Standard Chartered IPO Analysis

Incorporated by the merger of The Chartered Bank and The Standard Bank, Standard Chartered Bank (SCB), with presence in India, Hong Kong and Shanghai for over 150 years, operates mainly in Asia, Africa and Middle East. SCB is an indirect subsidiary of Standard Chartered headquartered in London, United Kingdom.

With over 300 direct and indirect subsidiaries, joint ventures and associates, Standard Chartered is one of the leading international banking and financial services company and is listed on both the London and Hong Kong Stock exchanges. The company operates in two businesses: Wholesale Banking and Consumer Banking. The Wholesale Banking business provides corporate and institutional clients with trade finance, cash management, securities services, foreign exchange and risk management, raising capital, corporate and principal finance solutions. Consumer Banking products and services include banking services, deposit-taking services, credit cards, personal loans, mortgages, auto finance and wealth management services. For the year ended 31 December 2009, Consumer Banking and Wholesale Banking contributed 17% and 79%, respectively, of the company's operating profit before taxation and impairment. The Wholesale Banking portfolio is predominantly short term, with 70% of loans and advances having a contractual maturity of one year or less. In Consumer Banking, 61% of the portfolio is in the mortgage book, traditionally longer term in nature and well secured.

The Group manages its reportable business segments on global basis. The operations are based in 8 main geographic areas as follows: Hong Kong, India, East & South Asia, Other Asia pacific, Africa, Korea and America UK and Europe. As on 31 December 2009, the Group had 1,700 branches and 5,679 ATMs operating in more than 71 markets. However, Hong Kong and India are the two major markets of the company. Hong Kong is the key market for the company, with 77 branch outlets and 223 ATMs end December 2009. For the year ended 31 December 2009, Hong Kong activities contributed USD 2370 million operating income (16% to total) and USD 1062 million PBT (21% to total). India is the second key market, with 94 branches and contributing operating an income of USD 1813 million (12% to total) and PBT of USD 1060 million (21% to total) to the group for the year ended December 2009.

To increase market visibility & brand perception in India, provide new source of capital and support the company's growth globally, Standard Chartered is taping the Indian market with the first ever IDR (Indian Depositary Receipts) issue. An IDR is a mechanism that allows investors in India to invest in listed foreign companies in Indian rupees. IDRs are depository receipts denominated in Indian rupees issued by a domestic depository in India, and give the holder the opportunity to hold an interest in equity shares in an overseas company.

The company is to issue 240,000,000 IDRs at price band of Rs 100-115 per IDR by the book-building process, thereby collecting nearly to Rs 2400 crore to Rs 2760 crore. About 30% of the issue will be available for allocation to retail investors and less than 2% of the issue will be available for eligible employees. The bank has provided 5% discount on the final issue price to retail Investors. Ten IDRs represent one underlying share of the company and the new shares to be issued will constitute 1.16% of the post-issue paid-up capital of the company. Post-issue, the equity capital swells to USD 1026.7 million/ Rs 47.93 billion. The issue opens on 25 May 2010 and closes on 28 May 2010.

Business Highlights:

* In CY 2009, total business of the company leaped up by 10% to USD 458.54 billion owing to 8% rise in the deposits to USD 256.74 billion and 13% increase in advances to USD 201.80 billion. The credit to deposit ratio stood at 78.9% in CY 2009.
* Low cost current and saving account (CASA) balance comprises 53% of the total deposit base, up from 43% in CY 2008. The CASA balance grew strongly by 34% to USD157 billion in CY 2009.
* NII in the consumer-banking segment fell by 8% owing to lower interest rates, while NII from wholesale banking rose by 17% during CY 2009. Dip in the cash management and custody business was compensated by the trade and lending business with re-pricing actions. As a result, overall NIM of the company fell from 2.5% in CY 2008 to 2.3% in CY 2009. NIM of the company in 8 different geographies are as follows: Africa 4.8%, India 3.8%, East & South Asia 3.7%, Other Asia Pacific 2.3%, Hong Kong & Korea 1.8% each, and America UK and Europe 1%.
* Net fee and commission income grew by 15% to USD 3370 million driven by wholesale banking income owing to strong corporate advisory income and capital market fees.
* Loan loss provisions for CY 2009 were up by 51% to USD 2000 million.
* India joined Hong Kong as the second geography to deliver operating profits in excess of USD1 billion.
* Normalized return on ordinary shareholders' equity was 14.3% in 2009 compared to 15.2% in 2008
* Risk weighted assets (RWA) increased by USD 25 billion or 13% compared to 2008, largely driven through Wholesale Banking, whose RWA increased by USD24 billion, or 18%. RWA growth was concentrated in Singapore, Hong Kong and MESA.
* As against the GALCO (Group Asset and Liability Committee) target of Tier 1 and total capital ratios within a range of 7 to 9% and 12 to 14%, respectively, total capital adequacy ratio end December 2009 was 16.5% and Tier 1 capital ratio was 11.5%. In the corresponding previous year, total capital adequacy ratio was 15.6% and Tier I capital was 9.9%. The Core Tier 1 ratio at end of CY 2009 was 8.9%.
* NAV per equity share on consolidated front jumped up to Rs 630.24 (USD 13.5) in CY 2009 as against Rs 340.80 (USD 7.3) in CY 2008.

