Fit For Growth Program Will Improve Efficiencies And Margins By 2026

Key Takeaways

• Strategic partnerships in infrastructure and renewable energy position Standard Chartered to benefit from global sustainability trends, potentially boosting revenue and enhancing earnings.
  
• Investment focus on affluent client segments in Wealth and Retail Banking is targeted for substantial income growth, positively influencing overall earnings.
  
• Challenges in revenue growth and rising operating expenses may impact net margins due to external rate headwinds, credit risks, and market competition.

Catalysts

Provides various banking products and services in Asia, Africa, the Middle East, Europe, and the Americas.

• The introduction of the Fit for Growth program, which aims to deliver significant cost savings and improve operational efficiencies, is expected to positively impact net margins as these savings ramp up towards 2026.
  
• The continued focus on cross-border network income growth, with an emphasis on high-return areas and increasing the proportion of income from financial institution clients, is likely to drive revenue growth in Corporate & Institutional Banking.
  
• Strategic partnerships, such as the one with Apollo for financing infrastructure and renewable energy, position Standard Chartered to benefit from global sustainability trends, potentially boosting revenue and enhancing earnings.
  
• Investment in Wealth and Retail Banking, particularly in affluent client segments, is targeted to drive double-digit income growth from 2024 to 2029, influencing overall earnings positively.
  
• The planned increase in structural hedges, from $64 billion to $75 billion by the end of 2025, is aimed at mitigating interest rate risks, which can stabilize net interest income and support earnings growth even amid rate fluctuations.

Standard Chartered Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Standard Chartered's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.9% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $2.51) by about April 2028, up from $3.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 8.9x today. This future PE is greater than the current PE for the GB Banks industry at 7.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Standard Chartered Future Earnings Per Share Growth

Risks

• The group's net interest income (NII) might be challenging to grow in 2025, due to potential reductions in deposit pass-through rates and strategic actions that could impact NII by around 1%, which would likely dampen revenue growth.
  
• There is an exposure to Hong Kong commercial real estate, which could pose credit risks with significant early alerts, potentially affecting future asset impairment charges and overall net margins.
  
• Operating expenses are expected to rise due to higher costs associated with the Fit for Growth program and deposit insurance costs, potentially affecting net earnings and operating margins.
  
• The external rates environment poses a headwind, with an expected reduction in currency-weighted average interest rates by 76 basis points in 2025, adversely affecting NII and thus revenue growth.
  
• Competitive pressures in the Asian markets could necessitate significant investment to capture opportunities, potentially stretching operating expenses and impacting net margins.

Valuation

• The analysts have a consensus price target of £12.226 for Standard Chartered based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £14.79, and the most bearish reporting a price target of just £9.33.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.1 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of £10.18, the analyst price target of £12.23 is 16.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.