Standard Chartered, a darling of the markets during the financial crisis, has recently fallen out of favour as investors worry about emerging-market growth. Analysing the bank can be a daunting task—it holds more than $600 billion in total assets and operates in 68 countries—and may cause some investors to shy away at any hint of risk. We suggest investors focus on four key issues: emerging-market exposure, capital, credit quality, and the long-term value of the business.
Can Standard Chartered Withstand a Slowdown in Emerging Markets?
We argue that there are several important issues at work here. First, while Standard Chartered is an Asia-focused bank, its footprint is broadly diversified across the region's countries and their unique economic issues. No one country makes up more than 25% of Standard Chartered's risk-weighted assets, and the bank's largest market is Hong Kong, whose economic growth is projected to be 4% in 2014.
Though an emerging market bank, Standard Chartered has limited exposure to the most troubled economies. The bank has insulated itself well from the potential impact of a Chinese slowdown on the property markets of Hong Kong and Singapore, and its primary exposure to the Fragile Five economies is India, the strongest of the countries. The bank has negligible exposure to Turkey, South Africa, and Brazil and only moderate exposure to Indonesia.
Does Standard Chartered have Enough Capital or Can Investors Expect a Capital Call?
We see Standard Chartered as one of the world's best-capitalized global banks, and argue that it has more than enough capital to meet regulatory requirements as well as support growth. Standard Chartered's regulatory capital ratios and common tangible equity ratio compare favourably with those of other global banks. We see Standard Chartered as very well capitalised, strong internal capital generation, and a huge deposit base. We think Standard Chartered has enough capital to fund a minimum of 6% annual asset growth through 2017, even if revenue growth is below historical levels.
What about Charges that the Bank's Credit Risk Management has Slipped? Are they Founded?
Charges by hedge fund investor Carson Block that Standard Chartered's underwriting has slipped look unfounded to us, as they rely on anecdotal reports of individual loans that he finds questionable. There is no evidence of a systemic slippage in underwriting, and Standard Chartered's reported credit metrics remain strong.
Standard Chartered Still Trades at a Premium to Tangible Book Value. What Makes it a Compelling Bargain?
We think Standard Chartered's narrow moat, which is built on its huge low-cost deposit base and interconnected business across emerging markets, will enable the firm to out-earn its 11% cost of equity every year through 2017, despite headwinds in its primary markets. The bank has operated in Hong Kong for 150 years and now has nearly 80 branches there, giving it a sustainable edge in Asia over competitors that are only now entering the market. Our fair value estimate is 1.7 times tangible book value.