Asset Quality:

Asset quality of the company according to its major segments is as follows:

* Consumer Banking Segment: Gross NPA declined by 10% to USD 1252 million while Net NPA sharply declined by 51% to USD 195 million in the year ended December 2009.
* Wholesale Banking Segment: Gross NPA jumped up by 70% to USD 2760 million, while Net NPA has leaped up by 52% to USD 956 million in the year ended December 2009. The provision coverage ratio increased to 65.4% from 61.0% a year ago. The spike in NPA is driven by a small number of individually significant accounts, the largest of which are two closely linked customers in Saudi Arabia, included within the MESA (Middle East and Other South Asian) region.

On overall basis, Gross NPA leaped up by 33% to Rs 18728 crore while Net NPA increased by 12% to Rs 5373 crore in CY 2009. On the other hand, the ratio of Gross NPA to Advances stood unchanged at 0.6% while the ratio of Net NPA to Advances improved by 30 bps to 2.0%. The provision coverage ratio stood increased at 71% in CY 2009 from 66% in CY 2008.

Strengths:

* Strong Capital Adequacy Ratio of 16.5% supports the bank for meeting time liabilities and other risks effectively.
* The bank enjoyed higher CASA ratio at 53% in CY 2009, thereby supporting higher NIM.
* Presence in developing markets like India, Africa and China will increase the opportunities for the bank to increase margin and market share and strengthen its presence.
* Although the bank is headquartered in the UK, the total share of America, UK and Europe as a whole constituted only 12% of the total Operating Income at USD 1800 million and only 7.3% of the total PBT at USD 375 million in CY 2009.

Weaknesses:

* Changes in exchange rates affect, among other things, the value of the company's assets and liabilities denominated in foreign currencies as well as the earnings reported by the company's non- US dollar denominated branches and subsidiaries. A sharp fall in the value of the US dollar could also impact trade flows and the wealth of clients holding US dollar-denominated assets, both of which could have an impact on the company's performance.
* The company operates primarily in Asia, Africa and the Middle East, and these operations expose it to risks arising from the political and economic environment in these areas.
* The company operates in a highly regulated industry. Changes in bank regulations and laws and regulations in different countries could have an impact on its operations or impair its financial condition.

Negatives of investing in IDR:

* The IDR market India is in a very nascent stage. So, there is no assurance for liquidity on the BSE and the NSE.
* Due to the factors related to the application of provisions of English law and the potential application of certain provisions of Indian law; IDR holders are unlikely to be able to receive additional shares from the company in a rights offering or a bonus issue of shares or following an election made, at their option, to receive scrip dividend from the company.
* The IDRs are not fungible with shares and there are restrictions on the withdrawal of shares from the IDR facility, including an absolute prohibition on withdrawal of shares for a period of one year following the date of the issue of the IDRs. In addition, each IDR holder will have to individually seek the approval of the RBI for any withdrawals following the end of this one-year period and the process for seeking such approval remains unclear at present. Further, residents in India are only permitted to hold the shares for the purpose of sale and are required to sell them within 30 days following withdrawal.
* Holding as well as trading in IDRs is not tax efficient as per current laws as (a) secondary trading of IDRs is not subject to the Securities Transaction Tax (STT) and, hence, higher capital gains tax will be payable. (b) Dividend distribution tax is not payable by the issuer company and, hence ,dividend will be taxable in the hands of the IDR holders.

Valuation:

Standard Chartered annualized EPS for CY 2009 on post-issue equity works out to Rs 79.5 per share or Rs 7.9 per IDR. At the price band of Rs 100 to Rs 115 per IDR (without considering discount of 5% to retail Investors) P/E of IDR is 12.6 to 14.5 times. Taking in to account, the premium from the fresh IDR issue, post-issue Book Value per IDR is Rs 63.7 and Rs 63.9 at issue price of Rs 100 and Rs 115, respectively. P/BV at both the bands works out to be 1.6 and 1.8 times, respectively.

