Standard Chartered PLC (LON:STAN) (LON:STAC) missed net income estimates by 3% and pre-tax profit estimates by 6% in its 2013FY earnings report as revenues came in 2% below estimates and impairments came in 12% worse than expected, partially offset by costs that were 3% better than expected. Even though 1H14 already looks better than 2H13, STAN has offered ‘modest growth’ as guidance for the rest of the year.
“With consensus estimates likely to drift down on the back of these numbers. H2 results illustrate the need to preserve capital versus grow a capital intensive business. We do not regard risk/reward to be favourable and continue to rate Standard Chartered PLC (LON:STAN) (LON:STAC) at Underperform,” write Jefferies analysts Joseph Dickerson and Omar Fell. They give STAN a £11 price target compared to £12.49 currently with a 1.3x price to tangible book value.
Credit quality deterioration a major concern
Deteriorating was already a concern, causing Dickerson to initiate coverage of Standard Chartered PLC (LON:STAN) (LON:STAC) at Underperform in January, and the earnings report proved that his fears were well founded. The rate of non-performing loans in Africa jumped from 4.3% in 1H13 to 9.4% in 2H13, while NPLs in the Americas, UK, and Europe went up from 0.4% to 1.3% over the same period. Total negotiated or forborn loans nearly tripled year on year, increasing from $2.5 billion in 2012 to $7.2 billion last year, while group coverage fell slightly half-on-half last year.
“Bottom line: credit quality is deteriorating,” write Dickerson and Fell.
The bright spot in Standard Chartered PLC (LON:STAN) (LON:STAC)’s earnings report is that capital levels are significantly better than analysts had expected – 11.2% CET1 compared to the consensus 10.5%, which should end any concerns about the bank’s capital position.
Standard Chartered the most mispriced stock we cover: Gordon
Standard Chartered PLC (LON:STAN) (LON:STAC) has lost nearly 30% of its share price over the last year (Muddy Water’s founder Carson Block shorted the bank about ten months ago, a play that looks great right now), which has caused some analysts to argue that it has become undervalued. Investec’s Ian Gordon was more optimistic at the end of 2013. Even though he acknowledged that 2013 was going to be a terrible year for the bank, he argued that bears are putting too much emphasis on impairments and overlooking the fact that Standard Chartered PLC (LON:STAN) (LON:STAC) was the cheapest bank in the UK.
Gordon reaffirmed his Buy rating this morning, calling Standard Chartered PLC (LON:STAN) (LON:STAC) “the most mispriced stock in our coverage universe,” reports Helen Burggraf for International Adviser.