Standard Chartered:Long road ahead

The reset period has begun. We remain SELLers.

Standard Chartered delivered a weak 1H15 result. Margins remain underpressure, non-interest income is subdued and asset quality remains amaterial headwind. We continue to believe a capital raising is likelybefore the end of the year. On the back of this result, we cut our 15-17CLEPS by 15-52% and we increase our DPS by up to 8%. Reiterate SELL.

Painful P&L performance.

1H15 attributable NPAT of US$1.46bn was up 624% HoH and down 37% YoY.

Margins fell 33bps YoY to 1.7% and financial markets revenue (credit, capitalmarkets) was down 31% QoQ and 25% YoY. Costs were broadly flat. The C/I ratioof 58% was flattered by disposal gains included in non-interest income. There was‘no kitchen sink’ but continued deterioration in vulnerable credits in India, thecommodities portfolio and suspected fraud in its private bank took the bad debtcharge as a % of gross loans rose to an annualised 1.14%. DPS was rebased toUS$0.144 (2Q14: US$0.288). Reported ROE was 6.5% and underlying ROE was5.4%. Pre-tax RoRWA was 1.3%.

Balance sheet: Capital progression good/asset quality deteriorating.

The commodities portfolio is US$49bn (2H14: US$55bn). YTD loan balances havefallen by 1.8% while YTD deposit momentum is -6.1% as the group focuses onrunning down expensive deposits. The loan-to-deposit ratio rose to 73% (2H14:70%). The gross NPL ratio as per our calculations rose to 3% (2H14: 2.6%) drivenby India, ASEAN, MENAP, Africa, Americas and Europe. Greater China was stableand Korea improved. The coverage ratio improved to 54% (2H14: 52%). TCE wentbackwards but CET1 benefitted from a sizeable RWA reduction and the scripdividend. The CET1 ratio was 11.5%.

15-17CL EPS adjusted by -15% to 52%; DPS revised up.

The strategic review is underway and an update on capital, costs, asset quality, et,.

will be given to the market by the end of 15CL. The environment remainschallenging from both a topline and asset quality perspective. We adjust ourearnings to account for: lower revenue, higher bad debts, CVA charge and an FXmanipulation settlement. We had rebased DPS to $0.40 and we move this to aconstant $0.43 for 15-17CL.

Reiterate cum-rights HK$104 target price and SELL recommendation.

We value Standard Chartered using the adapted Gordon Growth Model, which isbased on an ROE of 9%, a COE of 10.9% and a terminal growth rate of 4% for atarget PB multiple of 0.7x. Our valuation is equivalent to valuing the bank at a7.8% ROE (the top end of our ROE forecast over the next 3 years plus the UKlevy-related benefit from 2021) against 10.9% COE with no growth.