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Standard Chartered (STAN)\u2019s exposure to growing emerging markets has regularly been cited as one of the best reasons to buy and own its shares, but it hasn\u2019t always been seen that way.<\/p>\n
Banks are rightly seen as geared plays on the economies that they operate in. When economies are growing, banks lend more money to businesses and individuals and interest income tends to grow as a result. Other areas such as corporate and investment banking also tend to do well, while growing prosperity often sees more demand for services such as wealth management which is often very profitable.<\/p>\n
If we take a look at the countries where the bank earns its money, we can see that it is favourably exposed to many of the faster growing, and increasingly wealthy, economies of the world such as Singapore, Hong Kong, India and the UAE.<\/p>\n
It has limited exposure to the slower growing economies of the UK and much of western Europe, and a modest exposure to the US.<\/p>\n
While exposure to growth is what investors want it often comes with risks attached. If that growth contains elements such as asset speculation or unproven businesses with borrowed money from banks, this is sometimes where trouble often occurs. Bad loans that can\u2019t be repaid can blow big holes in banks\u2019 profits and put lots of pressure on their finances with shareholders footing the bill.<\/p>\n
These concerns were plaguing Standard Chartered shares less than three years ago. There were worries about the bank\u2019s exposure to China\u2019s fragile commercial property market and the very modest returns on equity (ROE) the bank was making.<\/p>\n
As a result, as recently as the end of 2023, Standard Chartered shares could be picked up for just 5.4 times forecast earnings and a price to book value of only 0.5 times. These valuations were a sign of extreme pessimism and lack of enthusiasm for the shares.<\/p>\n
Hindsight is a wonderful thing, yet it seems that those fears were overdone if the recent performance of Standard shares is anything to go by. They have appreciated by 15 per cent year to date and by 76.8 per cent over the past year, which compares very favourably with the FTSE All-Share index which has returned 6.6 per cent and 21.5 per cent, respectively.<\/p>\n
The bank has been increasing its profits as evidenced by an increasing earnings per share (EPS).<\/p>\n
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There has also been a shift in the source of its operating income. More than half of its income now comes from non-interest income which makes it less dependent on traditional lending activities and pushes it towards more profitable income streams such as capital markets and wealth management.<\/p>\n
This improvement in earnings quality is underpinned by a strong financial position. Outstanding loans are equal to 54 per cent of total deposits, which is a very secure position. The bank is also not dangerously leveraged \u2013 where banks are more highly leveraged than non-financial firms \u2013 with an assets-to-equity ratio of just under 18 times.<\/p>\n
Wealth business and cost efficiencies to power profit growth<\/p>\n
Standard Chartered\u2019s strong share price performance which has seen it outperform its FTSE 100 peers is down to a steadily improving profit outlook.<\/p>\n
This can be explained by the changing profit mix of the bank and in particular the rapid growth in profits from the Wealth Solutions business. Pre-tax profits from this business grew by 50 per cent in the first quarter of 2026 and are expected to grow strongly over the next few years.<\/p>\n
Standard Chartered is favourably exposed to populations that are steadily getting richer and who increasingly want to shift away from savings accounts to more sophisticated investments. This is creating strong demand for wealth management services which has seen Standard Chartered become the third biggest wealth manager in Asia and ideally placed to tap into wealthy customers in places like Hong Kong.<\/p>\n
The bank is looking to bring in more than \u00a3200bn of new client money over the next few years and, if successful, profits could grow very strongly. Current consensus estimates from City analysts see Wealth Solutions\u2019 operating income growing from just over $3bn in 2025 to $4.8bn by 2028. This makes it by far the fastest growing part of Standard Chartered\u2019s business and the main driver of its profits growth.<\/p>\n
Growth here is expected to be driven by improved efficiencies and reduced headcount. Standard Chartered believes that it can raise revenue per employee by 20 per cent by 2028, as businesses such as Wealth Solutions can bring in more revenue without adding more staff.<\/p>\n
The combination of profit growth and improved employee efficiencies is expected to see a significant downwards improvement in the bank\u2019s cost-to-income ratio.<\/p>\n
As a result, Standard Chartered is expected to generate very strong growth in EPS over the next few years. Basic EPS is expected to grow from 195\u00a2 in 2025 to 330\u00a2 by 2028. This equates to a compound annual average growth rate of 19 per cent, which is impressive.<\/p>\n
EPS growth is also expected to be boosted by ongoing share repurchases of around $2.5bn per year over the next few years.<\/p>\n
This is also expected to come with improvements in return on tangible equity (ROTE), which is a key measure of profit quality as long as it is not driven by increased levels of financial leverage \u2013 it won\u2019t be in Standard Chartered\u2019s case.<\/p>\n
