Standard Chartered’s (LSE: STAN) shares have declined by nearly 12% so far this year, thanking the total loss over the past 12months to more than 19%.
What’s more, these declines have taken the bank’s shares down to a level not seen since the financial crisis, making them attractive to value investors. However, Standard’s shares may not be as cheap as they seem, and investors who are looking for a bargain, could be in for a surprise.
Korean troubles
Standard’s troubles can be traced back to Korea. StanChart Korea, Standard’s third largest business by assets, is struggling and report an operating loss of $162m for 2013. As a result of these losses and credit impairment charges, Standard was forced to write down the value of its South Korean business by $1bn at the end of 2013.
To try and combat this decline, Standard started to close 73 of its 350 South Korean branches. Management has also sold off the group’s Korean savings bank and consumer finance operations in for a total of $148m.
Nevertheless, these evasive actions were not enough to stop the bank’s management from issuing a first-quarter profit warning.
Indeed, at the end of last month management revealed that it now expects the bank’s income for the first-half of 2014 to be down by a mid-single digit percentage, compared to the figure reported for the same period last year.
Is the bank a value play?
The best value opportunities arise when shares are trading below the company’s tangible book value figure. Tangible book value is book value less any intangible assets such as goodwill, in other words, assets you can actually touch. So, the best way to assess whether or not Standard is a value play is to put a value on the bank’s tangible assets.
According to my figures, at the end of 2013 Standard’s tangible book value was £25bn, compared to the bank’s current market capitalisation of £30bn. On a per share basis, I believe that Standard’s tangible book value per share is approximately 2,000p.
It would appear as if Standard still has some way to fall before the bank is an attractive value opportunity.
Unknown risks
Unfortunately, due to the nature of today’s banking environment, it’s hard to value bank shares due to the potential risks hidden within the balance sheet. This is why I believe that Standard could be a value trap.
Indeed, what concerns me most is Standard’s proximity to China and the possibility of a regional credit crisis, the prospect of which is looming on the horizon. An Asian credit crisis is possibly the biggest risk facing Standard and it could tear the bank apart.
Still, the bank reported a Core Tier 1 ratio of 11.8% at the end of the first quarter, above the regulatory minimum.
Foolish summary
So all in all, Standard’s shares are currently trading at a level not seen since the financial crisis. However, as the bank’s shares still trade above their tangible book value, they could have further to fall.
