Shareholders in Standard Chartered (LSE: STAN) suffered on Tuesday when the bank’s shares fell sharply. The Standard Chartered share price was still up 25% over the past year, at the time of writing this earlier today. But Tuesday’s sharp fall was less than welcome for shareholders.
So what’s happening with the share price?
Third-quarter results
On Tuesday the bank released its third-quarter results. As the share price reaction suggests, they were coolly received in the City.
On the surface, the results look strong. Income was up 7%, underlying pre–tax profit rose by 44% to $1.1bn, and earnings per share jumped 70%. Given the apparently robust performance, why did the share price fall?
One reason was less the bank’s performance in recent months than the outlook for the months ahead. It said: “The economic recovery from the Covid-19 pandemic has continued to be uneven and punctuated by supply-chain disruption.” The unevenness to which that comment referred made some investors concerned that the bank’s recovery in some areas could lag that elsewhere for the foreseeable future. An unevenly distributed economic recovery matters more for a bank like Standard Chartered than it does for, say, Lloyds or Natwest because it’s far more geographically diversified. So slow recovery in one region could hamper its overall performance.
Another concern is that while the performance looked strong compared to last year, that was a weak baseline for comparison. Looking back at the third quarter of 2019, Standard Chartered reported underlying pre-tax operating profit of $1.2bn compared to $1.1bn this time around. Statutory basic earnings per share then were 22.5c, but that fell to 20.7c this year. So while the headline results seem impressive, the bank is still not performing as well as it was before the pandemic.
Is the Standard Chartered share price a buying opportunity?
Despite that, I wonder whether the reaction to the results wasn’t overdone.
The bank may not have reached its pre-pandemic financial performance level again yet, but it’s not far off. It produced substantial profits in the third quarter. The bank also guided that it expects income growth to return to its 5%-7% guidance range from next year. With its diversified footprint and heavy exposure to developing markets, especially in Asia, Standard Chartered could be a play on a broad-based global economic recovery picking up speed in the next several years. On that basis, while the current price-to-earnings ratio of 18 doesn’t look cheap, it could turn out to be good value looking back several years from now.
The concern for me as a Standard Chartered shareholder, however, is that we’ve been here before. For many years, the bank’s developing market story has somehow never seemed to translate into sustained business growth. The Standard Chartered share price is now 27% below where it stood five years ago.
Risks continue to face the bank. Any economic downturn could lead to higher defaults and lower profits. Mounting political risks in some markets could make it costlier for the bank to comply with regulatory requirements, hurting profits. I do think if it returns to its target growth rate next year and beyond, the long-term outlook for the Standard Chartered share price is positive. But it could take a lot of patience as an investor to realise the benefits.
