All the major banks in the FTSE 100 are significantly undervalued, in my view.
This partly results from enduring pessimism over their long-term prospects following the 2016 Brexit vote. It may also reflect the mini-financial crisis in March/April 2023 that stirred memories of the 2007 catastrophe.
And another reason could be the prospect of shrinking net interest margins (NIM) as UK interest rates fall. The NIM is the difference between the rate charged on bank loans compared to deposits.
Of these factors, I think only the last one is justified and it remains the key risk for the bank.
As for the other two, UK banks hugely bolstered their capital buffers after the 2007 crisis. And this left them perfectly able to withstand the fallout from the Silicon Valley Bank and Credit Suisse failures last year.
This all provides superb value opportunities in the sector, including Standard Chartered (LSE: STAN).
The most undervalued of them all?
The best way to ascertain the fair value of any share is the discounted cash flow (DCF) method, in my experience.
Using other analysts’ figures and my own, DCF analysis shows all the major FTSE 100 banks to be undervalued by over 50%!
Lloyds is undervalued the least at a 51% value gap. NatWest is at 55%, HSBC at 60%, and Barclays at 63%.
Top of the list – at 66% undervalued – is Standard Chartered.
Therefore, a fair value for its shares would be £22.12, against the current £7.52. Given the vagaries of the market, of course, they could go lower or higher than that.
Strong growth outlook?
H1 2024 results released on 30 July showed its operating income jumped 11% to $9.958bn, from $8.951bn in H1 2023. This helped power a 20% lift in profit before tax to $3.957bn.
Profit attributable to shareholders increased 21%, to $2.567bn, with the bank’s return on equity rising 2% to 14%.
Interestingly, its overall NIM increased by 0.18% over the period, despite the decline in rates in the UK. This is due to higher interest rates still prevailing in other countries in which it operates.
Consensus analysts’ estimates are now that its earnings will grow 11.7% a year to end-2026. Earnings per share are expected to increase 14.5% a year to then.
Will I buy the stock?
I already have two holdings in the UK bank sector – HSBC, and NatWest. Aside from the extreme undervaluation they have in common with Standard Chartered, they also offer a notably higher yield.
HSBC’s payout is 7.4% at present, and NatWest’s is 4.9%. Last year, Standard Chartered paid a total dividend of 27 cents (21p), giving a current yield of only 2.8%.
I am focused now on stocks that pay high dividends, aged over 50 as I am. So, this additional bank is not for me.
However, if I were 10 years younger, I would buy the shares today for their extreme undervaluation and strong growth prospects.
