Time to book profits in Standard Chartered shares

I had recommended Standard Chartered Bank in this column at 430 pence after its late 2015 $5 billion rights issue because I believed incoming CEO Bill Winters had the right template to reinvent the most mismanaged major international bank devoted entirely to emerging markets finance. The turnaround in the bank since 2015 has been impressive. Revenues have stabilised. The Basel Tier One capital ratio now is a stellar 13.86 per cent. The bank has slashed costs, reduced its exposure to Indian steel/mining oligarch and Southeast Asian energy/commodities conglomerates. The bank has also restored relations with US regulators outrage by its blatant violation anti-Iran sanctions and anti-money laundering protocols in 2012.
Yet Stan Chart shares at 800 pence in London now look fully valued to me at 0.9 times tangible book value. The bank has not restored its dividend. Revenue growth in second quarter 2017 was marginally negative at a time when Asian economies, led by India and China, are in bull market mode. Loan growth has been mediocre relative to HSBC. Return on equity is a meagre 5 per cent, though far better than 2016's pathetic 2.1 per cent. Since Stan Chart's cost of capital is at least 10 per cent, it is obvious that Bill Winters has still not managed to steer the bank to the Churchillian "broad sunlit uplands" of shareholder value creation. In contrast, HSBC shares have risen 60 per cent in the past year, return on equity has risen to 8.9 per cent, its Asian loan book's profitability has surged and outgoing CEO Stuart Gulliver has rewarded us with a $2 billion share buyback programme after posting another blockbuster quarter. Both HSBC and Stan Chart share a pedigree in Victorian Britain's colonial empire but the Home for Scottish Bank Clerks (HSBC) is definitely on a roll. The time to buy Stan Chart was in late 2015 when it traded at a draconian discount to its peers at a mere 0.5 times tangible book value. Now that the shares have almost doubled since my 430 pence entry price recommendation, I believe the shares will tread water until Mr Winters demonstrates higher, sustainable returns on equity and a credible loan growth strategy in Asia.
Stan Chart has provisioned $6 billion in the corporate and Institutional Banking Division though the non-performing loan ratio remains for too high at 7 per cent. As revenue momentum has stalled, the scale of planned investments in Hong Kong and Mainland China will prevent any major short term boosts in the bank's return on equity. The low hanging fruit from the cost control programme has long been plucked and operating expenses are still far too high at $4.9 billion in the first half of 2017.
Despite its $1 billion in planned investment, it will be difficult, if not impossible, for the bank to regain lost market share in India, Asean (Association of Southeast Asian Nations) and Singapore. The bank's businesses in the Gulf have been devastated by the oil price crash, the slump in world trade, the property bear markets, the sovereign credit downgrades of Oman and Bahrain, war in Syria and Iraq. Corporate banking loan growth and trade finance in Africa is a disappointment as several African economies are mired in recession, led by Nigeria's bungled devaluation. Private banking and wealth management has still not achieved scale at a mere 4 per cent of group revenues.
I do not see how Bill Winters will attain his 8-10 per cent return on equity target by 2018. The bank needs to show significant revenue growth momentum, a fall in loan loss reserves, delivery on the next stage of the planned cost cuts, the reinstatement of the dividend and evidence of market share gains in strategic/core banking markets such as Singapore, Hong Kong, India and China.
An international bank with a systemic bad debt problem (albeit well provisioned and well capitalised) whose return on equity is 50 per cent below its cost of capital does not deserve to trade at 0.9 times price to tangible book value. So while I do not see huge downside risk in Stan Chart, I believe "fair value" is in the 0.7 times tangible book value range or stock price near 625 pence. This can easily happen this autumn since global stock markets are downright expensive and face a myriad of political and interest rate risks. Timing is everything in love, war and bank stock investing. I now recommend investors who bought Stan Chart shares at 430 pence to take profits after a fabulous 86 per cent return on capital.