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Standard Chartered - guidance weak in the face of headwinds

Nicholas Hyett, Equity Analyst | 27 February 2020 | A A A
Standard Chartered - guidance weak in the face of headwinds

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Standard Chartered plc Ordinary US$0.50

Sell: 491.20 | Buy: 491.50 | Change 5.80 (1.20%)
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Standard Chartered's underlying operating income rose 2% during the year, or 4% at constant currency, to $15.3bn, driven by a good result in the investment banking business. Good cost control, partially offset by increased bad loans, meant underlying profit before tax rose 8% to $4.2bn.

The board announced a final dividend of 20 cents per share, taking the full year payment to 27 cents per share, up 29% year-on-year. The bank announced another share buyback of $0.5bn.

Market conditions meant the bank has reduced its guidance for income growth and profitability next year.

The shares fell 3.6% in early trading.

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Our view

Standard Chartered has shown promising signs in 2019. Cost control's been a hallmark of the bank for some time, but the addition of income growth means profits are heading in the right direction too.

A not insignificant chunk of revenue is being driven by the volatile Financial Markets business. But with good progress on loan growth and in the Private Bank, there's a solid underpinning of more sustainable income growth too. That should help Standard Chartered achieve the ambitious targets it has set itself for the three years to the end of 2021.

Unfortunately conditions have conspired to turn against the group just as it was starting to cruise.

Global growth has slowed, reducing demand for new loans. That's also contributed to interest rate staying lower for longer. There's only so low you can push interest rates on savings accounts, and lenders have to pass on the savings to borrowers to remain competitive - the turn the group can make, its net interest margin, is lower as a result.

The ongoing trade disputes between the US and China will weigh on the group's trade finance business. Meanwhile social unrest in Hong Kong has damaged performance in the bank's largest market.

Throw the coronavirus into the mix and the backdrop is challenging to say the least. Greater China & North Asia accounted for the vast majority of underlying profits in 2019. As a result the medium term target for 5% - 7% net income now looks out of reach next year.

It's worth noting that Standard Chartered's still lagging rival HSBC when it comes to profitability, and 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 last 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.

In the long run we think Standard Chartered's emerging market bias is 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 the dividend weather market turmoil.

If the bank can hit, then build on, its return on equity targets, 2019's $1bn buyback and prospective yield of 4.3% could be just the start. Unfortunately conditions outside the bank's control mean that could take longer to be achieved than originally hoped.

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Full Year Results

Full year net interest income fell 2% to $7.7bn. That reflects a lower net interest margin (the difference between what the bank charges borrowers and pays on its own debt) of 1.62% which more than offset an increase in loans to customers. Bad loans rose by 22% to $906m.

Other income, which includes banking fees for retail and corporate customers, rose 6% to $7.6bn. That reflects a particularly strong result in the bank's fixed-income team in the investment bank.

Core operating expenses rose 1% at constant currencies to $10.1bn. However, having increased more slowly than income that meant the bank's cost:income ratio improved to 66%.

Fines and other litigation expenses fell 75% in the year to $226m, with restructuring charges down at £254m.

The bank finished the year with a CET1 ratio of 13.8%, comfortably within the groups 13-14% target range and up 0.28 percentage points since Q3. The bank reported a return on tangible equity (ROTE) for the year of 6.4%.

Guidance for next year has been cut in the face of ongoing interest rate weakness, a slowing global economy, trade tensions between the US and China, and the coronavirius outbreak. Net income growth is expected to be below the 5-7% medium term target, and it is now expected to take longer to reach a 10% ROTE.

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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.

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