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Standard Chartered - Income growth

Nicholas Hyett | 2 May 2018 | A A A
Standard Chartered - Income growth

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Standard Chartered plc Ordinary US$0.50

Sell: 515.20 | Buy: 515.60 | Change -3.40 (-0.65%)
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Healthy income growth more than offset increased operating costs, driving operating profits at Standard Chartered up 14% in the first quarter. A modest decline in bad loans saw underlying operating profits rise 20% to $1.3bn.

The shares rose 1.1% in early trading.

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Our View

Until recently we have been concerned Standard Chartered's recovery was being driven by cost savings rather than income growth. Those savings have been hugely impressive, but they're not a long term source of profit growth.

Fortunately it's starting to look like we can put those worries to rest.

First quarter results may not be quite what some had hoped for - after Standard Chartered reported double digit income growth in the first few weeks of the quarter. But growth is still right at the top end of target, and all the cost discipline over recent years means it's dropping straight through to profits.

The recovery is widespread and the bank's medium term target for a return on equity of 8% or higher is within touching distance.

It's not an ambitious growth target though - fellow emerging market focussed bank HSBC is targeting over 10% on the same horizon. It's not quite the gung-ho, high-growth bank investors were sold 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 Retail bank's Wealth division.

In the long run, Standard Chartered's emerging market bias could be a huge positive, driving rapid income growth. If it can hit, and build on, those not very demanding returns targets, the bank's pledge to "increase the dividend per share over time as the Group's performance improves" could make for some very attractive returns.

Standard Chartered shares currently offer a prospective yield of 2.3% and trades on a price to earnings ratio of around 13.2 times, more or less in line with its historical average.

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Trading details

Total income in the quarter grew 7% to $3.9bn, with improvements spread across the whole bank.

Corporate & Institutional saw income rise 7% to $1.7bn, with Retail up 14% to $1.3bn, Commercial up 7% to $351m and Private Banking rising 23% to $144m. Even the corporate centre delivered profits of $297m - although that's 19% lower than the same period last year.

Growth was driven by a 3% increase in net loans to customers, with the bank's more transactional business lines also delivering steady growth.

Operating expenses rose 5%, or 1% at constant currency, to $2.2bn, with the group achieving 95% of its $2.9bn cost efficiency target with nine months to go. Restructuring costs were up slightly on last year at $70m, with regulatory costs falling 2% to $303m.

CET1, a standard measure of banking capitalisation, rose 0.1 percentage points to 13.9%.

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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.