The biggest negative in Standard Chartered Plc’s (StanChart) first half results is its performance in India, the market that contributed the most to its profit before tax last year.
For the first half of 2011, StanChart’s local operations reported a 12% decline in income and a 39% fall in profit from a year ago. That was mainly on account of higher provisioning for dodgy loans and a slump in project and deal flows in a slowing economy.
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Things are only going to get tougher locally as the results of other private sector banks show and as the central bank keeps on hiking rates to combat inflation.
However, the spread of its operations means that a poor showing in one market is often compensated by others—in this case Hong Kong and China. Thus, StanChart’s net profit rose 20% from a year ago, beating brokerages’ forecasts.
While income grew at a sedate 11%, the bank was able to restrain costs and had to set aside a smaller amount against impaired loans. Loans and deposits grew, and the bank indicated that it was hiring more people, unlike peers such as HSBC Holdings Plc and Barclays Plc, which are cutting jobs.
The bank has no sovereign debt exposure to troubled European economies and about 85% of its profits come from Asia, where economic growth is still higher than most parts of the world.
What does this mean for depository receipt holders? StanChart’s Indian depository receipt (IDR) had outperformed the Bankex of BSE for the greater part of this fiscal year, till market regulator Securities and Exchange Board of India (Sebi) decided to disallow unrestricted conversion of these instruments into shares.
Since then, the IDRs have lagged the Bankex, even while shares of StanChart listed in the London market continued to do marginally better than the local banking benchmark.
In the two months before the Sebi decision, London shares were trading at 2-7% premium (adjusted for exchange price fluctuations) over the IDRs. Since then, not only is the premium much higher, but the range has also increased; it’s now 18-27%.
However, price discovery of a derivative can never be truly divorced from its underlying instrument. And the fundamentals suggest that things are going reasonably well for the bank, at least in other Asian markets. There may be hope for IDR holders yet.
Graphics by: Yogesh Kumar/Mint
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