Jefferies sees compelling risk/reward in StanChart, stays at 'buy'

Analysts at Jefferies reiterated their 'buy' recommendation for shares of Standard Chartered, telling clients that the consensus was likely underestimating the lender's performance in the financial markets segment during the second quarter.

On 17 July, StanChart published a compilation of the consensus for analysts' estimates which, for the second quarter, left Jefferies expecting a 42% beat on pre-tax profits and $237m more of income.

Indeed, Jefferies said that even its own estimate for Financial Markets revenue of $834m, for a 12% increase on the year, was "conservative" given how peers in the US had performed.

The broker also believed that their peers had missed the fact that one-month HIBOR averaged 100 basis points over the three months to June, remaining "meaningfully higher" than LIBOR, and against current spot of 30 basis points.

As long as guidance from the lender on the potential headwinds from interest rates for the full-year stayed within $600-800m, that would be "uncontroversial", Jefferies said.

On operating costs, any figure above $2.6bn would be seen as a negative while anything below $2.4bn would be positive, the analysts added.

Jefferies was about in-line with the consensus for StanChart's credit costs but said that it would be helpful if management provided a range for its own expectations on this front.

Consensus was also too low when it came to StanChart's common equity Tier 1 capital ratio, with Jefferies's estimate of 13.9% at the end of the June being at the high end of the range of analysts' views.

The analysts said that was because the sale of Permata would add about 40 basis points to CET1 while credit migration would not offset until the second half of the year.

"Q2 expectations consistent with upgrade thesis - investors should look to re-visit the name. Our STAN upgrade on 31 May cited prospects for positive earnings revisions: our '20-22 after tax estimates average 30% above the street.

"We expect Q2 to provide evidence that STAN's bottom line is delivering this prospect. With the shares on 0.4x [tangible book value] and prospects for [return on tangible equity] to improve to a mid-7% level by 2022, we believe STAN offers a compelling risk/reward."