Standard Chartered plc (STAN) Ordinary US$0.50
HL comment (28 April 2022)
First quarter underlying pre-tax profit came in at $1.5bn, up 5% ignoring the effect of exchange rates. That was better than the market expected. Performance was driven by a n 11% increase in total income to $4.3bn, thanks to rising interest rates and a record performance in Financial Markets.
The group recognised a $200m impairment charge, up $180m year-on-year. The majority of the charge reflects weaker expectations for Chinese Real Estate.
Standard Chartered now expects full year income growth to be slightly higher than the 5-7% previously guided.
The shares rose 13.8% following the announcement.
Standard Chartered has made quite the debut in its new financial year. The market's been very pleased by the group's better-than-expected profits.
Rising interest rates have helped traditional income streams swell. But that could be said of the other UK banks.
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. Signs in Asia had been promising, but growth is a little more sluggish at the moment. We don't view this as a flashing red indicator, but as global economies grapple with the fall out from Covid, we can't rule out further pressure.
After a long period of cost reduction, the strategic focus is now firmly on growth. We see that as a positive, since ultimately cost savings only take profits so far, but Standard Chartered has found growth hard to come by historically. On the plus side the bank 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 sprightly, they're still a great extra source of revenue.
Recent interest rate hikes have caused the group to up its full year expectations. 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 dividend is 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
- Price/Book ratio: 0.25
- Ten year average Price/Book ratio: 0.68
- Prospective dividend yield (next 12 months): 3.1%
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.
First quarter results (constant currency)
Net interest income, which is earned largely from interest payments, rose 10% to $1.8bn. This was largely driven by an increase in net interest margin, which is the difference between the interest rate banks charge compared to what they receive on deposits, from 1.22% to 1.29%.
Other income, which includes things like fees, rose 11% to $2.5bn, reflecting a strong performance from Financial Markets - especially Macro Trading revenues. This offset weakness in Wealth Management, with the largest market, Hong Kong, facing double digit declines.
Total loans and advances to customers were $295.8bn, up from $292.1bn last year.
On a geographical basis, underlying pre-tax profit fell by a quarter to $907m, in the group's biggest region, Asia. Europe & Americas more than doubled to $512m, and Africa & Middle East also grew strongly - up 66% to a touch over $300m.
Corporate, Commercial and Institutional Banking, the group's largest segment, saw profits rise 26% to $1.1bn.
Operating expenses rose 6% to $2.6bn, with an underlying cost-to-income ratio of 62.1%. Looking ahead, Standard Chartered said: "Operating expenses are expected to be slightly higher than the previously guided $10.7bn as a consequence of the impact of the higher income growth expectations on performance related pay".
The group's CET1 ratio, which is an important measure of a bank's capitalisation was 13.9%, at the top end of the 13 to 14% target range.
Higher profits and the effect of share buybacks meant return on tangible equity rose from 10.8% to 11.1%.
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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