What next for Standard Chartered and HSBC?
Incoming CEO Bill Winters must raise as much as $6 billion in capital ahead of the Bank of England's stress test results in December.
I had originally recommended shorting Standard Chartered Bank at 1,500 pence, written successive column this summer outlining the bearish case for the stock and projected a target of 650 pence in London. This target has now been achieved. Britain's oldest "imperial" bank lost 50 per cent of its value in the past year, thanks to a spike in non-performing loans, exposure to China, Asian trade finance, commodities and a failed investment banking strategy.
Incoming CEO Bill Winters, once JPMorgan's investment banking chief, must raise as much as $6 billion in capital ahead of the Bank of England's stress test results in December. While management has slashed the dividend and exited equity capital markets, I believe a capital raise is inevitable and the bank's valuation metrics are only optically "cheap". The third-quarter earnings will be a bloodbath, given StanChart's exposure to Asia's troubled equities, currencies and exporters. Non-performing loans in India, South Korea, Malaysia and China are certain to rise in the next six months. StanChart trades at 0.56 times forward book value, below its post-Lehman bottom at 0.75 times in December 2008. In 2010, only five years ago, Britain's pure play emerging markets bank traded at two times book value. Since StanChart is dirt-cheap, a capital raise will be dilutive to shareholders. The bank's shares will also be vulnerable to a spike in debt defaults and rescheduling across the emerging markets. Provisions for bad loans are certain to rise in 2016. Paradoxically, any bull run in the shares until the Bank of England stress test in December will make a rights issue even more likely. A 600-800 pence trading range would not surprise me in the next 12 months.
HSBC Holdings is grossly undervalued at HK$58 in Hong Kong or 485 pence in London even though CEO Stuart Gulliver's eagerness to shed his banks in Brazil, Turkey and a dozen other emerging markets makes it the world's ex-local bank! Gulliver plans to slash the payroll by another 50,000 jobs. Unlike Stan Chart, HSBC's 11.6 per cent Basle Tier One capital adequacy ratio means there is no threat to the dividend, which is now a stellar 6.8 per cent. HSBC trades at a forward valuation multiple of nine times earnings, reasonable for a bank that can well offer nine to 10 per cent return on equity. HSBC is also a "safe haven" bank during times of stress in Asian, Arab and African emerging market banking due to its role as Britain's "too big to fail" bank. HSBC is exposure to China and Southeast Asia's financial turmoil, the bank's vast Group Treasury bond portfolio makes it positively geared to a Fed liftoff and steepening in the US Treasury bond yield curve.
HSBC shares have priced in a draconian loan loss scenario that I do not believe is credible. After all, loan growth in Hong Kong is only six per cent and residential mortgage LTV is a mere 27 per cent, thanks to Hong Kong Monetary Authority regulatory restraints. The bank is no longer as exposed to the Hong Kong property's speculative mania as it was in 1997, the twilight of the Crown Colony era. HSBC has also exited banking to smaller corporates in Indonesia, Pakistan, India and even the GCC. Stuart Gulliver has made it clear that HSBC will exit subscale or unprofitable markets. HSBC's price/tangible book value, or PTBV, of 0.85, higher then Citigroup's 0.7 times PTBV but lower than JPMorgan's 1.2 times PTBV. Of course, neither JPMorgan nor Citigroup offer investors remotely a dividend yield as attractive as HSBC.
There is no other "systemic" global bank on earth that matches the dividend yield of HSBC. Management will also aggressively slash risk weighted assets in its Global Banking and Markets Division, and US retail banking, a strategy that will boost capital ratios and further strengthen dividend growth. Gulliver has injected capital discipline and a shareholder value focus to HSBC that simply did not exist under Sir John Bond. In times of crisis, the Home for Scottish Bank Clerks - HSBC - is a proven winner!
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