Investment View: One slightly sick trading statement does not make StanChart a 'sell'

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The Independent Online

Should you be standing with Standard Chartered after last week's less than stellar trading update? The market tells its own story. The shares have been on the skids since it was issued. In fact they've been trending down for a while.

Standard Chartered nearly hit £18 in the middle of March, about the time I said keep buying. In hindsight that wasn't the cleverest recommendation I have made, but there were good reasons for it: a relatively restrained valuation and its positioning in lots of rapidly growing markets.

It now looks as if those who sold made the correct call after the bank admitted that recent trading had been less than stunning in its first quarter.

This is a bank from which you don't expect to see bumps in the road. Of course, what we don't have is any numbers to see what has been going on. Standard Chartered is unusual in not putting out any numbers at all with its quarterly updates.

So investors are left to interpret comments from the management, which said operating profits would be "slightly down" when compared to the first quarter of 2012 and that "momentum slowed" after a strong January.

When you don't put any numbers out for people to judge, they'll think the worst. Other banks have learnt this lesson. Sadly, StanChart has not.

All the same, one thing to take to the bank is that it still expects to meet forecasts for full-year pre-tax profits. That ought to provide some comfort: management would look very, very stupid saying that if the difficult trading in places such as South Korea and Singapore persists through the rest of the year.

Analysts have noted growing competition from other foreign banks, but if StanChart is as confident as it sounds, and its comments on the future outlook were more optimistic, then the shares could look quite cheap by the end of the year. The bank is, after all, signalling a rapid return to "trend levels", which means income growth of 10 per cent. Not too shabby.

This is something quite a few people in the analyst and broking communities have picked up on. They see recent share price falls as a buying opportunity. So do I.

Bailing on one of the world's best-run banks, which managed to turn in increases in profits right through the financial crisis (it's produced a record every year for the last 10), would seem on the face of one slightly sick trading statement to be an over-reaction.

I personally took note of the application for licences in Angola and Mozambique, which emerged on Friday. That wouldn't seem to be earth-shattering news. But these are economies which are growing very rapidly. In fact, sub-Saharan Africa as a whole could easily become the next "hot" economic region within a decade or two. It's true that its history doesn't inspire much confidence, but combine a resource boom with an emerging middle class and, crucially, improving governance at the political level, albeit in places which desperately need that, and it could surprise us all.

StanChart is no Barclays, already an established giant on the continent, but it has proved time and again that it is good at emerging markets. So watch this space. On 10 times earnings, yielding 3.6 per cent, the bank is cheaper than, say, HSBC, 11.5 times implying a 4.6 per cent yield.

HSBC is due to update on strategy later this week, and we can expect more cost cuts and more sales of non-core and subscale businesses. Capital is being deployed in areas of growth, such as so called "emerging markets", and UK mortgages.

But as Ian Gordon, an analyst at Investec notes, it's generating so much capital it is struggling to find a use for it. If only all banks were like that.

If you've a decent slug of cash, HSBC is where you'd want to hold it on deposit. Standard Chartered is a risk, given that there are people out there shorting it right now amid worries about loan qualities. All the same, Standard Chartered is where you'd want to invest in terms of shares. HSBC is a solid hold, but StanChart is a strong buy.