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Standard Chartered - impaired China asset leads to dip in profit

Standard Chartered reported $4.4bn of operating income in the third quarter, up 7% when ignoring the impact of currency moves.

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Standard Chartered reported $4.4bn of operating income in the third quarter, up 7% when ignoring the impact of currency moves. Performance was driven by a 20% increase in net interest income, offsetting a 5% drop from other income driven by weaker performance from the Financial Markets division.

Underlying profit before tax of $1.3bn was broadly in line with expectations. But a surprise $0.7bn impairment charge, taken to write down the value of Standard's stake in a local Chinese bank, meant statutory profit before tax of $0.6bn was materially below expectations.

The CET1 ratio, a measure of balance sheet strength, dipped slightly from 14.0% to 13.9% over the quarter - still at the top end of the target range.

Full-year guidance is broadly intact, there was a slight change in net interest margin expectations - now expected to "approach" 1.7% (previously expected at 1.7%).

The shares fell 11.7% in early trading.

View the Standard Chartered share price and how to deal

Our view

Let's start with the elephant in the room, the $700m write-down on Standard's stake in a Chinese bank. This was unexpected and took markets by surprise. The Chinese domestic banking environment is tricky, and as a result, management took the prudent approach of writing down the value of the asset there.

Issues with China's commercial real estate (CRE) sector have also been a worry. Impairments in expectation of defaults surprised on the upside and despite exposure coming down in recent years, it remains a risk.

Taking a step back, despite being a heavily Asian-focused bank, exposure to the domestic Chinese market is fairly limited. Excluding the unexpected charges this quarter, performance was pretty robust.

Both third-quarter and year-to-date performance have been heavily weighted toward higher interest income. But it's not UK rates that move the dial. Higher rates in key areas like Hong Kong and Singapore have been providing a tailwind.

Net interest margin, a measure of how much profit a bank can earn on its deposits and lending, is expected to settle at around 1.7% over the year and tick a little higher in 2024. That leaves room to generate a healthy profit, but it's not the only cog for Standard.

Fee-earning businesses are vital. Guidance points to 8-10% income growth next year, and given that we can assume a 3% benefit from the bank's hedge (think bond portfolio) rolling onto higher yields, that leaves a decent chunk coming from non-interest income (fees). Growth in Wealth Management is expected to continue and despite a flat year so far for Financial Markets, management expects an uptick. We're a little cautious on the latter.

Capital sits right at the top of target levels, and the latest $1bn buyback is almost complete ($2bn in total this year). We're expecting a prudent approach to distributions at the full year, but there's plenty of scope to give more back. Of course, nothing is guaranteed.

Overall, Standard Chartered has genuine promise, and its Asia focus offers something different to most UK peers. The valuation doesn't look overly demanding, but cost control's a question mark and we can't rule out ups and downs - especially in the current climate.

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.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 26th October 2023