Lead manager Goldman Sachs was able to successfully price a 30.4 million share offering for Standard Chartered last Friday, balancing the slim discount permitted under UK guidelines with a 15% run up in the bank's share price since the onset of pre-marketing two weeks earlier. More importantly for Standard Chartered, completion of the deal sees the bank achieve a long cherished and once postponed goal of listing in Hong Kong and bringing Asian institutional investors to its stock for the first time.
Its experience also runs contrary to most recent equity deals, where lead managers have had to contend with steeply declining share prices and correspondingly fractious issuers. In this instance, the challenge for the lead was to diversify the bank's investor base into Asia and in doing so, convince investors the stock still retained value despite a mini bull run that has not been replicated by most the region's banks over the same time period.
It was helped by being able to juggle retail institutional and corporate support for a deal, which represents 2.7% of Standard Chartered's issued share capital and will now rank the bank second to HSBC in terms of assets and third to Hang Seng Bank in terms of market capitalization. Pricing after London's close came at HK$84 per share, with HK$2.55 billion ($328.2 million) raised pre shoe and potentially up to $377 million post shoe.
Pricing came at a 2% discount to a closing price of 708p, the maximum allowed under UK Investor Protection Committee guidelines, which impose a discount limit of 5% inclusive of underwriters' fees.
Before the deal, Standard Chartered had no Asian institutions listed on its UK share register. A total of 60 institutions participated in the new deal, of which roughly 90% are said to be new to the stock. Three came in with anchor orders for more than $40 million.
However, the combination of a very narrow discount and volatile markets meant that many investors sat on the sidelines until the last minute and a large number decided to hold back because the stock price had run up so much. This meant that while books closed covered, they were not heavily oversubscribed and institutional books came in 1.5 times over and retail books 1.3 times over.
Final allocations show an 87.5%/12.5% split between institutions and retail, with the latter allocated almost in full. Observers say this is partly because Standard Chartered wanted as much retail participation as possible and partly because there were a large number of small allocations - typically for one or two board lots.
Geographically, about 50% of the deal was placed in Asia and 25% equally in the US and Europe. But as one observer points out, "Although 50% was placed in Europe and the US, investors in these locations were running Asian funds. None of Standard Chartered's existing institutional investors were called by the syndicates' sales teams and none of the bank's top 20 institutional investors were allocated paper."
Corporate investors were allocated 17% of the institutional tranche after five came in with orders for a total of $50 million and a further 15 for an average of roughly $2 million. Institutional and corporate investors received roughly 60% allocations.
For many Asian funds, Standard Chartered main appeal will be as a non-index play on regional banking growth and a good diversification away from Hong Kong's sluggish banking sector. But the stock's inclusion in the MSCI UK means that regional funds will never view it as a major index play, although inclusion in the Hang Seng Index should provide some secondary market support from local investors.
The index committee has said that both Bank of China and Standard Chartered are eligible for inclusion. Should they come in (at the likely expense of Bank of East Asia), financial stocks will account for a hefty 43.1% weighting of the overall index, up from 36.6% currently.
With a market capitalization of roughly $13 billion and asset base of $107 billion, Standard Chartered is very similar in size to Bank of China, which has a market cap of $11 billion and asset base of $98 billion. The two sandwich HSBC and its affiliate Hang Seng Bank, which have respective market caps and asset bases of $104 billion/$687 billion and $20.8 billion/$61 billion.
It is often said that investors new to the bank are surprised to find that it is an emerging markets play. First half earnings, for example, show that the bank derives 96% of its profits from Asia, Africa and the Middle East. And while this means high growth, it has also historically meant higher than average NPLs and depressed ROE.
Analysts say that Standard Chartered's most important task now is to make good its promises concerning ROE (Return on Equity). During roadshows, new group CEO Mervyn Davies laid out a detailed blueprint showing how the bank intends to increase ROE from 12.8% (1H02) to a targeted 20% level within the next couple of years.
Shareholders have already approved a buy back plan to reduce the impact of expensive hybrid securities on the bank's capital structure and costs have been trimmed by moves to centralise regional processing operations in Chennai and Kuala Lumpur.
Some analysts think it will not be enough. One of the chief doubters is Macquarie's Simon Ho who recently wrote that although the "efficiency programme is a step in the right direction, Macquarie believes it is not big enough to significantly impact ROA and ROE."
Ho looked at comparable tier 1 banks in Singapore, Hong Kong and Australia and says that Standard Chartered has a lower than average ROE because of higher provisions and higher costs. He concludes that although the bank's footprint across Asia is wide, it is also quite shallow in a number of countries, which means a high cost base, but relatively low revenue generation.
"The main issue is that in most foreign markets Standard Chartered is operating as a foreign bank and this will continue to be a disadvantage," he comments.
The other main issue is Standard Chartered's skewed and heavily geared capital base. At the end of the first half, the bank reported a total CAR of 15.9% of which tier 2 accounted for 7.1%, hybrids for 3.2% and tier 1 for 5.6%. Some analysts believe there is a danger that future dividend payments will be muted if the bank feels it needs to increase core capital and retain earnings. Compared to other leading Hong Kong, Singaporean and Australian banks, it already pays a lower than average dividend - 4.3% yield vs 4.8% HSBC, 5% BOC and 5.9% Hang Seng Bank.
But as the bank's supporters argue, Standard Chartered once traded at a premium to HSBC because of its stronger correlation to Asian growth levels. Since the Asian crisis, it has traded at a discount, but for those who believe the Asian Century is resurgent, the long term potential remains clear. While Standard Chartered derives 87% of profits from Asia, HSBC derives 50% and therefore has a lower growth profile, but stabler risk profile. The former is currently trading on a 2002 price to book of 2.1 times and the latter 2.2 times.
Observers say that what impressed investors most during roadshows was Standard Chartered's unique blend of Asian history, emerging markets focus and international management. They also conclude that a re-appraisal of the story was the main reason for the strong share price resurgence, which was able to withstand strong shorting pressure the day of pricing, when three times the daily average was traded ($250 million).
However, while the stock fell 3.6% on the day, other UK listed banks such as HSBC and Barclays were also down (2.4% and 2.8%).
