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There is also the matter of finding a bank with the heft to raise enough equity to adequately capitalise an enlarged lender. That’s at a time when the cost of capital is rising. That was one complexity to a tie-up with First Abu Dhabi, according to analysts at Barclays. The UAE-based bank has risk-weighted assets of $158 billion, dwarfed by Standard Chartered’s assets of $253 billion.
Nevertheless, investors should take repeated takeover interest as a cue: Standard Chartered is too cheap.
ADVICE Buy
WHY Takeover potential and improving profitability indicate the shares could be undervalued
(Source: The Times)
During the first nine months of last year, the bank recorded a return on tangible equity of 10.1 per cent.
That leaves it generating a return at least in line with its cost of equity, analysts at Shore Capital estimate, which warrants a value of 900p, or roughly 0.9 times the bank’s net tangible assets. Any bidder would need to pay a small premium to clear a deal, the broker reckons, which would value the shares at more than £10.50, about 50 per cent higher than the present price.
Emerging progress
The signs are that Winters’ turnaround efforts may be about to deliver a boost to profitability. The bank’s fortunes are geared towards a reopening of the Chinese economy and the lifting of international travel restrictions could provide a catalyst for profit growth this year as cross-border business recovers.
Short-term hedges taken out in the immediate aftermath of the Ukraine war to help to insulate against interest rate fluctuations have delayed and dampened the full benefit of rate rises to Standard Chartered’s net interest margin, the difference between the rate it pays depositors and the rate at which it lends. But about 60 per cent of those hedges roll off in February, with the remainder maturing in February next year. Analysts at Jefferies think this will increase the bank’s margin to 1.73 per cent by next year, markedly higher than 1.21 per cent in 2021.
Income over last year is expected to have risen by 13 per cent, ahead of a three-year target for compound annual growth between 8 per cent and 10 per cent by 2024. Market volatility and oscillating commodity prices have provided a boost to the financial markets business, increasing demand for energy hedging and trading activity.
Revenue growth is now outpacing that of costs, with the difference standing at a ratio of 5 per cent over the first nine months of last year. StanChart is closing in on its own 2024 target of 60 per cent, but an acquirer with sufficient scale could go further if it can create synergies by stripping out duplicate costs.
A rise in bad debts is the key risk ahead for all banks as recessions loom. For Standard Chartered, a surge in infections in China complicates the reopening story, as does the bank’s exposure to the country’s commercial property sector. Its exposure to the Chinese commercial real estate sector stands at $3.5 billion, or just over 1 per cent of the loan book, roughly half of which is secured lending.
Thus far, group-wide defaults remain benign. Roll forward impairments recorded during the first nine months to the full year and the charge would stand at only 0.18 per cent of the loan book, below a long-running average of between 0.3 per cent and 0.35 per cent.
Some logistical impediments to a takeover remain. The chief hurdle would be clearing regulatory permissions. Then there are the challenges arising from tensions between China and the West. HSBC offers the clearest case study in the difficulties of straddling both sides.
Potential bid shines light on prospects at Standard Chartered
Emma Powell
Tuesday January 10 2023, 12.01am, The Times
Steering Standard Chartered towards better profitability has been beset by self-imposed and wider economic obstacles. Slow progress has embedded a steep discount in the shares against the value of the bank’s own assets and has made the emerging markets-focused lender an inevitable, perennial takeover target.
The emergence of a potential bid from First Abu Dhabi Bank last week has pushed Standard Chartered’s shares to an almost three-year high, but they still look cheap. The United Arab Emirates-based lender walked away after running the rule over the bank, but Standard Chartered remains in play for another suitor.
The FTSE 100 group’s valuation has long trailed both its London-listed peers and Asia-focused rivals. That has invited talk that it is ripe for acquisition, either by a western financial services group seeking to push into emerging markets, or a rival trying to capitalise on the benefits of greater scale. Names including the Melbourne-based ANZ Bank, Scotiabank, of Canada, HSBC and JP Morgan, the former employer of Bill Winters, Standard Chartered’s chief executive, have been linked with the group over the years.
Even after the First Abu Dhabi-induced boost to the group’s market value, the shares still trade at a 33 per cent discount to the bank’s tangible asset value at the end of September last year, more than twice the average for UK-listed peers including Lloyds and Barclays. First Abu Dhabi trades at twice its tangible asset value; banks operating in some of Standard Chartered’s key emerging markets, such as DBS, of Singapore, also trade at weighty premiums.
Cheap shares
StanChart’s paltry valuation can be attributed to an inferior return on tangible equity, a profitability measure. Winters inherited a mess in 2015. Higher-risk lending and large exposures to individual clients resulted in heavy impairments, particularly in a commodities sector in the throes of a downturn, that took years to wash through. The bank also has been forced to take provisions for charges relating to legacy misconduct, which included fines totalling $1.1 billion from American and British regulators in 2019.
