StanChart’s IDR

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IDR details

Issue Size: $500 million - $700 million

Date: May 25-May 28


STANDARD Chartered has decided to raise funds from Indian stock market through Indian Depository Receipts (IDR). The bank has indicated that it will raise $500 million to $700 million through the issue, which will remain open from May 25, 2010 to May 28, 2010.

BUSINESS:

Standard Chartered is one of the oldest banks in the world. In fact, it was the first bank to start operations in many Asian countries and has a history of over 150 years in India. The bank earned over 90% of its profit before tax from Asia, Middle East and Africa in the financial year ended December 2009. Since it has limited presence in the Western Europe and North America, it was hardly affected by the sub-prime crisis.

   Its operations are divided into two main divisions — consumer bank and wholesale bank. The consumer bank is like any other retail bank offering products such as mortgages, personal loans and credit cards. In times, when financial crisis had completely eroded the assets of several multi-national banks, Standard Chartered boasts of a loan portfolio, which is 84% secured. The bank has achieved this feat by focusing more on secured lending like mortgages. However, increasing focus on secured lending can hamper its net interest margin (NIM), which already declined to 2.3% in 2009 from 2.5% in 2008. The management said that it will not increase the share of secured lending more.

   The bank has a strong liability side too, with as much as 53% of its deposits coming from low-cost current account and savings account deposits. In this respect, its performance is better than HDFC Bank, which is generally regarded as the best Indian bank. However, in terms of NIM, Standard Chartered's performance is not as encouraging as top Indian banks, which boast of a NIM of 3% or higher.

   In the wholesale banking division, it provides trade finance and products like currency options and structured finance to corporates located across geographies. The performance of this division is related to trade flows between economies. This division posted a growth of 28% and 36% in 2008 and 2009, respectively in its operating profit. It must be noted that the company reported this set of numbers, when the sub-prime crisis had wrecked havoc specifically in the western side of the globe. Such performance by wholesale banking division helped it in reporting growth in 2009, when consumer banking division actually registered a 22% fall in operating profit. Meanwhile, the bank grew its cost by only 4%, while its income rose by 9% giving it a cushion of 5%.

COMPARISON:

The bank reported a return on assets (RoA) of 0.8% in 2009, which is at par with its peers in other parts of globe. However, Indian banks clocked an average RoA of 1% in fiscal year ended March 2009. So compared to domestic banks, Standard Chartered's performance is sub par.

   It posted a profit growth of 4% year-onyear in 2009. Compared to international banks, this looks much better since their bottomlines bore the brunt of toxic assets. However, compared to Indian banks, Standard Chartered grew at a much lower rate. Prior to 2008, the bank's performance is much better than even Indian banks. This shows that the bank has a much better track record. It's capital adequacy ratio (CAR) stood at 16.5% at the end of 2009. At this level, its CAR is at par with top Indian banks and show that the bank has sufficient capital base to grow.

VALUATION:

The bank is yet to announce the price range at the time this article went to the press. Back on the envelope calculations show the price per IDR is expected to be in the range of Rs 98 to Rs 137. Retail investors will get a discount of 5% on the issue price. Ten IDRs are equivalent to one share. As per the company's information, earning per share stood at Rs 77 in FY2009. Given that, IDR will be trading at a price-to-earning (P/E) multiple of 12.7-17.7. Its international peers are trading at an average P/E of 14. Top public sector Indian banks are trading at an average P/E of 11, while top private banks are trading at an average P/E of 24. The valuation of IDR seem to be reasonable given the multiples at which the stocks of its domestic and international peers are trading. Given the reasonable valuations and clean financials, investors can subscribe to this IDR.