular interest is Standard Chartered's banking operations in Africa. Standard Chartered's key markets in Africa are Kenya, Nigeria, Ghana, and Zambia. Its operating income from Africa has grown over five years by a compounded average growth rate (CAGR) of 15.0%. This is significantly faster than many of its other markets, and most analysts believe this is where Standard Chartered's future growth lies. Many African economies have very low financial penetration; and so there is plenty of scope for financial services to expand.

Classifying all of Standard Chartered's emerging market operations as being located in high growth economies would not be very accurate. Hong Kong, Singapore, and South Korea are high income economies, with slower economic growth rates. These three economies accounted for 39% of total operating income in 2012, and are its three most profitable markets. But these economies are still in better shape than many in Europe, Japan and North America. They have significantly lower unemployment, and are forecasted to have GDP growth in 2013 of 2.6%, 2.3% and 3.2%, respectively; compared to 2.0% in the US, or -0.6% in the Euro area. From 2007 to 2012, operating income from these three economies still grew by an impressive CAGR of 10.4%.

Currently, a very important risk to investing in emerging markets is related to currencies. The Economist had published an article on June 8th, here; explaining that emerging markets have generally been falling out of favor by investors. Fear of the Fed tightening monetary policy, as emerging market monetary policy is generally still being eased, has led investors to expect the dollar to continue to rise against many emerging market currencies. With falling values of emerging market currencies, the earnings the bank generates would be worth less in the reporting currency, the US dollar. (However, this should not affect Standard Chartered's operations in Hong Kong, as the Hong Kong dollar is pegged to the U.S. dollar.) Together with slowing growth in emerging markets, and rising loan losses in some markets, the outlook for rising profit growth in the next few years is reduced.

Dividend history and payout ratio

($)

2010

2011

2012

2013 (F)

2014 (F)

Dividends per share

0.6915

0.76

0.84

0.92

1.01

Normalized EPS

1.97

1.98

2.25

2.31

2.51

Payout ratio

35.1%

38.4%

37.3%

39.8%

40.2%

Analysts expect Standard Chartered to increase its dividend to 92 cents for 2013, which implies a forward dividend yield of 4.3%. This is an increase of 9.5% over the previous year. With a payout ratio of less than 40%, dividend has sufficient scope to continue to rise in the future.

For investors who want to own a bank which pays a relatively high dividend yield, and believe emerging markets have stronger growth prospects, consider Standard Chartered as a dividend growth company.

SCBFF Chart
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SCBFF data by YCharts

Source: Standard Chartered Has Emerging Markets Growth And Yields 4%