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Standard Chartered - Performance steadies, but returns struggle

Nicholas Hyett | 3 August 2016 | A A A
Standard Chartered - Performance steadies, but returns struggle

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Standard Chartered plc Ordinary US$0.50

Sell: 430.70 | Buy: 431.00 | Change 4.70 (1.10%)
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Standard Chartered have reported first half underlying profit before tax of $1bn. This is down 46% year-on-year, but represents a significant improvement on the $1bn loss in the second half of 2015. Underlying operating income steadied at $6.8bn, following an 18% fall in the previous half. The market pushed Standard Chartered shares up 4.8%, following the better than expected results.

At its strategy update last year the group said that it would target an 8% return on equity (ROE) in 2018, and 10% by 2020. Despite delivering a positive ROE this half of 2.1% (following negative numbers in the previous quarter) the group believes that changes to the macro-economic environment mean that it will now take longer than expected to meet expected returns.

The group saw loan impairments of $1.1bn in the half, down from $2.4bn in the preceding half and $1.7bn a year earlier. However, the group also notes the continuing growth in non-performing loans, reflecting difficult economic conditions.

Operating costs, excluding regulatory, were $4bn in the half, down 13% year-on-year following restructuring and senior staff redundancies. The group has identified cost efficiencies in excess of $1bn for 2016, with work underway to identify further savings for 2017.

The net interest rate margin in the half held steady at 1.6%, with customer loans up slightly on the previous quarter.

The group continued to strengthen its balance sheet, with a CET1 ratio of 13.1% (Dec 15: 12.6%), above the group's target of 12-13%. Growth was largely the result of declines in risk weighted assets (RWAs), which declined from $302.9m at FY15 to $293.2m.

As previously announced, no dividend was declared for the half year.

Outlook:

The group is more cautious on the outlook for the future than it was in November 2015. Lower for longer interest rates, slower economic growth rates in key Asian economies, lower global trade volumes and Brexit related uncertainty are all expected to hamper performance.

Our view:

Bill Winters must like a challenge. The bank he walked into was in a bad way, with loan losses in vertical take-off and income swirling down the plug hole. When emerging markets submerge, a business like Standard Chartered will always feel the pain, especially when they had raised their risk appetite during the bull years. It is now down to Mr Winters and his team to sort out the mess.

Plans to shed riskier assets, cut operating costs and rebuild capital make perfect sense in the circumstances, and early signs suggest that they are making some headway. But this is all a far cry from the image of Standard Chartered as the "growth bank" that investors had just a few years ago.

The new strategy is a big change of direction. Gone is the approach of getting in close, with an open chequebook, to the key industrial families of S.E. Asia in an attempt to become their primary commercial and investment banking partner. Instead, Standard Chartered is focusing more on establishing strong private banking relationships with the wealthier citizens of the emerging markets.

Done well, private banking is a great business. Ask the Swiss. It offers potentially steady returns with limited risk, lending tends to be well secured, because the clients are rich. Whether Mr Winters can pull it off remains to be seen, but he has the network and the brand necessary to make a go of it.

In the long run, Standard Chartered's emerging market bias could be a huge positive. Right now though, the bank faces what could be quite a lengthy turnaround process. If the bank can hit the 10% Return on Equity target, and pay out half of earnings as dividend, then an attractive dividend yield may one day be possible, given the shares are trading far below book value. Right now though, a 10% ROE looks as far away as ever.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.