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Standard Chartered - dividend gone after BoE request

Nicholas Hyett, Equity Analyst | 1 April 2020 | A A A
Standard Chartered - dividend gone after BoE request

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Standard Chartered plc Ordinary US$0.50

Sell: 597.80 | Buy: 598.20 | Change -8.60 (-1.42%)
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Following a request from the Bank of England Standard Chartered has cancelled its 2019 final dividend and buyback programme as well as suspending all returns to investors this year. This is in line with similar requests made to all UK banks.

The board will review the 2020 full year dividend and medium term guidance at the end of the year.

The bank is launching a $50m coronavirus relief fund and offering $1bn in financing at preferential rates to companies supporting the fight against coronavirus.

The shares fell 6.5% in early trading.

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Our view

Standard Chartered may be UK listed, but it's really an Asian bank. However, that hasn't exempted it from the Bank of England's instruction (to all intents and purposes) to scrap any dividends until next year.

Preserving capital may be no bad thing. The months ahead look set to be tough for the banking industry globally.

We've already seen several companies file for bankruptcy, and as lockdowns drag on we expect to see more. That means a rise in loan defaults which will eat into the bank's profits and ultimately capital.

Even financially sound businesses will be leaning heavily on their bankers in the months to come. As many businesses see sales fall to near zero, borrowing is the only way to meet expenses and that means drawing on existing loan facilities and looking for new ones. Banks' key capital ratios are calculated by dividing available capital by 'risk weighted assets' or 'RWAs'. As loans to customers increase, RWAs increase and capital ratios fall (even if available capital remains unchanged).

It's these kinds of pressures on capital that have led regulators to order dividends suspended. Reserves will become increasingly depleted the longer the current crisis lasts and will need to be replenished before dividend payments return.

The move by central banks around the world to slash interest rates doesn't help matters from a commercial bank's perspective. The lower interest rate will largely be passed onto borrowers thanks to a combination of base rate tracking loans, competition and regulatory action. But the interest banks pay to savers is already on the floor. With little room to push funding costs lower the net interest margin (the difference between what the bank can make on loans and pays for funding) will be squeezed. That will significantly reduce the profitability of loans.

On top of that Standard Chartered faces the additional headwind of weakening emerging market currencies and a strengthening dollar. Companies that borrow in dollars but earn profits in local currencies will find borrowing more expensive, and Standard Chartered's local currency denominated profits will be worth less.

There is some good news though. Early signs are that China and other North Asian economies have so far managed the outbreak better than many Western countries, and these are the key markets for Standard Chartered. If the region can avoid a sustained downturn then Standard Chartered may well be better placed than UK listed rivals.

That's not say investors can afford to be blasé about the risks in Standard Chartered. Emerging markets are inherently higher risk and if we enter a serious global recession we believe they could suffer badly.

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Full Year Results

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.

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.

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.

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