“Really not sure; difficult one.” That’s the refrain from market players when Euromoney asks about new strategic investors in Standard Chartered, hot on the heels of an FT report that Temasek is mulling the sale of its 18% stake.
The consensus view is that Temasek does appear to be seeking to divest its holding, first acquired from the Khoo family in March 2006, in order to rebalance its financials portfolio, which makes up 31% of Temasek’s investments. The stake in Standard Chartered represents 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.
The market has already 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 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, said in a report: “A number of names have been linked to the group and this [FT] article 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 Basel 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, though the US investment firm boosted its cash reserves by $32 billion in 2011.
Meanwhile, the outbound strategy of Asian banks is at a nascent stage. The acquisition by Citic Securities of pan-Asian brokerage CLSA from Crédit Agricole in July was the first substantial purchase of a western brokerage by a Chinese securities firm and amounted to a modest $1.25 billion.
CIMB’s acquisition earlier this year of Royal Bank of Scotland’s Asia-Pacific cash equities and investment banking business was a bargain $118 million, 0.98 times book value. China Construction Bank (CCB), which has $15 billion of excess capital, said last month it was on the prowl for a bank based in Europe to boost its international franchise, which is notably weaker than its peers, ICBC and Bank of China.
Standard Chartered is perceived as being relatively well-managed – even after the Iran scandal – and boasts a much-coveted international trade finance franchise.
However, analysts reckon a CCB bid is unlikely unless attractively priced, citing: instability in Europe; the likely concern of Chinese regulators; the risk of a negative market reaction, particularly given fears over asset quality in China and cultural risks emerging from any strategic investment; and the fact Temasek remains a 7% investor in Standard Chartered.
Chirantan Barua, at Bernstein Research, commenting on Asian banks’ likely interest in Standard, 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.”
In summary, while sovereign wealth funds might mull a stake, there are no obvious financial investors on the horizon.