Several companies were commented upon in the 26 November Capital Chronicle article Exploiting the dollar's drop. One of these was Standard Chartered Bank plc. At the time, the bank was trading at 1,002 pence per share.

Standard issued a market update on 8 December. It was not well received by most analysts who cited the following negatives:

  1. Projected increases of investment costs linked to the firm's goal of expanding its consumer banking business in countries like India and Indonesia will narrow its revenue/cost ratio

  2. Currency concerns as the dollar falls

  3. The suspect capacity of Standard to compete against giants HSBC and Citigroup both of whom trumped the firm in recent acquisition auctions in South Korea

  4. Standard is only going to make its revenue number by reducing allowances for bad and doubtful debts

There are always at least two ways of interpreting things. Let's look at that list again:

  1. The revenue/cost ratio may narrow. But these costs are investment for future growth. Unless there is evidence the money is being poorly spent it makes little sense to punish the shares because the near-term impact is a rise in cost ratios. Is the board truly expected to make an instantaneous return on investments?

  2. This is a real concern, but Standard Chartered earns approximately 30% of its revenue from its Hong Kong (HK) operations. The HK dollar is pegged to the US dollar, a natural hedge to US currency movements and, when the US$ falls, assistance against other Asian currencies. Moreover, Standard Chartered is a non-tradeable and should not be directly affected by non-HK Asia's comparative disadvantage in the export sector as the dollar falls

  3. Being outgunned by bigger rivals is a constant risk, not a new one. Yet Standard Chartered has still managed to become the largest foreign bank in India (around 10% of its revenues) holding the top spot in credit card lending and the number four slot in mortgage lending. It has also managed to develop its China operations with a 19.99% stake in newly established Bohai Commercial bank. The significance of a "new" bank is that it comes with no hidden luggage and is likely to provide Standard with a greater management role

  4. True enough. But the lower bad debt allowance is a direct result of early repayment of HK mortgages. The accounting is not gimmickry.
Standard Chartered is a defensive in the current environment, notwithstanding the constant of political risk, but carries also exposure to growing emerging asian markets. At 12x 2005 earnings it trades at a premium to UK and European banks (typically 9x-11x) but is at a modest discount to Asian counterparts (at 12x-19x). The same pattern holds for the price/book ratio. The company yields 3.3% denominated, sadly, in $US and modestly covered 1.6 times.

A holder of sterling, Capital Chronicle watches the share price decline with serious interest. The shares are trading at 958 pence at the time of writing.

The author has no shares in Standard Chartered plc at the time of writing

Further related dollar comment: although it has recovered over the last couple of days, perhaps due to short covering, downside risks remain. Macro factors apart, the US retains its laissez-faire policy; and OPEC members are happy to unload the currency as its depreciation hits their huge balances. OPEC are even making noises about pricing their product in euros.

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