Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) gets me excited.
Here is a high-quality bank with emerging market exposure that trades on a price-to-book ratio of just 1.23.
For me, that’s simply too low for two reasons. Firstly, Standard Chartered is unlikely to be subject to a vast amount of future writedowns. It has not been in the past, with net assets increasing from $22.7 billion in 2008 to their current level of $46 billion during what is generally regarded as one of the most challenging periods in history for banking. Therefore, the price-to-book ratio is unlikely to contain a large margin of safety in case of future writedowns.
Secondly, Standard Chartered has proved that its net assets are capable of generating a significant amount of profit in recent years. Indeed, profits have increased from $3.3 billion in 2008 to $5 billion in 2012. So, I think that goodwill of just 23% is far too low for net assets that can generate just under half of that in one year.
As well as being good value, I also feel that Standard Chartered’s shares are at a low ebb, as highlighted by the share price chart. Shares hit a low of just under 1,400p in June 2013 and since then have traded sideways in a 200p range from 1,400p to 1,600p. However, they have tested this limit and seem to gain momentum when at the lower end of their range, indicating strong support at this price.
Furthermore, shares have vastly underperformed the FTSE 100 in 2013, delivering a return of -5% versus the market return of 14%. I am sceptical that this divergence will remain so large and would expect it to narrow over the medium term, meaning Standard Chartered could have a positive medium to long term ahead of it.
In addition, Standard Chartered consistently delivers impressive returns to equityholders. Indeed, return on equity has been above 10% in each of the last five years, averaging 12.3% over the period and being 10.8% last year. This is mightily impressive and highlights the fact that if Standard Chartered is capable of such returns during highly challenging trading conditions, what can it achieve during more prosperous times?
