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Standard Chartered - Bad loans "unusually low" and profits up

Nicholas Hyett | 26 April 2017 | A A A
Standard Chartered - Bad loans

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Standard Chartered plc Ordinary US$0.50

Sell: 604.80 | Buy: 605.00 | Change -1.20 (-0.20%)
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First quarter profits before tax increased 94% to $1bn, thanks to the rapidly falling proportion of loan impairments (down 58% year-on-year) and other costs remaining broadly flat.

The shares rose 3.9% following the announcement.

Our View

Standard Chartered is slowly getting back on its feet after a tough couple of years. A commodity downturn and an accompanying slowdown in emerging markets saw bad loans sky rocket and income swirl down the plug hole.

A company like Standard Chartered is always going to be sensitive to those sorts of headwinds, but the situation was made worse by the bank's appetite for riskier investments during the boom years. Getting the bank back on track has been a painful process, with billions of dollars' worth of loans written off and huge restructuring costs.

First quarter results could mark a significant moment, with provisions for bad loans falling substantially and operating income creeping up. Management are clearly cautious though, warning of intense competition and ongoing credit concerns both hanging over the outlook. Not quite the gung-ho high-growth bank of yesteryear.

That might be no bad thing, since the bank seems to have learnt its lessons from recent troubles. Investment banking is taking a back seat with the focus instead shifting to high value private banking clients. It's a small portion of the business at present, but it's growing steadily and offers potentially steady returns with limited risk, since lending tends to be well secured. There are cross selling opportunities too, not least the Retail arm's Wealth division.

In the long run, Standard Chartered's emerging market bias could be a huge positive. But right now the bank is still putting its house in order, and that will take time. If it can hit the 10% Return on Equity target, and pay out half of earnings, the result would be an attractive and growing dividend. Right now though, that target looks as far away as ever.

First Quarter Results

Once the effect of the 2016 losses in Standard Chartered's private equity arm, Principal Finance, are excluded from 2016 results, the bank's profits increased 26% in the first quarter.

The improved performance was largely due to a 58% drop in the level of bad loans, booked at $198m this quarter, and ongoing cost control. Operating expenses of $2.1bn (excluding regulatory costs) were 13% lower than a year earlier, while Restructuring costs were also considerably lower.

Income of $3.6bn represents an 8% improvement on Q116, while net loans & advances, and customer accounts both rose by 5% versus year end, hitting $270bn and $398bn respectively.

Corporate and Institutional banking (which accounts for 45% of group income) delivered 4% year-on-year growth. However, this largely reflects the improved Principal Finance performance, excluding which income was down 4% thanks to lower Corporate Finance income and reduced volatility impacting Foreign Exchange revenues. Private and Retail banking both delivered income growth of 2%, while Commercial fell 6%.

Standard Chartered's Common Equity Tier 1 (CET1) ratio, a key measure of bank capitalisation, saw a 0.2 percentage point improvement versus the year end, hitting 13.8%. That was despite a small increase in total Risk Weighted Assets (RWAs) now at $273bn.

While overall credit quality has improved compared to the same period last year, loan impairments were unusually low this quarter and Standard Chartered remains cautious about credit conditions in its markets. The bank continues to see intense competition but believes that investments in the business and a focus on clients is making it more competitive and will deliver sustainable income growth over time.

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.

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