Standard Chartered (STAN) is one of our favourite banks and one of the few global banks that wasn't deeply damaged by the financial crisis. Its footprint in some of the world's fastest-growing markets - Asia, Africa, and the Middle East - spurred profit growth of about 14% annually between 2010 and 2012. Although slowdowns in its key markets mean near-term growth is likely to be subpar, we think the underlying fundamentals remain strong. We're especially impressed that Standard Chartered is controlling expenses well despite cost inflation in its markets, and is maintaining its 55% cost/income ratio. We think the bank's diversification - no market accounts for more than 25% of profits before tax and noninterest income accounts for nearly half of revenue - will help the firm smooth over any bumps in the road, although turmoil in Asia, Africa, or the Middle East is bound to affect its profitability.
In early 2014, Standard Chartered announced a new structure under which it will operate as one bank focused on three customer segments - Corporate and Institutional (formerly Wholesale), Commercial and Private Banking, and Retail (formerly Consumer). The biggest change is the creation of Commercial and Private Banking, which will combine the SME and middle-market segments under one roof. This more clearly links the bank's commercial and private banking capabilities, with the idea that both divisions are well-positioned to serve the wealthy owners of privately held business. Although we think this strategic move is a good one, we think the reorganization is otherwise largely window dressing - the majority of Standard Chartered's revenue will continue to come from its largely unchanged former Wholesale division.
We like these changes in theory - we think they will sharpen the bank's focus on serving customers that value its reach across fast-growing markets, the source of its narrow moat - but we doubt they will significantly reinvigorate growth. We're also unconvinced that they will spur material cost synergies, as Standard Chartered's operations are already fairly lean. Still, we think the bank's attractive footprint and strategic focus mean its long-term prospects are bright.
Standard Chartered's strategy is to continue to build out its network in Asia, Africa, and the Middle East, so its fortunes are closely tied to the economic health of these occasionally unstable regions. Competition is heating up in Asia, particularly in Hong Kong - one of Standard Chartered's biggest markets - and profit margins could suffer. We note that growth has slowed significantly in these markets, and Standard Chartered also faces headwinds as it pulls back from South Korea - we expect growth through at least 2015 to be below historical levels.
We believe that Standard Chartered of is worth £ 16.30 per share, making the stock currently undervalued.
This is an extract of a Morningstar equity analyst report. Premium members can read the full report here.
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