The One Bank You Can Bank On

Published in Company Comment on 4 May 2011

It's steady as she goes at good value Standard Chartered.

Britain's most reliable bank did what it does best on Wednesday: There were no nasty shocks in Standard Chartered's (LSE: STAN) update to the market, while equally the good news was tempered with a dash of realism.

The bank, which does the majority of its business in Asia and the emerging markets, said it has enjoyed a strong start to 2011, with double-digit income growth from both its consumer and wholesale divisions. 

Of the two halves, consumer banking is growing as a proportion of Standard Chartered's income, which is all part of the plan, and a good strategy if you believe that the wealth being generated in emerging economies is set to cascade down through its new middle-classes.

Shareholders -- including me -- may also be reassured to see the bank has curbed its escalating costs, for now at least. The company spent 2010 ramping up staff numbers, and given that it does its business in some of the hottest economies in the world, new bankers don't come cheap.

Expensive expansion

While Standard Chartered didn't give detailed figures on first-quarter expenses (or anything else, for that matter) the bank said they were running at approximately the same rate as the end of 2010, and that total headcount had actually fallen. Finance director Richard Meddings warned in follow-up comments though that the bank remains in growth mode, and that it will still look to boost its headcount by around 1,000 over 2011.

Higher expenses over the past 12 months means Standard Chartered's cost to income ratio -- the 'cost income jaws' of banker speak -- is negative year-on-year, although it says this has narrowed compared to 2010 as a whole.

Basically, a bank wants its income to grow faster than its costs, so a smaller ratio is better. But Standard Chartered sees good opportunities for growth, so it's presently expanding the cost side of the equation to seize more market share.

Finally and crucially in these days of toxic assets and bank runs, Standard Chartered remains highly liquid and "very well" capitalised, with no noteworthy new impairments so far in 2011. 

As of the last count, its tier one capital ratio was 14%, which is well above peers like Barclays (LSE: BARC) -- 11% -- and also above the new Basel III requirements.


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No funny business

The Motley Fool's motto is to 'Educate, Amuse and Enrich', and I'm well aware that this is a very dry article about a not-so-thrilling update.

But I'd argue that Standard Chartered's very steadiness is sensational in itself. While other banks went belly up or were bailed out by taxpayers, this one got through the credit crunch without even cutting its dividend.

Partly that was down to good fortune -- while US and some European property markets plunged and unemployment soared, Standard Chartered's markets shrugged off the turmoil in short order.

But geographical distance didn't stop, for instance, German banks loading up on US sub-prime mortgage bonds. Standard Chartered largely avoided these excess of the last boom.

Standard fits

Next time it might not be so lucky -- if there's a dangerous bubble building up anywhere in the world right now, it's surely in the Asian markets where Standard Chartered does much of its business.

So does anything dodgy lurk on its books? There's no evidence of that so far. Some worried that the surprise rights issue back in October would foreshadow a nasty revelation. But as I wrote at the time I think the bank was simply taking advantage of an exuberant period for its share price.

Indeed, Standard Chartered shares have fallen 14% since it announced that cash call, and it has been one of the worst performing bank stocks to own in 2011. 

More than recent trading results however, I think this reflects that giddy enthusiasm of late 2010, when the bank's share price actually surpassed its pre-credit crunch highs. That's not something owners of Lloyds Banking Group (LSE: LLOY) or Royal Bank of Scotland (LSE: RBS) can expect to see for many years to come.

In any event, it's good news if you want to buy the shares. Standard Chartered's share price is down 2% as I write, which puts it on a current year P/E of just 13, falling to nearer 11 for 2012. 

I think that's good value for a bank with its superb track record and profits growing at double-digit rates, and as soon as the Motley Fool's trading rules allow it, I'll probably buy some more.

More company comment:

> Owain owns shares in Standard Chartered and Lloyds.

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RobinnBanks 06 May 2011 , 8:52pm

STAN has been my best performer over 12 years; and Lloyds one of the worst since they were conned into buying HBOS.

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