StanChart puts hot share price to good use

October 13, 2010

Few banks do opportunistic capital raisings better than Standard Chartered. The emerging market lender’s rights issue of $5.2 billion, net of fees, comes just as stock markets in Asia are pumped up on cheap money from the West. The bank’s own valuation, long at a premium to peers, is looking distinctly toppy. This crafty capital dash is unlikely to go to waste.

The money StanChart will raise through its London and Hong Kong listings would take its core Tier 1 capital ratio, the measure regulators watch most keenly, to almost 12 percent. Its expected year-end ratio of 10 percent already beats most European banks. But new Basel capital buffers, combined with extra demands on systemically important banks, will make that the standard rather than the exception. Swiss regulators have already asked their own banks to aim even higher.

Capital ratios are affected by other factors too. Risk-weighted assets — the denominator in the ratio — are also rising as regulators tighten up their demands. JPMorgan predicts its risk-adjusted balance sheet will expand by almost 40 percent under the new rules, while UBS and Credit Suisse expect their RWAs to double. StanChart should not suffer as much. But assume a pessimistic 10 percent uplift, and the lender would need almost half the rights issue proceeds just to keep its capital ratio where it is.

At first glance, the fundraising looks premature. Regulators have given banks nine years to make the Basel grade, and StanChart is generating some $3 billion a year in retained earnings. Why do a rights issue when it can generate the same amount of capital under its own steam in less than two years?

The answer lies in StanChart’s soaraway share price. Even after a 1.5 percent drop following the rights issue announcement, and taking into account the extra capital, its shares trade at about 2.3 times expected year-end tangible book value — well above the rating of rival HSBC. The shares have almost trebled since the bank’s last rights issue in November 2008.

The $5.2 billion should find a use. As well as appeasing regulators, the bank should beef up in areas like South America, where it remains far behind the likes of Citi, and Africa, where it might soon be leapfrogged by HSBC pending the lender’s talks to acquire Nedbank. StanChart can raise capital opportunistically — now it must show that it can deploy it too.

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