Today I am explaining why I believe Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) is ready to rise strongly next year.
Digging in with developing markets
Standard Chartered alerted investors this week when it advised that, although client activity remains strong, that “difficult market conditions that began in August have continued in the second half and are likely to remain through to the year end.”
The bank warned that weakness in its Own Account and Financial Markets divisions are likely to offset strength in Consumer Banking revenues, while turnover at Wholesale Banking is expected to remain flat in 2012. And these trends are likely to result in no revenue growth during 2013, Standard Chartered warned.
Still, the bank confirmed the promising headway it is making in emerging markets, a crucial theme considering that some 80% of group revenue is sourced from Asia, the Middle East and Africa. Indeed, Standard Chartered continues to see turnover grow in Hong Kong, India and Africa at double-digit pace, offsetting weaknesses elsewhere.
Although regulatory changes in Korea persist in troubling Standard Chartered, the firm is undergoing severe transformation here — from closing hundreds of branches as part of wide-scale cost-cutting initiatives, through to focusing on core clients and putting some of its non-core assets on the chopping block — in a bid to rapidly turn around its fortunes in the country.
It is certainly true that the issue of currency weakness in these regions, particularly in the Indian rupee and Indonesian rupiah against the US dollar, could continue into the new year. Indeed, this phenomenon is expected to adversely affect turnover and profit growth to the tune of 1% this year.
Still, for 2014 I expect accelerating customer activity, combined with restructuring in troubled regions, in its developing market operations to offset the potential for further FX weakness. And in the long term I believe that the effect of a rising, and richer, population in emerging markets bodes well for Standard Chartered’s growth prospects.
City brokers expect earnings to slide marginally in 2013, with a 3% being pencilled in to 133.3p per share. But earnings per share are predicted to rebound 10% during next year to 146.6p. Based on current projections, Standard Chartered currently sports a P/E rating of 9.1 for next year, camped comfortably below the watermark of 10 which represents excellent value.
In particular, Investec has said that it expects “a sharp re-acceleration in Wholesale Bank revenues with substantially curtailed margin and Own Account headwinds” to drive performance next year, and has attached a 1,900p price target, up 45% from current levels.
