BREAKINGVIEWS-StanChart doesn't justify premium over HSBC

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley

HONG KONG, Feb 29 (Reuters Breakingviews) - Standard Chartered and HSBC had a strong 2011, but in different ways. Both offer a play on the rise of emerging markets. StanChart's earnings story is one of growth, while HSBC's is restructuring. Until now, investors prized StanChart's brand of Eastern promise more highly: it trades at 1.5 times forecast tangible net asset value, when its chief rival trades at 1.2 times. It may be time for investors to make the switch.

Judged by the second half of 2011, there's not much difference between the two. StanChart's pre-tax profit slipped 14 percent over the preceding six months, while HSBC's fell by almost half. But strip out Europe and North America, and the charge StanChart took on restructuring its strike-prone Korean business, and both saw declines of just 4-5 percent. StanChart's annualised return on equity of 11 percent for the last six months beat HSBC's, but only by a couple of percentage points.

Then look at the two banks' crown jewels. StanChart's is India. But that nation has fallen out of favour as interest rate hikes and corruption scandals crunch the country's growth. Both banks made around $800 million of pre-tax profit in India in 2011, yet in relative terms, a slowdown there would hit smaller StanChart harder. In China, meanwhile, where growth is still robust, HSBC has the edge. Its pre-tax profit of $706 million from the country, excluding its stakes in third parties, was four times StanChart's in 2011.

Finally, consider growth. StanChart's net asset value has increased by an average 18 percent a year since 2006, according to Reuters data -- triple HSBC's rate. But while StanChart is slightly better capitalised, that expansion is getting riskier, and costlier. The bank is hiring as wages in Asia rise, and lending more, increasingly in unsecured areas like credit cards, at a time when economic deceleration could affect credit quality.

That leaves it hard to square the valuation gap. Investors may be factoring in the possibility that StanChart will one day be a takeover target for an ambitious Chinese bank. With most mainland banks guarding as yet unquantified losses, that's some way off. Both banks are the envy of the Western pack, but absent bid hopes, StanChart investors have run too far ahead.

CONTEXT NEWS

-- Standard Chartered, the UK-domiciled emerging market lender, reported pre-tax profit of $6.8 billion in 2011, an 11 percent increase on the previous year. But pre-tax profit fell 14 percent from the first half of the year to the second half, driven by higher expenses and an increase in loan impairments.

-- Income from Hong Kong, which makes up almost a fifth of the group's top line, grew 22 percent during the year to over $3 billion. Income from India fell 11 percent to $1.8 billion. The group said it had "not been satisfied" with its Korea business, which was beset by strikes in 2011.

-- StanChart's expenses were equivalent to 56 percent of income for the full year. Stripping out a $206 million charge for restructuring the Korean division, and $165 million for the UK bank levy, the expense ratio would have been 54 percent.

-- StanChart trades at 1.5 times its forecast 2012 book value excluding intangible assets, according to Credit Suisse. Rival emerging market lender HSBC, which reported its earnings on Feb. 27, trades at 1.2 times.

-- StanChart's UK-listed shares were trading at 1653 pence by 1100 GMT on Feb. 29, a 1.9 percent increase on the previous day's close.

-- Reuters: StanChart profits hit record despite wages spike -- For previous columns by the author, Reuters customers can click on

(Editing by Peter Thal Larsen and David Evans)