Standard Chartered Banks begins pre-marketing for listing

A research blackout starts today (Friday) ahead of the UK-domiciled bank''s dual primary listing in Hong Kong.
Standard Chartered and its lead manager Goldman Sachs have decided to press ahead with the pre-marketing of a 56.3 million new share offering despite this week's events in the US.

Syndicate bankers believe it makes sense to continue canvassing investor opinion in the hope that global equity markets will recover ahead of the launch of formal roadshows. At the same time, however, a number believe that the deal is unlikely to proceed to the next stage since the threat of a global recession will have a greater impact on the ratios of a bank targeted at the emerging markets like Standard Chartered than many of its nearest comparables in the UK.

Under the current timetable, pre-marketing is scheduled to run from September 14 to September 28, followed by formal roadshows from October 3 through to October 12. Pricing will take place over the weekend of October 13/14, with allocations expected on Monday October 15.

The amount of shares the bank can offer in Hong Kong is capped at 5% inclusive of a 15% greenshoe. Because of UK regulations governing pre-emptive rights, the maximum discount that can be applied is also capped at 5% inclusive of underwritersÆ fees. The lead has consequently told syndicate bankers that the issue will be priced at an approximately 2% discount to the middle of the best bid/offer spread at the close of trade in London on October 12.  

Alongside Goldman, Cazenove Securities is joint-lead, with co-leads comprising JPMorgan and UBS Warburg and co-managers, ABN AMRO, BOCI, BNP Paribas Peregrine, Credit Suisse First Boston, Deutsche, Lehman Brothers, Morgan Stanley and Salomon Smith Barney.

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 centers 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.

Since its decision to move its headquarters to the UK and obtain a dual primary listing, however, the ratio has moved 70/30 in London's favour. As a spokesperson explains, "There's been a shift towards the UK because of recent share issues to fund acquisitions in France and the US that were created on the UK share register." 

In addition to London and Hong Kong, HSBC also obtained a secondary listing in Paris last June and has an approximately $1.3 billion outstanding ADR pool out of a $97 billion market cap. By comparison, Standard Chartered is only currently listed in the UK and stands to raise $570 million at today's prices (inclusive the 2% discount) from its new listing in Hong Kong. It has a current market cap of $11.3 billion.

Few doubt that the stock will have great appeal to the TerritoryÆs retail investors as well as regional fund managers that do not presently trade in London. In a recent credit report, Moody's summarised the bank's fundamental appeal when it concluded that, "Standard Chartered is one of the very few - essentially perhaps just three - international financial institutions able to consistently deliver a broad-range of state-of-the-art financial products to Asian countries."

Analysts comment that the bankÆs projected growth levels and current trading levels make it an undoubted long-term buy. But they also caution that it remains one of the most vulnerable bank stocks to an economic downturn.

"My gut feeling is that the bank shouldn't be doing this transaction now," says one UK bank specialist. "Its ratios were showing signs of weakness even before Tuesday's events. Like HSBC, Standard Chartered's profits are generated from Asia, which is, in turn, highly correlated to a weakening US economy and this has been dragging its price to book down to about 1.82 times."

He adds, "Many of the domestic UK banks have been outperformers over a three to six month period, because they're viewed as defensive stocks. Standard Chartered has underperformed over the same time period because it is not."

Its share price has consequently dropped from the 1000 pence level at the beginning of June to 700 pence at the opening of trading in London yesterday (Thursday). At these levels, analysts say that it is trading on a p/e ratio of about 11.5 times 2001 earnings, down from more its more usual 15 to 16 times level. The rest of the UKÆs lower-growth banking sector has historically averaged about 11 to 13 times.

After the sale of its remaining UK business, Chartered Trust in 2000 and the acquisition of ANZ Grindlays Bank in India, the bankÆs assets and profitability have become highly concentrated in the Asia Pacific region. Between FY99 and FY00, for example, regional assets grew from just over one half to two-thirds.

The bank's stated aim is to become the world's specialist emerging markets bank and its ambition to list in HK, where is is one of three note issuing banks, marks a natural progression that has been a long time in coming. Yet aside from HSBC, which has a far more diversified and larger global remit, there are few comparables.

"It's extremely difficult," says London-based Fox-Pitt Kelton analyst John Kirk. "A lot of institutions still compare Standard Chartered to the UK banks even though it has very little in common with them any more. It has no exposure in the UK now and at the six-month stage this year, was reporting 60% of profitability coming from Asia. For HSBC about 40% of profits come from Asia these days, but the ratio is moving in the opposite direction to Standard Chartered."

Analysts conclude that Standard CharteredÆs main challenge lies in converting top line growth into bottom line profit. A number say that its acquisition of Chase ManhattanÆs Hong Kong credit card business last year was a clever step despite the competition it faces within a sector in which it now has a 25% market share.

ôWe have a very positive view,ö says a third analyst. ôConsumer banking is becoming more important to it than corporate banking. In Hong Kong, mortgage lending dominates consumer banking, but we expect consumer loans including credit cards to jump from a 8% to 12% market share over the next few years. ThereÆs still a lot of money to be made in this sector and as customers become more sophisticated, they will gravitate to bigger players such as Standard Chartered.ö

Should Standard Chartered achieve its desired listing in Hong Kong, it will also hope to join three other banks as constituent stocks to the Hang Seng Index. Of the three, HSBC currently has a 27.97% weighting, with Hang Seng Bank on 5.66% and Bank of East Asia 0.91%.