Why Standard Chartered remains a target despite its latest suitor walking away

When Bill Winters was quizzed about the perennial takeover rumours around Standard Chartered in 2021, he said that his bank was a “complex beast” and he did not feel vulnerable as a target.

However, the chief executive invited any prospective buyer to “give it a go and explain to our shareholders why they are better off in combination than they are sticking with us alone — be my guest”.

First Abu Dhabi Bank almost accepted the invitation. Last year, the Middle Eastern lender hired Citigroup and Moelis to explore potential international takeovers or investments, with the 169-year-old, UK-based lender their prime target.

FAB ultimately decided against a deal — formally ending any ambitions in a statement on Thursday — but StanChart’s stock surged 20 per cent when the news broke of its past interest. It remains 7 per cent higher as the story “awakened animal spirits”, according to Jefferies analyst Joseph Dickerson.

Renewed merger and acquisition speculation will put pressure on Winters — the former JPMorgan Chase executive now in his eighth year in charge — to swiftly restore revenue growth and double-digit profitability if he wants to keep the bank independent.

Since he took over, the stock has dropped by a third, leaving StanChart as one of Europe’s most undervalued banks. It is worth only £20bn and trades at a 60 per cent discount to the book value of its net assets, about half that of many Asia-Pacific-based peers.

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For long-suffering shareholders sitting on big paper losses, a serious bid would be hard to ignore, but getting a deal over the line might prove even more difficult.

“I understand why it should be attractive as an acquisition — [it] gives the acquirer a great footprint across geographies,” said Hugh Young, chair of Abrdn asset management in Asia, a longstanding top-15 shareholder. “As to whether it should be sold or should remain standalone, frankly it could be either. An acquisition would be hellishly tricky from a regulatory point of view.”

More recently, a plunge in the pound has made the UK-listed lender even cheaper for an international acquirer, especially those in the Middle East buoyed by surging energy prices and a desire to diversify outside the region.

“The timing of the interest from the First Abu Dhabi Bank does not surprise me,” said Trevor Green, head of UK equities at Aviva Investors, another top-15 investor. “Whether other approaches appear is open to speculation, but what isn’t is that the Middle East is using its firepower to do more M&A away from oil revenues.”

In addition to Abu Dhabi’s ambitions, Saudi National Bank recently agreed to buy a 9.9 per cent stake in Credit Suisse to stabilise the lender after a series of crises. Qatari funds also own large chunks of Credit Suisse and Barclays in the UK.

StanChart, which declined to comment for this article, is no stranger to the M&A rumour mill.

In 2014 and 2015 alone, Australian bank ANZ, Wall Street giant JPMorgan, Spain’s Santander and Canada’s Scotiabank were linked with deals, attracted by its hard-to-replicate international network built over a century and a half.

In 2018, the Financial Times reported that Barclays’ board ran the rule over its peer, and StanChart’s historic rival HSBC has always maintained an interest if it were ever put up for sale, even if just as a defensive measure, senior executives there say.

The most important investor for any buyer to court is Singapore’s state-owned investment fund Temasek, which owns 16.4 per cent of the stock. It first bought into the bank in 2006 when the shares traded at more than double their current price of £6.96.

Temasek’s frustration has grown as the share price dwindled, and in 2019 it stepped up pressure on management, questioning why it was unable to make returns matching its other big investment, Singapore’s DBS Group.

DBS has surged 70 per cent during Winters’ tenure and is worth $66bn, almost three times StanChart’s market cap.

Winters inherited a bank in crisis and always faced a multiyear challenge to revive the franchise. He said he spent his first years at the bank digging through “fertiliser” to uncover the valuable businesses buried by billions of losses from risky emerging market loans, necessitating 15,000 job cuts and a $5.1bn capital injection in 2015.

The chief also oversaw a cultural overhaul at the lender, which had been fined billions of dollars for dodging US sanctions on Iran and suffered from ethics violations and allegations of harassment even in its top ranks. Winters called the transgressions a “cancer” on the bank and vowed to root them out.

Financial performance was slow to recover, with revenues and profits falling far below the levels seen in the previous five years as ties with risky clients were cut and compliance standards tightened.

“Winters gave the business a heart attack when he took over, clamped down on risk too hard and if you do that, you change the psychology, making people too fearful of risk and growth,” said a top-10 shareholder.

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Recently, there have been signs of recovery. The share price has improved as global interest rates rise, widening margins on lending. Another boost has been China’s decision to end its “zero-Covid” policy that had severely hampered StanChart’s most important market of Hong Kong, where it makes 22 per cent of its revenues.

Underlying income increased 10 per cent to $12.5bn and pre-tax profit rose 17 per cent to $3.2bn in the first nine months of 2022, with the bank generating a 10.1 per cent return on equity — a measure of profitability — up from 6 per cent in 2021. It has also returned $1.4bn to shareholders via dividends and buybacks this year.

Andrew Coombs, an analyst at Citigroup, said “the simplistic thesis for an acquisition of StanChart is that it has an attractive Asian and African footprint, a bloated cost base relative to the size of its revenues, and it continues to trade at a low multiple versus local peers.”

On the other hand, complications included its revenues being “highly exposed” to the vagaries of global interest rates and “a lack of scale” in retail banking outside of Hong Kong, in particular Singapore, India, South Korea and China, added Coombs.

Any buyer, especially a domestically focused one in the Middle East, would have to secure approval from a host of domestic regulators in the 59 markets StanChart operates. The bank is also one of the main lenders, alongside HSBC, caught between the geopolitical stand-off between the US, the UK and China over trade and the crackdown on Hong Kong.

“A possible offer for Standard Chartered puts a floor under a share price that is already attractively valued as Hong Kong and China reopen,” said Guy de Blonay, fund manager at Jupiter, the bank’s seventh-largest investor. “In my opinion, the complexity of the deal may have been behind [FAB’s] change of mind regarding the offer.”

And if no bid materialises then the bank will have to prove it can restore long-term profitability itself, something not all investors are optimistic can be done.

“Taking credit for better earnings as interest rates rise is like an ice-cream van man taking credit for the sun being out,” said one senior figure at the lender. “A better test of your strategy is whether you perform consistently through market cycles and it hasn’t.”