Over the past month there’s been a very strong recovery in banking shares, mostly on the back of upbeat trading statements from JP Morgan, Wells Fargo and Citibank. This optimism has spilled over to Standard Chartered, the London-listed, emerging-markets banking group, whose shares have soared 65% since the start of March. Yet to me, this recovery smacks of too much too soon. Here’s why.
Standard Chartered (LSE:STAN), rated a BUY by Collins Stewart
I suspect that part of the sector’s recent bounce has been down to a reversal of past write-offs and also the easing of the US ‘mark-to-market’ accounting rules. Neither tells us much about future performance, which for Standard Chartered could be weaker than expected. Over 80% of its $179bn loan book is in Asian, African and Middle Eastern markets that are in, or entering, recession. Nearly 30% of its loans are in Singapore and Korea – both expected to contract by nearly 5% in 2009. Overall, if you weight the loan book by geography, it’s about to be hit by a 2% drop in GDP compared with 2.9% growth last year. This may be less than the 2.8% slump suffered during the 1998 Asian crisis, but it shows the challenges ahead.
These factors were probably the reason for last November’s £1.8bn, deeply discounted, rights issue (at 390p). The firm had to protect its capital ratios (proforma tier 1 of 8.9%) before the wave of defaults strikes home. Whether this amount will be sufficient is unclear. Sure, so far Standard Chartered has escaped most of the subprime carnage, but with the likes of China, Singapore and India suffering export declines, I believe the worst is still to come for the firm. In 1998, asset impairments rocketed to three times current levels – enough to wipe out about 75% of its profits.
So is the stock, trading on a 2009 multiple of about 11 and a price/book ratio of 1.2, at a significant premium to peers? I suspect some investors are kidding themselves that the recession will be much shorter and shallower than expected. In addition, many funds are trying to jump back on board the banking bounce, thus sustaining the rally past justifiable levels. I’d value Standard Chartered at one times net assets or around £8.00 per share, well below the current price.
Recommendation: SELL at 992p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments