Standard Chartered Bank:Lowering earnings and TP post Brexit,maintain Neutral

What's changed

Following the UK’s decision to leave the EU, we lower our earnings and12-month TP from HK$60to HK$57to reflect the macro challenges and ahigher market risk premium. While STAN has comparatively lower Europeexposure than the other UK banks (10% of loans and 4% of revenues in2015vs HSBC at 42% and 35%), it is affected by the weaker macro andUK’s exit from EU nonetheless given it is headquartered in London andhas operating entities in Europe ex UK. Retain Neutral.

Implications

EPS cuts: We cut our 2016E/17E/18E EPS by 2%/6%/5% to reflect:(1)lower revenues on a weaker global macro leading to slower balance sheetgrowth,(2) delayed US$ rate rises (our macro team now expects the nextrate rise to come in December 2016), and (3) translation impact of therecent GBP moves vs. US$.

TP change: We increase our Beta estimate from 1.2X to 1.3X to reflectearnings, balance sheet and operational uncertainty. This leads to anincrease in our cost of equity (COE) assumption from 10.1% to 10.7%.

Valuation

STAN trades at 0.55X 2016E P/B vs. around 3% GS ROE. We maintain ourNeutral rating on the stock due to limited upside potential but cut our RIMbased 12m TP from HK$60(implies 0.57X 2016E P/B) to HK$57(implies0.55X 2016E P/B) on lower earnings and a higher COE.

Key risks

Upside: M&A optionality, better macro, meeting or beating targets;downside: weaker asset quality, higher business disruption fromrestructuring, failure to reprice up relationships.