Lower credit costs to boost StanChart, Jefferies says

Lower credit costs will boost Standard Chartered’s earnings more than investors expect, Jefferies said as the broker nudged up its price target for the bank’s shares and restated its ‘buy’ rating.

The Asia-focused bank’s return on tangible equity will jump to 7% in 2022 from an estimated 2% as revenue returns to growth of about 4% and credit costs drop, Jefferies analyst Joseph Dickerson said.

Revenue will benefit from volatility in areas such as foreign exchange and pent-up loan demand as economies revive, Dickerson said. Credit cost provisions for 2020 look conservative against a cyclical recovery in the banks’ markets and sectors such as metals and mining performing better, he said.

Standard Chartered should start to receive positive earnings revisions with Jefferies estimates for the next two years 22% ahead of consensus, Dickerson said.

“We believe credit expenses can be a source of operational surprise at STAN and our below consensus charge for '21E explains nearly 50% of the gap to consensus,” Dickerson wrote in a note to clients. “Ongoing moves in both markets activity and a release of pent-up loan demand in key geographies are characteristics that should benefit STAN's revenue base in Q4 and into 2021.”

Dickerson increased his price target for the FTSE 100 company’s shares to 594p from 589p. The company's shares rose 9.9% to 512p at 15:19 GMT as bank stocks jumped in response to rising bond yields.

Under guidance from the Bank of England Standard Chartered should be able to pay out 17 cents a share to shareholders for 2020, equivalent to a 3% yield, the analyst said. The bank’s strong capital position should leave scope for the payout to at least double in 2021, he added.