Ahead of the UK Budget and the US Federal Reserve announcement on interest rates, leading shares are moving higher again.
Standard Chartered is leading the way, as analysts welcomed last month’s news that former JP Morgan bank boss Bill Winters would become its chief executive, despite the risks of a cash call on shareholders. Barclays said:
We expect the appointment of a new chief executive to mark a turning point for Standard Chartered and see plenty of scope for the business to be refocused with a material improvement in returns back towards those of Asian peers. In addition, there’s an opportunity to allay market concerns on credit quality and the group’s capital position. The incoming chief executive can undertake a more radical restructuring and drive a re- rating of the shares.
In anticipation of this change we upgrade our rating from equalweight to overweight with an increased price target of 1150p (from 1000p), with the just over 1.0 times tangible book multiple reflecting uncertainty around the action that new management might take and the risk of an equity raise.
Although the current management team has recently begun to target an 11-12% common equity tier 1 ratio, which we see as more appropriate for Standard Chartered, concerns around credit quality have yet to be fully addressed. We estimate that a balance sheet review could lead to up to a further $4.7bn of provisions and that if new management were to immediately rebuild the CET1 ratio to 11.5% then £3.2bn of additional equity would be required. This sort of action has tended to drive a re-rating of the shares at other European banks.
Meanwhile Bernstein Research also turned positive, upgrading to outperform from underperform with a price target of1200p, up from 700p). The bank reckoned a capital call was unlikely, adding:
At this stage, we see more upside than downside – significantly more so in a two year window – which is why we are advising investors to start building positions in the stock. 2015 will likely be a bit more negative in earnings than what the Street has at the moment but all that management needs to show is some direction in the next half for investors to price in the 2016 /17 earnings trajectory. Tail risks? The only one remaining (unknown unknown) is a significant deterioration in Singapore and Hong Kong books on the back of a rapid Fed funds hike to (say) more than 200 basis points. That’s highly unlikely and if that’s a concern, investors can happily hedge against Asian names with similar exposure as Standard’s and which are trading at a healthy premium over the bank.
Standard’s shares have jumped 62.5p or more than 6% to 1027.5p, the biggest riser in the leading index. It is on course for its best day since August 2012.
Overall the FTSE 100 is up 28.22 points at 6865.83, as investors looked to measures in the Budget and awaited any signs of interest rate rises in US Federal Reserve statement.
Royal Dutch Shell B shares are up 20p to 2088.5p in anticipation the Chancellor will unveil tax breaks for North Sea producers, hit by rising costs and the falling cost of crude.
But Tullow Oil has slipped 3.4p to 295p after recent gains while Weir, which supplies pumping equipment to the oil sector, is down 19p at £17.61 after Morgan Stanley cut its rating from equal weight to underweight and slashed its price target from £21 to £14.80.
