Standard Chartered’s (LSE: STAN) (NASDAQOTH: SCBFF.US) shares have collapsed nearly 16% during the past few months and when compared to historic valuation multiples, the bank’s shares now appear cheap.
However, due to a number of factors it is no longer appropriate to value Standard in comparison to historic figures. Indeed, it could be said that comparing the bank’s current valuation to historic multiples is now extremely misleading.
Lower growth lower valuation
The reason behind Standard’s recent decline, which extends back into last year, is investor apprehension about the bank’s slowing rate of growth. Further, investors have raised concerns that the bank’s capital cushion could be lower than stated.
Unfortunately, earlier this year the bank came out and confirmed investors’ fears that for the next few years, earnings growth was going to be slower than originally forecast. Specifically, Standard’s management now predict mid-single-digit annual earnings growth for the next few years, compared to double-digit annual growth, as previously predicted.
Still, now Standard has scaled back its plans for growth, many City analysts believe that the bank’s capital position is no longer an issue. What’s more, Standard’s management has revealed that the bank is going to pull out of non-core markets, which will hopefully boost the capital position further.
However, now that Standard’s management has revised annual growth targets down to the single-digit range, many City analysts believe that it is unlikely the bank’s shares will attract a high P/E multiple, as they have done in the past.
Unfortunately, this implies that although Standard’s shares are trading at their lowest valuation in a decade, this valuation seems appropriate when considering the bank’s lower rate of growth.
An Asian bank
As mentioned above, Standard is pulling out of non-core markets during the next few years as the bank targets growth within key Asian markets.
However, as Standard refocuses its sights on Asia, with little exposure to Western financial markets, some City analysts have suggested that the bank should be viewed as an Asian bank and valued against Asian peers as a result.
So, when compared to HSBC and DBS Group Holdings Ltd, two of Asia’s biggest banking conglomerates, Standard now looks, if anything, overpriced. For example, Standard currently trades at a historic P/E of 12.5 while HSBC trades at a multiple of 12.1 and DBS trades at a historic P/E of 11.
Foolish summary
So overall, as a bank focused on Asia, Standard deserves to be valued against Asian peers. What’s more, the company’s lower rate of earnings growth warrants a lower valuation, implying that at present levels, Standard Chartered could actually be overvalued.
