EUR 850.00 For Business Accounts Only

Morningstar | Standard Chartered Remains Undervalued Post-3Q Result

There was little in Standard Chartered’s third-quarter result that alters our long-term view on the bank. Costs were contained in the third quarter with operating expense, excluding regulatory costs, 4.7% lower than the previous quarter. This was a positive as higher operating expense was a disappointment in the first-half result. Second-half operating expense will be at a similar level to the first half and our full-year forecast is largely in-line. Combined with the bank's restructuring effort, we expect profitability to steadily increase over the medium term as operating environment improves. Underlying annualized ROE was 6.5% for the third quarter with nine months return on equity at a similar level.

With ROE heading toward an earlier announced 8% target, management will provide a strategy update at the full-year result for the bank to achieve an ROE, and our assumed cost of capital, of 10%. With its Common Equity Tier 1 ratio improving by 28 basis points to 14.5%, reducing the level of equity by returning capital to shareholders, can provide a lift to ROE. However, management is looking to reinvest in the business without elaborating further details. Our forecasts are adjusted but not enough to change our fair value estimates  of GBX 740 and HKD 74. Our fair value estimates represent a fair price/book of 0.7 times. With its share price trading at a 25% discount to our fair value estimates, we believe the bank is undervalued and the market is overly concerned about global trade.

Net interest margin was soft for the quarter with overall net interest margin slipping 1 basis point on last quarter as improvement in Hong Kong, a core geography for the group, was offset by softer rates in India and China. An increase in funding cost was slightly ahead of asset yields. On the liabilities side, the bank cited a migration from lower cost current and savings account, or CASA, to fixed deposits, which attract higher interests. We note that at a system level in Hong Kong, Hong Kong dollar CASA declined to 61% from 66% at the beginning of the year while total CASA including foreign currency, fell to 54% from 58% over the same period. Management noted margins expanded further in Hong Kong and we believe this is attributable to the bank’s high-quality deposit base, as CASA makes up close to 80% of its deposit there. An increase in U.S. rates saw Hibor sustainably increase and would have contributed to improving asset yields, though management noted there was some difficulty in passing on the interest rate increase to some customers. We continue to assume a steady increase in net interest margin over our explicit forecast.

Credit quality continues to be benign as economic conditions remain resilient. This is in line with peers and most banks under our coverage in the region. We continue to assume rising expected credit loss, or ECL, in our explicit forecast period. The bank has not seen a deterioration in asset quality yet and noted the impact is on investor confidence. The latter has resulted in a decline in revenue for wealth management and brokerage for banks in general. Excluding a $40 million one-off income for its Bancassurance business, wealth management revenue for Standard Chartered declined 6% against last quarter.