Standard Chartereds (LSE: STAN) is one of Londons fallen angels. Indeed, Standard used to be one Londons most successful banking groups but the groups outlook has been deteriorating for some time.
Things have now become so bad for Standard that City analysts are starting to question the groups long-term outlook. One set of City analysts has gone so far as to say that they dont believe Standard is sustainable as a business in its current state.
Not sustainable
Analysts are concerned about Standards falling return on equity, a key measure of banking profitability. In the simplest possible terms, return on equity means the amount of net income returned as a percentage of shareholders equity. And this figure should be above the cost of capital the cost of fundsused for financing a business.
If Standards return on equity stays below 15% for much longer, the banks income wont cover the cost of capital required to run the business. The bank is targeting at return on equity of 10% in the medium term, which is clearly not enough.
Recapitalise
The only way out of this tangle is for Standard to raise cash, reorganise its loan book and look for opportunities to expand its balance sheet. If management make these changes, the group should be able to improve its return on equity and return to growth.
On that basis, City analysts believe that Standards new management willconduct a rights issue in order to raise around $5.3bn. This should be enough to recapitalisethe bank and help return Standard to growth.
With a market capitalisation of 24.2bn,the bank is well placed to conduct a small rights issue and raise the $5.3bn analysts believe will be enough to recapitalise the groups balance sheet.
Of course, Standard could always go for broke and conduct a huge $10bn+ rights issue to allay all fears about the banks capital levels and growth rate once and for all.
While this would be damaging to Standards share price in the short term, the banks long-term prospects would improve significantly. A strong balance sheet and restructured loan book would give Standard the perfect foundations to drive growth.
Dividend cut
Unfortunately, if Standard dose conduct a rights issue, the bank could also be forced to cut its dividend payout. This would be bad news for income seekers. Standards shares currently offer a dividend yield of 5.9%, one of the highest yields around.
So if you brought Standardfor income, now might be the time to sell up and look for other income opportunities elsewhere.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.