Deutsche Bank downgrades StanChart on challenging revenue outlook

Deutsche Bank downgraded Standard Chartered to ‘sell’ from ‘hold’ and cut the price target to 454p from 460p following the company’s first-quarter results on Tuesday.

It said the results beat its expectations thanks to a better cost, capital and impairment performance.

Deutsche said pre-tax profit was a beat versus its forecasts, as impairment came in at half the level it had expected and the core equity tier 1 ratio of 13.1% was also better than it estimated. Meanwhile, $539m of management adjusted PBT was much higher than DB’s forecast of $29m.

However, the surge in the share price that followed the results is not justified by the revenue outlook and forecast returns in 2018, said DB, as it argued the long-term valuation of the stock should be driven by 2018 returns, not near-term improvements in credit quality.

“We have revenues in 2018 rising 13% from 1Q16 annualised levels but this is only enough to produce a 5% return on equity in 2018,” the bank said.

“Revenues would either need to be $1bn higher to hit a 7% RoE, or impairments zero. Given the current environment, neither scenario seems likely and we downgrade our recommendation.”

Deutsche Bank said upside risks include better capital formation or significant improvement in emerging markets growth and commodity price prospects leading to an improved impairment and revenue outlook.

At 0948 BST, StanChart shares were down 2.8% to 555.60p.