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Investors looking at taking an exposure to other emerging economies of Asia, the Middle East and Africa are advised to consider subscribing to this issue at the current valuations. The stock is currently trading on the LSE (based on closing price on 19 May 2010) at 1.9x CY09 BV and 2.14x adjusted book value. Historically, the stock has traded in the range of 1.8–2.5x times book value and is currently trading at 1.69x FY10 and 1.56x FY12 Bloomberg consensus book value (calculated based on closing price on 19 May 10). As compared to this, HSBC Holdings with a RoE of 5% (13% for Standard Chartered) is trading at 1.23x FY11 earnings and 1.14x FY12 earnings. Adjusted for RoE, Standard Chartered Bank is still trading at an attractive valuation.
SCB’s forthcoming IDR provides an opportunity for Indian investors to buy into a truly pan-Asian bank with strong presence in India, Hong Kong, South Korea and Singapore. The bank emerged unscathed from the recent financial crisis and has delivered a remarkable 16.5% net profit CAGR during 2004-09. It is a well-known brand in Asia, offering a full product suite, strong ability to offer cross-border financing and deal structuring, stable funding base, and a well-capitalised balance sheet. We estimate 18% CAGR in net profit over FY10-11ii. Valuations are reasonable at 1.5x FY10ii book, and we expect the IDR to develop a small premium, in addition to steady appreciation in underlying shares.
While its India operations’ profitability is high, STAN’s overall profitability (CY09 ROA of 0.8%; CY11 ROA of 1.01%) is relatively low compared with that of Indian banks. Moreover, with its diversified presence, its 10% loan growth is likely to be below that of local banks (20-25% over the next two years). The bank’s upcoming IDR issue provides a high quality diversification option to domestic investors. However, domestic insurers are not allowed to own IDRs, and with lower liquidity (STAN trades over US$150-200 mn a day in Europe), foreign interest in the IDRs would be limited. Retail and HNI interest will also be dampened by the higher taxation on both dividend and capital gains on IDRs compared to rates on local stocks Therefore, with little appeal to the primary investors (insurers and foreigners own 60-80% of free float) in Indian banks, we expect STAN’s IDR multiples to be at a discount to that of Indian banks. Also, with restrictions on fungibility, IDRs may trade at a discount to the bank’s Hong Kong and London listings.
Standard Chartered PLC is a well covered stock globally as per Bloomberg. Of the overall global analyst coverage (22), the stock has been rated ‘BUY’ by ten analysts, ‘Hold’ by 9, ‘Neutral’ by 2 and ‘Sell’ by 1. Based on the Bloomberg consensus estimates, the stock trades at 1.7x its CY10E BV and 1.5x its CY11E BV. Though it trades at a significant premium to its global peers, we believe that healthy return ratios (adjusted RoE on tangible networth is ~18%), superior asset quality, profitability, its diversified business model and strong presence in high growth Asian and African markets justify the valuation premium. Standard Chartered PLC is a global financial conglomerate operating through a number of subsidiaries (through 1700 outlets) across the world providing banking and financial services focusing primarily on Asia, Africa and the Middle East markets. The company is offering 240m IDRs within a price band of Rs100-115 (implying an issue size of Rs24-27.6bn) and 10 IDRs representing one share of the company. The company is raising capital to fund growth of its global businesses, provide diversified investment opportunity to domestic investors and build a strong brand for itself. We recommend a ‘Subscribe’ due to following reasons:
With operational presence in 70 countries and increasing foot print into Indian banking business standard chartered presents an excellent opportunity for the Indian Investor to buy a global banking franchise. A conservative business model combined with reasonable RoE of 14% and ~1% RoA the bank is available at a reasonable price of 1.6X FYE FY10BV. We therefore recommend a SUBSCRIBE on the stock.
The Indian Investor is getting an opportunity through Standard Chartered Bank’s IDR to invest in global company. The issue has certain constraints in terms of lower institutional participation & higher incidence of tax. In terms of valuation, the stock is currently trading at 1.7x book value. Its peer group valuation is in the range of 1.5x-3.4x. Further, for retail investors it is offered in the Price band of INR 95-109 which implies a P/B of 1.5-1.7x. However, considering the wide presence in the emerging economies which will benefit bank’s future performance, we recommend investors to SUBSCRIBE to the issue.
SCB's IDR provides Indian investors a vehicle to invest in a global entity that has a global presence. As a result of its diversified presence and emerging market focus, SCB came out relatively unscathed from the sub-prime crisis and is now well poised to benefit from the ongoing recovery in emerging economies. Hence, the bank is an excellent diversified multinational banking play, with strategic positioning in high-growth emerging markets. The stock is currently trading at 1.7x CY2010 P/B vis-a-vis 2.9x and 3.8x FY2010 P/B for Axis Bank and HDFC Bank, respectively. We recommend Subscribe to the Issue.
