View from City Road: Standard is riding high

Click to follow
The Independent Online
STANDARD Chartered has had all the luck lately, and the share price showed it yesterday, with a 14p rise to 568p, only 8p short of the high point in November. This fresh upsurge was because of a double benefit from a sale and leaseback of various properties the bank owns in the Far East, including its Hong Kong headquarters. The peculiarities of international rules for bank capital adequacy allowed Standard a pounds 360m boost to its capital as a result of the disposal of pounds 200m worth of buildings.

It works like this: the sale proceeds boosted Standard's balance sheet by pounds 180m, which goes to straight to its core, or Tier 1, capital, which is mainly shareholders' equity and reserves. There is another layer of bank capital, called Tier 2, made up of bonds, general bad debt provisions and the like, but any Tier 2 above 100 per cent of Tier 1 is not allowed to count.

As Standard currently has more Tier 2 than it can use, an increase in core capital automatically allows another chunk to qualify as capital - hence the doubling-up process. This has increased Standard's key capital ratio 0.5 percentage points to just under 10 per cent, which is well above the 8 per cent minimum, making the bank look healthy despite its recent losses in the Bombay stock market scandal.

A bank's lending is restricted to a multiple of its capital, and so this gives more freedom in the still buoyant Far Eastern markets. Indeed, Standard has a further pounds 100m of surplus Tier 2 capital, which could be brought into play if there are other disposals. The Far East may be a risky banking market, but its growth rate and profitability have been impressive.

Coming on top of recent successful and profitable court cases in the US and Australia, Standard is doing rather well out of non-banking management. The pounds 100m profit from the property disposals in the Far East is also equal to the provision set aside for bad debts in Bombay, an affair which the market has recently been getting into proportion (after over-reacting when it first emerged in the summer.) The restructuring of the bank is well under way, so underlying profitability is also improving. With the possibility of a bid as the icing on the cake, Standard looks a better bet than most of the English clearers.

Comments