FTSE 100 bank Standard Chartered (LSE: STAN) is up 94% from its 12 February 12-month traded low of £5.71.
However, as a former senior investment bank trader and private investor, such a rise does not deter me from potentially buying it. I know that price and value are not the same thing.
How does the valuation look?
I always start my value analysis by comparing a stock’s key ratios against its main competitors.
Beginning with the price-to-earnings ratio, Standard Chartered currently trades at 8 against a peer average of 8.6. These peers comprise NatWest at 7.8, HSBC at 8.1, Lloyds at 8.4, and Barclays at 10.
So, Standard Chartered is undervalued on this measure.
This is also the case on the price-to-book ratio, on which it trades at 0.6 compared to a 0.8 competitor average. And it is true as well on its 1.7 price-to-sales ratio against a peer average of 2.4.
To translate these relative undervaluations into share price terms, I used the second part of my standard assessment process. This evaluates where any stock price should be, based on its future cash flow forecasts using other analysts’ figures and my own.
The resultant discounted cash flow (DCF) analysis shows Standard Chartered shares are 56% undervalued at their current £11.07 price.
So the fair value for the stock is technically £25.16.
Market forces may push it lower or higher than that, of course. However, the three key relative undervaluations and the DCF confirm to me that huge value remains in the stock.
How is the bank handling falling interest rates?
I have long seen Standard Chartered’s key risk as being a slide in its net interest income (NII). This is the difference in interest charged on loans and paid on deposits.
This threat to earnings applies to banking operations in countries that are reducing interest rates as inflation declines.
Some banks have sought to offset falling interest rates by lending more. Others such as Standard Chartered have focused on increasing their business from fee-based rather than interest-based activities.
In Q3 2024, it delivered an underlying operating income of $4.9bn (£3.92bn). This was 12% up year on year and was the best quarter since 2015.
Crucially here, underlying NII was up 9%, while underlying non-NII increased 15%. This latter category was driven by a record quarter in the fee-based Wealth Solutions and Global Markets operations.
Will I buy the stock?
It is earnings growth that powers a company’s share price and dividend higher over time. In Standard Chartered’s case, analysts forecast its earnings will rise 5.6% each year to the end of 2027.
I think this will drive the stock closer to its fair valuation level and enable the bank to keep increasing its dividend. In 2023, this was 27 cents (fixed at 21p), giving a current yield of 1.9%.
Consequently, if I did not already own shares in HSBC and NatWest, I would buy Standard Chartered shares as quickly as possible. I believe it is worth investors considering.
