Standard Chartered Bank PLC (SCB) is tapping the capital markets with an IDR issue. IDR is Indian Depository Receipts and this is the first issue of IDR in the country. An IDR simply put is a depository receipt which represents underlying shares. The holder is entitled to all corporate actions which would occur on the underlying shares and in the case of SCB issue each IDR is 1/10th of a share. The issue opens on the 25th of May and closes on the 28th of May.

The company would be announcing the price band on Monday and for purposes of evaluation have assumed the price band based on Fridays closing price on the London Stock Exchange. The price band assumed is at a 6% discount and a 2% premium to the closing price. The advantage in this share is the arbitrage opportunity which could be available as the share is traded in two countries and quoted in two currencies. The share is quoted at the Hong Kong exchange and quoted in HK Dollars which is pegged to the US dollar and in London in GBP. There is also a time zone advantage where the Hong Kong exchange opens before Mumbai and London opens roughly four hours after Mumbai opens.

Business
SCB opened its first branch anywhere in the world in Kolkata 152 years ago, in 1858. The first three branches were in Kolkata, Mumbai and Shanghai. What is interesting to note is that this listing in India could effectively be a second homecoming for the bank as India is one of the fastest growing economies where SCB is located in size. India is the second largest contributor in terms of net profits for the bank and marginally behind Hong Kong. We all know that Hong Kong is a trading economy and is a mature economy where growth is difficult to come by. In this context the bank is banking on the India growth story and is ready to capture the same.

The key statistics for SCB indicate that India is a focus area for the bank. The bank has 94 branches in India in 37 cities. The bank employs 17,500 people in the country.  Globally the bank operates through approximately 1700 branches and outlets in more than 70 countries employing over 75,000 employees. The bank   as of its year ended December 2009 had consolidated assets of US$ 437 billion, advances of $ 198 billion, deposits of $ 251 billion and a net worth of $ 27.3 billion. The company operates two divisions namely the Consumer Banking and the Wholesale Division. In terms of operating profits the consumer banking division contributed 17% while the wholesale division contributed 83%.

In terms of asset distribution, Hong Kong has 19%, Singapore 13%, Korea 13% and India 7%. In terms of operating income Hong Kong has 16%, Singapore 10%, Korea 10% and India 12%. In terms of GDP growth India has a distinctive advantage to all the other economies where SCB is located and except China which is expected to grow higher than India is one of the fastest growing economies. In terms of operating income India contributed US$ 1694 million for year ended December 2008 and $ 1813 for December 2009. The profit before tax for the relevant years was $ 891 million and $ 1060 million. India has grown at a compounded annual growth rate of 32% in operating income and 40% in profit before tax over the last five years.

Key markets for the bank are Hong Kong, Singapore, India, South Korea, Asia Pacific and Africa regions. It is interesting to note that during the global crisis at the end of the last quarter of 2008, SCB did not receive any support of any kind from any government. This is a testimony to the inherent strength of the bank.  

Use of Proceeds              

• To provide Indian investors with an opportunity to invest in the Company and participate in its growth. The company has been established in India for many years, is committed to India’s future and believes that India will remain a growing and key market – the issue demonstrates that commitment;
• To increase the market visibility and brand perception of the Company in India.
• To support growth across the Company’s business globally. The current economic circumstances and related market dislocation have presented unique opportunities to deploy capital into selected areas where the competitive environment, pricing levels and returns are particularly attractive and
• To widen the Company’s investor base and to provide a new source of capital. 

Financials
SCB reported operating income of $ 11067, 13968 and 15184 million dollars for the years ended December 2007, 2008 and 2009. Its profit before tax for the same period was 4035, 4568 and 5151 million $. Its profit after tax was 2989, 3344 and 3477 million $ respectively. Its fully diluted earnings per share in US cents were 174.2 cents, 1891.3 cents and 165.3 cents respectively. In terms of rupees the net profit was Rs 13952.7 crs for year ended December 2007, Rs 15,609.8 crs for December 2008 and Rs 16,230.6 crs for the year ended December 2009. The EPs was Rs 82.16, Rs 89.67 and Rs 77.16 respectively. The dilution through this issue would be a miniscule 1.17% and would hardly impact the EPS. SCB has been a liberal dividend distributor and has been paying a dividend payout of 30% plus.
The bank has a tier 1 capital of 11.5% and tier 2 of 5% making a total of 16.5% of capital. Its CASA as % of total deposits is 53 and has been risen from 48 two years ago. Its cost to income ratio is 52% and its return on equity is 14.3%.

Comparison
SCB is a global bank having exposure all over the world with a strong exposure to Hong Kong, India, Asia Pacific and the Middle East. It can be compared with some global banks like Barclays, HSBC, RBS and Lloyds. In India it can be compared with ICICI Bank, HDFC Bank, SBI and Axis Bank. The bank compares very favourably with its competitors and one must remember that considering Indian banks the advantage that SCB has is that it can borrow at Libor and lend at higher rates in India and Asia Pacific and other countries at substantially higher rates.

Risks
Any bank is subject to risks involving non-performing assets, country risk etc. In the case of SCB this increases manifold because it is located in multi-countries. The risk on political, currency and rules and regulations of local economies increase substantially. However on the flip side things are better simply because the risks get spread as there is diversification of its portfolio and not everything can go wrong at the same time.

The local outfit of SCB was involved in some cases in the 1992 scam which happened in India and the bank has not made mention of it in the risk factors. In terms of financial implications it may not be much but it casts a doubt on the transparency and compliance that the bank follows.  Thirdly this is an issue of IDR’s and therefore involves costs of depository and other charges. Investors may not be fully aware of the same. There are currency risks as the share is traded in different currencies and in India would be traded in rupees.

This would be the first issue under the new SEBI rules and listing would have to happen in 12 working days. Further QIB’s would have to pay the full amount on application unlike the 10% payable earlier. This would eliminate the earlier risk of market performance post IPO to a great extent.
Against the risks mentioned above there is one distinct advantage that is available by investing in this issue and that is you get an international exposure without having to go abroad and it is in a bank which is global in nature and having adequate exposure to the fast growing economies of India, China, the Middle East and Asia Pacific.

Valuations
SCB had an EPS of Rs 77.16 per share based on December 2009 numbers. The share is being offered at a price band of Rs 103-111 approximately per IDR or Rs 1030-1110 per share which means an earnings multiple of about 13.35 to 14.39 times based on year ended December 2009 numbers. HDFC bank quotes at a price earnings multiple of over 27.5 times March 2010 numbers while SBI quotes at 12 times its earnings. In terms of price to book value SCB is quoting at 1.77 times book. HDFC is quoting at 3.86 times book, while SBI is quoting at 1.74 times book.

Conclusion
SCB is available at an attractive valuation compared to existing Indian peers and is favourably comparable to Global peers as well. SCB is a consistent performer and high dividend paying company. The discount to current closing price and the 5% additional discount to retail investors make the issue attractive.    
Investors looking for an international flavour and a decent return of 15-20% per annum should subscribe.

Sebi disclaimer: – I intend to subscribe to the above issue. 

The article will be updated once the price band is announced on Monday morning.