How Safe Is Your Money In Standard Chartered PLC?

Standard Chartered PLC (LON:STAN) is out of favour and looking cheap — but how safe are the bank’s finances?

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Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) has fallen out of favour recently, and shareholders have seen the value of their stock fall by 33% over the last year.

Fears of an emerging market slowdown, and rumours of impending credit quality problems haven’t helped, but on the face of it Standard Chartered remains healthy and profitable — and with a forecast P/E of 9.3 and a prospective yield of 4.5%, the bank’s shares look cheap.

I’ve been taking a closer look at three of Standard Chartered’s key financial ratios, to see if I can see any sign of near-term problems.

1. Net interest margin

Net interest margin is a core measure of banking profitability, and captures the difference between the interest a bank pays on its deposits, and the interest it earns on its loans.

Standard Chartered reported a net interest margin of 2.1% for 2013, down slightly from 2.2% in 2012, but still near the top of the range for its sector. I don’t think that last year’s decline is a major concern, as the net interest margin for two of the bank’s three largest segments, Hong Kong and the ‘other Asia Pacific’ regions, remained unchanged last year.

2. Tier 1 capital ratio

Tier 1 capital is essentially a measure of a bank’s retained profits and its equity (book value). One of the requirements of the new Basel III banking rules, which come into force in 2015, is that banks will have to meet new, tougher, tier 1 capital standards.

Standard Chartered’s common equity tier 1 ratio under new rules is 11.2%, which suggests that rumours of a potential capital shortfall are unfounded at present. The only potential concern, for me, is that these ratios are calculated using complex mathematical models — and Standard Chartered says that planned changes to its models in 2014 are expected to reduce the bank’s common equity tier 1 ratio to below 11%.

3. Return on equity

Return on equity (RoE) is a useful way to measure the performance of financial firms, as it shows how much profit was generated compared to the book value (equity) of the firm.

Standard Chartered reported a return on equity of 11.2% for 2013, excluding one-off items. This is down from 12.8% in 2012, but remains substantially higher than the 9.2% reported by Asia-Pacific peer HSBC Holdings for 2013.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland owns shares in HSBC Holdings. The Motley Fool owns shares in Standard Chartered.

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