Description

Standard Chartered is a global bank headquartered in London with a footprint concentrated in Asia and to a lesser extent Africa/Middle East. Along with most of the post-2008 banking universe, returns on assets and equity have been weak for over a decade.  Nevertheless, trading at 40% of book value and 44% of tangible book, the bank is too cheap. Standard Chartered is currently running around a 6% ROE this year which should expand slightly to 7% by 2023.  Should short term rates ever rise, they should benefit to the tune of approximately 100bps of ROE expansion for a 100bps increase in US rates. For what it’s worth the company has set out targets to achieve over a 7% ROE by 2023 and a 10% “medium term” ROE objective. These are not the ROEs which compounder bros dream of.  

A general (very) simplified rule of thumb for balance sheet financial companies which has served me well as a starting point is that over time a 10% ROE is worth book and linearly a 7% ROE is worth 70% of book.  By year end 2022 book value should be 11.85 (GBP).  If Standard traded to 70% of book on a forward 7% ROE then it would have a price of 8.29 plus .16 in 2022 dividends for a target of 8.45 from the current price of 4.32.  

Standard Chartered has one of the more interesting geographical footprints in the banking universe - especially for an organization headquartered in London

To address the bogeyman head on, yes Standard has credit exposure to the Greater China region.  Total CRE exposures which “relate to China” are $4.2B with $.8B of that “booked in China.”  Booked in China in this context refers to loans where the entity responsible for the credit performance is Chinese or where a substantial amount of the cash flows are generated in China.  For context, this is against a $600B asset balance sheet and roughly $40B of equity.  There are no direct exposures to developers in breach of the three red line policy and 56% of these loans have a stated LTV of under 56%.  If you have a table pounding macro view that China will face a massive imminent CRE credit meltdown then this is not the investment for you.  If you are of the view that there will be casualties amongst the overextended Chinese developers but not a full systemic crisis then these exposures appear quite manageable.  

On the metrics, Standard is in fine shape with a CET1 ratio of 14.6% and a total capital ratio of 22%.  Loan loss reserves cover approximately 70% of problem assets.  As mentioned before, Standard benefits from a rising rate environment even if the rate shift is parallel.  

Unlike many inexpensive banks around the world, Standard Chartered has a reason to exist.  It plays an important role facilitating cross-border finance across its footprint.  The bank is forward looking enough and of sufficient scale to invest in digital finance initiatives.  This may be a particular growth area as many areas such as the Middle East and Africa considerably lag the world with respect to the adoption of new payment methods.  More information about these initiatives can be found in their October Innovation and Digitalisation event. (https://www.sc.com/en/investors/events-and-presentations/innovation-and-digitisation-event/)

In short, Standard Chartered is non-distressed asset trading at a distressed valuation.  The opportunity this setup creates is that from 40% of book value, even a minor revaluation could generate fantastic returns.  There are many banks trading at low valuations around the world but after looking at many of them Standard Chartered is in a sweet spot for the upside potential relative to the risks.

Catalyst

Rising rates; time.