Standard Chartered IDR

Stock Opportunities
1

I am pretty much surprised to see Standard Chartered PLC’s IDRshaven’tbeen able to enthuse any interest among the Indian investor community. Here is a bank which has a very long history, which has been doing well in the recent times( having recorded H1 profit increase on a YOY basis for the last 9 years), available at a pretty decent yield, with relatively fewer issues about its assets, trading in a prettylacklustermanner.

Sure, there are issues…fungibility, taxation, strike in Korea etc., but for people who are really interested in picking up stock of a great bank and holding it for a really long term period, such things have little material value. How does fungibility matter to an investor, who has no desire to arbitrage the price gap between the IDR and the underlying stock. Similarly, how will capital gains arise if I dont sell my IDRs?

Actually, in my opinion, placing a bet on a bank with global presence is much safer than taking a call on any bank which has just the Indian presence. Sure, I do like Corporation Bank, but I find Standard Chartered to be much safer. Safety,along withreasonable growth and pretty decent fundamentals, is what has attracted me to Standard Chartered Plc.

2

Hi vivek,

I recall Parag Parikh talking about stanchart IDR in a tv show. He did recommend this one with a long term view.

Some queries which should be answered is

What kind of valuations are we talking about here for StanChart IDR?

What is div yield? What kind of div has been paid over the years? Is it gradually increasing?

What kind of taxation is there on dividend given by the company?

What is the market cap of Stanchart and how does it stack up with bigger banks of India?

And finally if at all one were to sell it what kind of tax rate applies to it?

regards

hitesh.

3

Div Yield at current price works out to 3.7%

Please seehttp://investors.standardchartered.com/dividend.cfmto keep track of dividends. Another aspect that comes out here is the foreign exchange risk, which can reduce your dividend yield should the INR appreciate in the future.

Valuation wise, if you compare this with a Barclays or an Deutsche then it appears a bit expensive in terms of P/B, however Stan Chart has a better return ratio and larger exposure to Asia compared to others.

4

Stanchart IDr is atrue blue chip available at dirt cheap price of 80 rs when its equivalent price in LONdon & HK is around 120 rs.

The price has been badly hammered o down on fungibility issue but thats even being reconsidered as per a recent Live Mint report.

All in all an excellent buy at current price level.

5

I guess the price has also fallen in Great Britain and HongKong. But, I am looking at whether or not this deserves to be rankedalong withthe private banks in India. How does it compare with the private banks over here? Thats my fundamental reason for looking at Standard Chartered.

6

At a P/E of nearly 10, I guess this is definitely worth considering. At Indian prices, this stock is trading at a P/B of almost 1. Somehow it looks cheaper than State Bank…forget the private banks of India.

7

BUSINESS LINE BUY STANCHART IDR March 31, 2012:

Fresh investments with a two-three year horizon can be considered in the Indian Depository Receipts (IDRs) of Standard Chartered PLC.

Standard Chartered PLC is a holding company which operates 1,700 branches in 70 countries through various subsidiaries. Majority of the income of Standard Chartered PLC is derived from Asia, Africa and West Asia. For 2011, only 10 per cent of the income was generated from the troubled UK, Europe and Americas.

Following the recent Budget announcement allowing two-way fungibility in IDRs, the Standard Chartered IDR has turned attractive. Fungibility allows an investor to trade freely between the two exchanges on which a stock is listed. This allows them to take advantage of any disparity in price between the two locations.

Today, the Standard Chartered IDR trades at a 25 per cent discount to the stock price in London. .

The stock trades at Rs.1270 in London. The IDR in India trades at Rs.95. Given that 10 IDRs equal one share, there is a 25 per cent gap in price.

This gap offers good upside potential. Prior to SEBI restricting IDR’s convertibility in June 2011, the Standard Chartered IDR was trading at an average 8 per cent discount to the underlying share in the UK.

The stock also provides a good diversification opportunity for those who hold Indian bank stocks. The business prospects of Standard Chartered remain strong. At its current price (Rs 95), the price-to-adjusted book value of the IDR works out to 1.37 times, a discount to most new private banks in India. The price-to-earnings multiple is at an attractive 9.4 times.

While Standard Chartered PLC has lower return on equity than Indian private banking peers, its large balance-sheet with strong fee income contribution, and diversified income stream make the stock a good long-term investment.

Good capital adequacy ratio (17.6 per cent), high proportion of low-cost deposits, and access to cheaper sources of funds, thanks to superior credit rating (AA-), are other positives.

The dividend yield on the IDR is 4.1 per cent (however the dividend is taxed at marginal tax rate). Also, unlike local shares, long-term capital gain on sale of IDR would be taxed.

DIVERSIFIED BUSINESS

. The total assets of the Standard Chartered PLC have grown by 12.6 per cent compounded annually during 2007-2011 and profit at an annualised rate of around 11.2 per cent in this period.

The company’s business is diversified across geographies and business segments. No country contributes more than 17 per cent to the total income and no business segment accounts for more than 14 per cent. Fee income which needs lower capital, accounts for 42.5 per cent of the total income.

Diversity in business cushioned the company’s profits even as the earnings from its key geographies â India and Korea â declined during 2011. Similarly, the consumer banking business, whose profits declined during 2009, recovered and aided profit growth during 2010 and 2011 when wholesale banking’s profit growth moderated.

Rise in interest rates, subdued capital market activity, shrinking margins and rupee depreciation took a toll on Standard Chartered PLC’s India business. The income fell by 11 per cent while the operating profits declined by 33 per cent. The company has acquired other businesses to expand in Asia.

