Standard Chartered PLC (LON:STAN) is set to witness a very strong outlook for 2014, thanks to sharp re-acceleration in Wholesale Banking revenues, believes Investec plc (LON:INVR).
Ian Gordon of Investec assigns a Buy rating on Standard Chartered with a target price of 1900p.
UK’s cheapest bank
Ian Gordon believes in a clear positive outlook for Standard Chartered PLC (LON:STAN) in 2014e driven by a sharp re-acceleration in Wholesale Banking revenues with substantially curtailed margin and own account headwinds.
However, the analyst points out that today’s preclose update reflect known headwinds, exacerbated by a particularly soft Q4 in both Financial Markets and Wealth Management. Though flat revenues may exceed the peer group, the analyst believes 2013 has been Standard Chartered’s annus horribilis.
With 9.1x 2014e EPS, Ian Gordon believes Standard Chartered is the UK’s cheapest bank, which in his view remains an anomaly.
Standard Chartered third quarter results
Standard Chartered reported a ‘resilient performance’ in the third quarter, slowed by the group’s performance in South Korea and Singapore.
The London-based but Asia-focused bank disclosed that its income and operating margin grew by a ‘low single digit’ for the nine months ended September 30, 2013, compared to the same period last year.
In its statement, the group disclosed operating profit for consumer banking for the first nine months of the year was down by a ‘mid single digit percentage’ with its operations in Korea having a material impact. However, excluding Korea, the group’s consumer banking helped grow income and profits by ‘high single digit percentages’.
Ian Gordon of Investec points out that normal bear argument against Standard Chartered PLC (LON:STAN) has been that Wholesale Banking impairments must rise. However the analyst believes such a view hasn’t considered the structural differences between Standard Chartered’s balance sheet and those of its peers, as about 65% of WB assets are with a sub-1 year tenor.
The Investec analyst points out that Standard Chartered PLC (LON:STAN)’s Wholesale Banking impairment actually fell by 33% during first half of 2013, despite experiencing continued elevated impairments in India.
However, the analyst points out that higher impairments within the Consumer Banking primarily reflect Korea.
Gordon states that Standard Chartered PLC (LON:STAN)’s costs have again exhibited huge flexibility and have grown only by 0.2% year-on-year. As sharply re-accelerating revenue growth is anticipated in 2014e, the analyst expects to witness a return to positive jaws next year.
The following table depicts Investec estimates for Standard Chartered Bank:
Investec assigns a Buy rating on Standard Chartered Plc with RoE-g/CoE-g derived 1900p target getting reaffirmed.