Standard Chartered Bank: takeover bait?

StanChart is a 150-year-old bank whose roots lie in British colonial empire in South Africa, Singapore and Hong Kong. Yet, while the sun has long set on Queen Victoria's empire, StanChart is still around, an emerging market bank with offices in 50 countries, management based in London and Singapore and 70 per cent of its asset book in the Pacific Basin. As an emerging market bank, StanChart has its share of banking fiascos in the 1990's. From the billion dollar loss lending to rogue brokers on the Bombay stock exchange in 1992 to a gold trading scandal at its Mocatta Metal sub, from the rand devaluation in South Africa to the currency meltdown in Southeast Asia, StanChart has taken its fair share of hits but the emerging markets financiers operate in a tough neighbourhood. Above all, StanChart has witnessed the abrupt departure of two successive CEOs, Malcolm Williamson in '98 and Rana Talwar last week, both presumably axed by StanChart Chairman Sir Patrick Gilliam.

Rana Talwar was one of John Reed's proteges at Citibank so the rumours about "cultural differences" between him and the Hooray Henrys on the StanChart board might well be true. After all boardroom intrigues in the Darwinian jungle of New York money centre banks' are more akin to running with the bulls at Pamplona rather than the Ascot, Glyndebourne and Pall Mall club land millieu favoured by generations of StanChart chairmen.

The battle of Waterloo may have well been won on the playing fields of Eton, but the technocrat Dehliwalla Indian ex-Citibanker Rana Talwar was no languid English toff. He was the brainchild behind StanCharts takeover of ANZ Grindlays Bank, another British Raj relic that was the elephant's graveyard of world finance, Rana Talwar bought Chase Manhattan's retail and credit card book in Hong Kong and exited the low margin business of international gold trading. He positioned StanChart as an emerging markets Citicorp, jetting to buy banks as far a field as Cairo, Jakrata, Bangkok, Taipei and Seoul. Having taken over as CEO during the '98 Asian financial meltdown, Rana Talwar captained the ship, to paraphrase the old Chinese curse, during an interesting time in emerging markets finance. This was the reason why StanChart's earnings growth was anemic at a mere 3 per cent since '98, a dismal performance for a high risk emerging markets bank.

However, Rana Talwar's legacy is to build StanChart a global consumer banking platform to offset its strong but volatile traditional trade finance and foreign exchange business. He slashed the bank's workforce by 20 per cent after the Grindlay's deal, invested in processing centres in Kuala Lampur and Chennai, introduced an aggressive cultural revolution in the management suite. But, when all was said, and done, Rana Talwar knew that StanChart was only one tenth the size of Citicorp or HSBC in banking world where, to borrow the Godzilla tag line, size matters. So, he favoured selling StanChart to a bigger, richer rival. This, if the international financial grapevine is credible, is the reason why Rana Talwar is no longer CEO os StanChart.

Well, now what? First, Mr Market has got StanChart's share valuations all wrong. The bank's shares jumped to 850 pence when the news of Talwar's resignation flashed on my Bloomberg screen. Silly old Mr Market does not realise that the post-Talwar era means adieu to a trade sale, as Sir Patrick is fiercely pro-independence. Two, StanChart trades at a forward multiple of 17, reflecting market exuberance that it is takeover bait. This premium valuation makes no sense in a world where Deutsche Bank trades at a mere 12x multiple and ABN Amro is even cheaper at 10 times earnings. A premium multiple can reflect scarcity value, as was the case in the Citi-corp Banacci deal in Mexico. Yet 17, times earnings for an emerging markets bank with flat revenues, a potential dilutive Hong Kong listing, lower margins, higher loan loss provisions and Asian recession? Three, the takeover rationale for StanChart is solid enough. Lloyds TSB and Barclays know that HM Treasury and the Bank of England will block a British Big Bank merger, as happened with Lloyds' bid for Abbey.

National British retail banking is a mature, low growth business. So, a bid for StanChart makes perfect sense. Yet, why should Barclays or Lloyds ignite a bidding war now, when a takeover premium would be highly dilutive for their shareholders?

This leads to another variable in the StanChart takeover equation, the role of Malaysian Chinese billionaire Tan Sri Kook Puat, who acquired a 15 per cent stake in the bank while acting as a white knight in a past hostile bear hug bid by Lloyds. He is reputedly only a seller of his StanChart stake at 12 pounds, a slight premium to the bank's all time high. Yet, StanChart, will be lucky to do 46-50 pence earnings per share in 2002 so Tan Kook's target takeover is an absurd 25 times valuation. There is zero chance that any bank chairman in London or New York will pay that kind of premium valuation to acquire this admittedly unique franchise, particularly if it means big time earnings dilution. Not cricket, old boy!

StanChart shares ar ea classic short at 850-900 pence for a 670-720 target. It is inconceivable that the new CEO, Mervyn Davies, is going to sell the bank just yet and Sir Patrick does not retire until 2003. Besides, Davies, the bank's former Hong Kong chieftain, will do his best to build StanChart's Greater China business where it has done business since the time of the Opium Wars and the Manchu Emperors. China may still officially be the world's last Marxist-Leninist (or Maoist-Dengist) multinational empire but, as Chairman Deng declared when he replaced Mao with Adam Smith in Shanghai and Szenchen, "to grow rich is glorious." Well, with 1.2 billion people, an estimated $900 billion in savings, WTO membership and a 7 per cent growth rate, China is the worlds ultimate high growth retail banking market. If the new StanChart CEO gets his China strategy right and Asia recovers from recession, a takeover of the bank at 11-12 pounds would make total sense. But, this is not going to happen till 2003 at the earliest. So, StanChart shares have no business being at 850 pence with this phony takeover premium. I believe the bank's shares are headed to 650-700 pence once Mr Market realises that my buddies at StanChart's Bur Dubai's office are just not going to be working for Lloyds or Barclay's at least not till 2003.

MATEIN KHALID
STRATEGIST, CAPITAL MARKETS & RESEARCH

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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