If current consensus forecasts are met, then ROTE is expected to increase from 11.9 per cent in 2025 to 15.5 per cent in 2028. Standard Chartered believes that this has room to improve further and is targeting 18 per cent by 2030.<\/p>\n
This is a very respectable level of profitability, but will it be sustainable? The big caveat when it comes to investing in banks is that their high levels of leverage and sensitivity of profits to the general economy and investment markets mean that ROTE will fluctuate over a business cycle.<\/p>\n
Valuation looks decent given earnings momentum<\/p>\n
Despite a strong share price performance, Standard Chartered still trades on a relatively undemanding forecast price-to-book value (or net asset value) of just 1.1 times, which makes it the cheapest valued FTSE 100 bank on this measure.<\/p>\n
While other banks such as Barclays and NatWest are expected to deliver strong earnings growth, the quality of earnings and earnings growth at Standard Chartered \u2013 along with its low exposure to a fragile UK economy \u2013 suggests that its shares may still be worthy of buying at current levels.<\/p>\n
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Rolls-Royce (RR.) shares continue to deliver for investors. They are a classic example of how profit forecast upgrades can drive spectacular gains in share price. So far in 2026, the shares have returned 23 per cent compared with 6.6 per cent for the FTSE All-Share index. Over the five years, the shares have returned a stellar 1,220 per cent compared with 65.4 per cent for the All-Share.<\/p>\n
The returns have been driven not only by a strong increase in profit forecasts, but also the multiple that has been put on those profits (the price-to-earnings ratio).<\/p>\n
A couple of years ago when the shares were trading around the 400p mark, you could have been forgiven for thinking that the shares were already richly valued at over 26 times the next year\u2019s forecast EPS. At the time of writing, the shares were 1,432p and trading at over 35 times forecast earnings.<\/p>\n
Trying to call the top of a momentous share price rally is hard, especially when the company concerned is doing so well and keeps upgrading profit forecasts. What can look like an expensive valuation currently can eventually be justified \u2013 and more \u2013 if profits keep on growing faster than investors expect.<\/p>\n
However, what cannot be denied is the higher valuation you pay to invest the more risk you are taking on. There is no room for disappointment in Rolls-Royce shares at the current price, but could the good times keep rolling?<\/p>\n
The power of profit growth<\/p>\n
Increasing profits is what all investors want. The more growth, the better. Rolls-Royce fit the bill perfectly in this respect in recent years.<\/p>\n
If you were looking at the company just a couple of years ago then the company would have told you that it was hoping to meet the following financial targets by 2027:<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Operating profit (or EBIT) of \u00a32.5bn to \u00a32.8bn<\/p>\n
RR.:LSE<\/p>\n
Rolls-Royce Holdings PLC<\/p>\n
1mth<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Operating margins of 13-15 per cent.<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Annual free cash flow of \u00a32.8bn to \u00a33.1bn.<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Return on capital employed (ROCE) of 16-18 per cent.<\/p>\n
It managed to do all that in 2025. Now it has set the following midterm (three-to-five-year) targets:<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Operating profit of \u00a34.9bn to \u00a35.2bn<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Operating margins of 18-20 per cent<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 Free cash flow of \u00a35bn to \u00a35.3bn<\/p>\n
\u25cf\u00a0\u00a0\u00a0\u00a0\u00a0 ROCE of 23-26 per cent<\/p>\n
These new targets represent a huge shift in profitability and cash generation, and it largely explains why the share price has performed so well.<\/p>\n
Yet, why is the future looking so rosy for Rolls-Royce right now?<\/p>\n
Learning from past mistakes \u2013 realising the potential of civil aerospace<\/p>\n
There are lots of reasons, but undoubtedly one of the main drivers has been getting the civil aerospace business to realise its profit potential.<\/p>\n
Aerospace is Rolls\u2019 biggest source of profit by some margin and is blessed with some very attractive business economics if they are managed well.<\/p>\n
Rolls\u2019 Trent aircraft engines are installed on thousands of aircraft across the world and are expected to remain in service for many years. Its Trent 700 engine is the most fuel-efficient engine on the A330 fleet and is under contract for maintenance and repairs until the mid-2030s.<\/p>\n
While there is profit in selling engines to aircraft manufacturers which accounts for 31 per cent of divisional sales, the juicy profits are made from the maintenance contracts which account for 69 per cent of revenues.<\/p>\n
Rolls\u2019 engines are on long-term service agreements (LTSA) with the commercial and business airlines that use them.<\/p>\n
Very chunky profit margins can be made from LTSA as long as they are priced correctly and the costs of maintenance are managed well. They were not in the past which led to a lot of lossmaking and low-margin contracts. Renegotiated contracts, cost discipline and better use of predictive data \u2013 to control maintenance costs \u2013 has now put this business on a very strong footing.<\/p>\n