Retrenching from riskier lending and back to five core markets — China, Hong Kong, South Korea, India and Singapore — affected income, but resizing the bank’s cost base has taken much longer. The group’s cost-to-income ratio still stood at 63 per cent over the first nine months of last year. (Necessary) efforts to strengthen its regulatory capital levels have further held back returns generated by the market.
Whether Standard Chartered deserves a price tag closer towards the value of its asset base depends on its ability to achieve a key target of generating a return on tangible equity of 10 per cent by 2024 and to sustain double-digit profitability.
Even with a TO off the table for the time being this share is still a stonking buy, IMHO. I have high hopes for the results a divi and or a further share buy back this year.
Bill Winters has turned out to be just what SC needed. A safe pair of steady hands.
As Bill has stated, SC will do well when interest rates start to rise.
bl-rg even continues to ramp it up mocking TO interest for STAN which imv might have some space for sp/m-cap improvement but not much.
https://www.bloomberg.com/news/articles/2023-01-07/abu-dhabi-s-stanchart-interest-showcases-global-ambitions
Sitting on a 50% profit for me, probably the only time I bought at the right time. Can't bring myself to sell as its the shining light in my investments and think its got some way to go in the future.
I was a customer of theirs when I lived in the FI.
This is either a hold, weak sell or a buy for the extremely brave. Looking at STAN's recent rise before anybody heard about that Arabic Bank wanting to swoop ; & so short lived it was too, I reckon I might have to wait a while for any profit from that tranch ! Reeled me in for a few more shares at a ridiculously high price yesterday .
(Source: Times online)
Standard Chartered has become a takeover target after the biggest lender in the United Arab Emirates confirmed it had been considering a multibillion-pound bid for the FTSE 100 bank.
Shares in Standard Chartered rose by up to 20 per cent yesterday after it emerged that First Abu Dhabi Bank had looked at an offer for the London-based group but was no longer pursuing the idea.
A deal would have created an emerging markets-focused banking giant with assets of more than $1 trillion, although it would have been tricky to pull off given the scrutiny such it would have attracted from regulators.
However, the aborted bid highlights Standard Chartered’s vulnerability to a takeover.
Me12345: you must have been a wisker away from your shares being bought. Google says the day high was 797p (buy price).
Hang on to your hats. This will get others sniffing. I have always felt it is ripe for a takeover by someone wanting a readymade presence in the potentially fastest growing market in the world, once this covid business is behind us.
It certainly is the biggest holding in our Portfolios, bought at £4.89
NP, good to get clarity on it, G**gle had nothing on it when SP went ballistic (ish !)
First Abu Dhabi Bank PJSC ("First Abu Dhabi Bank") notes recent press speculation in relation to Standard Chartered PLC ("Standard Chartered", or the "Company"). First Abu Dhabi Bank confirms that it had previously been at the very early stages of evaluating a possible offer for Standard Chartered, but as of the date of this announcement, is no longer doing so.
RNS says no longer evaluating a possible offer
no you are right. They are no longer interested.
sorry if misreported on pulled out bit, a m8 sent me a one liner on it
Just goes to show how cheap banks have been.Had a sell price at £7.95 but think these will pass that anyway bid or no bid gl
This is huuuugggeeee!
Bloomberg - https://www.bloomberg.com/news/articles/2023-01-05/first-abu-dhabi-bank-is-said-to-explore-standard-chartered-bid
First Abu Dhabi Bank PJSC has been exploring a bid for Standard Chartered Plc, according to people familiar with the matter, in what would be a complex deal aimed at building an emerging markets lender with more than $1 trillion of assets.
The Middle East’s largest bank has been considering a full takeover of the London-based lender, the people said, declining to be identified as the deliberations are private. FAB, as the bank is known, has been assessing Standard Chartered for more than six months and is working with advisers, the people said.
The Gulf lender may also consider other deal structures, such as an acquisition of parts of the UK-based firm, one of the people said. FAB could decide not to proceed with any deal, given the significant hurdles and complexities of the transaction, they said. Representatives for FAB and Standard Chartered declined to comment.
If a deal does go ahead, it would be the biggest foreign takeover by a company in the Gulf region and one of the largest bank mergers in the past decade. Standard Chartered is worth about $23.1 billion, compared with FAB’s $51.9 billion valuation.
They have not pulled out.
First A D Bank being reported in the press
supp there is an RNS somewhere (not seen it) about a AD bank wanting to purchase but they have pulled out
Ok what happened here today then???
WOW
The market takes "a nose dive" and Standard hits the leader board with significant rise in sp.. One off freak or something happening ?
Yes on the surface all looks pretty good, I was tempted to add on the dip, but the China property exposure and the fact that China itself has become a bit of a pariah has given me pause for thought.
Everything is going well, beats all expectations and the the share price still goes down 1%.
It is a quality invetment and I am in for the long term.