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Standard Chartered - Dividend back as outlook improves

Nicholas Hyett | 27 February 2018 | A A A
Standard Chartered - Dividend back as outlook improves

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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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With net income growth outstripping operating expenses, and provisions for bad loans falling, Standard Chartered saw 2017 underlying pre-tax profits increase 175% to £3bn.

The bank also announced a final dividend of 11 cents per share, the first time it's paid a dividend since 2015.

The shares were broadly flat in early trading.

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Our View

Despite the progress Standard Chartered has made in recent years, the bank's developing a track record of not quite delivering on expectations.

That's unfortunate because, all-in-all, the group's in far better shape than it has been for years. It's got good positions in attractive end markets, many legacy issues are now in the past and the balance sheet has been substantially repaired.

However, income growth has been steady rather than spectacular, and is struggling to keep pace with GDP growth in the rapidly developing economies in which Standard Chartered operates. While costs are falling as a percentage of income, they're still high when compared to other banks and continue to creep upwards in absolute terms.

Medium-term profitability targets are also unambitious when compared to rivals - albeit still a significant improvement on where the bank is today. HSBC for instance has set its target 25% higher.

It's not quite the gung-ho, high-growth bank investors would have recognised in the early part of this decade.

But that might be no bad thing. Investment banking is taking a back seat, as the focus shifts to high value private banking and affluent retail banking clients. It's still a small portion of the business, but it's growing steadily and offers returns with limited risk, since lending tends to be well secured. There are cross selling opportunities too, not least into the Wealth division.

In the long run, Standard Chartered's emerging market bias could be a huge positive, driving rapid income growth. But it needs to sort out the fine details first. Since the bank has pledged to "increase the dividend per share over time as the Group's performance improves" investors will hope that it can hit those not terribly demanding targets sooner rather than later.

Standard Chartered shares currently offer a prospective yield of 2.4% and trades on a price to earnings ratio of around 15 times.

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Full Year Results

Operating income rose 3% in 2017, hitting $14.3bn, as loans to customers and net interest margin (the difference between what the bank charges on loans and pays on deposits) both improved. Meanwhile operating expenses rose 2% to $8.6bn, with over 85% of the $2.9bn 2015-2019 efficiency saving target already met.

At $1.2bn, provisions for non-performing loans were almost 50% lower in 2017 than a year earlier. The portfolio of non-performing loans held for liquidation fell by $1.6bn in the year, with $653m still to be exited.

At a divisional level, Corporate & Institutional Banking is the largest contributor to group profit before tax at $1.3bn, with Retail Banking coming in second at $873m. Both delivered strong growth in the year. The smaller Commercial Banking and Private Banking units delivered profits of $282m and a loss of $1m respectively.

Regionally Greater China & Northern Asia now accounts for the lion's share of profits, around $1.9bn, or 64.5% of group total. This is followed by Africa & Middle East and ASEAN & South Asia.

Standard Chartered's Common Equity Tier 1 (CET1) capital ratio, an important measure of bank capitalisation, remained steady at 13.6%.

Going forwards the bank will be targeting income growth of 5-7% a year, with cost increases below inflation. 2018 has reportedly started well, with broad-based double-digit income growth. Standard Chartered continues to target return on equity of over 8% in the medium term (2017: 3.5%).

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.