Standard Chartered (LSE: STAN) shares have fallen by 15% this year, as stagnating earnings and rising bad debts have eroded the market’s confidence in the emerging markets specialist.
Yet Standard Chartered remains profitable and offers a generous 4.6% prospective yield — are things really that bad, or is the bank a bargain at today’s 1,150p share price?
Valuation
Let’s start with the basics: how is Standard Chartered valued against its past earnings, and the market’s expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average normalised earnings per share |
9.3 |
|
2-year average forecast P/E |
9.6 |
Source: Company reports, consensus forecasts
These numbers suggest that Standard Chartered is currently very cheap, on both a forecast and historic basis.
To put these figures into context, the FTSE 100 currently trades on a P/E of 13.4 and offers a 3.5% dividend yield.
What about the fundamentals?
Earnings don’t tell the whole story of an investment’s potential. I’ve listed the five-year growth rate for some of Standard Chartered’s other key metrics in the table below, to give a broader view of its recent performance:
|
Metric |
5-year compound average growth rate |
|
Operating income (equivalent to sales) |
+3.7% |
|
Normalised earnings per share |
+3.3% |
|
Normalised return on equity |
-4.8% |
|
Dividend |
+6.1% |
|
Book value |
+8.0% |
Source: Company reports
Standard Chartered’s operating income and earnings have both grown steadily, albeit modestly, over the last five years, at an average rate of around 3.5% per year.
The firm’s return on equity, however, has fallen steadily, as earnings growth has failed to keep pace with the bank’s equity, or book, value, which has risen by an average of 8% per year.
This suggests to me that Standard Chartered’s growth has come at the expense of some profitability — and if bad losses continue to rise, it could suggest that the bank’s loan quality has suffered, too.
Shareholders have been well rewarded through the dividend, which has risen by an average of 6.1% per year. However, while this year’s dividend remains twice covered by forecast earnings, significant dividend growth appears unlikely in the near future.
Is it time to buy StanChart?
I’ve been uncertain about Standard Chartered for some time now, fearing that the bank could be about to experience a surge of bad debts and weak earnings, in its key Asian markets.
However, I’m beginning to think that at around 1,150p, Standard Chartered’s shares are becoming cheap enough to discount the risk of a few years of poor profits — especially as the bank’s 4.6% prospective yield remains amply covered by earnings.
Standard Chartered has gone back onto my watch list, and deserves a cautious buy rating, in my opinion.
