Asia's Favorite Western Banker

03/09/2011 11:38 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Standard Chartered is on a roll in India and at the forefront of China’s efforts to internationalize its currency, writes Yiannis G. Mostrous in Global Investment Strategist.

Banks are one of the best investments to gain exposure to emerging markets. The banking industry is the centerpiece of every economy, acting as a facilitator of economic activity (through loans) and a custodian of citizens’ money (through deposits).

Standard Chartered (London: STAN, OTC: SCBFF) is one lender that offers well-diversified exposure to those emerging markets.

A London-based bank with a dual listing in Hong Kong and England, Standard Chartered has a network of 1,750-plus branches in more than 70 counties across the Asia-Pacific region, as well as South Asia, Europe, Middle East, Africa, and the Americas.

Last week, Standard Chartered reported extremely strong profits before taxes: $6.1 billion for 2010, up 19% from the previous year. The lender’s costs—especially personnel-related costs—rose, as Standard Chartered expanded its business; the bank hired 7,000 employees last year alone. Assets were up 18% to $517 billion.

The bank has achieved well-balanced growth, with its consumer and corporate businesses both increasing revenue by 7% to 8%. On the consumer side, wealth management grew 24% while mortgages were up 22%.

Among the highlights of the lender’s corporate business was a 32% gain in corporate finance and a 24% rise in principal finance (including private equity and real-estate infrastructure).

The bank’s earnings were also geographically diversified. India contributed the highest profit before taxes at $1.2 billion, a significant number when one considers that the bank’s Indian profits amounted to $100 million a decade ago. Income from Indian operations also grew 12% on a yearly basis.

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India now joins Hong Kong as one of the bank’s best-performing regions. Although Hong Kong’s performance was fairly flat last year, the city’s banking industry benefits from a significant, long-term tailwind: the continuing “internationalization” of China’s currency, the renminbi (RMB).

Next: Riding the Wave in Hong Kong


Riding the Wave in Hong Kong
Hong Kong serves as the financial conduit between mainland China and the world. As the Chinese government increasingly allows the RMB to be used in international transactions, a fast-growing market has been created in Hong Kong to facilitate this process.

In 2009, about $530 million of China’s trade was settled in RMB. One year later, that figure had risen to $75 billion. Meanwhile, RMB deposits in Hong Kong grew apace; offshore RMB deposits in Hong Kong grew fivefold last year to $48 billion.

This trend is in its early stages. But it will mean big business for those lenders that can enable RMB transactions.

Standard Chartered was the first bank to facilitate domestic RMB trade settlement, the first lender to launch a RMB-denominated bond for a foreign corporate and the first to offer retail RMB-structured products.

Given its good relationships with the Hong Kong government and its long history in the region, Standard Chartered should continue to be a leader in this new business.

Fees Up, Losses Drying Up
The bank’s bad-loan provisions decreased 56% to $883 million last year, on the back of rebounding economies. Net-interest income—revenue from lending minus payments to depositors—rose 11%, to $8.47 billion, while fee income rose 19% to $4.56 billion.

Standard Chartered’s core capital ratio of 11.8% improved substantially from last year, indicating a strong balance sheet.

Although non-performing loans rose 14% last year, they remain low at just 1.87% of all loans. The increase was caused by three accounts in the Middle East, but there are adequate provisions in place and restructuring is underway.

Management announced a strong start to 2011, forecasting double-digit income growth this year. We believe this is achievable. Standard Chartered’s unique position in Asia and other emerging economies gives it an extremely favorable growth outlook.

Trading at an attractive valuation of 1.5 times book value and 12 times expected 2011 earnings, Standard Chartered remains a buy up to 1,850 pence in London and $30 in the OTC market. As always, we prefer the local shares. [London shares closed at 1,679.53p Tuesday; the OTC-traded proxy ended the day at $27—Editor.]

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