David Poulet 2013-01 ValueX - Standard Chartered

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A compounding machine for the price of a Bank

David Poulet

+33 1 47 20 73 39

[email protected]

http://www.valuex.ch/

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Important Disclaimers

This presentation has been written in January 2013 for Investment Professionals.

Nothing contained in the present document constitutes a recommendation for the purchase or

sale of any security.

Information and views provided may be incomplete, inaccurate or condensed.

AMIRAL GESTION has a long position in STANDARD CHARTERED.

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• STAN has an outstanding track-record

• However, it’s not just a “very good, very well-managed bank” such as WELLS

FARGO, HANDELSBANKEN or SANTANDER…

• STAN has a singular business model that I will try to summarize

• It implies, according to me:

- a risk level significantly lower than in traditional banks

- a classification of STAN among the group of “compounding

machines” rather than in the “banks’ universe”

• STAN’s valuation ratios:

- have been among the lowest over the past 10 years

- are a bargain compared to other “compounding machines”

What I want to highlight in this presentation

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An outstanding track-record

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1. Growth

CAGR 5Y 10Y

NBI

Standard Chartered 14,9% 15,0%

HSBC 1,3% 11,4%

Deposits


HSBC 7,2% 11,1%

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2. Profitability

RoRWA = Return on Risk Weighted Assets ; it measures the profitability of a bank given its

absolute level of risk and regardless of its level of leverage.

RoRWA

5Y 2006 2007 2008 2009 2010 2011

Standard Chartered 1,77% 1,63% 1,68% 1,73% 1,68% 1,89% 1,88%

HSBC 1,09% 1,79% 1,82% 0,50% 0,51% 1,18% 1,45%

BNP Paribas 1,10% 1,74% 1,56% 0,57% 1,04% 1,34% 1,01%

Banco Santander 1,51% 1,70% 1,82% 1,73% 1,66% 1,40% 0,91%

Deutsche Bank 0,91% 2,31% 2,14% -1,20% 1,71% 0,75% 1,14%

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3. Value creation

IRR= Tangible Book Value per share annual growth + dividend reinvestment

Standard Chartered : - average ROtE last 10Y : 21,3%

- average P/TBV last 10Y : 2,53x (relutive capital increases on TBV)

- results might be slightly biased due to currency effects

IRR 5Y 10Y


HSBC 12,4% 23,2%

BNP Paribas 9,1% 16,1%

Société Générale 3,1% 12,8%

Deutsche Bank 0,6% 9,2%

Santander 12,7% 21,3%

BBVA 15,4% 14,6%

Barclays 19,3% 18,5%

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What is the business model behind

this track-record?

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The business-model behind the track-record

Traditional approach: to look at the bank’s country exposure and market shares

Pays % Loan book % NBI

Hong Kong 19% 15%

Singapore 18% 11%

South Korea 14% 11%

Other Asia-Pacific 19% 20%

India 4% 13%

Middle-East 7% 13%

Africa 2% 8%

America & Europe 12% 9%

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ISSUES:

• Only 1700 branches worldwide (e.g.: Crédit Agricole has 10 000 only in France)

• No significant market share in any country except Hong Kong

Standard Chartered IS NOT a conglomerate of local banks

that would, perchance, be implanted in Emerging Markets.

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Zone % loan book % NBI

Hong Kong 19% 15%

Singapore 18% 11%

South Korea 14% 11%

Oher Asia-Pacific 19% 20%

India 4% 13%

Middle-East 7% 13%

Africa 2% 8%

America & Europe 12% 9%

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Standard Chartered IS NOT a conglomerate of local banks that would, perchance, be

implanted in Emerging Markets.

Standard Chartered IS:

1. [77%]* A « Commercial Banking Network »

stateless, hard to replicate

2. [23%] Local Retail Banks not necessarily universal and support The Network (local currency funding)

* 77% of the operational result – 55% of loan book.

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1. The Network

• Business: wholesale commercial banking

• Clients : multinationals

• Stateless: - main driver: international trade

- half of the revenues are originated in one country (ex: Western) and

booked in another (ex: Oriental)

• High Market Share

- only 2 serious competitors on a global scale: CITI and HSBC

- 6th USD clearer in the world

• Moderate Risk: - 67% loan book has a maturity below one year (trade finance)

- little transformation

• High Value added: see next page

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1. The Network

• Transactional

- trade finance

- cash management

- custody

• Value added

- financial market

- currency exchange

• Stategic

- corporate finance (advisory…)

- principal finance

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1. The Network

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Quel business model ?

1. The Network

The « Wells Fargo » of Commercial Banking

• Strategy : to be among a multinational’s top 3 bankers and to concentrate its efforts on such

clients

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Quel business model ?

