(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
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.
-- 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
-- Reuters: StanChart profits hit record despite wages spike
-- For previous columns by the author, Reuters customers can
(Editing by Peter Thal Larsen and David Evans)