Comparing Standard Chartered with any Indian bank will not be proper as none of the Indian banks has scale of international operations as Standard Chartered. Moreover, the peer group for Standard Chartered will be global banks and not Indian banks and, hence, the price of the Standard Chartered share will be decided on other global exchanges.

The current share price of Standard Chartered on the London Stock Exchange (LSE) is 16.20 GBP (Rs 1092.22) and on the Hong Kong Stock Exchange (HSE) 185 HKD (Rs 1110.00). The three-month, six-month and one-year average price on the LSE is GBP 17.21, GBP 16.20, and GBP 15.27, respectively, while that on the HSE is HKD 202.29, HKD 196.65 and HKD 192.1, respectively. The average three-month, six-month and one-year premium/discount on the HSE compared with the LSE is 0.3% premium, 1.61% discount and 0.6% premium (with a range of -6.2% to 7.3% in the one year period ended 23 May 2010).

The Indian IDR can trade at premium/discount to price on LSE/HSE depending on liquidity and interest in the scrip on Indian exchanges. Notably, domestic insurance companies, which are major investors in banks, cannot hold IDRs. FIIs may prefer buying Standard Chartered on the HSE or the LSE, especially due to restricted fungibility of IDRs in India. Retail/HNI investors may also not prefer Standard Chartered IDR due to higher taxes involved in holding and trading.

Moreover, Indian investors have enough choice with so many Indian public and private sector banks listed and the domestic growth story considered as far superior and safer than the global growth story. Hence, the possibility of IDRs trading at discount to the HSE/LSE is high.

The price of the Standard Chartered IDR on Indian stock exchanges will be substantially determined by the prevailing price of Standard Chartered on the LSE and HSE and relative exchange rate between UK, Hong Kong and Indian currency. Global economic, political and stock market conditions will have more influence on the IDR price than Indian economic, political and stock market conditions. If the IDR gets priced near the prevailing market prices on LSE/HSE, the 5% discount to retail investors will leave little cushion in view of the high volatility currently prevailing in global markets and possibility of IDR trading at discount to the LSE/HSE share prices post listing.

Standard Chartered Grey Market Premium

Company Name	Offer Price (Rs.)	Premium (Rs.)
Standard Chartered PLC	100 to 115	Discount

StanChart sets IDR price band at Rs 100-115 each

Issue remains opens for subscription between 25 and 28 May 2010

Standard Chartered Plc. has set the price band for its proposed issue of 240 million Indian Depository Receipts (IDRs) at Rs 100-115 each. Retail investors will be allotted shares at 5% discount to the issue price. The issue opens for subscription on 25 May 2010 and closes on 28 May 2010.

The IDRs will be listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The bank is already listed in London and Hong Kong.

Ten IDRs will represent one underlying equity share of Standard Chartered Plc. The proceeds of the issue will be added to the overall capital reserves to support the bank's business growth.

Asia-focused British bank Standard Chartered's IDR is the first issue of its kind in India. Like American or Global Depository Receipts, where Indian companies raise resources overseas, IDRs enable foreign companies to do the same in India. As per the Securities and Exchange Board of India's guidelines, IDRs can be issued by companies that have been listed in the home market for a minimum of three years and have registered a profit in at least three of the five years before the issue.

Standard Chartered Plc IDR

Standard Chartered Plc IDR

Standard Chartered Plc IDR

Conservative investors looking for defensive options can subscribe to the Indian Depository Receipt (IDR) offer of Standard Chartered (StanChart) PLC. The IDR is an opportunity for investors to invest in a globally diversified (both in terms of geography and segments) banking and financial services conglomerate at a reasonable price. Investors, however, need to bear in mind the higher capital gains and dividend tax incidence on returns from IDRs compared with domestic shares. Investors in the IDR would also lose out if the Rupee appreciates vis a vis the Pound.

StanChart's global access to low cost funds, the possibility of better growth driven by improving credit offtake as well as margins in the emerging markets and likely improvement in fee income as capital markets stabilise, argue for the investment.

Valuation

Each IDR represents one-tenth of Standard Chartered PLC's UK listed stock. The actual price at which the IDRs are offered for subscription by investors will be known only on Monday May 24th. The Friday closing price of Stanchart's shares at the London Stock Exchange offers a clue as to the likely level around which the eventual price would be determined. At Rs 103.6 (computed based on a 5 per cent discount on the current price of £16.1) ), the stock would discount the bank's calendar 2009 earnings by 13.4 times. The offer would be at a price-book value of 2.1 times, excluding goodwill. The pre-tax dividend yield would be 3.5 per cent.

