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Great presentation by David Poulet
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1
A compounding machine for the price of a Bank
David Poulet
+33 1 47 20 73 39
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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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An outstanding track-record
1. Growth
CAGR 5Y 10Y
NBI
Standard Chartered 14,9% 15,0%
HSBC 1,3% 11,4%
Deposits
Standard Chartered 18,7% 18,1%
HSBC 7,2% 11,1%
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An outstanding track-record
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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An outstanding track-record
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
Standard Chartered 28,8% 27,2%
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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The business-model behind the track-record
Traditional approach: to look at the bank’s country exposure and market shares
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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The business-model behind the track-record
Traditional approach: to look at the bank’s country exposure and market shares
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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The business-model behind the track-record
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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The business-model behind the track-record
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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The business-model behind the track-record
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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The business-model behind the track-record
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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The business-model behind the track-record
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
•
• 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