When I think of Asia-focused banking company Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.
1) Volatile share price
Banking companies operate in a cyclical sector. Their business performance tends to wax and wane with the ups and downs of macro-economic cycles. You only have to look at Standard Chartered’s record on cash flow and profitability to see that:
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2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
|---|---|---|---|---|---|---|
|
Net cash from operations ($m) |
23,730 |
(4,754) |
(16,635) |
18,370 |
17,880 |
9,305 |
|
Diluted earnings per share (cents) |
201.3 |
165 |
193 |
198 |
202 |
167 |
Unadjusted figures like these are important for banks because their share prices tend to follow the numbers. Take Standard Chartered’s 2013 earnings-per-share result, for example. The year came in down around 17% and the share price has dropped by about 17% since the beginning of 2014 leading up to the results announcement. If we consider the share-price movement since the beginning of 2013, the fall is about 35%.
According to the directors, investor sentiment towards emerging markets turned sharply sour from May 2013 and Standard Chartered found trading difficult. It’s no surprise that the share price started factoring in a tough year ahead straight away, as stock markets are forward looking. However, bank shares tend to be early movers when it comes to mirroring macro-economic conditions, as the nature of the banking business locks it into such cyclicality in a direct way.
Share price swings like that bring both opportunity and threat to any investment in banks like Standard Chartered. Right now, with the directors making positive noises about 2014’s potential trading, and the way they are banging the drum about the strength of the firm’s longer-term growth story, I’m seeing more opportunity than threat in the firm’s recent share-price weakness.
2) Regulatory drag
According to the CEO part of Standard Chartered’s profitability challenges during 2013 were down to increasing costs due to rising rregulatory requirements and the British governments bank levy — an annual tax on all the bank’s debts.
The banks have been facing accelerated scrutiny and firming regulation for some time, and it seems unlikely that such pressure will lift. The banking regulatory landscape has been shifting and the increased costs resulting seem likely to be a permanent feature going forward.
What now?
Despite such concerns, Standard Chartered’s forward dividend yield is running at around 4.7% for 2015, which looks attractive given the firm’s longer-term growth prospects.