Acquisitions have helped the company strengthen its presence in Korea, Taiwan, Thailand, Pakistan and India. Recent buyouts include GE Capital’s consumer finance business in Hong Kong and Singapore and GE Money’s (Singapore) auto and personal loan business.

Standard Chartered PLC’s net profits for the year ended December 2011 grew by 12 per cent to $4.74 billionor Rs 26,278 crore.

GROWTH PROSPECTS

The growth prospects of Standard Chartered PLC appear bright, notwithstanding regulatory tightening across various markets. It has already met some of the regulations stipulated by Basel III and has strong capital position.

The markets in which it has a presence are expected to sustain healthy economic growth. According to IMF estimates, developing Asia (includes India, China, ASEAN) is expected to deliver GDP growth of 8.4 per cent over the next five years, while newly industrialised Asia (includes Hong Kong, Singapore and Korea) may deliver 4.4 per cent and West Asia and Africa 5 per cent.

Monetary easing and pick up in investment activity in countries such as India will help Standard Chartered’s business.

CURRENCY FLUCTUATION

An appreciating rupee does pose a risk as it may depress the value of the IDR. However, this appreciation may also bolster the company’s earnings from India

8

I would like to make a bearish case of SCB. Its operations are spread across Asia and Europe.

Assuming the macro mess they are in the short term it could be hard to see a good revenue growth. May be it would be wiser to wait before building position into the stock.

My case is based purely on the macro outlook.

The IDR may be cheap by Indian standards but IDR is unlikely to follow Indian valuation(low volumes) the P/E trend will have to be set overseas

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9

Hi Akhil,

Standard Chartered in a macro mess??? Are you sure about it?

They have got some sour loans in Indonesia, I guess, but considering the overall structure, such things will happen with every bank anywhere in the bank. Given that they are very aggressive in financing big ticket deals in South East Asia and Middle East, some loans are bound to get bad/non-standard.

Always understand, like in all other industry, size does matter in Banking and infact ut matters all the more in banking. A bigger sized bank will have much many revenue and profit generating streams compared to a smaller sized banks. Also, if a bank has expertise in sponsoring cross-border asset deals, it becomes a bug money-spinner for it as well.

10

SCB has a new India head and is driving a lot of cost reductions (closing down high cost branches, removing non-performing management staff), so this year results of the India business should be better. Globally, it continues to be a very strong bank.

11

Hi Vivek,

If such an arbitrage opportunity exists, it should have been explited already. Are we missing anything here?

Regards

Vinod

12

Operationally bank is very good.SCB has it best years ahead. Having learn’t the hard lessons of not hiring locally and too much involvement with speculation.Considering global bearish outlook for financials and banks,

I was trying to make a point that the valuation might be dictated by London and not India?

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13

Hi,

Sorry for the confusion. The bank is in a very good shape operationally.

I was referring to the global financial situation. Considering that real estate bubbles in China, Australia, Southeast asia there would be period of slowdown.

My point being when the banking sector is not rosy how will the bank manage to beat it?

I am not aware of their growth plans

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14

With fungibility now being allowed the Indian ADR price is still at 20% discount to UK n HK prices. One can buy here n sell abroad n pocket the arbitrage till 25 % limit is reached.

This coupled with superb growth in emerging markets where bank is concentrating withMNC promoters div yield at 4% , cheap valuation ,good growth makes it an alluring choice.

The stock also gives a chance to Indian investor to take a bit in stocks listed abroad thus helping in diversifying from only Indian equities.

Views invited.

15

St anC is surely a long haul. At the price where I have accumulated the yield is more than 5 p.c. Moreover, this stock is a great stock if somebody has a negative view of rupee dollar. But then, there have beena few setbacks for StanC this year, like paying a hefty penalty to NY banking regulator. Moreover, there’s always a rumour of Temasek being interested in exiting its position in StanC.

16

It’s interesting to see that StanChart IDR is where it was 4 years back when it was first discussed here.
What could have possibly gone wrong here?

  1. Large part of the business used to come from HK region (I imagine it is still the same) and with the current situation in China the overall environment remains difficult for StanChart
  2. Dividend yield continues to be around 5% but that is not helping us as opportunity cost of holding this is too much
  3. Growth is not picking up
  4. Tax on dividend and long term capital gains is probably keeping the interest level low among investor community

No wonder StanChart was the first and the only IDR to be listed in India.

17

The bank is raising GBP 3.3 bn in rights issue and recently the top management has purchased shares from market. Stock continues to make new lows.

18

Like other large banks, SCB has shut down some divisions. The UK is pushing for privatisation with sale of stake held in Lloyds Banking Group and RBS. The major pain for SCB is also due to the Asia focus and Chinese slowdown.

Raising Capital, Cutting Costs

Considering to start buying in small quantities.

19

Excerpts from a recent article

About $5 billion of advances Standard Chartered made to Indian borrowers have been internally classified as at risk of defaulting, in addition to the $1 billion of onshore loans that have already become non-performing in India

and

While India’s broader banking industry has been afflicted by rising defaults, Standard Chartered stands out. At 8.9%, it had the second-highest bad-loan ratio among the 50 largest lenders in India as of March 31, five times that of HSBC Holdings Plc. and seven times Citigroup Inc.’s, the latest filings to the central bank based on local loan books show.

Winters now has to untangle the bad-loan mess in India even as he retains Sands’s focus on emerging markets. It may take time: 65% of Standard Chartered’s exposure in the country is to borrowers rated below investment grade, according to the bank

20

Stanchart IDR is being terminated.