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Standard Chartered Bank (02888.HK) - One more chance to be greedy

Tuesday, May 11, 2010

8838

Standard Chartered Bank(2888)

Recommendation on 11 May 2010
Recommendation	BUY
Price on Recommendation Date	$195.800
Target Price	$228.000

Weekly Special - 1810 Xiaomi

Standard Chartered Bank (STAN) released 1Q interim management statement (IMS) last week reporting record 1Q profit. STAN's share price dropped 10.6% from April's high amid European debt woes; we see it is another chance to buy after Dubai debt woe as we believe STAN can continue to deliver strong performance. STAN is now ready for India listing, it would help the group's future expansion. We expect the bank's ROE can keep at 14.5% in FY10, 2.1x FY10E P/B ratio is justified. We raise our 12-month target price to HK$228 and there is about 16% upside potential relative to the last close price; we reiterate STAN's “BUY” rating.

Profit continue breaking record

The IMS stating STAN had a very strong start to the year with a record quarter in terms of profit and income. From FY09 annual report, Wholesale banking (WB) was still the key growth driver, income up 24% YoY; and from 1Q10 IMS, WB income continued up over 20%. On the other hand, Consumer Banking (CB) income also rose by double digit, showing the group's growth momentum remains strong.

STAN's FY09 loan loss provision (LLP) was higher than expected, so we revise upward our FY10 LLP estimates. From 1Q IMS, asset quality of CB has improved and LLP of WB kept low, we believe STAN's asset quality remains good and we only raise FY10 credit cost forecast to 75 bps.

India listing in 2010

From FY09 annual report, STAN's India business contributed 20% of the group's pre-tax profit, same level with HK business, and it is likely to become the group's biggest profit driver. STAN is now ready for India listing, we believe the listing can help the group's business expansion in India.

Dividend

We expect STAN's EPS will continuously increasing in the coming years, and so as dividend will keep rising. After DPS was cut in 2008 amid the financial crisis, STAN's FY09 DPS increased by 7% YoY. We believe STAN will keep about 40% payout ratio, FY10 DPS is expected to break record high at HK$5.81, and the expected yield is about 3%.

Valuation

After earning revision, FY10E EPS will be HK$14.90. We keep our target 2010E P/B at 2.1x which is 10% below 6-years mean from 2003, as STAN's ROE is expected to keep at 14.5% in FY10, still slightly below 6-years mean. We raise our 12-month target price to $228 as FY09 BVPS rose more than expected, there is about 16% upside potential relative to the last close price. We reiterate STAN's “BUY” rating.

Key Risk

- Greater than expected NPL and credit cost

- NIM narrower than expected

Peer comparison

Financial Data

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