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Standard Chartered - healthy income growth, good cost control

Nicholas Hyett | 1 August 2019 | A A A
Standard Chartered - healthy income growth, good cost control

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Standard Chartered plc Ordinary US$0.50

Sell: 661.40 | Buy: 662.00 | Change 1.00 (0.15%)
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Standard Chartered's net income rose 4% year-on-year, at constant exchange rates, to $7.7bn in the first half. Income growth was driven by an increase in loans to clients. Lower operating expenses and a fall in bad loans, meant underlying profit before tax rose 13% to $2.6bn.

The interim dividend rose 17% to 7 cents a share.

Standard Chartered shares rose 3.4% in early trading.

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Our view

Until recently we've been concerned Emerging Market specialist 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.

Standard Chartered has since set itself some ambitious targets for the three years to the end of 2021. Most eye catching is a target of 5% - 7% a year income growth. 4% in the first half of 2019 isn't a bad start, but leaves still room for improvement.

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.

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 Retail Wealth business.

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 prove a major positive. Their growing and increasingly wealthy populations can drive the income growth the bank is aiming for. An increasingly strong capital position is underpinning loan growth and should help weather market turmoil.

If the bank can hit, then build on, its return on equity targets, a $1bn buyback and prospective yield of 3.7% could be just the start. 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 11.9.

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Half Year Results

Standard Chartered's Corporate & Institutional Bank saw income rise 5% to $3.6bn, thanks to 6% growth in loans to customers. Combined with a small decline in operating expenses, that drove a 24% increase in underlying profits before tax to $1.4bn. Return on equity in the division rose to 10%.

Retail Banking revenues fell 1% at a reported level to $2.6bn. However once currency movements are excluded that represents 3% growth, with strong growth in Asia more than offsetting weakness in Africa & the Middle East. Underlying profits before tax were flat year-on-year at $618m, as lower expenses were offset by lower reported revenues. Return on equity in the division rose to 14.6%.

The Commercial Banking business saw underlying income rise 6% to $746m - with growth across all regions. Income growth, lower costs and a decline in bad loans meant underlying profits rose 104% to $286m.

Private Banking reported income growth of 13% to $306m, driven by Wealth products and improved margins. The group added $1.7bn in new money to its asset management business. Underlying profits improved to $100m from a $5m loss last year, thanks to lower costs and an improved bad loan position. Divisional return on equity was 15.7%.

Central & Other reported a 51% decline in underlying profit before tax to $251m, on higher operating expenses and lower income.

The bank reported a CET1 ratio of 13.5%, in the middle of its target range, despite the $1bn share buyback programme.

Underlying return on equity for the half rose to 8.4% at the group level. Management remain confident that the bank can achieve a greater than 10% return on equity in 2021.

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