Almost a year to the day, Standard Chartered Bank has re-launched its Hong Kong listing, with investor pre-marketing beginning yesterday (Monday). At the outset it appears little has changed for the better since the bank last began pre-marketing the deal on September 14 2001.
Market sentiment has failed to improve in the interim period and the bank's share price opened in London yesterday at 675p compared to 700p at the same point in the launch cycle a year ago. Back in September 2001, bank officials initially said it made sense to canvass investor opinion in the hope equity markets would recover ahead of formal roadshows. The deal was then pulled after the post September 11 recovery failed to materialise.
This year resignation appears to have replaced guarded optimism and observers say the bank is determined to see the deal through to fulfill its long cherished goal of improving its profile in Asia where the majority of its profits are derived. With assets of $107.5 billion, Standard Chartered is one of three note-issuing banks in Hong Kong and is preparing to make a strong push into China where it opened its first consumer branch in Shanghai in July and recently took a $50 million strategic stake in the IPO of Bank of China Hong Kong.
Specialists believe it may succeed if it can follow Bank of China's example and overcome difficult markets by leveraging retail, corporate and institutional investors off against each other to bid the issue price higher. Goldman Sachs led both offerings and for Standard Chartered, is acting as sole global co-ordinator, with Cazenove Securities as joint lead and co-sponsor of the Hong Kong offering.
In the institutional tranche, there are three co-leads - BOCI, JPMorgan and UBS Warburg and in the Hong Kong retail offering, just one co-lead, BOCI.
Pre-marketing will last for just one week, wrapping up this Friday when a maximum subscription price for the Hong Kong retail offering will be announced. This will be set at a premium to the prevailing trading price to make sure investors do not get hit in the event that the underlying price rises before books close.
Formal roadshows will then start on Monday October 21, with two teams, one of which will cover Asia and the other either Europe and the US, or more likely, just the US.
The deal will be run as a concurrent offering, with both the Hong Kong and institutional book opening on October 21, although retail will be closed one day earlier on October 24. Pricing will be set on Saturday October 26, announced the following Monday, with the shares beginning trading three days later on Thursday October 31.
Under UK IPC (Investor Protection Committee) guidelines covering non pre-emptive rights issues, the share offering cannot exceed 5% of issued share capital inclusive of a 15% greenshoe. In terms of pricing, the maximum discount that can be applied is also capped at 5% inclusive of underwriters' fees.
This means the deal will be priced at an approximately 2% discount to the middle of the best bid/offer spread at the close of trade on October 25. UK guidelines placed in a Hong Kong context, however, make life extremely difficult for the lead manager, since funds are more likely to baulk at the prospect of a slim discount followed by three days of market risk when the global backdrop is volatile.
Observers also say that because management feels Standard Chartered's share price is low, the bank is unlikely to aim for the maximum allowed, but is targeting proceeds of $300 million to $400 million, implying a share sale of roughly 3% to 3.5% and offering of roughly 30 million to 40 million shares. The bank currently has a market capitalization of $11.8 billion and 1.125 billion shares outstanding.
Similar to HSBC before it, Standard Chartered is hoping to achieve a dual primary listing in Hong Kong and London, with shares registered in both centres and full two-way fungibility. When HSBC initially sought a secondary listing in London in 1992, there was an approximately 50/50 split between the two jurisdictions. But its decision to move its headquarters to the UK and obtain a dual primary listing, has seen the ratio move 70/30 in London's favour, as subsequent share sales have been booked through the UK register.
Standard Chartered currently has a free float of 86%, with the remaining 14% held by Malaysian tycoon, Tan Sri Khoo, whose age (85) has prompted constant rumours the bank will be the subject of a take-over bid and intermittently proved a huge boost to its share price. Aside from Khoo, Standard Chartered has little Asian representation and no Asian institutions listed on its UK share register.
