Standard Chartered PLC (LON:STAN) shares shot higher in opening trade on Thursday before settling back to be flat after a media report suggested that the emerging markets-focused bank is drawing up plans for a rare share buy-back.
The Financial Times said the FTSE 100-listed lender could announce a buy-back alongside its full-year results, due in late February 2019, depending on the size of any fines doled out by US authorities over breaches of Iran sanctions, which could be around US$1.5bn.
READ: Standard Chartered higher as third-quarter profit beats expectations, bank cautiously optimistic on outlook
Noting the report, Russ Mould, investment director at AJ Bell commented: “With its shares trading at a huge discount to their tangible net asset value (TNAV), it is easy to see why the board of Standard Chartered may be considering a share buyback.”
He added: “Among the UK’s Big Five banks, only Barclays trades at a lower multiple of net asset value, or book, value and continued debate over the long-term merits of its investment banking operations make that understandable.”
Mould pointed out that to judge whether a share buy-back truly makes sense for shareholders, they can apply the two tests once outlined by legendary investor Warren Buffett, whose Berkshire Hathaway investment vehicle has bought back just under US$1bn of its own shares so far this year, the first such move for several years.
“In his 2012 Letter to Shareholders, the Sage of Omaha wrote: ‘Charlie [Munger] and I favour repurchases when two conditions are met: first, a company has ample funds to take care of the operational liquidity and needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated’,” he noted.
Strategic point of view is less clear
The investment director said its big discount to book value may well mean Standard Chartered passes the second test, providing investors do not fear another global recession or debt bust is just around the corner, although the issue of whether the banks’ putative share buyback makes sense from a strategic point of view is less clear.
Mould added: “Management will argue that a common equity tier one (CET1) ratio of 14.5% means it has ample capital buffers on its balance sheet should there be an unexpected economic downturn in its key markets, since Article 92 of the (European) Capital Requirement Regulations stipulate that a 4.5% CET1 ratio is required by the end of 2019.”
“However,” he continued, “shareholders may be wise to point out to them that the financial markets are becoming more wary of buybacks for two reasons.
“First, markets’ faith in the synchronised global recovery seems to be ebbing again, judging by the autumn volatility.
“Second, there is little evidence that even huge buybacks have done share prices any good and gathering commentary that they have done harm. GE and IBM have lavished tens of billions of dollars on share buybacks without helping their share price at all and GE is now in crisis-management mode as it tries to cope with the debts it has accumulated to fund the buybacks.”
Mould concluded: “Standard Chartered would at least be buying its shares after they have fallen to levels that look cheap, unlike GE and IBM which seemed to buy stock irrespective of price or valuation, and the bank is unlikely to pile up debt to fund any scheme.
“But even Lloyds and HSBC have seen little share price benefit result from their share buyback programmes over the past year.”
In late morning trading, having reached a session peak of 614p, Standard Chartered shares settled back to 592p, down 0.6% on Wednesday's close.