This price would place the stock at a discount to most of the Indian private sector banks (1.8 to 4.4 times). While StanChart may not match the pace of Indian private sector banks on growth in its asset book, its large size, well-diversified presence across emerging markets, along with a clean balance sheet and strong risk management systems, make the stock a good investment.

The profit before tax (PBT) of StanChart for the year ended December 31, 2009 was Rs 24,044 crore .

Standard Chartered PLC intends to raise $500 million from this offer of IDRs. The primary objective appears to be an India listing as the offer will only add 1.18 per cent to the equity base and shore up the core capital ratio marginally from 8.92 per cent to 9.16 per cent. As of December 2009, the capital adequacy ratio of Standard Chartered PLC stood at a comfortable 16.5 per cent.

Business

Standard Chartered PLC is a holding company that offers a host of financial services through its subsidiaries in almost 70 countries with predominant presence in the high growth markets of Hong Kong, Korea, India, China, Africa and other Asian countries.

The company segments its business into Wholesale segment and Consumer segment.

The Wholesale segment comprises transaction banking , capital market services, corporate finance and principal finance mainly targeted to corporates. The bank's consumer banking encompasses credit cards, personal loans, wealth management, mortgages and auto loans.

StanChart has an international credit rating of A, as against BBB- sovereign credit rating for India, an indicator of the edge it enjoys over Indian banks in accessing global funds for its operations at a low cost. The bank's high low-cost deposit proportion of 53 per cent as of December 2009, also helps reduce the overall cost of funds.

Financials

StanChart's net profit attributable to shareholders grew by 14 per cent annually during 2006-09. The PBT during the same period grew at an annualised 17.4 per cent. During the period 2006-09, the profit contribution from under-banked and high-margin geographies such as India, Asian economies such as China and Indonesia and Africa rose at a much faster pace than that from the developed regions, thereby increasing the overall profitability. StanChart also made acquisitions such as Union Bank of Pakistan (in 2006), American Express Bank (2008) and Korea First Bank Hsinchu International Bank which strengthened its presence in the emerging markets. StanChart adopts advanced Basel II norms on par with global banks with respect to its operational structure, which lends higher transparency and increases its readiness to tackle risks.

India, despite being a smaller business in terms of lending, has been a significant profit contributor to StanChart owing to higher fee based income from the growing wholesale banking business. India contributed 20 per cent to PBT, though it only made up 6.5 per cent of the asset book in 2009.

Despite it being a troubled year, StanChart weathered 2009 reasonably well. While its total income grew by 9 per cent, the costs only grew at 4 per cent thereby improving the group operating profits. This helped cost-income ratio fall from 56 per cent in 2008 to 51 per cent in 2009. A huge jump in the provisioning for bad-assets (51 per cent increase in 2009) partly limited profit growth but improved the overall provision coverage.

StanChart also has significant fee income (50 per cent of total income) coming in from services such as cash management, wealth management, principal investments and corporate finance. For 2009, the 22 per cent fall in operating profits for consumer banking was made up by the 36 per cent expansion in wholesale banking profits.

In the year ahead, the strong traction in consumer credit offtake in StanChart's key markets — India, Hong Kong, Korea and Singapore — may aid improvement in consumer banking offtake.

StanChart's Net Interest Margin, which was maintained at 2.5 per cent for 2006-08, fell to 2.3 per cent in 2009. While this was a function of the pressure on interest rates last year, margins may improve significantly from now on the back of the bank's low funding costs, rising rates and demand for credit.

Consumer banking which was a laggard in 2009 too may drive profit growth as the wealth management business revives as the global economy revives. StanChart indicated in its Interim Management Statement for the first quarter of 2010, that the group witnessed improvement in volumes, as the consumer segment increased its contribution to the overall income and profits. There was also increase in lending volumes. StanChart's overall asset quality is reasonable in the global context, especially given its emereging markets focus. The Gross NPA ratio stood at 2 per cent with an overall provision coverage of 70 per cent by end of 2009. The average loan to value is low in both mortgages (50 per cent) and wholesale banking , substantially limiting credit risk.

Credit growth is usually correlated to overall economic activity and on this score investors in StanChart may not have much to worry about. IMF forecasts regions such as Developing Asia, Africa and West Asia may have GDP growth rates of 8.4 per cent, 4.3 per cent, 4.5 per cent for 2010 and 8.4 per cent, 5.3 per cent and 4.8 per cent in 2011. This may have a two-fold impact on business as consumer demand revives and corporates revive borrowing plans. The prospect of a shift from a very easy monetary policy to a slightly tighter one does exist in India, China and Korea. However, StanChart's large low-cost deposit base and its access to low cost funds may help it weather such a phase better than peers.

Offer details: The issue opens on 25 May and closes on 28 May 2010. .

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