To say it hasn’t been a banner year for Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) shareholders is something of an understatement. The Asian-focused bank that shrugged off the financial crisis like Godzilla batting away helicopters has seen its shares slump 17%, despite the relatively benign conditions of 2013.
That slide compares to a 10% gain for the FTSE 100 this year, and perhaps more surprisingly with a 60% surge for shares in Lloyds Banking Group – a UK rival that doesn’t pay a dividend and only a few years ago had to be bailed out by taxpayers.
How did Standard Chartered fall so low? And will it recover in 2014?
The higher they climb, the farther they fall
In some ways, Standard Chartered hasn’t done too much wrong. Rather, it was set up for a fall.
You see, while banks like Lloyds and Royal Bank of Scotland Group – and even CitiGroup, Standard Chartered’s US-based rival in opening up branches in new territories in Asia and Africa – have all traded at a sharp discount to book value since the financial crisis, Standard Chartered remained at a decent premium.
It was sitting pretty on a pedestal, waiting to be knocked off – and then things were thrown its way.
First we saw big fines – in total, $667 million paid to US authorities in late 2012 to settle claims it broke sanctions with Iran. This tarnished Standard’s reputation as a “good” bank that was beyond the questionable dealings that had brought low its Western-orientated rivals.
Next: the downgrades. Standard Chartered has spent 2013 gradually conceding that the days of double-digit growth are, for now at least, behind it, with the group income expected to be flat in the current year. Loan impairments in its consumer operations have been rising (the Korean market has turned into something of a mini-basket case for the bank) and its wholesale banking division surprised analysts with its feebleness. Estimates have been slashed.
Questions about culture, rising impairments, and falling earnings are hardly prime-time material, and Standard Chartered has crashed off its pedestal with a thump.
Down but hardly out
We don’t invest in the past, however, but hope to profit in the future. And in my view, investors in Standard Chartered who paid nearly £20 in 2010 for a bank on a P/E of 16 were taking a bigger risk than newcomers who need to cough up just £13 for shares on a P/E rating below 10.
There’s no doubt the clouds have gathered over this bank, and it’d be foolish to invest assuming they will immediately lift. The question is whether 2014 will be quite as bad as the market now fears – and, more importantly, whether the long-term case has been impaired.
In terms of the next 12 months, obviously it’s impossible to predict what will happen with any certainty. But with analysts having trimmed their expectations for earnings by more than 10% in the past three months, things don’t need to go so well for the bank to just hold course.
Some doubters point to last summer, when the mere notion that the Federal Reserve might begin to taper its easy money caused funds to flow from emerging markets, and hence imperilled the operations of Standard Chartered and other players in the region. But I’d suggest much of that move has likely now happened. Moreover, the Fed is tapering because the US economy is strengthening. That should be good for the global economy and banks that profit from international trade, like Standard Chartered.
The real bears fear a repeat of the Asian crisis of the late 1990s. It’s worth pondering, but as best I can tell it’s overly pessimistic. Companies in the region are much less dependent on hot dollars these days, and the local economies in general far stronger. 2014 could be bumpy, but I don’t foresee a crash landing.
Still the best bank in the best markets
And let’s not forget what made Standard Chartered so attractive in the first place. The demographics in Asia and the rest of the emerging markets remain compelling, as does the direction of travel for their economies. As they continue to strive to catch up with living standards in the West, this bank should continue to thrive by providing the financial clout that consumers and companies require to do so.
The market expects 140p of earnings in 2014 for Standard Chartered, and a dividend of 56.7p. That would make for a P/E of barely more than 9, and an attractive dividend yield of 4.3%.
Of course, things could go worse for the bank — but I think it has earned the benefit of the doubt. Especially given that today’s investors don’t have to pay much of a premium for that reputation.
