M. V. S. Santosh Kumar
Conservative investors looking for defensive options can subscribe to the Indian Depository Receipt (IDR) offer of Standard Chartered (StanChart) PLC. The IDR is an opportunity for investors to invest in a globally diversified (both in terms of geography and segments) banking and financial services conglomerate at a reasonable price. Investors, however, need to bear in mind the higher capital gains and dividend tax incidence on returns from IDRs compared with domestic shares. Investors in the IDR would also lose out if the Rupee appreciates vis a vis the Pound.
StanChart's global access to low cost funds, the possibility of better growth driven by improving credit offtake as well as margins in the emerging markets and likely improvement in fee income as capital markets stabilise, argue for the investment.
Valuation
Each IDR represents one-tenth of Standard Chartered PLC's UK listed stock. The actual price at which the IDRs are offered for subscription by investors will be known only on Monday May 24th. The Friday closing price of Stanchart's shares at the London Stock Exchange offers a clue as to the likely level around which the eventual price would be determined. At Rs 103.6 (computed based on a 5 per cent discount on the current price of £16.1) ), the stock would discount the bank's calendar 2009 earnings by 13.4 times. The offer would be at a price-book value of 2.1 times, excluding goodwill. The pre-tax dividend yield would be 3.5 per cent.
This price would place the stock at a discount to most of the Indian private sector banks (1.8 to 4.4 times). While StanChart may not match the pace of Indian private sector banks on growth in its asset book, its large size, well-diversified presence across emerging markets, along with a clean balance sheet and strong risk management systems, make the stock a good investment.
The profit before tax (PBT) of StanChart for the year ended December 31, 2009 was Rs 24,044 crore .
Standard Chartered PLC intends to raise $500 million from this offer of IDRs. The primary objective appears to be an India listing as the offer will only add 1.18 per cent to the equity base and shore up the core capital ratio marginally from 8.92 per cent to 9.16 per cent. As of December 2009, the capital adequacy ratio of Standard Chartered PLC stood at a comfortable 16.5 per cent.
Business
Standard Chartered PLC is a holding company that offers a host of financial services through its subsidiaries in almost 70 countries with predominant presence in the high growth markets of Hong Kong, Korea, India, China, Africa and other Asian countries.
The company segments its business into Wholesale segment and Consumer segment.
The Wholesale segment comprises transaction banking , capital market services, corporate finance and principal finance mainly targeted to corporates. The bank's consumer banking encompasses credit cards, personal loans, wealth management, mortgages and auto loans.
StanChart has an international credit rating of A, as against BBB- sovereign credit rating for India, an indicator of the edge it enjoys over Indian banks in accessing global funds for its operations at a low cost. The bank's high low-cost deposit proportion of 53 per cent as of December 2009, also helps reduce the overall cost of funds.
Financials
StanChart's net profit attributable to shareholders grew by 14 per cent annually during 2006-09. The PBT during the same period grew at an annualised 17.4 per cent. During the period 2006-09, the profit contribution from under-banked and high-margin geographies such as India, Asian economies such as China and Indonesia and Africa rose at a much faster pace than that from the developed regions, thereby increasing the overall profitability. StanChart also made acquisitions such as Union Bank of Pakistan (in 2006), American Express Bank (2008) and Korea First Bank Hsinchu International Bank which strengthened its presence in the emerging markets. StanChart adopts advanced Basel II norms on par with global banks with respect to its operational structure, which lends higher transparency and increases its readiness to tackle risks.
India, despite being a smaller business in terms of lending, has been a significant profit contributor to StanChart owing to higher fee based income from the growing wholesale banking business. India contributed 20 per cent to PBT, though it only made up 6.5 per cent of the asset book in 2009.
Despite it being a troubled year, StanChart weathered 2009 reasonably well. While its total income grew by 9 per cent, the costs only grew at 4 per cent thereby improving the group operating profits. This helped cost-income ratio fall from 56 per cent in 2008 to 51 per cent in 2009. A huge jump in the provisioning for bad-assets (51 per cent increase in 2009) partly limited profit growth but improved the overall provision coverage.
StanChart also has significant fee income (50 per cent of total income) coming in from services such as cash management, wealth management, principal investments and corporate finance. For 2009, the 22 per cent fall in operating profits for consumer banking was made up by the 36 per cent expansion in wholesale banking profits.
In the year ahead, the strong traction in consumer credit offtake in StanChart's key markets — India, Hong Kong, Korea and Singapore — may aid improvement in consumer banking offtake.
StanChart's Net Interest Margin, which was maintained at 2.5 per cent for 2006-08, fell to 2.3 per cent in 2009. While this was a function of the pressure on interest rates last year, margins may improve significantly from now on the back of the bank's low funding costs, rising rates and demand for credit.
Consumer banking which was a laggard in 2009 too may drive profit growth as the wealth management business revives as the global economy revives. StanChart indicated in its Interim Management Statement for the first quarter of 2010, that the group witnessed improvement in volumes, as the consumer segment increased its contribution to the overall income and profits. There was also increase in lending volumes. StanChart's overall asset quality is reasonable in the global context, especially given its emereging markets focus. The Gross NPA ratio stood at 2 per cent with an overall provision coverage of 70 per cent by end of 2009. The average loan to value is low in both mortgages (50 per cent) and wholesale banking , substantially limiting credit risk.
Credit growth is usually correlated to overall economic activity and on this score investors in StanChart may not have much to worry about. IMF forecasts regions such as Developing Asia, Africa and West Asia may have GDP growth rates of 8.4 per cent, 4.3 per cent, 4.5 per cent for 2010 and 8.4 per cent, 5.3 per cent and 4.8 per cent in 2011. This may have a two-fold impact on business as consumer demand revives and corporates revive borrowing plans. The prospect of a shift from a very easy monetary policy to a slightly tighter one does exist in India, China and Korea. However, StanChart's large low-cost deposit base and its access to low cost funds may help it weather such a phase better than peers.
Zerodha (Trading Account)
RHP