1. The Network

The « Wells Fargo » of Commercial Banking

• One of the few banks that publishes the number of products per client (and the only one I know of in

wholesale banking)

• No participation in syndications

No recourse to EB LTRO program

No proprietary trading desks

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2. The local retail banks

• Usefulness within the Group: to raise funding in local currencies for The Network

• 23% of profits, 45% of loan book

• 44 countries, 100% Asia / Middle-East / Africa

• Do not aim to be universal in every country

• Focus (46% of NBI) on 3 segments SMEs

Priority Banking (équivalent to HSBC Premier)

Private Banking

• Same « relationship model»: no team is dedicated to selling a specific product, disclosure

of the number of products per client …

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STAN does not bear the

risk of a traditional bank

(even of a well-managed one)

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STAN does not bear the risk of a traditional bank

1. Profits come from services, not from carrying risks on the balance sheet

HIGHLY PROFITABLE - over-the-cycle ROE guidance: mid-teens (historical average 22%)

DESPITE

1. LOW TRANSFORMATION RISK

STAN does not make money on borrowing short term and lending long-term

2. NO FUNDING RISK

76% Loan to Deposit ratio

3. HIGH CAPITAL RATIOS

Core Tier-1 Ratio, Bale III fully-loaded, end of year 2011: 10,8% one of the highest in the World after UBS

CA Group, one of the best capitalized banking groups in the Eurozone, hopes to reach 10% by end of year 2013

4. THE LEVERAGE IS REALLY LOW – it’s not a matter of RWAs optimization

Leverage ratio = 15x BNP Paribas = 25x, Deutsche Bank = 35x, same profits as Barclays with a 4x smaller balance sheet

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STAN does not bear the risk of a traditional bank

2. Diversification annihilates systemic risk

• STAN business is spread over several continents and 10s of geographies (no country

represents more than 20% of the loan book)

• STAN business is mainly done with multinationals, whose risk is weakly correlated with the

country in which the loan is booked

• Very low volatility of results

• despite… - 2012 : US settlement regarding Iran + huge increase of

bad loans in India

- 2011 : strikes in South Korea

- 2009 : bad loans in UAE (Dubai World)

- 2006 : volatilization of Zimbabwean businesses

- 2002 : collapse of property prices + SRAS in HK

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Valuation

The lowest multiples of the past 15 years

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Valuation

1. Intrinsic Valuation

• Theoretical Formula: P/TBV = [ ROE – g ] / [ COE – g]

• Assumed over-the-cycle ROE: 14% - company guidance « mid-teens »

- RoRWA last 5 years (crisis) 1,77%, I keep 1,60% to be divided by a 11% CET1-B3 => 14,5% ROE which I round

up to 14%

• Assumed Growth: 6% (arbitrary)

- historical: 15%, of which 11% organic growth

- company guidance: mid-teen growth for wholesale banking and double digit growth for the entire group

• COE : 10% Rational: track-record, low leverage, geographical diversification

• Price Target: P/TBV = [ 14% - 6% ] / [ 10% - 6% ] = 2,0x

• Today: P/TBV FY13 = 1,54x ; upside 29%

• One of the few banks to be profitable enough for growh to be creating value.

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Valuation

2. Current valuation versus historic valuation

• Current Valuation

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• Historical Valuation

• STAN has been cheaper only at one period over the past decade: end of 2008

2010 2011 2012 2013 2014 2015

P/TBV 2,02 1,88 1,71 1,48 1,29 1,13

PER 14,6 13,0 12,4 11,0 9,9 9,4

Rdt 2,4% 2,7% 2,9%

5Y 10Y 00 02 04 06 07 08 09 10 11

P/TBV 2,2 2,5 3,1 2,4 2,7 3,2 4,1 1,3 2,2 1,9 1,5

PER 13,0 13,1 11,2 13,0 11,0 15,0 21,0 6,3 13,6 13,6 10,3

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Valuation

3. STAN’s valuation versus good quality emerging markets banks

Pays P/TBV 12 PER 13

Global Standard Chartered 1,6 11,2

HSBC 1,3 11,4

India

Axis Bank 2,6 10,0

Yes Bank 3,9 11,6

ICICI 2,2 14,6

Singapore UOB 1,3 11,1

OCBC 1,3 12,2

Thailand Bangkok Bank 1,4 10,3

China CCB 1,6 6,7

Bank of China 1,1 6,1

Dubai First Gulf Bank 1,4 8,3

Indonesia

Bank Central Asia 5,4 16,9

Bank Rakyat 3,9 10,4

Bank Mandiri 3,3 11,9

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Valuation

4. STAN valuation versus Compounding Machines

A compounding machine for the price of a Bank!

Net Income

5Y CAGR

Emerging

markets

exposure

PER 12 PER 13 PER 14

Standard Chartered 16,3% 88% 12,5 11,2 10,1

Nestlé 6,6% 40% 19,2 17,9 16,6

Swatch 15,4% 55% 17,8 15,3 13,8

GE -7,4% 24% 17,1 12,5 11,7

Google 25,9% 18,9 16,6 14,0

Procter & Gamble 6,3% 38% 18,6 16,8 15,8

L’Oréal 5,2% 47% 23,4 21,7 20,1

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David Poulet 2013-01 ValueX - Standard Chartered