Standard Chartered’s Future Looks Gloomy, Stock Downgraded

Standard Chartered bank has been toppled from its perch. Not that long ago equity analysts were singing its praises, now the future looks gloomy and the stock has been downgraded

Erin Davis 4 November, 2015 | 8:00AM

No-moat-rated Standard Chartered (STAN) conceded on November 3 that it needed to raise capital, much as we had said it would. The amount to be raised, £ 3.3 billion, and the price £4.65 per share for the equity rights, were in line with our expectations. Management said that the fresh capital would increase the bank’s June common equity Tier 1 ratio to 13.1% from 11.5% as reported, in line with our view that 13% is the new baseline for global banks. In our baseline scenario, we think this capital raise is sufficient, although we cannot rule out the need for additional capital if credit losses are significantly worse than we are forecasting. The results of the U.K. stress test, which will incorporate emerging-market risks for the first time, will not be available until early December.

The scale of the operational change that is needed is shocking

While the capital raise is essentially as expected, news about the strength of the bank’s business was worse than anticipated, even in lieu of the fact that we removed the bank’s narrow moat rating earlier this year. We plan to reduce our £10 per share fair value estimate by 10%-15% as we incorporate a lowered forecast for future earnings into our valuation. We were especially disappointed by management’s return on equity target of 8% for 2018 and 10% for 2020 – both figures are well below the 12% cost of equity we assign to the bank, and below the nearly 10% rate we'd expected the bank to earn in 2018.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Standard Chartered PLC434.20 GBX1.26

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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