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Standard Chartered - Sputtering, but not yet to life

Equity research team | 1 November 2016 | A A A
Standard Chartered - Sputtering, but not yet to life

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Standard Chartered plc Ordinary US$0.50

Sell: 409.30 | Buy: 409.50 | Change -40.10 (-8.88%)
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Sputtering, but not yet to life

Standard Chartered shares are down over 6% this morning after the bank announced underlying profits before tax of $458m, although substantial restructuring charges reduced this to $153m at the reported level.

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 the bank is making good progress. 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. But right now the bank faces what could be a lengthy turnaround process. If the bank can hit the 10% Return on Equity target, and pay out half of earnings as a dividend, an attractive dividend yield may be on offer one day. Right now though, a 10% ROE looks as far away as ever.

Third Quarter Results:

Group operating income remained flat versus the previous quarter, at $3.5bn, as higher income from China and North Asia, driven by a better result in Hong Kong, was offset by performances in Africa & Middle East and Europe & Americas.

Compared to Q2, operating expenses in the quarter increased slightly to $2.1bn, with regulatory costs of $278m. The group remains on target to achieve its target of $1bn cost savings in 2016.

Loan impairments remain high by historic standards at $596m, as a result of market level and portfolio specific challenges, but still represent a significant improvement on a year previously when they exceeded $1.2bn.

The bank had its required CET 1 capitalisation level increased during the quarter, from 9.2% to 9.8%. The group currently remains well above this level, with a CET 1 ratio of 13%, however, this represents a 0.1 percentage point decline versus both the first two quarters of the year.

Stand Chartered continues to make progress in the sales of its bad bank assets, having resolved around 70% of the $20bn of risk-weighted asset portfolio held for disposal. Recent restructuring is expected to boost the CET 1 ratio by 0.5 percentage points in the fourth quarter.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.