Standard Chartered shares are cheap if the bank does this

There's lots to like in these third-quarter results, but a debate rages about whether this is the time to buy. Graeme Evans explains.

Set against geopolitical tensions and emerging market headwinds, today's profits beat from Standard Chartered may only be temporary respite for investors.

The blue-chip stock has suffered a substantial de-rating in recent months, with the toughening conditions in global markets causing shares to tumble 16% in the past month and 27% across the year as a whole.

Profits still rose 25% to $3.4 billion in today's third-quarter results, but analysts point out that this was driven by improved risk discipline and lower impairment charges, with revenues still weaker than consensus.

While there's plenty to admire in the resilience of the Q3 performance, UBS analyst Jason Napier still sees no entry point for investors following the recent share price slump.

He recently cut his target price from 735p to 600p and retains a preference for Barclays, Lloyds Banking Group and RBS, as they are still trading at a material price/earnings (PE) and capital return discount to both HSBC and Standard Chartered.

Deutsche Bank added:

"The key issue central to the Standard Chartered medium-term investment case remains revenues, with Q3 showing little progress."

Source: TradingView   Past performance is not a guide to future performance

As Standard Chartered now has plenty of capital and operates in high-growth markets, Deutsche Bank analyst David Lock said it was surprising that risk weighted assets, deposits and loan balances were falling, not growing.

He added: "This suggests the bank is struggling to deploy capital effectively at present, and we expect this to be a key focus.

"A risk remains that Standard Chartered needs another increase in investment spend in order to compete more effectively with peers."

This is likely to be addressed at February's annual results, when CEO Bill Winters plans to announce the key areas of focus “that will deliver higher returns over the next three years".

The aim remains to generate returns in excess of 10%, which compares with the 7.5% return on tangible equity recorded in the most recent quarter. If investors believe that this target can be met, then UBS's Napier concedes the shares are looking cheap.

Under a 2015 restructuring plan, which is now largely complete at a cost of more than $3 billion, Winters oversaw more than $1 billion in cost efficiencies and a significant balance sheet reduction. Profits have increased consistently since then, despite slower than expected economic growth.

In its most recent quarter, Standard said income was slightly lower on the previous quarter due to a weaker performance in Africa and the Middle East as geopolitical headwinds impacted UAE in particular.

Emerging markets are increasingly under pressure due to the stronger US dollar, while the US-China trade war is weighing on the China stock market.

The company said growth fundamentals remain solid across its markets, but also admitted that "escalating trade tension and other macroeconomic factors" were affecting sentiment in emerging markets.

In 2015, Standard slumped to a $1.5 billion loss - its first since 1989 - due to an 87% jump in loan impairments amid the collapse in commodity prices.