Standard Chartered PLC: A Comprehensive Investment Analysis

Broker Name: OCBC Investment Research

Date of Report: 30 October 2024

Investment Thesis and Summary

Standard Chartered Bank (SCB) is a dominant force in the financial world, especially within emerging markets (EM) such as Asia, Africa, and the Middle East. With the growing concerns about EM’s growth slowdown and currency fluctuations, SCB’s growth outlook has been under scrutiny. However, SCB’s ability to implement strategic measures to achieve its return on equity (ROE) targets could support a re-rating, leading to a sustainable valuation for the bank.

Strong Revenue Momentum

SCB reported impressive 3Q24 results, with underlying revenue, pre-provisions operating profit (PPOP), and underlying profit before tax (PBT) surpassing consensus estimates by 4%, 14%, and 15% respectively. This performance was largely driven by higher-than-expected revenue. Key positives include:

• Other income exceeded consensus forecast by 7%, driven by robust revenue growth in Wealth (+32% YoY), Markets (+16% YoY), and Banking (+7% YoY).
• Net interest income (NII) was 2% ahead of the consensus estimate.
• Net interest margin (NIM) increased by 2bps QoQ to 1.95%.
• Operating costs were 2% lower than expected.
• Loan impairments were 25% lower than consensus estimates.
• Higher guidance on capital return and return on tangible equity (ROTE).

Capital Position Remains Solid

The Common Equity Tier-1 (CET1) ratio was slightly lower than expected at 14.2% (vs 14.6% in 2Q24), driven by higher market risk-weighted assets (RWA) and foreign exchange movements. Despite this, the ratio remains above the 13-14% target range. Management anticipates low single-digit percentage growth in RWAs. Additionally, 3Q24 provisions amounted to USD178 million, 25% below consensus estimates.

Positive Surprise in Outlook Guidance

SCB’s updated guidance includes several positive outlooks:

• Income is expected to increase towards 10% YoY in 2024, surpassing the consensus estimate of +8.5% YoY.
• 2024 NII remains unchanged at USD10-10.25 billion.
• Medium-term income growth guidance remains at 5-7% CAGR during 2023-26, although 2025 growth is expected to be below this range.
• Positive operating leverage is expected in 2024-26, with no changes to the 2026 cost guidance of less than USD12 billion.
• Capital return guidance has increased to at least USD8 billion during 2024-26, up from the previous guidance of at least USD5 billion.
• ROTE guidance has been lifted from 12% to 13% by 2026, exceeding the consensus estimate of 12.4%.
• Credit cost is expected to normalize towards 30-35bps.

SCB’s share price has risen 39% YTD, outperforming the Hang Seng Index by 16 percentage points, driven by improved market sentiment, reduced market concerns about the China real estate market, and superior total shareholder returns. The stock trades at 0.57x forward price-to-book (P/B), with an 8-9% ROE, and offers a 3.0% 2025 dividend yield. Earnings estimates for the next two years have been increased by about 1-2%, and the fair value estimate has been raised to HKD 108.00, implying a higher valuation multiple of 0.7x forward P/B.

ESG Updates

SCB leads its global peers in corporate governance practices, with a majority-independent board enhancing management oversight. The absence of significant dissent to directors at the 2023 AGM suggests shareholder satisfaction. However, SCB faces allegations of funding fossil fuel projects despite its climate commitments.

SCB’s reliance on skilled staff presents potential recruitment and retention challenges. The bank leads peers in talent management initiatives, such as graduate programs and engagement surveys. Nevertheless, the employee turnover rate increased to 15.5% in FY2022 from 7.3% in FY2020.

SCB handles customers’ personal information and is thus vulnerable to reputational risks in case of a data breach. It leads peers in data privacy practices, with an overarching privacy framework and access control techniques to mitigate risks. However, it appears to lack practices related to third-party data handling.

Potential Catalysts

• Faster-than-expected macroeconomic growth and economic resilience, which could drive stronger-than-expected core earnings.
• Better-than-expected cost controls and capital allocation.
• Potential mergers and acquisitions.

Investment Risks

• Weaker-than-expected macroeconomic growth in EM could negatively impact loan growth and raise asset quality concerns.
• Potential business disruption from restructuring activities.
• Exposure to uncertainties in the UK regulatory environment.
• Loan provisions could pose a headwind if EM growth contracts faster than expected.

Valuation Analysis

When comparing SCB to its peers, the following key metrics stand out:

• Standard Chartered PLC (2888 HK): Price/Earnings: 7.5 (2024E), 6.6 (2025E); Price/Book: 0.6 (2024E, 2025E); ROE: 8.8% (2024E), 8.7% (2025E); Dividend Yield: 2.8% (2024E), 3.1% (2025E).
• HSBC Holdings PLC (5 HK): Price/Earnings: 7.2 (2024E), 7.4 (2025E); Price/Book: 1.0 (2024E), 0.9 (2025E); ROE: 13.7% (2024E), 12.6% (2025E); Dividend Yield: 8.6% (2024E), 6.8% (2025E).
• Hang Seng Bank Ltd (11 HK): Price/Earnings: 10.7 (2024E), 10.9 (2025E); Price/Book: 1.1 (2024E, 2025E); ROE: 10.7% (2024E), 10.4% (2025E); Dividend Yield: 7.0% (2024E), 6.9% (2025E).
• BOC Hong Kong Holdings Ltd (2388 HK): Price/Earnings: 7.4 (2024E), 7.5 (2025E); Price/Book: 0.8 (2024E, 2025E); ROE: 11.0% (2024E), 10.5% (2025E); Dividend Yield: 7.4% (2024E, 7.4% 2025E).

Company Overview (as of 31 December 2023)

Company Description: Standard Chartered Bank (SCB) is a leading international banking group listed on the London, Hong Kong, Bombay, and National Stock Exchanges in India. Headquartered in London, SCB operates in 63 markets worldwide, with more than 80% of its income and profits coming from Asia, Africa, and the Middle East. SCB has more than 1,700 offices in over 70 countries and operates four business segments: Corporate & Institutional Banking, Private Banking, Commercial Banking, and Retail Banking. These businesses serve four regions: Europe & Americas, Greater China & North Asia, Africa & Middle East, and ASEAN & South Asia. With over 86,000 employees in more than 60 markets, SCB has a history spanning more than 150 years in some of the world’s most dynamic regions.

Financial Summary

Profitability Ratios

Credit Ratios