Morningstar | Standard Chartered's Potential Share Buyback No Surprise; Bank Remains Undervalued
No-moat Standard Chartered’s potential $1 billion share buyback, according to media reports, is no surprise given the bank’s excess level of capital. After the full-year result, management was aiming for ordinary dividend per share to double by fiscal 2021, underpinned by improving profitability. This is supplemented by further divestment of its non-core business. Return on Tangible Equity, or RoTE, of 10% is the target for 2021, from 5.1% now, while maintaining the common equity Tier 1 ratio of 13% to 14%. Ahead of the first quarter update next week, we leave our forecasts and fair value estimates of HKD 80/GBX 790 unchanged. We have already factored in higher leverage, with the bank returning capital to shareholders. Despite the latest improvement in the bank’s share price, along with its United Kingdom peers, we continue to see the bank as undervalued and our four-star rating is unchanged. A delay in the U.K.’s impending exit from the European Union has alleviated concerns of a no-deal exit. More importantly, the U.K. contributes less than 5% of the bank’s operational profit. Confirmation of capital management initiatives aside, a key focus for the first-quarter update is the bank’s operational improvement. With only a quarter passing since the announcement of the full-year result, we do not expect the magnitude of changes to be significant but reiterate the focus is on the positive trajectory, because the market was previously disappointed with the pace of the turnaround. We continue to expect the bank’s key markets of Hong Kong and Singapore to be the core earnings driver. Year-to-February system loan growth in Hong Kong is tracking well at 7.3% annualised while weaker loan growth of 0.5% in Singapore is a result of a decline in mortgages. Both regions should underpin an increase in net interest income, which will also be supported by stronger interbank rates. We expect fee income to bounce back from a weak fourth quarter as capital markets improve.Standard Chartered is a holding company and an international banking group that serves people and companies across Asia, Africa and the Middle East. Co. comprises a network of more than 1,026 branches and outlets in 63 markets. Co.'s segments are: Corporate & Institutional Banking, which supports transaction banking, corporate finance, financial markets and borrowing needs; Private Banking, which provides a range of investment, credit and wealth planning solutions; Commercial Banking, which provides a range of international financial solutions; Retail Banking, which provides digital banking services. At Dec 31 2017, Co. had total assets of US$663.50 billion and deposits of US$30.94 billion.
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