This bank proved Budget-proof and our investment thesis holds firm

And Questor has run out of road on these motor financing stocks

If a valuation is low enough and the business model is not definitively broken, it may not take much to provoke a positive shift in sentiment. Emerging markets-focused bank Standard Chartered is a perfect example.
Our investment thesis is playing out nicely, with a paper gain of more than 20pc and $0.09 (7p) of dividends per share in the bank, while an ongoing buyback scheme is reducing the share count and increasing our stake.
Most pertinently of all, the stock still trades on 0.8 times tangible net asset, or book value per share, suggesting we still have both downside protection and upside potential. Even after the good run, we are effectively buying every $1 of the bank’s assets for 80 cents.
Last week’s third-quarter results were better than expected and so strong that even the Budget on the same day could not overshadow them. Net interest margins held up well, cost control was good and loan and asset impairments remained subdued .These trends were visible across results season from the quintet of FTSE 100 banks in general.
Volatility across equity, bond and currency markets in August and September boosted the global markets operation and the focus on private banking and wealth management again showed its worth.
The well-heeled clients here tend to be sticky and content to pay the fees, providing service levels are maintained and peace of mind is the result. Better still, wealth management comes with lighter regulatory and capital requirements compared to retail or investment banking.
The shares had been motoring along nicely before the upbeat update, thanks to China’s efforts to give its economy and financial markets a boost. Whether interest rate cuts, lower capital requirements for banks and looser regulations on buying second properties are enough to get the country back on track remains doubtful, especially as the real aim is to boost consumption and lessen its economic reliance upon real estate and construction.
However, further reforms may be coming, and the positive response offered by Standard Chartered’s shares to the early initiatives showed how depressed sentiment toward the bank, China and emerging markets more generally had become. It did not take much to persuade investors to take another look.
It may take more, given the advance in Standard Chartered’s shares, but the valuation still looks tempting enough. Moreover, the combination of the forecast $0.33-a-share full-year dividend (equivalent to around 25p at current exchange rates) and $2.5bn in share buybacks equates to more than 11pc of the FTSE 100 index member’s current stock market capitalisation.
Questor says: hold
Ticker: STAN
Share price: 919.8p
Oh dear. This column’s record in handling regulatory inquiries is truly dreadful, and Close Brothers adds to a tale of woe that includes VP and Dignity to name but two. The fault here is ours, as regulatory risk is something that needs to be factored into every analysis and investment case. A further development only clouds the picture again and as such we are deciding, for better or worse, to just swallow a very nasty book loss and move on.
Last week’s court ruling on the issue of discretionary commission arrangements looks as tough as it could be for motor finance providers, since it stated lenders were liable for dealers’ non-disclosure. Close Brothers and other affected parties are likely to appeal. However, we do not know how that will go or how to quantify the scope for customer redress – should the appeals fail – or how the ruling could affect the Financial Conduct Authority’s own report that is due in May 2025.
The stress and time involved trying to fathom it all takes us back to a former hedge fund client’s warning about how price-to-brain damage should be considered when assessing a stock. In this case, we are just out of our depth and the pain is just too great.
Another regulatory initiative also catches our eye. The FCA has launched a study into how premium finance enables consumers to pay for motor and home insurance and whether they get a fair deal on the loans they take out from providers.
Admiral provides car, home and pet insurance, as well as financial services. This column is not accusing the company of anything untoward under any circumstances. But the whole sector feels unlikely to set sail until the study concludes. So, we will gratefully book our profits, having banked 174p a share in dividends as well, and seek to revisit the stock another time.
Questor says: sell
Ticker: CBG/ADM
Share price: 225.8p/2,553p
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