Standard Chartered’s future back in focus
Bank enjoys structural bull run; Temasek sale easier said than done
The independence of Standard Chartered, one of the recurring themes of global banking, has been called into question once again with reports that Singapore sovereign wealth fund Temasek is discussing a possible sale of its £6 billion ($9.7 billion) stake.
Banking experts and sources close to both parties were divided on whether the latest reports have merit, but Standard Chartered shares fell on the news as investors reacted to renewed scrutiny surrounding the bank’s future.
A closer examination suggests, even if Temasek did want to sell the 18% stake in the emerging markets-focused bank, doing so would be easier said than done.
One investment banker sums up the mood of the doubters, asking simply: "Who could take down such a stake?"
For its part, Standard Chartered would not comment on market rumour, but tells Euromoney that Temasek has been "a supportive shareholder of Standard Chartered for over six years and it has built its stake from around 12% in 2006 to 18% today.
"They are fully supportive of our management, strategy and all the past corporate actions, including two rights issues. And, as a long-term investor, we enjoy a close relationship with Temasek, as we do with all our shareholders."
Most observers agree that Temasek has, for some time, at least been examining ways in which Standard Chartered might be combined with another of its investments, namely DBS bank of Singapore. However, with a market that remains so finely balanced and subject to volatile swings, it is unclear if not being able to forge a merger between the two would result in it abandoning its stake in Standard Chartered altogether.
And the fact remains there are no obvious financial investors on the horizon, either in developed markets or in Asia.
There are plenty who continue to believe that Temasek is seeking to divest its holding, first acquired from the Khoo family in March 2006, to rebalance its financials portfolio, which makes up 31% of its investments.
The stake in Standard Chartered constitutes a hefty 27% of this banking portfolio. Manu Bhaskaran, research fellow at Singapore’s Institute of Policy Studies, says: "They have not denied that they might be selling in the market, so presumably it depends on the pricing. Although this issue is not being pushed urgently, it does seem to be the case that there is no strategic desire to hold on."
Analysts note that at Standard Chartered’s annual general meeting this year, Temasek declined to support the elections of all the executive directors, which, as Credit Suisse notes, "could have been a result of different corporate governance structures in Singapore and the UK".
Nevertheless, Standard Chartered is enjoying a structural bull run. Thanks to organic consumer and wholesale banking growth, Standard Chartered on September 17 revealed to analysts that it is gunning for a 2016 operating profit of $10 billion, representing a 15% compound annual growth rate from 2011’s $5.2 billion. In short, few banks in the current market climate offer a combination of double-digit earnings growth alongside a 5% dividend yield.
Before the latest share price dip, the market had rewarded Standard Chartered for its relative resilience in the global crisis and growth prospects. Having recovered from the shock $340 million fine for Iran-related transactions, Standard Chartered trades at a relatively pricey 1.3-times book value on 2012’s estimated earnings, with a market cap of $58 billion, while its developed market bank peers still trade at a discount to book value.
The valuation and sheer size of Standard Chartered makes Temasek’s successor in the bank unclear, say market players. Analysts reckon the stake could be worth around $10.5 billion, assuming a 15% to 30% premium.
Credit Suisse analysts, led by Amit Goel, say in a report: "A number of names have been linked to the group and this article [which first appeared in the Financial Times], could re-kindle discussions in this regard, although the valuation premium and the size of the group could be a hindrance."
Buyers in developed markets are few and far between, given banks’ capital constraints as Basle III looms and the more restrictive use of minority investments in calculating common equity.
Valuation concerns, regulatory pressures and a preference for organic growth in emerging markets have reduced the chances that JPMorgan – which has previously been linked to Standard Chartered – will bid for the bank, say analysts.
Meanwhile, the outbound strategy of Asian banks is at an early stage, and concerns of a slowdown in the region could thwart interest.
Chirantan Barua, at Bernstein Research, commenting on Asian banks’ likely interest in Standard Chartered, notes: "The last thing these entities would want [after years of dealing with problems at home] is to buy into an expensive franchise at the start of an Asian slowdown and impending impairment cycle."