Commodity Price Drop Threatens Standard Chartered

We're cutting our fair value estimate for Standard Chartered amid concerns over the impact of a protracted decline in oil and other commodities prices

Erin Davis 15 January, 2015 | 1:30PM
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While we appreciate management’s argument that Standard Chartered (STAN) has been reducing its exposure to troubled markets for some time, and that the bank’s loans tend to be of fairly short duration, we think that the speed and size of the drop in commodity prices will be enough to materially increase the probability of client financial distress. Ultimately, this would reduce the value of collateral held against Standard Chartered’s $61 billion of commodities lending.

We’ve long held that capital is key to our valuation for Standard Chartered shares. Therefore, we're increasingly worried about the potential impact of the steep and protracted drop in the price of oil and other commodities. We had already anticipated a material increase in loan losses, leading to a modest decrease in our fair value estimate, but any capital raise would likely reduce our fair value estimate further.

We're therefore reducing our fair value estimate to 1,530 pence per share from 1,630 as we increase our loan-loss forecasts and reduce our revenue estimates. 

The shares currently carry a 4-star rating, indicating the market is moderately undervaluing the stock compared to our fair value estimate.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Standard Chartered PLC531.00 GBX-2.78Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.