As a result, one of the new deal's greatest selling points should be its appeal to regional funds seeking pan-Asian banking exposure and Hong Kong funds seeking diversification away from the Territory's sluggish banking sector. Where the latter is concerned, analysts tend to agree that Standard Chartered provides a far better proxy to pan Asian growth than its nearest comparable, HSBC, although its Hong Kong listed stock will be far less liquid.
Where retail and corporate investors are concerned, Standard Chartered will also be hoping to draw some of the loyalty and brand awareness Bank of China was able to rely on back in July. And although Bank of China has dipped below its retail IPO price of HK$8.075, closing yesterday at HK$7.75, observers say retail investors are still looking for investment opportunities in place of low yielding cash deposits. Standard Chartered has a current dividend yield of 4.25%.
Analysts say the bank typically trades at a 5% to 10% discount to HSBC and is currently trading at the bottom of this range on a 2002 price to book ratio of 1.8 times compared to roughly 2 times for HSBC. Because of both banks' international focus, they easily pierce the Hong Kong average of roughly 1.2 times book.
In terms of Net Interest Margins (NIM), Standard Chartered also beats the Hong Kong average (3.1% 1H versus 2.5%). But because of its emerging markets focus, it scores less well when it comes to NPLs (5.5% 1H versus 5.16%) and Return on Equity is also lower (12.8% 1H versus 15.5%) because of an inefficient capital structure, which it is in the process of addressing.
A second big selling point will be its stronger growth story versus local banks. Syndicate research argues for 15% to 20% compound annual EPS growth (Earnings Per Share) over the next three years, while ROE is estimated to improve to at least 15% and possibly up to 20%.
Growth will in part, be driven by earnings that are regionally diversified and provide natural hedges against a downturn in any one particular area. Observers say HSBC derives 50% of profits from Asia, while Standard Chartered derives 87%, or 96% if Africa is also included. The UK and the US, on the other hand, score very lowly since this is where the bank books all its administrative costs.
In terms of revenue breakdowns, Hong Kong accounted for 32% at the end of the first half, with UK and the Americas on 13%, other Asia Pacific 12%, Middle East and South Asia 11%, Singapore 10%, India 9%, Africa 8% and Singapore 5%.
In its interim results, the bank also recorded $1.2 billion in revenue from consumer banking and $1.1 billion from wholesale banking, with the former recording 13% growth year-on-year and the latter a 1% decline. Within the consumer sector, the bank saw credit cards and consumer loans account for 46%, wealth management and deposits 34%, mortgages and auto financing 19% and other 1%. On the corporate side, trade finance and lending accounted for 37%, global markets 45%, cash management 15% and custody 3%.
Analysts point out that a strategic tilt towards consumer banking has proved positive for earnings, but also highlight a problem from rising delinquencies in Hong Kong where Standard Chartered has its biggest concentration of customers and profits. As a result of the Territory's depressed economy, the bank had to increase its bad loan charge to $83 million at the end of the second quarter compared to $60 million at the end of the first quarter. The figure is expected to rise further still during the second half of the year.
Standard Chartered aims to be the world's premier emerging markets bank and analysts say that while this benefits performance during a global upturn, Asia's high correlation to the US economy, puts the bank in a vulnerable position in the event of a global recession. A strong concentration of assets in the Middle East is also vulnerable in the event of a war against Iraq.
The bank has highlighted six major strategic initiatives - improving capital efficiency; driving growth in China and India; building market share in the consumer sector; repositioning wholesale banking to drive returns; improving cost efficiency and constraining risk.
The bank's capital structure is an area often highlighted by analysts and in the process of being addressed through a share buy-back programme approved at a board meeting earlier this month. Because the bank is heavily weighted in hybrids and tier 2 capital, it returns low ROE. At the end of the first half, the bank's overall CAR stood at 15.9%, with tier 1 accounting for 9%. Optimally, it would like tier 1 to average 7% to 9% and the overall CAR 12% to 14%.
The bank estimates that post buy-back, including some very expensive preference shares, it should also be able to save up to $40 million in dividend payments.
