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Standard Chartered - Dividends climb as bank looks to the future

Nicholas Hyett | 26 February 2019 | A A A
Standard Chartered - Dividends climb as bank looks to the future

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Standard Chartered plc Ordinary US$0.50

Sell: 432.80 | Buy: 433.00 | Change -1.40 (-0.32%)
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Full year operating income rose 5% in 2018, to $15bn, with underlying profit before tax of $3.9bn, up 28%. The results reflect income growth in the Retail and Corporate & Institutional divisions, while a decline in bad loans saw expenses fall substantially.

The board has recommended a final dividend of $0.15 per share, up 36% on last year.

The shares fell 1.3% in early trading as fourth quarter numbers came in behind analyst expectations.

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Our view

Emerging Market specialist, Standard Chartered has set itself some ambitious targets for the next three years. Most eye catching is a target of 5% - 7% a year income growth.

Until recently we've been concerned Standard Chartered's recovery was being driven by cost savings rather than income. Those savings have been impressive and the bank's hoping to deliver more, but they're not a long term source of profit growth.

Unfortunately the group's still lagging rival HSBC, when it comes to profitability, and 2021 return on equity targets aren't as ambitious either. It's not quite the gung-ho, high-growth bank investors were sold in the early part of this decade, especially since the loans to customers are actually shrinking (not a good sign long-term.)

But a more cautious approach might be no bad thing. Investment banking is volatile, and so are the emerging markets where Standard Chartered gets most of its 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 at present, 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.

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. It doesn't help that Greater China & North Asia accounted for 61.4% of underlying profits in 2018 - and signs are that economic growth in the region is slowing.

In the long run though, Standard Chartered's emerging market bias should be a huge positive. Growing and increasingly wealthy populations can provide the income growth the bank has promised.

If it can hit, then build on, its return on equity targets, the pledge to "increase the full-year dividend per share over time" could make for some very attractive returns. The shares currently offer a prospective yield of 3.5% and management reckon dividends could double by 2021 - although as ever there are no guarantees.

Standard Chartered shares currently trade on a price to earnings ratio of around 9.9 times, below its longer term average of 12.6.

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Full Year Results

Net interest income rose 8% year-on-year to $8.8bn, with a slight improvement in net interest margin (the difference between what the bank charges on loans and pays on deposits), to 1.58%, offsetting lower loans to customers. Other income rose 1% to $6.1bn. The Corporate & Institutional bank saw particular growth in its Cash Management and Custody business.

An improvement in loan quality saw money set aside for bad loans fall 38% to $740m.

Operating expenses rose 3% in the year to $10.5bn, or $10.1bn once the UK bank levy is excluded. Standard Chartered also set aside $900m for potential fines relating to the breaking of US sanctions and currency trading. The disposal of the bank's private equity business, Principal Finance, generated $158m of restructuring costs.

The bank's CET1 ratio (a key measure of banking capitalisation) was 0.6 percentage points higher in 2018 at 14.2%. That primarily reflects lower Risk Weighted Assets. Return on Tangible Equity (RoTE) hit 7.4% (2017:4.4%).

Standard Chartered released a short strategic update alongside results, setting out priorities to 2021. The Bank will remain focussed on cost savings, especially through digitisation, and increase investment in growth. Management are targeting income growth of 5-7% a year out to 2021, with a RoTE In 2021 of over 10%.

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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.