KimEng upgrades StanChart´s Hong Kong-listed shares to buy

New sanctions penalties and potentially higher-than-expected losses from commodity finance will lead StanChart to go cap in hand to investors for fresh funds, but the shares are still too underappreciated, broker KimEng said.

At just 0.6 on a price-to-book basis, the valuation for StanChart´s Hong Kong-listed shares (2888HK) has become “undemanding” even under a worst case scenario.

According to media outlets cited by analyst Steven Chan, SCB may still keep the accounts of some Iranian entities, including Bank Saderat, and has generated revenue from the overseas companies of some Iran-connected entities, such as IFIC Holding and Mapna International.

Hence, SCB may face another US sanctions fine to the tune of $1bn in 2015, Chan explained.

Regarding commodity finance, SCB has lowered that to $48.8bn as of June 2015 (17.3% of loans) from $61.8bn a year before.

Of that amount, $25.6bn was to the “less risky” oil and gas related sectors. As well, about 58% of commodity finance was to investment grade clients and 72% had a maturity of under one year.

Due to market concerns over Glencore, KimEng took the “conservative” choice of raising its 'credit cost' forecast for non-oil and gas commodity finance to 10-11% in 2016-16 from 5-6% in the year before.

As a result, its CET1 capital cushion will drop to 11% by the end of December 2016. To bring it back to 12% SCB wil need to replenish $1.2bn of equity capital (at a theoretical issue price of HKD 51.50).

Tang lowered his target price on the stock to HKD88.60 from HKD120.