Shares in Standard Life (STAN) rose on Wednesday after a 37% rise in quarterly profits on the same period of last year. Morningstar analysts believe the bank is undervalued and the market is overly concerned about global trade. The bank’s fair value estimate remains at 740p, above a current price of around 554p.
There was little in Standard Chartered’s third-quarter result that alters our long-term view on the bank. Costs were contained in the third quarter with operating expense, excluding regulatory costs, 4.7% lower than the previous quarter. Second-half operating expense will be at a similar level to the first half and our full-year forecast is largely in-line. Combined with the bank's restructuring effort, we expect profitability to steadily increase over the medium term as operating environment improves.
Credit quality continues to be benign as economic conditions remain resilient. This is in line with peers and most banks under our coverage in the region. The bank has not seen a deterioration in asset quality yet and noted the impact is on investor confidence. The latter has resulted in a decline in revenue for wealth management and brokerage for banks in general. Excluding a $40 million one-off income for its Bancassurance business, wealth management revenue for Standard Chartered declined 6% against last quarter.
Asia Deposits Should Increase
With US interest rates continuing to normalise, we expect steady increases in the bank’s net interest margin. The bank’s operations in Hong Kong and Singapore are the largest beneficiaries. The two markets combine for 40% of the group’s customer deposit with sizeable local-currency deposit market share in Hong Kong, and to a lesser extent in Singapore.
With a large global footprint and its focus on financing trade and multinational national corporates, we think Standard Chartered has a riskier business model than most domestic and regional banks, reflected in our high uncertainty rating. We believe a shock to global economies, increasing trade protectionism such as that between the US and China, will dampen growth and credit demand and translate into lower income for transaction banking and financial market products. The retail banking business in the underlying local economies where the bank operates will see slower growth. More subdued capital markets will also result in lower demand for wealth management products, leading to lower fee income for the bank.
By geography, a greater concentration in Asia means a slowdown in China will have repercussion across the region. Key markets affected include Hong Kong, Singapore, and Korea; including China, these make up almost half of the group’s total assets. Higher exposure to these markets is offset by a larger proportion of retail banking.
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