If most of us are asked to name a bank with large exposure to Asia, the likelihood is the first name that comes to mind is HSBC (HSBA) rather than its smaller rival Standard Chartered (STAN).

In fairness, having been established in Hong Kong and Shanghai more than 150 years ago to help finance the burgeoning trade between the island, the mainland and Japan, the ‘grande dame’ of Asian banking HSBC is today not only the largest listed UK bank by market value at £120 billion but the third-largest stock in the FTSE 100.

By comparison, Standard Chartered is a minnow with a market value of just £18.4 billion, below that of all the major UK high street banks and putting it 31st in the FTSE 100, yet to a few seasoned fund managers and analysts it is a better investment.

POTENTIAL FOR DOUBLE-DIGIT RETURNS

Clive Beagles, manager of the JOHCM UK Equity Income Fund (B03KR61), argues the bank’s lowly valuation and low expectations are a good starting point.

‘People have got a bit tired of perennial disappointment from the bank, so now it trades on less than half book value, whereas it used to trade on two to three times book value.

‘If you go back to when it traded on those higher multiples, it had high growth rates and decent cost control, and to a degree people are right, it has underachieved because today it is only making a return on equity of about 8% whereas the aim is to get to 11% to 12%.

‘But it is investing to grow, particularly in emerging Asian economies. People have got fed up with it not delivering double-digit return on equity, but we think the bank is on a clear path to get    back there.’

Beagles isn’t alone in predicting a return to double-digit margins – Jefferies analyst Joseph Dickerson believes Standard Chartered could get to a 12% return on tangible equity as soon as next year, meaning the implied valuation is too cheap.

RIGHT-SIZED FOR ITS MARKETS

Past efforts to make Standard Chartered more efficient and less capital-intensive ‘will allow it to fully benefit from a recovery in wealth business as Asia reopens and fund flows accrue to the region on structural grounds,’ argues the analyst.

Having visited senior management in Hong Kong and Singapore earlier this month, Dickerson sees a vast opportunity in the region as wealth management activity and financial flows pick up with Greater China account openings in the first quarter of 2023 running 90% above pre-pandemic levels on an annualised basis.

Moreover, due to the reduced capital intensity of the region and the cost efficiencies achieved in the last four years, Dickerson argues the bank – and its shareholders – stand a real chance of benefiting financially from its positive prospects this time round.

‘We raise our wealth revenue forecasts by 8% through 2025 and reduce our risk-weighted assets estimate by 4% to reflect the better density already delivered in Asia,’ he says.

‘The former drives 3% higher pre-tax profit estimates while the latter enables 80% higher buybacks in 2024 and 2025. We see a 12% return on tangible equity in 2024 yet the shares are only on 0.5 times 2024 tangible book value.’

Analyst Peter Richardson at Berenberg also visited the bank earlier this month and says management accepts it needs to do more to prove it can generate sustainably higher returns, and it is taking a more dynamic approach as a result.

‘Standard Chartered’s smaller mass-market scale enables it to disrupt markets. Its virtual bank in Hong Kong is already used by one in five customers in its target market. We think this venture has provided a blueprint for the bank’s digital activity in Singapore via Trust Bank, and over time could be used in large markets including India and Indonesia to materially support revenues.’

Meanwhile, in wealth management, Richardson says the bank’s position in Singapore as well as other Asian markets can support above-market growth given wealth clients’ diversification away from Hong Kong.

WHAT COULD HAPPEN NEXT?

There is also the small matter of takeover interest. In January, First Abu Dhabi Bank said it had been considering an offer for Standard Chartered but didn’t take it any further.

Under UK stock market rules, First Abu Dhabi Bank is not allowed to make another approach for six months, but that restrictive window expires on 5 July meaning it could come back as soon as a fortnight’s time with a bid, should it wish to do so.

Alternatively, management could decide to redomicile the bank in Asia to exploit higher ratings for local banks.

‘Standard Chartered’s geographic footprint is almost identical to DBS (D05:SGX), the biggest bank in Singapore, yet its price to book multiple is pretty much a third,’ observes JO Hambro’s Beagles.

‘We’ve already seen various UK-listed companies switch stock market listings to get a higher rating elsewhere. Does Standard Chartered need to be listed in the UK? Not really. If that valuation gap stays as wide as it is, it wouldn’t be a tremendous surprise to see something similar happen to the bank or an external party like Abu Dhabi seeking to exploit that. To me, the risk/reward looks highly favourable at this valuation.’

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