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A bank trading on a p/e of 14 times for next year looks quite expensive enough, given the low-growth nature of the banking business in the UK.
Indeed, the sector average is more like ten times. But when it comes to Standard Chartered (STAN, tipped at 1,282p), things are different.
Why? Because the firm has the expertise to capitalise on the “fastest-growing opportunity of all – the Chinese mainland”, says Nick Louth in the Fleet Street Letter. Despite the average 8.8% annual growth in China’s GDP between 2000 and 2005, most Western companies are still losing money there.
But Standard Chartered has the local knowledge needed to avoid the pitfalls of operating in China, and it is now “perfectly placed to cherry-pick projects”. Its wholesale banking business in China has already been profitable for two years, and it has now also made a strong entry into the Chinese consumer-banking sector. It is firmly established in four main cities, including Shanghai and Beijing, and in the last six months its assets there have grown by 200%.
The bank has been diversifying its Hong Kong-based risks by making strategic buys across the region; most notably, it bought Korea First Bank for $3.3bn back in April. Sparkling half-year results released in August showed a 32% jump in overall earnings per share – with a 69% leap in the value of its loan book – plus improved credit quality. The dividend of 2.6% might not seem as generous as most UK banks, but none of them can beat the 16.9% average annual increase in payout it has achieved over the last five years.
And while 14 times earnings may make the price seem high, its earnings per share have been growing faster – an annual average of 18.5% over the last five years (which is double the amount UK banks have managed over the same period). Moreover, Standard Chartered is ideally placed to benefit from continued growth in China’s demand for banking services, and could well become a takeover target, pushing shares higher still. Buy the shares under 1,325p, says Louth, and look for a two-year target of 1,700p.
Published in Investment-Advice
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by
Annunziata Rees-Mogg
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