UBS downgrades Standard Chartered to 'sell' on overoptimistic premium

21st Apr 2016 11:19

(ShareCast News) - UBS has downgraded Standard Chartered to 'sell' from 'neutral' after the emerging markets-focused bank recovered more than 40% from its February lows and stands at a hefty premium to many peers."With many funds short or underweight at the start of the year, commodity prices regaining some poise, EM equities rallying and EM funds seeing a return to inflows, a rally is directionally easy to rationalise."However, UBS pointed out that the rally had happened against a background of a 60% fall in consensus profit forecasts for this year and 30% decline for the next.UBS has kepts it forecasts unchanged and still sees "a great businesses within StanChart", namely transaction banking, financial markets and bits of retail.But the Swiss bank forecasts a loss for this year as "the headwinds of de-risking, deleveraging, and flat and low yield curves will combine with elevated loan losses to make life particularly difficult near term [...and...] leaving the 8% ROE target for 2018 out of reach".While the shares may be cheap on the long-term view due to their 35% discount to triple net asset value, with capital levels sufficient to weather headwinds, analysts said they preferred to value businesses "based on the profits we expect, a basis upon which StanChart looks distinctly over-extended in our view".Moreover, at 14.4 times 2017 forecast earnings per share, the FTSE 100 bank trades at a material premium to scale banks it competes with, ranging from a 26% premium to Hong Kong banks, 34% to Singapore's, 56% to the Europeans, and 200% to the Chinese."Considering the fears investors harboured about EM in general and China in particular only a short while ago, we think this is too optimistic."