There’s no denying that Standard Chartered’s (LSE: STAN) (NASDAQOTH: SCBFF.US) shares look cheap right now. However, it would appear that the bank’s shares are cheap for a reason.
Indeed, over the past few months there has been an almost continual stream of rumours within the City, all of which question Standard’s future prospects. According to these rumours, investors are worried about multiple aspects of Standard’s business, including capital adequacy, dividend sustainability and management quality.
Risk worth the reward?
At present levels, Standard’s shares trade at a forward P/E of 10.3, which appears cheap when compared to the wider banking sector average of 25. What’s more, Standard currently offers a 4.2% dividend yield, once again above the market average and attractive in the current environment of low interest rates.
Nevertheless, Standard’s high yield and low valuation reflect the market’s opinion of the company.
Indeed, after warning on profits, writing down over $1bn in assets and lowering growth forecasts last year, many investors believe that the bank’s current management is no longer up to the job. Some major shareholders have started to openly voice their doubts about management.
There are other issues with the bank as well. For example, as a result of rising loan defaults within Asia, City analysts now suspect that Standard will report a capital buffer shortfall of $5.5bn by 2015.
In percentage terms, Standard’s tier one capital ratio could fall to only 10.7% by 2015, a ratio of less than 10% is considered worrying. This forecast has given rise to the idea that Standard could be forced to slash its dividend payout, to help conserve cash.
Still, Standard is making progress restructuring its troublesome Korean arm. Last week Standard announced the sale of its Korean savings bank and consumer finance operations in for a total of $148m. Additionally, the bank is in process of closing at least 73 of its 350 branches in the country.
An Asian bank
Standard has now scaled back its international growth aspirations, as part of the company’s turnaround plan. As a result, some City analysts have suggested that the bank should now be valued as an Asian bank. Effectively, this implies that Standard should be valued against Asian peers.
So, comparing Standard to HSBC (LSE: HSBA) (NYSE: HSBC.US) and DBS Group Holdings Ltd, two of Asia’s biggest banking conglomerates, Standard now looks appropriately priced. For example, HSBC currently trades at a forward P/E of 11.3 while DBS trades at a forward P/E of 10.7. Standard’s forward P/E, as mentioned above, stands at 10.3.
The better choice
On the other hand, HSBC looks to be a better investment than Standard. In particular, City analysts expect the bank will support a dividend yield of 5.1% next year. The payout looks secure thanks to HSBC’s sector leading tier one capital ratio of 13.6%.
What’s more, the bank’s forward P/E appears low compared to City growth projections for the next few years. Specifically, the City expects that HSBC’s earnings will grow at 10% per annum for the next two years, an impressive rate of growth. Standard’s earnings, as guided by management, are only expected to expand at a high-single digit clip.