The nature of the LTSA contracts are very attractive to Rolls-Royce and its investors. Airlines pay Rolls-Royce a regular fee based on the number of engine flying hours (EFH). The EFH rate paid is different for each airline and is dependent on how the aircraft is used. Rates will be determined by factors such as flight lengths, how many take-offs and landings, and the climb thrust rates the engine will have to cope with. The more intensively the engine is used, the higher the rate paid by the airline.<\/p>\n
A large wide-body aircraft used on long haul routes could be under contract for 20 years, while business jets may be nearer to 10 years.<\/p>\n
An airline may pay a similar annual fee over the length of the contract with routine maintenance every year and a big overhaul every five years.\u00a0These terms provide a great source of upfront cash flow for Rolls-Royce, but profits are only booked when work is done.<\/p>\n
This means in the early years of a contract, cash flow is higher than profits, but profits and cash flow will equal each other over the duration of the whole contract.<\/p>\n
An example of how the contracts work is shown below.<\/p>\n
As EFH increase, Rolls-Royce will make more money. At the moment, the outlook for EFH is very reassuring. The ongoing conflict in the Middle East has caused few problems for the company as most of the reduction in flying hours (capacity) has come from short-haul narrow body aircraft.<\/p>\n
Consensus forecasts by City analysts are for steady growth in EFH, which bodes well for the maintenance business and profits. The company also continues to add to its installed base of engines \u2013 and future maintenance revenues \u2013 with large engine deliveries up by 18 per cent in the first quarter of 2026.<\/p>\n
The defence business continues to perform well with a 20 per cent increase in deliveries in the first quarter of 2026. This business gets around 53 per cent of its revenues from maintenance and the after-market remains very buoyant for the company.<\/p>\n
The current geopolitical climate and the increase in defence spending that will come from it bodes very well for the long-term outlook of this business.<\/p>\n
The power systems business is a source of considerable potential for Rolls-Royce. Along with civil aerospace, this business is expected to be a major driver of the company\u2019s total profits in the years ahead.\u00a0<\/p>\n
This business is benefiting from booming demand for power from data centres and battery energy storage systems. The order intake across gas and diesel engine power generators was up by a massive 50 per cent during the first quarter of 2026.<\/p>\n
An area of excitement has come from Rolls-Royce\u2019s involvement in the nuclear power industry. It has partnered with Czech power company CEZ to construct small modular reactors (SMR).<\/p>\n
Each SMR has a generating capacity of 470 megawatts, which is much smaller than the 3,200 megawatts being built at Hinkley Point and Sizewell in the UK, but the cost is lower and the construction process is much faster. This is attractive to countries looking to build up their sources of clean and secure electricity.<\/p>\n
For example, the construction cost of Hinkley Point is currently running at a massive \u00a349bn \u2013 or about \u00a315mn per megawatt. The costs of SMR are a bit vague, but a 470MW SMR might be built for around \u00a32bn or just over \u00a34mn per MW \u2013 a huge difference.<\/p>\n
With much of the construction of SMRs done off site, it is possible to get them built and up and running much faster than a big nuclear power station.<\/p>\n
Rolls-Royce reckons that it is a good position to become the global leader in SMRs, but it is going to take some time for a meaningful profit stream to come from this area. That said, it may not be unreasonable to believe that significant value could eventually come from this business.<\/p>\n
A company in rude health but are the shares too expensive?<\/p>\n
The outlook for Rolls-Royce is good right now and could get better. Given this backdrop, it\u2019s understandable why investors would want to own shares in it.<\/p>\n
The company is exposed to many favourable trends across its three main businesses and is set up to make bigger profits from them. This is a company that deserves to be richly valued by the stock market as it is a rare asset which is very hard to replicate with products and services backed by huge installed bases of original equipment and customer loyalty.<\/p>\n
If you own the shares, you\u2019d probably be very reluctant to sell them. If you are prepared to take a long-term view, buying in now could still be very profitable.<\/p>\n","protected":false},"excerpt":{"rendered":"Standard Chartered (STAN)\u2019s exposure to growing emerging markets has regularly been cited as one of the best reasons…\n","protected":false},"author":2,"featured_media":77127,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[21387],"tags":[21176,7914,21177,703,20677],"class_list":["post-77126","post","type-post","status-publish","format-standard","has-post-thumbnail","category-standard-chartered","tag-alpha-weekly-analysis","tag-emerging-markets","tag-growth-investing","tag-standard-article","tag-standard-chartered"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/116869060583841555","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/77126","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=77126"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/77126\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/77127"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=77126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=77126"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=77126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}