Standard Chartered has always been the least obvious of Britain’s biggest listed banks (Miles Costello writes). Although it has its headquarters in the UK, it has no British branch network and confines its business activities in the local economy to corporate and investment banking for large commercial customers.
The bank, which traces its roots to the 1850s, operates mainly in the emerging markets, including southeast Asia, Africa and the Middle East, and its primary business lines are in personal, private and commercial banking.
The lack of a chequebook or local branch for its British investors to visit is no argument against holding the shares, of course, but it does give Standard Chartered a less familiar quality than HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group, its main listed peers.
For much of the past four years, Standard Chartered has been an investment conundrum, too. It emerged from the 2008 crisis with its balance sheet pretty much intact, unlike the wider banking market, only to have its own mini-meltdown six years later while its rivals were in recovery mode.
In 2015 the bank suspended its dividend in the wake of a succession of profit warnings in the previous year that culminated in the departure of Peter Sands, its former chief executive. The main culprits were a rise in bad loans and deteriorating conditions in emerging markets, including South Korea and India.
The bank, which also was guilty of overly rampant growth during its boom years, was further stymied by a series of misconduct problems, not least of which was an inability to resolve its compliance with anti-money laundering regulations, which led to fines of almost $1 billion.
Bill Winters, the former head of JP Morgan’s investment bank, took charge in 2015. He set about his task with vigour, embarking on a drive to save a gross $2.9 billion over four years via a combination of quitting unwanted businesses and sharpening operating efficiencies.
In February, Standard Chartered reinstated its full-year dividend, at 11 cents a share, after reporting a near-sixfold increase in statutory annual pre-tax profits to more than $2.4 billion and a sharp reduction in impairment losses against bad loans. The bank is leaner, stronger, considerably tidier and almost halfway towards generating a return on equity of 8 per cent.
Changing hands yesterday for 676¾p, or 5¾p up on the day, the shares are worth about a third less than they were when Mr Winters took charge in June 2015, despite clear evidence of a revival. The sluggish share price also comes despite speculation about a potential takeover, after it emerged in May that the lender had attracted informal interest from some members of the board at Barclays.
While Standard Chartered is a work in progress, there is nothing inherently wrong with it as an investment proposition, assuming that you are comfortable taking exposure to banks and to emerging markets, both of which tend to be cyclical, volatile and risky.
Standard Chartered’s main problem is that there is value to be gained elsewhere. The shares, which trade at close to 30 times earnings, are expensive relative to its big rivals. HSBC trades on a multiple of just over 17 times earnings and, at about 5.3 per cent, offers a considerably richer yield. Lloyds yields 4.9 per cent and trades at a price-to-earnings ratio of just over 14 times.
The yield is barely 1.2 per cent. While it’s true that steering clear means that you might miss out on a takeover premium, should an offer emerge, that is not reason enough to own them.
ADVICE Sell
WHY Not without its risks and, for an investor in banks, greater value can be found elsewhere in the sector
SSE
The deconstruction of SSE is gathering pace (Emily Gosden writes). The FTSE 100 energy group’s plans to demerge its household supply business and combine it with Npower have won the backing of shareholder advisory groups and look set to be waved through by investors on Thursday.
The deal will need approval by the Competition and Markets Authority, however, and while both parties seem confident, the watchdog is not due to decide until October. For now, anyone buying SSE shares will end up with stakes in the remaining SSE and the new supplier.
SSE argues that, freed from the retail division, it will be able to focus on its core competencies, investing £6 billion over five years in regulated energy networks and renewable energy development, as well as in conventional power plants. Yet networks are not quite the safe bet they once were as Ofgem tightens the screw on profits, denting growth, and with the spectre of Labour renationalisation hanging over the sector.
After the merger, SSE plans to pay a dividend of 80p for the year to March 2020, against expectations of £1 for the undivided SSE. The spun-off supplier, therefore, would need a 20p dividend to avoid the overall proposition representing a payment cut. That is seen as a tough ask.
SSE argues that the new supplier will benefit from its dedicated management team (it has hired Katie Bickerstaffe from Dixons Carphone to run it) and from efficiency savings through the merger with Npower (£175 million) within four years of completion.
It sounds good, but it’s unlikely to be plain sailing. Almost a third of the savings are supposed to come from merging billing systems, a process notoriously fraught with difficulties; there will be inevitable costs of redundancies, too. Crucially, efficiency is far from enough for a supplier to succeed.
Such cost savings will be required merely to tread water as the government’s price cap hits profits. Both SSE and Npower are losing customers to upstarts, while big entrants like Shell threaten further competition. Ms Bickerstaffe has a tough challenge ahead to turn two shrinking suppliers into one with a compelling growth story.
ADVICE Hold
WHY Challenges ahead for both parts of SSE
