Standard Chartered Plc

 

With economic conditions improving, Standard Chartered's management expects strong performance in the first half of CY10. The bank, which gets over 90 per cent income from emerging markets in Asia, Africa and West Asia, has outperformed most of its peers due to its relatively larger exposure to these markets, which have rebounded faster following the global financial crisis of 2008-09. Although recent news from Europe hasn't been great, StanChart is banking on consumer and wholesale banking businesses for growth. In its first analyst call after the listing of Indian Depository Receipts, the management shared its view on the bank's January-May 2010 performance and the future outlook. It expects income in the first six months of CY10 to be flat year-on-year, but sees it growing in double digits in the second half of CY10.

Business picking up

Compared to consumer banking, StanChart has focussed on lending to the safer wholesale banking business in the last two years, helping the latter grow much faster at 20 per cent annually. The restrictive lending in the consumer business ensured that the wholesale banking's share in the overall pie rose from 47 per cent in 2007 to about 61 per cent in 2009.

The bank's wide branch network, with strong cross-border capabilities, has helped it capitalise on international trade flows.

Notably, with economic conditions slowly improving, the bank is likely to lend more to the consumer segment. Lending in the consumer business, which grew a modest seveneight per cent on an average in the last two years, should pick up pace in 2010, with growth rates seen inching to 10-12 per cent. Profit growth in the segment is expected to be robust.

Outlook

StanChart's limited exposure to Europe augurs well for it in the uncertain environment that prevails globally. The bank is fairly capitalised with its Tier-I capital at 11.5 per cent, which will act as a cushion and provide fuel for growth. Positively, the management has said that impairment charges in the wholesale banking segment in H1 CY10 will be around half comared to the corresponding period last year. In the consumer bank segment, this will continue to be around two-thirds of H2 CY09 levels. This is comforting and should improve profits.

On the flip side, although business environment is improving, competition could tighten spreads, while higher investments for future growth could increase costs. Analysts are expecting costs to rise 11 per cent in CY10, which should push up the cost-to-income ratio from 52 per cent in CY09 to 55 per cent in CY10.

Overall, they expect the bank to post 23.5 per cent and 16.3 per cent growth in earnings in CY10 and CY11, respectively. At Rs 106.25 (it represents a tenth of Stanchart's London listed share), the stock is trading at 2.4 times its estimated CY10 book value and can be accumulated for the long term.