Stan­dard Char­tered looks safe as houses – but safety doesn’t mean growth. Avoid

The Sunday Telegraph - Money & Business - - Business - Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­ questor­rules; twit­

IT takes time to build a team and even longer to turn out im­pres­sive re­sults. Jurgen Klopp’s Liver­pool side have been mak­ing the run­ning at the top of the English Premier League this sea­son but it has taken the best part of three years for the Ger­man man­ager to turn them into cred­i­ble ti­tle con­tenders. It has been a dif­fer­ent story for Liver­pool’s shirt spon­sor, Stan­dard Char­tered, where Bill

Win­ters took over as chief ex­ec­u­tive in 2015, four months be­fore Klopp’s ar­rival in the dugout. The stock mar­ket per­for­mance of the Asia-fo­cused bank has hardly been push­ing for sil­ver­ware: the share price has slid by more than a third on Win­ters’ watch.

He has made a rad­i­cal break with the past, get­ting rid of a third of as­sets to lessen ex­po­sure to bad loans af­ter the bank over­reached it­self. The clean-up job means that Stan­dard Char­tered, which re­mains un­der the su­per­vi­sion of US reg­u­la­tors af­ter ac­cu­sa­tions that it breached sanc­tions on Iran and faces a $1.5bn (£1.2bn) fine over the mat­ter, looks as safe as houses, hav­ing nudged up its “core tier 1” ra­tio – the group’s main mea­sure of fi­nan­cial strength – to 14.2pc.

But safety does not go hand in hand with growth. The bank dis­ap­pointed at the in­terim stage in July when op­er­at­ing costs rose by 7pc – faster than op­er­at­ing in­come, which was 6pc higher at $7.6bn.

Win­ters is up against it. No one can be­grudge him pour­ing money into Stan­dard Char­tered’s tech­nol­ogy plat­form to tighten com­pli­ance. The bank also needs suf­fi­cient man­power on the ground. It is un­for­tu­nate that lo­cal com­peti­tors are tak­ing mar­ket share and that fall­ing rev­enues have not been matched by fall­ing costs. Morgan Stan­ley, the in­vest­ment bank, pointed out that in Hong Kong, one of Stan­dard Char­tered’s two key mar­kets along­side Sin­ga­pore, the bank was 16 per­cent­age points less ef­fi­cient than its peers when rev­enues peaked in 2015. Now the gap stands at 29 per­cent­age points.

Some of that comes from be­ing a Bri­tish bank. This year the bank levy will cost it around $310m. But the other ques­tion is one of scale. Even though it is worth more than £20bn, Stan­dard Char­tered is viewed as a peren­nial takeover tar­get in an in­dus­try dom­i­nated by gi­ants such as JP Morgan.

Ac­cord­ing to a sum-of-the-parts val­u­a­tion by Beren­berg, the bro­ker, al­most three quar­ters of the bank’s value is tied up in its Greater China & North Asia re­gion. The year af­ter next, Beren­berg fore­cast that re­turn on tan­gi­ble eq­uity for that di­vi­sion would pass 21pc while the bank’s four other ge­ogra­phies re­mained stuck deep in sin­gle dig­its.

Win­ters con­tin­ues to hold out hope that the group will de­liver a re­turn on eq­uity greater than 8pc in the medium term, com­pared with 6.7pc to­day and 5.2pc a year ago. How­ever, sev­eral an­a­lysts doubt he will get there.

All eyes re­main on China, whose fac­tory sec­tor re­cently re­ported stalled growth on softer ex­port or­ders af­ter 15 months of ex­pan­sion. Win­ters has al­ready played down the im­pact of a trade war with Amer­ica, sug­gest­ing that Stan­dard Char­tered could ben­e­fit if Chi­nese trade with other re­gions is boosted as a re­sult. But if China’s cen­tral bank again lets com­mer­cial lenders cut re­serves to boost spend­ing, in­vestors’ fears over spi­ralling debt lev­els can be ex­pected to rise.

Share­hold­ers can take a crumb of com­fort from the re­sump­tion of the in­terim div­i­dend, a sign that fi­nan­cial per­for­mance is look­ing up. Stan­dard Char­tered is also try­ing to ex­pand at nom­i­nal cost, with ini­tia­tives such as a dig­i­tal-only bank rolled out across sev­eral African mar­kets.

A cock­tail of heavy reg­u­la­tory costs, fines and low in­ter­est rates has made banks poor in­vest­ments a decade on from the fi­nan­cial cri­sis. This col­umn has yet to be proved right that Bar­clays has bet­ter times ahead. Its shares are down by 19.4pc since our tip in May even though its in­vest­ment bank­ing arm is ral­ly­ing. The ob­vi­ous frus­tra­tion of the chair­man, John Mcfar­lane, plus an ac­tivist in­vestor on the share reg­is­ter, means some­thing has to give.

Back at Stan­dard Char­tered, there must be an air of frus­tra­tion too. Even though its shares are trad­ing at barely 10 times next year’s fore­cast earn­ings, there are bet­ter ways to gain ex­po­sure to emerg­ing mar­kets.

Questor says: avoid

Ticker: STAN

Share price at close: 605.7p

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