Standard Chartered: Emerging Markets Bank Could Get Even Cheaper

| About: Standard Chartered (SCBFF)


Standard Chartered reports its first profit decline in over a decade.

Emerging markets remain out of favor.

Retail banking issues in South Korea are largely structural.

2013 has been a tough year for Standard Chartered (OTCPK:SCBFF) (STAN.L), with the bank reporting its first profit decline in over a decade. The bank, which focuses on emerging markets in Asia, Africa and the Middle East, has fallen out of favor with investors on growing concerns relating to weaker emerging market growth, worsening credit quality and the unexpected board level changes. Although the longer-term opportunities in emerging markets remain robust, Standard Chartered will likely face many more challenges before things begin to improve.

($) 2011 2012 2013
Normalized Earnings per share 1.98 2.25 2.04
Dividend per share 0.76 0.84 0.86
Click to enlarge

On March 5, Standard Chartered reported that statutory profit before tax for 2013 fell 11% to $6,064 million. Normalized EPS declined 9% to $2.04, from $2.25 in 2012. A strong operating performance in Hong Kong, the bank's largest market, where operating profit grew 16%, had been offset by a sharp deterioration in the South Korean business, which forced the bank to take a $1 billion writedown. Profitability in the rest of Asia, except India, had also been weak on the back of higher loan impairments and falling net interest margins.

Earlier concerns over Standard Chartered's balance sheet seems to have been overstated, as the bank reported a Basel III common equity tier one ratio of 11.2%, which is well in excess of UK regulatory requirements set to be introduced by 2019. Its leverage ratio was 4.7%, which is also in excess of the 3% minimum set by the Prudential Regulation Authority, the UK regulator. Standard Chartered remains one of the most well capitalized banks in its peer group and should be able to continue to fund asset growth through retained earnings. As evidence of its management's confidence in the bank's balance sheet, dividend per share for 2013 would increase by 2.4% to $0.86 per share, compared to $0.84 per share in 2012.

The announcement of the departure of Richard Meddings as finance director in January did not bode well with investors, and fueled rumors of internal strife. Meddings, who has spent seven years as finance director, had previously been seen as a likely successor to chief executive Peter Sands. Steve Bertamini, CEO of the consumer banking segment, will also be departing this year. Bertamini had overseen its Korean consumer unit, where profitability has slumped; but the bank had mentioned that his departure was not because of its poor performance. Meanwhile, Mike Rees has been promoted to the role of deputy CEO. Investors' confidence in the bank's stock had been badly shaken on fears of uncertainties from the major structural changes being discussed and the credibility of the new board.

With the Fed continuing to taper asset purchases and the slowing growth in emerging markets, investors' appetite for emerging markets will remain subdued in the near term. Standard Chartered's problems with consumer banking in South Korea are largely structural, because of high household debt levels, intensifying competition and increased regulatory pressures. Risks from a slowing Chinese economy and a potential property market bubble in Hong Kong remain, and Standard Chartered can do little to mitigate these risks. The bank had abandoned its double-digit revenue growth target in November, but it remains a long term aspirational target. At $20.75, Standard Chartered's stock may seem cheap with a price-to-book ratio of 1.08x, but it could get a lot cheaper.

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