Standard Chartered
Shares in Standard Chartered (LSE: STAN) fell another 5% today, on news that Fitch Ratings has downgraded the bank’s credit rating from “AA-” to “A+”. The credit ratings firm said “unfavourable profitability and asset quality trends as well as its underperformance relative to peers” were the main reasons behind its decision.
Fitch has also maintained its rating outlook as “negative“, which indicates there is a heightened probability of another downgrade. This decision stems from the risks of “further downturn in the credit cycle as well as high management and staff turnover“, which could undermine the implementation of the bank’s new strategic plan.
Standard Chartered’s new strategic plan, which was only unveiled on Tuesday, envisages 15,000 job cuts over the next three years, the sale or restructuring of $100bn worth of risk-weighted assets and a $5.1bn rights issue to shore up its capital position. The bank’s new strategy would enable it to focus on retail banking and the growing wealth management market in Asia, and move away from riskier lending, particularly in the cyclical commodities sector.
Although this new plan should help Standard Chartered to become leaner and more profitable in the longer term, it still faces major headwinds in the near term. Economic conditions in emerging markets will likely worsen further and Standard Chartered still has some $43bn worth of loans linked to the deteriorating commodities sector. This should mean loan losses could still have much further to rise, and the bank’s earnings much further to fall.
So, whilst Standard Chartered’s shares have lost 58% of its value over the past two years, I would still prefer to avoid investing in the bank.
Rolls-Royce
Shares in Rolls-Royce (LSE: RR) have performed similarly poorly over the past two years, dropping 39% in the same period. Its commercial aviation engine division, which had until now been unscathed by falling demand, saw its sales grow significantly more slowly in its latest first-half results.
Although lower than expected demand for Airbus A330s had been partly to blame, airlines have been holding off purchases of older Trent 700 engines in anticipation of the introduction of the replacement Trent 7000 model. This should mean the slowdown in sales will only be temporary, as demand for widebody aircraft continues to be buoyant, despite the slowdown in emerging markets.
So. although Rolls-Royce is set to see its underlying earnings fall by as much as 17% this year, the positive outlook on the company’s long term fundamentals should mean the company’s shares are still worth buying. Its valuations are also attractive, with its shares trading at a forward P/E ratio of 12.5, and carrying a forward dividend yield of 3.4%.
Countrywide
Countrywide (LSE: CWD) surprised investors yesterday, with a worse than expected 11% decline in operating profits for the first nine months of 2015. Its shares have fallen by 22% in the past six months, as the recovery in the number of property transactions failed to materialise over the summer period.
The company now expects property transactions will be 5% lower this year than in 2014, and this would also mean operating profits for the full year will be less than last year. Although, the near term outlook for the sector is gloomy, the longer term outlook is still positive. Economic conditions in the UK remain relatively strong, and this should mean property transactions should eventually pick up.
On top of this, Countrywide’s valuation is attractive. Its shares now trade at just 12.6 times its expected 2015 earnings and carry a forward dividend yield of 3.4%.
