Confirmation that First Abu Dhabi Bank considered a tilt at Standard Chartered raises a number of questions and ideas.
The deal didn’t happen – and now won’t. But on January 5, First Abu Dhabi Bank (FAB) confirmed it had “previously been at the very early stages of evaluating a possible offer for Standard Chartered.”
Even the confirmation that it had thought about doing so pushed the StanChart share price up by 8%, which suggests the market thinks a takeover remains on the cards.
Not so long ago, one could count on an M&A rumour about StanChart cropping up roughly once a quarter. ANZ? DBS? JPMorgan? Santander? A host of institutions have been in the frame over the years. But not lately.
Despite the best efforts of Bill Winters for seven years – and oh, how he has tried – return on equity has not done what he wants it to
The FAB news, however, has analysts looking afresh at the idea.
As Citi analyst Andrew Coombs noted on January 6: “The simplistic thesis for an acquisition of StanChart is that it has an attractive Asian (and African) footprint, a bloated cost base relative to the size of its revenues, and it continues to trade at a low multiple versus local peers.”
Therefore, in theory, a buyer could look forward to high cost synergies, making any deal highly earnings accretive.
Part of the furniture
The thing about StanChart is that everyone knows how good it should be given the strength of that emerging market footprint. The bank is part of the furniture in Asia; from Sri Lanka to Hong Kong, one finds it lodged in marquee addresses with a presence dating back more than a century.
It doesn’t trouble investment banking league tables, but it is a trade-finance and commercial-banking powerhouse with peerless institutional relationships.
Yet despite the best efforts of Bill Winters for seven years – and oh, how he has tried – return on equity has not done what he wants it to. Correspondingly, it trades at a relatively feeble level on most important metrics, including price-to-book (0.6 times) and forward price-to-earnings ratio (about six times 2024 estimates).
Put these two things together and you have something that is attractive and theoretically long-term cheap.
So, one can see why FAB was interested. What an opportunity that represents on paper: the ability, at a stroke, to turn the UAE’s largest bank into a global player, to inherit an institution that has been building on-the-ground relationships across Asia and Africa for three times longer than the United Arab Emirates has existed as a sovereign state.
As Jefferies says, FAB is trading on twice tangible book value and looking at StanChart on 0.5 times tangible book value. The deal would have meant acquiring a bank with more than twice its loans and deposits and 44% more tangible equity. Plus, of course, the pound has tanked, while the dirham is pegged to the US dollar.
“This situation highlights the attractiveness for the right banking asset to be had at a discount to book,” Jefferies says.
A particular investor
But, beyond questions of cost base and the sheer complexity of Standard Chartered’s global medley – it operates in about 60 markets and a deal would need to seek regulatory approval in all of them – there is another question that any potential buyer must ask itself. Would it be able to talk shareholders around? And one in particular.
We refer here, of course, to Temasek, which is the biggest single shareholder in Standard Chartered, with a 16.4% stake. Although it has no representative on the board, preferring to work in the background, it is an actively involved shareholder that, in recent years, has sought more frequent updates on the bank and its turnaround strategy.
It is not clear if the FAB bid ever got far enough for Temasek to have anything to respond to, but in Singapore a question is doing the rounds: would the Singapore state investment company be likely to block a deal that appeared not to be in the island nation’s best interests?
We should explain why that question arises at all. Standard Chartered is British, in terms of its headquarters, chief regulator and primary listing. But its biggest hubs in terms of headcount are Hong Kong and Singapore. Many of its most senior figures, most obviously Simon Cooper, who is global chief executive of corporate, commercial and institutional banking, are based in Singapore.
One would imagine that a possible Abu Dhabi purchase raises an uncomfortable prospect for Singapore: that one of its biggest employers (StanChart had 10,000 staff in Singapore in 2020) be bought by a state-backed bank from another city with aspirations to be a regional financial services hub.
What if FAB, or a similar acquirer, were to move the bulk of StanChart’s headcount to the Gulf and anchor a pitch as a regional centre upon it?
FAB is 37.9% owned by Mubadala, a sovereign wealth fund with a mandate to diversify Abu Dhabi away from hydrocarbons, and a further 15.7% by the Abu Dhabi ruling family.
What if FAB, or a similar acquirer, were to move the bulk of StanChart’s headcount to the Gulf and anchor a pitch as a regional centre upon it?
Temasek isn’t some dormant state utility. It must invest first and foremost to make money for the nation: it has a long track record of buying companies from startups to blue chips all over the world with an eye on long-term investment themes rather than local politics.
But it does have a stewardship role for the nation too – we’ve written before, for example, on the dual purpose of its backstopping of a rights issue for Singapore Airlines during the pandemic – and always has an eye on the future of the country.
Any suitor for StanChart would need to understand that mentality.
Regardless, the news has the market talking. Jefferies says FAB’s acknowledgement “awakened animal spirits in the name” of StanChart, and argues that StanChart now has “an embedded M&A put”.
The broker also expects a 20% recovery in wealth revenues once Greater China reopens and gets past Covid, so there is upside for a buyer too.
FAB won’t be the last name to appear in the frame this year.
