• Bank can get $6 billion of capital by unit exits, asset sales
  • Strategy Announcement to come around Dec. 1 BOE stress test

Standard Chartered Plc can cover the $4 billion capital gap expected to be revealed by U.K. stress tests without raising new money from investors, as it can generate $6 billion by streamlining its retail bank and ending partnerships with other financial institutions, Goldman Sachs Inc. said.

The bank can free up $2 billion of capital by closing retail operations outside Hong Kong, Singapore and South Korea that are too small to be efficient, a further $1 billion by selling stakes in lenders such as Agricultural Bank of China Ltd., and the remainder by abandoning low-returning clients and businesses, Goldman said in an Oct. 7 note. The analysts upgraded the lender to buy and forecast a return of 27 percent once the management restructuring is complete.

“While we incorporate a $4 billion capital shortfall in our valuation, we see scope for new management to restructure the company, addressing both capital and returns,” analysts led by Martin Leitgeb said. “This year’s emerging-market focused stress test will be the binding capital constraint for StanChart. Consequently we expect the start of December to bring clarity on the bank’s capital position” and clear the way for a strategy update, they said.

Standard Chartered, which makes almost all of its revenue in Asia, has felt the brunt of turmoil resulting from commodity prices slumping to a 16-year low and concern that China’s economy is slowing more than expected. Since starting on June 10, Chief Executive Officer Bill Winters, 54, has cut the bank’s dividend in half to save $1 billion and pledged to reduce risk-weighted assets by as much as $30 billion by 2016. Some analysts have forecast a capital gap of as much as $10 billion when the Bank of England releases its second round of stress tests on Dec. 1.

‘Attractive’ Shares

The stock has lost about 22 percent this year after dropping 29 percent in 2014. Standard Chartered is trading at 0.6 times its book value, a 40 percent discount, according to data compiled by Bloomberg, indicating investors think the lender is worth less than they should expect to receive if the company liquidated its assets.

“The excessive share price reaction creates an attractive entry point,” Goldman’s Leitgeb said. “The shares are now approaching a 15-year low on an absolute basis and relative to the bank’s tangible book value they have rarely been lower.”

The bank reported a 11.5 percent common equity Tier 1 ratio in the first half, a greater level of financial strength than the expected minimum long-term requirements from regulators around the world. However, analysts expect the bank’s bad loans to surge this year as its borrowers are hurt by falling commodity prices and a devaluation in the Chinese yuan.

Aberdeen Asset Management Plc CEO Martin Gilbert, Standard Chartered’s second-largest shareholder, has backed a capital increase if Winters decides he needs to shore up its balance sheet.

Standard Chartered should sell its stakes in Agricultural Bank of China, Asia Commercial Bank and China Bohai Bank, Pt Bank Permata Tbk and Fleming, Family & Partners, Goldman said. The lender could also raise more capital by selling or trimming its private bank, which “in Asia lacks scale relative to those of other international banks.” 

Goldman raised its recommendation to buy on Wednesday with a 12-month price target of 910 pence. Standard Chartered traded at 746 pence at 2 p.m. in London.

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