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Standard Chartered plc: The Good Bank Turns Bad

Oh, Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), where did it all go wrong? You survived the financial crisis in far better state than the beleaguered big four, while your exposure to China and emerging markets heralded a future full of Eastern promise. You were the good bank. We respected you. 

So what happened? In the last three years, your share price has fallen 27%. Over two years, it is down 10% in what was a bumper period for almost every other bank. During that spell, bad boys Barclays rose 40%, Royal Bank of Scotland rose 50% and Lloyds Banking Group soared an almighty 185%.

Analysts are losing faith in you. Nomura has just cut its target price from 1,810p to 1,690p, although it still names you a ‘buy’. JP Morgan is neutral, and has cut your price in 1750p to 1500p. Frankly, I’ve lost a bit of faith myself. Can you turn things round?

Sinking sands

You have a tough struggle ahead of you. Your recent trading update sparked a 7% drop in the share price, after management admitted that tough market conditions will persist until the end of the year. Income looks set to be flat in 2013. Impairments are rising. Even currency volatility is against you, as the likes of the Indian rupee and Indonesian rupiah depreciate against the US dollar. Given latest US non-farm payrolls data, they could depreciate even further. You bad boy, you.

I really hate to raise the subject of Korea, where your consumer banking income is set to drop by around 15%, and you’ve been hit by a £1 billion write-down. And maybe I should gloss over that $667 million US fine for sanctions busting and money-laundering (no bank is perfect, as we know). Competition is getting tougher as well, as your rivals target lucrative emerging markets. It’s been a challenging year, as chief executive Peter Sands is the first to admit.

You’ve had your moments. Last month, you became the first British bank to open a branch in Iraq. Good luck with that. Hong Kong, Africa and India all posted double-digit income growth. Costs are under control, you’re well capitalised, and your balance sheet is “liquid, and well-diversified by product, industry and geography”. Plus, of course, 90% of your business operates in fast-growth areas of Africa, Asia and the Middle East. So there is hope for the future.

Bad for good?

I’m on your side, Standard Chartered. That recent 6% rise in the interim dividend shows willing. Your 3.9% yield beats the FTSE 100 average of 3.5%. A 3% drop in earnings per share (EPS) growth this year should flip into a 10% rise in 2014. So better days lie ahead. Trading at 9.6 times earnings, now could be the ideal time to buy. I’ve bought bad banks on bad news before, so why not buy a good bank on bad news?

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> Harvey owns shares in Royal Bank of Scotland. The Motley Fool owns shares in Standard Chartered.