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Standard Chartered - Bad loans continue to weigh

Nicholas Hyett | 24 February 2017 | A A A
Standard Chartered - Bad loans continue to weigh

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Standard Chartered plc Ordinary US$0.50

Sell: 440.10 | Buy: 440.30 | Change 0.00 (0.00%)
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Standard Chartered reported profit before tax of $1.1bn in 2016 (2015: $0.8bn). The cost of bad loans to the bank remains elevated, at $2.4bn, although flat year-on year.

Standard Chartered shares fell 4.9% in early trading.

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's down to Mr Winters and his team to sort out the mess. A year and a half in and it's still a struggle.

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 it can hit the 10% Return on Equity target, and pay out half of earnings as a dividend, an attractive dividend may be on offer one day. Right now though, a 10% ROE looks as far away as ever.

Full Year Results

Full year underlying income fell 11% to $13.8bn, impacted largely by the strength of the US dollar versus the currencies of the emerging markets in which Standard Chartered operate, and asset sales.

Operating costs across the bank fell 5% to $10bn, with the bank targeting 2018 costs (excluding the UK bank levy) below those seen in 2015. The group incurred $236m of redundancy costs as part of restructuring the business.

Net interest margin (the difference between what the group charges on loans and pays on deposits) fell 0.16 percentage points to 1.53% as the group focussed on lower margin, lower risk products.

Risk weighted assets (RWAs) held in the bank's liquidation portfolio, as a result of its reduced risk appetite, fell more than 80% over the year. This lower level of RWAs contributed to the 1 percentage point improvement in the bank's capital position (as measured by the common equity tier one capital ratio), which now stand at 13.6%.

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.