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Standard Chartered - buyback to start as profits recover

Full year underlying operating income was $14.7bn, down 1%, ignoring the effect of exchange rates.

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Full year underlying operating income was $14.7bn, down 1%, ignoring the effect of exchange rates. That reflects a fall in net interest income, which is earned largely from interest payments, and flat other income, which includes things like fees.

Underlying pre-tax profit rose 61% to $3.9bn. This was largely thanks to much lower credit impairment charges as the economic backdrop improved.

The group plans to achieve a return on tangible equity of 10% by 2024. This will include generating higher income - helped by interest rate increases - capping Risk Weighted Assets, investing $300m in China and introducing cost savings.

A $750m share buyback and a final dividend of 9 cents per share were announced.

The shares fell 3.4% following the announcement.

View the latest Standard Chartered share price and how to deal

Our view

The market had a subdued reaction to what seemed to us, very reasonable full year results.

As the world and its economies recover from the worst of Covid, banks are natural beneficiaries. Standard Chartered is no exception, with expected defaults on credit now significantly lower than they were last year. With interest rates on the rise too, the group's expecting income from interest on its loans to add 3% to group income growth over the next couple of years.

This could all be ripped out the playbook of the UK's other banks.

But Standard Chartered is a lot more reliant on the fortunes of Asian economies than many of its London-listed peers. That means interest rate rises won't mean as much, because Asian economies aren't currently thought to be raising rates. But overall, signs in Asia are promising. That also means the bank is more exposed to dollar interest rates than sterling.

After a long period of cost reduction the strategic focus is now firmly on growth. We see that as a positive, since ultimately cost savings only take profits so far, but Standard Chartered has found growth hard to come by historically. On the plus side the bank generates the majority of its revenues from fee earnings businesses like wealth management and investment banking. In the event of low interest rates, these businesses can pick up some of the slack, and when interest rates are looking more sprightly, they're still a great extra source of revenue.

The bank's targeting 8-10% income growth a year, up from 5-7%, largely thanks to recent interest rate hikes. Combine that with Standard Chartered's 10% return on equity target and a commitment to return surplus capital to shareholders, and the result could be an attractive and growing dividend.

It's worth noting though that Standard Chartered does have some currency complexities. Companies that borrow in dollars but earn profits in local currencies will find borrowing more expensive if the dollar rises, and Standard Chartered's local currency denominated profits will be worth less. This can swing at short notice, so the extra chances for volatility should be kept in mind.

We'd also said we'd like Standard Chartered to start showing signs of more organic growth. Strip away accounting adjustments and things still look a little sluggish on that front. This is by no means a flashing red indicator, but if the group fails to come good on its refreshed targets, it will be very disappointing.

Overall, Standard Chartered has genuine promise, and we continue to admire its exposure to Asian markets and alternative sources of revenue. Please remember nothing is guaranteed, so we can't rule out ups and downs.

Standard Chartered key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results

Net interest income fell 2% to $6.8bn, as higher volumes were offset by lower Net Interest Margins. Net interest margins were affected by low interest rates in the year and fell 10 basis points to 1.21%, excluding the benefit of accounting changes, Net Interest Margins were 1.18%.

Total loans and advances to customers rose 6% to $298.5bn, driven by growth in Financial Markets, Mortgages and Corporate Lending.

Other income of $7.9bn was flat, as a weaker performance in Financial Markets and Treasury offset a record performance in Wealth Management and strong fee growth in Transaction Banking.

On a geographical basis, profit growth was seen in all regions, with Asia - the group's biggest region - up 11%, and Africa and the Middle East and Europe and Americas seeing huge increases compared to 2020.

Corporate, Commercial and Institutional Banking, the group's largest segment, saw profits rise 58% to $3.1bn, reflecting a $1.6bn reduction in impairment charges. Consumer, Private & Business banking profit also rose, up 55% to $1.1bn.

Operating expenses rose to $10.4bn. The bank's underlying cost-to-income ratio of 69.8% was higher than last year's 66.4%.

The group's CET1 ratio, which is an important measure of a bank's capitalisation, was 14.1%, down from 14.4%. The group said ''the Board is committed to operating within the 13 to 14 per cent CET1 ratio range and we are very clear that capital not needed to fund growth will be returned to shareholders.'' Standard Chartered expects to return over $5bn to shareholders over the next three years.

Return on tangible equity improved from 3% to 6%. Plans to improve this to 10% include the expectation that there will be income growth of 8-10% between the new financial year and 2024.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 17th February 2022