UBS downgrades Standard Chartered to 'sell' on overoptimistic premium

UBS has downgraded Standard Chartered to 'sell' from 'neutral' after the emerging markets-focused bank recovered more than 40% from its February lows and stands at a hefty premium to many peers.

"With many funds short or underweight at the start of the year, commodity prices regaining some poise, EM equities rallying and EM funds seeing a return to inflows, a rally is directionally easy to rationalise."

However, UBS pointed out that the rally had happened against a background of a 60% fall in consensus profit forecasts for this year and 30% decline for the next.

UBS has kepts it forecasts unchanged and still sees "a great businesses within StanChart", namely transaction banking, financial markets and bits of retail.

But the Swiss bank forecasts a loss for this year as "the headwinds of de-risking, deleveraging, and flat and low yield curves will combine with elevated loan losses to make life particularly difficult near term [...and...] leaving the 8% ROE target for 2018 out of reach".

While the shares may be cheap on the long-term view due to their 35% discount to triple net asset value, with capital levels sufficient to weather headwinds, analysts said they preferred to value businesses "based on the profits we expect, a basis upon which StanChart looks distinctly over-extended in our view".

Moreover, at 14.4 times 2017 forecast earnings per share, the FTSE 100 bank trades at a material premium to scale banks it competes with, ranging from a 26% premium to Hong Kong banks, 34% to Singapore's, 56% to the Europeans, and 200% to the Chinese.

"Considering the fears investors harboured about EM in general and China in particular only a short while ago, we think this is too optimistic."