Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Asian markets stall
Standard Chartered is heavily geared towards the high-growth regions of Asia, but the bank has experienced a marked slowdown in these territories as of late. On top of this, the effect of economic deterioration in these regions has resulted in adverse currency movements for the group, a trend expected to weigh on 2013 profits to the tune of around $70m.
Indeed, the bank’s interims last month revealed that turnover at its operations in Korea and Singapore contracted by single-digit percentages during January-September. And the bank has been whacked by changing regulations in Korea, and was forced to swallow a $1bn goodwill writedown on its businesses there earlier this year.
… but developing markets poised to deliver long-term
Standard Chartered is heavily dependent upon the performance of its emerging market operations, and derives more than 80% of its income from the promising territories of Asia, the Middle East and Africa.
And despite the effect of recent legal difficulties and wider macroeconomic slowdown on the bank’s performance here in recent times, I believe that the long-term earnings outlook from these geographies remains compelling. Even though the bank was forced to cut its growth forecasts for these regions in recent weeks, growth of 6.5% for Asia through to 2014, and 6.3% from 2018, still provides plenty of opportunity for Standard Chartered to generate massive earnings.
Regulatory challenges ready to rise?
Standard Chartered’s interims revealed that costs remain “well controlled“, having grown in line with turnover in the year to date. However, the business announced that the effect of escalating regulatory and compliance expenses has been significant, and Standard Chartered faces the prospect of rising costs as authorities in Asia look likely to ratchet up legislation.
One particular concern is capital, and as KPMG notes: “Although banks in Asia can generally meet [Basel 3 capital] requirements with little difficulty at present, there is an emerging concern that the requirements could potentially act as a constraint on balance sheet growth in the years ahead.”
A great all-round selection
Still, current broker forecasts suggest that Standard Chartered is a fantastic stock pick for those seeking both exceptional growth and dividend prospects at excellent prices.
The company is expected to incur a 4% earnings per share (EPS) contraction in 2013, leaving the company dealing on a P/E rating of 11. But a projected 10% EPS snapback in 2014 creates a P/E multiple of 9.9 for next year, within the value for money territory below 10. And a price to earnings to growth (PEG) readout of 1 for next year underlines the firm’s improving bang-for-your-buck.
Meanwhile, income investors can take heart from the firm’s progressive dividend policy which is expected to result in further chunky payout rises both this year and next. If realised, these would create yields of 3.8% and 4.2% for this year and next, outstripping the FTSE 100 forward average of 3.2%.
