We added Standard Chartered (London: STAN, OTC: SCBFF) to the Long-Term Holdings Portfolio in late 2008, on the premise that banks are one of the best investment vehicles to gain exposure to emerging markets. After all, the banking industry is involved with the lifeblood of every economy, acting as a facilitator of economic activity (via loans) and a custodian of citizens’ money (through deposits).

Although Standard Chartered is headquartered in the UK, its primary focus is on emerging markets. Asia is Standard’s most important region, accounting for 83 percent of revenue. Consequently, the bank offers investors direct exposure to fast-growing emerging economies without the dilution of mature markets.

The latter characteristic has gained in importance given recent turmoil in the euro zone. With little or no exposure to many of Europe’s troubled economies, the bank will only be marginally affected regardless of the outcome of the crisis on the Continent.

Other banks are rightly worried and they’re making contingency plans. According to the latest projections, a Greek exit from the euro zone would cost European banks as a whole around five percent of their market capitalization, in terms of direct losses. For Standard Chartered, this hit would only amount to 3.5 percent of its market cap.

Under an extreme scenario, by which Italy, Spain, Portugal, and Greece all leave the euro, European banks would incur losses of more than 50 percent of their market cap. By contrast, Standard Chartered would only incur losses equal to less than 14 percent of its market cap.

Although unlikely, the entire exit from the euro of Europe’s troubled southern economies could prompt banks to withdraw investment funds from Europe and “repatriate” them. Such a move would burden the global financial system even further.

Despite its advantageous position compared to many of its European peers, Standard Chartered has not been a great performer lately. Its stock has only gained a couple of percentage points this year, largely because of investor uncertainty that it can achieve its target of 10 percent revenue growth and 15 percent return on equity.
On the other hand, Standard Chartered is one of the few banks in the world to have posted strong and growing profits in each of the last nine years.

Looking at a breakdown of the bank’s sources of profits, Hong Kong and Singapore are among its strongest markets; India and South Korea are among its weakest (see chart, below).

The company’s Indian operations remain particularly challenging, because of subdued business sentiment there. Although India has gradually emerged as a significant contributor to the bank’s earnings, the short-term outlook in that country appears weak. The Indian economy has been hit by governance-related issues, slowing domestic demand and high interest rates.


Source: Standard Chartered

Regardless, Standard Chartered should be able to grow earnings by about 10 percent this year—not spectacular, but solid. In today’s dicey environment, any bank that can produce solid growth rates while offering exposure to the right economies, as Standard Chartered does, is a good investment if the stock’s price is right. The stock currently trades at a relatively attractive valuation of 1.3 times book value and 10.8 times trailing earnings, while offering a 3.6 percent dividend yield. Its dividends are sustainable and paid semi-annually.

Standard Chartered remains a buy up to GBP1,600 in London and USD25 in the OTC market. As always, we prefer the local shares.