Standard Chartered plc (STAN) Ordinary US$0.50
HL comment (3 August 2021)
Standard Chartered reported underlying revenues of $7.6bn in the first half, down 7% at constant exchange rates (CER). That reflects the effect of lower interest rates and reduced trading income from the Financial Markets business and market volatility fell.
However, a $1.6bn positive swing in provisions for bad loans meant Standard Chartered saw underlying profit before tax rise 41% to $2.7bn.
Alongside results the bank announced an interim dividend of $0.03 per share, and a $250m share buy-back programme.
The group's shares rose 2.2% in early trading.
Standard Chartered may be UK listed, but it's really an Asian bank. However, the trends we've seen coming out of the pandemic have been much the same the world over.
The huge sums set aside in anticipation of bad loans have moderated and even gone into reverse - with previous provisions being released and boosting profits. Meanwhile lower interest rates are weighing on loan profitability even as customers increasingly feel confident enough to borrow and loan books grow again.
So far, so familiar.
However, there are some signs the group's Asian markets have weathered the current coronavirus storm better than their Western counterparts. The bank is also more exposed to dollar interest rates than sterling. And historically the US central bank has been better able to raise rates than the Bank of England.
After a long period of cost reduction the strategic focus is now firmly on income growth. We see that as a positive, since ultimately cost savings only take profits so far, but it's also been an area of weakness for the bank historically. The bank generates the majority of its revenues from fee earnings businesses like wealth management and investment banking. And these businesses are in a better place in a low interest rate environment.
Management believe net interest margins (difference between what the bank charge on loans and pays for funding) have stabilised. If true that would set the scene for income growth to return to normal from later this year.
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. More recently that's worked in the bank's favour as dollar weakness pushed emerging market currencies to a record high.
From 2022 the bank's targeting 5-7% income growth a year. Combine that with Standard Chartered's 10% return on equity target and a commitment to return surplus capital to shareholders, and the result would be an attractive and growing dividend. Clearly Standard Chartered has some promise although there are no guarantees.
Standard Chartered key facts
- Price/Book ratio: 0.40
- 10 year average Price/Book ratio: 0.78
- Prospective dividend yield (next 12 months): 4.2%
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.
Half Year Results
Half Year net interest income fell 6% year-on-year to $3.4bn. That reflects decline in net interest margins, the difference between what the bank charges borrowers and pays for funding, from 1.40% to 1.22%. Reduced loan profitability was partially offset by a 2% increase in loans and advances to customers, which reached $298.0bn, thanks to improvements in trade finance.
Other income fell 8% to $4.2bn. 21% growth in Wealth Management more than offset by a decline in Financial Markets, which has now lapped the exceptionally volatile markets and high levels of activity seen at the start of the pandemic.
Provisions for bad loans swung from a $1.6bn impairment last year to a $47m release this half. That more than offset a 4% increase in operating costs, as performance related pay normalised and investment in digital capabilities continued. The bank's cost-to-income ratio increased from 58.6% 12 months ago to 66.8% at the end of June.
Standard Chartered reported a CET1 ratio of 14.1%, slightly above its 13%-14% target. The banks returns on tangible equity improved from 7.6% to 11.2%.
Management expects income to return to the previously guided 5-7% a year from 2022, with 2021 to be broadly in line with 2020.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
Previous Standard Chartered plc updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.