Standard Chartered PLC’s Business Model “Isn’t Sustainable”

Standard Chartered PLC (LON: STAN) needs to reorganise its business to remain profitable.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Standard Chartered’s (LSE: STAN) is one of London’s fallen angels. Indeed, Standard used to be one London’s most successful banking groups but the group’s outlook has been deteriorating for some time.

Things have now become so bad for Standard that City analysts are starting to question the group’s long-term outlook. One set of City analysts has gone so far as to say that they don’t believe Standard is sustainable as a business in its current state. 

Not sustainable

Analysts are concerned about Standard’s falling return on equity, a key measure of banking profitability. In the simplest possible terms, return on equity means the amount of net income returned as a percentage of shareholders equity. And this figure should be above the cost of capital — the cost of funds used for financing a business. 

If Standard’s return on equity stays below 15% for much longer, the bank’s income won’t cover the cost of capital required to run the business. The bank is targeting at return on equity of 10% in the medium term, which is clearly not enough. 

Recapitalise

The only way out of this tangle is for Standard to raise cash, reorganise its loan book and look for opportunities to expand its balance sheet. If management make these changes, the group should be able to improve its return on equity and return to growth. 

On that basis, City analysts believe that Standard’s new management will conduct a rights issue in order to raise around $5.3bn. This should be enough to recapitalise the bank and help return Standard to growth. 

With a market capitalisation of £24.2bn, the bank is well placed to conduct a small rights issue and raise the $5.3bn analysts believe will be enough to recapitalise the group’s balance sheet. 

Of course, Standard could always go for broke and conduct a huge $10bn+ rights issue to allay all fears about the bank’s capital levels and growth rate once and for all.

While this would be damaging to Standard’s share price in the short term, the bank’s long-term prospects would improve significantly. A strong balance sheet and restructured loan book would give Standard the perfect foundations to drive growth.

Dividend cut

Unfortunately, if Standard dose conduct a rights issue, the bank could also be forced to cut its dividend payout. This would be bad news for income seekers. Standard’s shares currently offer a dividend yield of 5.9%, one of the highest yields around.

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »