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StanChart’s issue comes with some disadvantages

StanChart’s issue comes with some disadvantages
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First Published: Tue, May 25 2010. 09 53 PM IST

Updated: Tue, May 25 2010. 09 53 PM IST
Standard Chartered Plc is coming up with a public offer of 240 million Indian depository receipts (IDRs). Ten IDRs represent one equity share of the company (with a face value of $0.5, or Rs23.7, per equity share). Of the total issue, five million IDRs are reserved for its employees, hence, the effective net issue comes to 235 million IDRs. As a result of the IDR issue, the equity base of the company will expand by 1.2% to 2.05 billion equity shares.
The objective of the issue is to provide Indian investors an opportunity to invest and participate in the bank’s growth, to increase market visibility and brand perception of the bank in India, to support growth across businesses globally, to widen investor base and to provide a new source of capital.
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Standard Chartered operates through a number of subsidiaries, including Standard Chartered Bank, which is one of the leading international banking and financial services company. Standard Chartered Bank is listed on both the London Stock Exchange and the Hong Kong Stock Exchange and ranks among the top 25 companies in FTSE-100 by market capitalization. It is the main operating entity of the group.
The bank focuses on developing its wholesale and consumer banking business in Asia, Africa and West Asia, from where it derives 90% of its operating income and profit. The bank operates a network of around 1,700 branches and outlets (including subsidiaries, associates and joint ventures) and employs 73,000 people.
In recent years, the bank has more than doubled its income and profit, primarily as a result of organic growth and strategic alliances or acquisitions.
Key positives
Standard Chartered Bank focuses on the emerging markets for expansion of its operations. The bank is well positioned to benefit from the relatively stronger and earlier economic recovery seen in emerging markets. Its position in high-growth emerging markets makes it strong over the long term—both geographically and in balance sheet terms.
The bank’s Korea operations are about to see a turnaround with the management expecting an improvement in profitability on the back of increased market share and rising interest rates.
China remains a key area for investment for the group and Standard Chartered Bank will continue to expand its branch network in the country. While there is a risk of asset bubble in China, the bank’s conservative approach should help it manage the risk.
Diversification of business, capital employed and operating income across economies act as a natural hedge.
Key concerns
In view of improvement in the macro situation in emerging markets, financial market regulators may resort to reversal of the accommodative stance adopted during the crisis. We believe that the issue of regulatory changes for the banking sector remains significant and we think that the regulators will continue to push for higher capital ratios across the banking sector, which could have an eventual negative macroeconomic impact.
Standard Chartered Bank faces significant challenges in terms of expanding its operations within the countries it operates. Increased protectionism may limit the growth potential of the bank in general and consumer banking in specific. This is adequately reflected in the bank’s India operations.
The Reserve Bank of India has not been active in granting new branch licences to foreign banks. As a result, the bank has added only nine branches over the last five years.
Also, institutional participation in the bank’s IDR is likely to be restricted with domestic insurers not permitted to invest in IDRs and foreign institutional investors (FIIs) likely to have limited interest in it since they can invest in the stock through more liquid exchanges, such as London Stock Exchange (LSE) and Hong Kong Stock Exchange (HKSE).
Further, retail interest in IDRs will be curtailed due to higher taxation on dividend as well as capital gains on IDRs as compared with domestic stocks. Due to likely lower institutional participation and curtailed retail interest, the IDRs could trade at a discount to trading multiples as seen in LSE and HKSE.
Valuation
Standard Chartered Bank’s IDR provides Indian investors a chance to invest in a global entity. As a result of its diversified presence and emerging-market focus, the bank came out relatively unscathed from the subprime crisis and is now poised to benefit from the ongoing recovery in emerging economies. Hence, the bank is an excellent diversified multinational banking play. However, the issue price discounts most of the positives.
The issue has certain disadvantages, such as lower institutional participation (domestic insurers not allowed to participate in IDRs and restricted FII interest) and higher tax (dividend and capital gains tax) on IDRs. At the lower end of the offer price band, the stock is offered at around 10% discount to its current market price at HKSE and leaves scope for some appreciation considering the 5% discount offered to retail investors.
Graphic by Naveen Kumar Saini/Mint
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First Published: Tue, May 25 2010. 09 53 PM IST
More Topics: Standard Chartered Plc | IDRs | Stocks | Markets | FII |