Standard Chartered (LSE: STAN) has been the top-performing FTSE 100 bank over the last 12 months. Its shares have gained 85% — well ahead of peers HSBC (48%), Barclays (42%), Lloyds (11%) and Royal Bank of Scotland (6%).
However, the shares moved lower today after the company reported its annual results at 08:35. As I write, they’re trading at 715p — 4% down on yesterday’s close.
In light of this morning’s results and profit-taking, and the tremendous rise over 12 months, should you buy or sell Standard Chartered today?
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Turnaround
The company said it made “good progress” in 2016. Statutory numbers show operating income down 8% to $14.1bn from $15.3bn but pre-tax profit swinging to $409m from a $1.5bn loss in 2015. On an underlying basis, pre-tax profit increased over 30% to $1.1bn from $834m.
The bank said it delivered gross cost efficiencies of $1.2bn and is targeting further efficiencies in 2017 and 2018. Meanwhile, a reduction in risk-weighted assets saw the Common Equity Tier 1 ratio strengthen to 13.6% from 12.6% the prior year.
The balance sheet is now considerably more robust but the board declared no dividend for the year. This is because of a number of economic and regulatory uncertainties, the turnaround in profitability being at a relatively early stage and the need to prioritise investment to drive a sustainable improvement in financial returns.
Chief executive Bill Winters said: “Our financial returns are not yet where they need to be and do not reflect the group’s earnings potential. Having worked hard to secure our foundations we are now focused on realising that potential”.
Earnings potential
Underlying earnings per share (EPS) for 2016 came in at just 3.4 cents, making the trailing price-to-earnings (P/E) ratio a mind-boggling 265 at the current share price of 715p.
However, City analysts see the earnings potential Bill Winters referred to coming through to the tune of about 40p EPS in 2017 and 60p in 2018, giving a forward P/E of 18, falling to 12. If these forecasts are on the button, Standard Chartered’s shares remain reasonably cheap, even after the tremendous gains over the past 12 months.
The bank also looks cheap on another valuation measure. With the FTSE 100 five having all now updated on their tangible net asset values (TNAV) as of 31 December, we have the following valuations:
| Recent share price | TNAV/share | Price/TNAV | |
| Standard Chartered | 715p | $11.64 (931p) | 0.77 |
| HSBC | 652p | $7.91 (633p) | 1.03 |
| Barclays | 226p | 290p | 0.78 |
| Lloyds | 69p | 54.8p | 1.26 |
| RBS | 242p | 296p | 0.82 |
As you can see, Standard Chartered is the cheapest of the five on asset valuation and with the shares at such a discount to TNAV, there’s potential for a good re-rating, if management can get the assets working to deliver higher returns.
I think management has done a fine job so far and, as I’m confident in the long-term growth story for the emerging markets on which Standard Chartered is focused, I believe the shares continue to be worth buying.
