Shares in FTSE 100 bank Standard Chartered (LSE: STAN) are down 29% from their 3 March one-year £12.81 traded high.
This is an unusual dip in the share’s price, but is still up 44% from its 17 April 12-month low of £6.35.
I have been sorely tempted to buy the stock for a while now for reasons analysed below. However, the fact that I own shares in two other banks – HSBC and NatWest – prevents me from doing so. Adding another banking stock to these would unbalance the risk-reward profile of my overall portfolio.
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However, for investors whose portfolios this suits, the current price dip might mean a great buying opportunity to consider.
A clever shift in business strategy
A key long-term risk for all banks – and Standard Chartered is no different – has been declining interest rates in key markets.
This has already reduced the net interest income (NII) many have made. The NII is the difference between the interest they gain on loans they make and on deposits taken in.
Standard Chartered has increasingly shifted from an interest-based business to a fee-based one to counter the effects of this. Its 2024 results showed non-NII jumped 20% to $9.3bn (£7.09bn) as a result.
Interesting as well from an investment perspective is that the bank’s total NII rose 10% over the same period, to $10.4bn. This is because it has multiple banking operations in many countries where interest rates have not fallen.
Moreover, Standard Chartered is continuing to expand its fee-based private banking services quickly. It opened a global investment service for ultra-high-net-worth (UHNW) clients in Singapore in March.
It also launched a centre in the UAE offering bespoke wealth management solutions for HNWs in the Middle East, Europe, and Africa in the same month. And to lay the groundwork for these developments, it expanded its frontline private bankers by 20% in the UAE on February.
Consensus analysts’ estimates are that the bank’s earnings will increase by 11% a year to the end of 2027. And it is growth in these that drives a firm’s share price and dividend in the future.
Where does all this leave the share valuation?
Standard Chartered’s 1.5 price-to-sales ratio is the joint lowest in its peer group, which averages 2.2. These banks comprise Barclays at 1.5, Lloyds at 2.3, NatWest at 2.5, and HSBC at 2.7. So it looks very undervalued on this basis.
The same applies to its price-to-book ratio of 0.6 compared to its competitors’ average of 0.8.
And its 7.8 price-to-earnings ratio also looks cheap compared to the 8.1 average of its peers.
The second part of my standard value assessment establishes where a share should be priced based on future cash flows. The resulting discounted cash flow analysis shows that Standard Chartered shares are 63% at their current £9.15 price.
Therefore, their fair value is technically £24.73, although shares go down and up in price.
One to consider?
As I said earlier, if it were not for my other bank stock holdings, I would buy Standard Chartered shares as soon as possible.
Its core business, earnings growth, and undervaluation look extremely compelling to me. And they look all the better on the share price dip. I believe the stock is worth considering.
