Image source: Standard Chartered plc
This FTSE 100 The stock caught my attention after I noticed the share price rose almost 10% in a single day last week. So I decided to investigate if this is the start of something bigger or just a one-time win.
Solid earnings
Chartered Standard (LSE:STAN) hit a new yearly high last week after reporting results that beat expectations. The UK-based bank reported a 5.5% rise in first-quarter pre-tax profit following a boost in its trading division. Revenue rose 6.4% to $5.2 billion, and earnings per share are now expected to rise 20% this year to $1.45.
Although the bank is based in London, most of its business is now in Asia. It is majority owned by Singapore-based Temasek Holdings and has rejected several takeover bids from the United Arab Emirates. Abu Dhabi's first bank. In October last year, the stock fell 12% after reporting a nearly $1 billion loss on investments in China.
So could this recent push be a precursor to a resurgence?
An alternative banking action
While Standard Chartered may be a lesser-known bank in the UK these days, it is still considered systemically important by the Financial Stability Board (FSB), an international body that provides advice and guidance on the global financial system. And those who have seen its imposing corporate office in Singapore's famous Marina Bay will be in no doubt about its global importance. But does that make it a better option than the big local banks that are household names? Maybe.
An attractive prospect is its indifference to the tides of the British economy, providing exposure to a different aspect of the UK financial sector. This could add a level of diversification to my portfolio that local bank stocks may not be able to provide. Key competitor HSBC It is probably the most similar but may have less growth prospects. From what I've seen, most analysts expect its earnings to decline 3% or more over the next three years. On the other hand, Standard Chartered is expected to increase its earnings by 9.2%.
What's the trick?
Standard Chartered lacks that key ingredient that makes other banking stocks so attractive: a high dividend yield. At just 2.8%, it's not very impressive compared to HSBC's 7% return. So while the recent growth looks good, it has some drawbacks and risks associated with it. For example, I'm a little concerned about bank credit deteriorations in China. It disclosed $165 million of writedowns in the first quarter, up from just $20 million last year. This is a worrying increase. On top of that, it has been forced to set aside $100 million in potential compensation for losses related to a capital investment plan in South Korea.
But despite the above problems, the stock's performance has been improving. The recent share price growth recouped almost all of the losses suffered last year, bringing the price closer to a new yearly high. Based on future cash flow estimates, some analysts estimate it could trade at 60% below fair value. And now that it's up 31% from this year's low, investors are starting to take notice. It has caught the attention of several major brokers, with both Jefferies and Berenberg giving a Buy rating on the stock last week.
If the current rally continues and the price breaks last year's high of 758p, I would certainly consider buying the shares.
