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Standard Chartered - Income growth, but at a cost

Nicholas Hyett | 31 July 2018 | A A A
Standard Chartered - Income growth, but at a cost

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Standard Chartered plc Ordinary US$0.50

Sell: 425.70 | Buy: 426.00 | Change 9.50 (2.28%)
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First half profits rose 22.8% on last year, to $2.4bn, boosted by improved income and a decline in bad loans. However, meaningful increases in costs meant the bank undershot expectations.

Standard Chartered announce an interim dividend of 6 cents per share.

The shares were down 1.8% by lunchtime.

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Our view

Until recently we've been concerned Standard Chartered's recovery was being driven by cost savings rather than income growth. Those savings have been 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. The income 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 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.

That might be no bad thing. Investment banking is volatile, and so are the emerging markets where Standard Chartered get most of their customers. Volatility squared isn't a good look for a bank.

As a result, high finance is set to take a back seat, as the focus shifts to high value private banking, affluent retail banking clients and trade finance. Private banking is 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.

It's not all plain sailing though. Increased exposure to trade finance means Standard Chartered would be among the hardest hit if geopolitical tensions boil over into an all-out trade war. Increased exposure to China doesn't help, and the bank has something of a track record of falling foul of US regulators on trade issues.

In the long run, Standard Chartered's emerging market bias could be a huge positive, driving rapid income growth. If it can hit, then build on, those not very demanding returns targets, the 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 2.6% and trade on a price to earnings ratio of around 11.2 times, slightly below a longer term average of 11.9.

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Half Year Results

Operating income rose 5% in the quarter, to $7.6bn, with growth across all segments. Greater China & North Asia delivered particular strength, seeing income growth of 9%, with the investment bank leading the way.

Total loans and advances to customers rose 6.6% to £255bn while the bank's net interest margin (the difference between what it pays to borrow and charges on loans) remained flat at 1.6%. Impairments relating to bad loans fell 50% to $293m, with overall credit quality improving.

Operating expenses of $4.5bn were up 7%, as Standard Chartered increased investment in growth and digital initiatives. Regulatory costs also rose 7% to $638m. The bank's cost to income ratio deteriorated slightly to 66.9 (versus 66.0 12 months ago).

The bank's common equity tier 1 (CET1) ratio, a key measure of banking capitalisation, finished the half at 14.2%, with the group having added 0.6 percentage points. The improvement was driven by higher profits and lower risk weighted assets. Return on equity in the half improved to 6.7%.

The group remains confident of its target for 5-7% annual income growth over the medium term, with returns on equity of more than 8%.

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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.