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Before last week, shares in FTSE 100 emerging markets specialist bank Standard Chartered (LSE: STAN) were around an 11-year high of £14.32. This followed a 90% gain from their 4 September one-year low of £7.43.
However, from last Wednesday (13 August), the stock began to drop on rumours of an impending legal issue. This was confirmed on Friday, when a US Congresswoman requested that Standard Chartered be investigated over alleged – but unspecified — sanctions evasion.
The bank responded that the underlying allegations were “entirely false” and had been rejected by US courts multiple times. It added: “We expect the dismissal of this case will continue to be upheld on appeal“.
A risk to the bank here is that the case is not dismissed. This could open the way for fines for breaching sanctions.
However, my view is that it is the core fundamentals of a business that drive its share price over time. And these look very good to me. Moreover, the stock is now trading at an even bigger discount to its true value than it was before the legal issue emerged.
How undervalued are the shares now?
On the price-to-sales ratio, Standard Chartered is joint bottom of its peer group at just 2.1. These banks comprise Barclays at 2.1, Lloyds at 2.8, NatWest at 2.9, and HSBC at 3.9 – averaging 2.9. So it is very undervalued on this basis.
It is also joint bottom of this group (again with Barclays) with a price-to-book ratio of only 0.8. The average of its competitors is 1.
A discounted cash flow (DCF) valuation shows exactly the price at which any share should be trading. This is derived from cash flow forecasts for the underlying business.
The DCF for Standard Chartered shows it is 40% undervalued at its current £13.04 price. Therefore, its fair value is £21.73.
Do recent results support this view?
A likely more enduring risk to Standard Chartered’s profits than the current legal issue is a global economic deterioration. This is because banks are broadly a reflection of the economies in which they operate.
The bank flagged this concern in its 31 July-released H1 2025 results, focused on tariffs. It said: “In an extreme case, the rest of the world may vastly reduce trade with the US. This could disrupt the macroeconomic status quo“.
That said, H1 pre-tax profit jumped 26% year on year to $4.383bn, far outstripping analysts’ forecasts of $3.83bn. Operating income rose 11% to $10.906bn, while operating expenses fell 3% to $6.247bn.
These numbers reinforce the bank’s successful ongoing strategy shift amid falling interest rates in many of its key markets, moving from an interest-based banking model to a fee-based one.
The fee-based Wealth Solutions, Global Markets and Global Banking divisions each recorded double-digit income growth over H1.
Looking ahead, consensus analysts’ forecasts are that Standard Chartered’s earnings will rise by 5% a year to end-2027. And it is growth here that drives any firm’s share price and dividends over time.
Given its strong recent results, solid earnings growth prospects and deep discount to fair value, I think now could be the perfect time for investors to consider the stock.
