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Standard Chartered - profit much higher than expected

Underlying pre-tax profit rose 35% to $1.4bn in the third quarter, ignoring the effect of exchange rates, which was better than the market expected.

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Underlying pre-tax profit rose 35% to $1.4bn in the third quarter, ignoring the effect of exchange rates, which was better than the market expected. Asia remains the group's biggest region, and there was a 19% increase in underlying pre-tax profit there.

Overall group performance was largely because of a 23% jump in non-interest income (income generated from fees and commission) to $2.4bn, but there was also a 19% increase in net interest income. Net interest income was lower than expected.

Non-cash impairment charges, relating to a weaker economic outlook, more than doubled to $227m. More than half of this related to Standard Chartered's exposure to the struggling Chinese commercial real estate sector.

The group's CET1 ratio (a key measure of how well-capitalised a bank is) was 13.7%, within the target range of 13-14%.

Standard acknowledged the "increasing recessionary pressures" in certain western markets, and therefore expects net interest margins (the difference between what a bank earns in interest on loans and pays on deposits) to be 1.4% for the full year. These currently stand at 1.43%.

The shares were unmoved following the announcement.

View the Standard Chartered share price and how to deal

Our view

Standard Chartered might be listed in the UK but its fortunes are anything but domestic.

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 here won't mean as much. The group has large exposure to some riskier commercial real estate debt in China too, with related impairment charges chipping away at profit's full potential. We're pleasantly surprised with performance in Asia overall, but this exposure to the region isn't enough to fully offset all risks.

Western economies are teetering on the brink of recession, which would still take some of the wind out of Standard's sails. Especially when you consider that these regions bolstered performance for the group in the third quarter. That's why the profitability level of its loans is expected to dip at the full year, and we can't rule out further downgrades.

Something we like about Standard is that it 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 spritely, they're still a great extra source of revenue.

Recent interest rate hikes have been a real boon of late. Combine that with Standard Chartered's generous return on equity target and a commitment to return surplus capital to shareholders, and the result could be an attractive and growing dividend. No shareholder returns or dividends are ever guaranteed though.

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.

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 - 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
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: 26th October 2022