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Standard Chartered - profits lower than expected

Standard Chartered's underlying operating income rose 16% to $16.3bn last year, ignoring the effect of exchange rates.

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Standard Chartered's underlying operating income rose 16% to $16.3bn last year, ignoring the effect of exchange rates. That reflects double digit growth across net interest income and other income, which includes revenue earned on things like fees, commission, and trading. Net interest margins (the difference between what a bank earns in interest in loans and pays on deposits) was 1.41%, up from 1.21%, helped by higher interest rates.

The group's cost to income ratio - an important efficiency measure - rose five percentage points to 69%. The group recognised a credit impairment charge of $838m, which was an increase of $575m and reflects exposure to the Chinese Real Estate sector, and lower quality government debt in Pakistan, Ghana and Sri Lanka. Underlying pre-tax profits were $4.8bn, up 15%. Performance was worse than expected.

Looking ahead, Standard Chartered expects return on tangible equity "to be approaching 10%" in the new financial year, and has upgraded 2024 targets to be greater than 11%.

A new $1bn share buyback was announced, as well as a final dividend of 14 cents per share.

The shares rose 1.1% following the announcement.

View the Standard Chartered share price and how to deal

Our view

The elephant in the room where Standard Chartered is concerned is that profits were disappointing at the full year. The banking giant is very much an Asian bank, despite being listed in London.

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 (reduced exposure to these areas doesn't mean no exposure). That's why the profitability level of its loans are under the microscope, 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 higher, they're still a great extra source of revenue.

But we should point out this is somewhat of a double-edged sword. Higher interest rates are one reason customers are nervous about the economy, which is acting as a headwind for the wealth management business. We view this as a temporary blip - the speed of interest rate increases has been unprecedented. In normal times, this diversified income model is something we admire.

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 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: 16th February 2023