Standard Chartered plc (STAN) Ordinary US$0.50
HL comment (25 February 2021)
Full year revenues of $14.8bn were down 2%, once you strip out the effect of exchange rate movements. That reflects the impact of lower interest rates, partially offset by growth in fee-based income- especially from the investment bank.
A significant increase in bad loans meant profit before tax fell 39% to $2.5bn.
The bank proposed a final dividend of $0.09 per share, along with a $254m share buyback. Together these represent the maximum return permitted by regulators.
The shares fell 2.4% in early trading.
Standard Chartered may be UK listed, but it's really an Asian bank. That didn't exempt it from the Bank of England's call for the sector to scrap any dividends until next year, and limits on payments going forwards, but it does make its position in the current crisis rather different.
Volatility in financial markets has translated into a bumper result in the investment bank while lower interest rates are squeezing margins in the loan book. The bank's made significant provisions for higher loan defaults resulting from the crisis.
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. While we remain wary about the end of government support schemes, Standard Chartered should be able to turn the corner quicker than more domestically focused rivals.
The bank is also more exposed to dollar interest rates than sterling. And while the recent Fed interest rate cuts have knocked hundreds of millions off revenues, historically the US central bank has been better able to raise rates again than the Bank of England.
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.
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 area of weakness for the bank historically. Fee earnings business like wealth management and investment banking are in a better place in a low interest rate environment, but the bank still expects income to stagnate next year.
However, 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. Despite the recent loan impairments, the bank's 14.4% Common Equity Tier (CET) 1 ratio is above the 13-14% target range which provides a nice base from which to build.
Clearly Standard Chartered has promise, but we would warn investors that at the moment promise is all it is. The bank has struggled to deliver income growth in the past and the low interest rate environment is not a good backdrop on which to turn things around.
Standard Chartered key facts
- Price/Book ratio: 0.28
- 10 year average Price/Book ratio: 1.41
- Prospective dividend yield (next 12 months): 3.4%
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 (constant currency)
The bank reported net interest income of $6.9bn, down 9% year-on-year. That's despite a 5% increase in loans to customers (which now stand at $281.7bn) and reflects a fall in net interest margins from 1.62% to 1.31%. The decline reflects the cut in central bank interest rates.
Other income rose 5% to $7.9bn. That was driven by a strong result in Financial Markets (where operating income rose 20% to $3.9bn) and Wealth Management (up 5% to $2.0bn). Performance in both divisions benefitted from increased customer transactions in a volatile market, delivering non-interest linked fee-income.
Impairments for bad loans rose 153% to $2.3bn during the year, weighted towards the first half. A significant proportion of that relates to three large corporate & institutional banking customers.
Underlying operating expenses, excluding the UK banking levy, fell 1% to $9.8bn. That reflects the impact of coronavirus on bonus accruals and travel expenses, partly offset by increased investment in digitisation. The bank's cost to income ratio, excluding the UK bank levy, fell 0.5 percentage points to 66.5%.
Standard Chartered reported a CET 1 ratio at the end of the year of 14.4%, above the target range of 13-14%. Above this level the bank will seek to deliver shareholder returns through a mixture of dividend and share buybacks.
The bank reported a return on tangible equity of 3.0%, down from 6.4% a year ago. However, it remains committed to its medium-term target of 10%, and more than 7% by 2023.
Management expect 2021 full year revenues to be similar to 2020, reflecting the impact of lower interest rates, with net interest margins to stabilise at a little below 1.24%. Income growth is expected to return to 5-7% a year from 2022.
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.
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