Standard Chartered posted operating income up 5% to $ 8.0 billion for the first half, while costs also decreased. However, that was more than offset by significant impairment losses related to bad loans, with pre-tax profit falling 25% to $ 2.0 billion.
The bank expects earnings to decline in the second half of the year, but while the depreciation will continue, it should be lower than this half of the year if economic conditions do not deteriorate.
The stocks were largely unchanged in early trading.
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Standard Chartered may be listed in the UK, but it is actually an Asian bank. That hasn’t exempted it from the Bank of England’s call for the sector to cut all dividends by next year, but it does make its position a little different in the current crisis.
Volatility in financial markets has resulted in record earnings for the investment bank, while corporate lending has skyrocketed as companies seek additional cash. The bank has made considerable provisions for higher loan defaults due to the crisis.
So far so familiar.
However, there are some signs that the group’s Asian markets have weathered the current coronavirus storm better than their western counterparts. While we continue to be wary of the risk of a second wave of viral infections and additional bans that would entail, it could mean Standard Chartered is turning the corner faster than more domestically focused rivals.
The bank is also more exposed to dollar rates than sterling. And while the Fed’s recent rate cuts have lost hundreds of millions in revenue, the Federal Reserve has historically been better able to hike rates than the Bank of England.
Low interest rates are a problem because while falling interest rates are largely passed on to borrowers (thanks to a combination of policy rates, competition and regulation), the interest rates banks pay to savers are already low. Since there is little room to reduce the cost of financing, the net interest margin (the difference between what the bank can make on the loan and what the bank pays for the financing) is reduced. If dollar interest rates rose, it could help increase the profitability of credit.
It’s worth noting, however, that Standard Chartered is facing headwinds from ailing emerging market currencies and a strengthening dollar. Companies that borrow in US dollars but make profits in local currencies will find borrowing more expensive, and Standard Chartered’s local currency-denominated profits will be worth less.
The good news is that, despite the recent depreciation of credit, Standard Chartered is relatively well capitalized and the current CET1 rate of 14.3% is above the target range of 13-14%. We note that in its half-year results, the bank announced that it would return excess capital to shareholders when terms become clearer. That probably bodes well for a full year dividend – though the level of shareholder return is less clear given the growth to be funded.
At the beginning of my career I was told, “If you want to get active in a particular economy, buy a bank”. That is still true today. Standard Chartered is arguably an easy game for a bigger recovery in Asian markets than in the West.
Key facts about Standard Chartered
- Price / book ratio: 0.2
- 10-year average price / booking ratio: 0.9
- Prospective return: 3.6%
We introduced this section in response to feedback from the last survey.
Please remember that returns are variable and are not a reliable indicator of future returns. Remember, metrics shouldn’t be viewed in isolation – it’s important to understand the big picture.
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Half-year results (constant exchange rates)
Net interest income decreased 7% to $ 3.5 billion for the first half, offset by a 20% increase in other income to $ 4.5 billion.
The lower interest income is despite an increase in total credit to customers and reflects the impact of lower interest rates on the bank’s net interest margin (the difference between what the bank charges borrowers and what depositors pay). The net interest margin decreased 0.26 percentage points to 1.40% in the first half and 1.28% in the second quarter.
Substantial growth in other income reflects strong performance in Standard Chartered’s Financial Markets business, where earnings rose 35% to £ 2.2 billion thanks to strong earnings in fixed income, foreign exchange and commodities trading.
Bad debt allowance for the half year was $ 1.6 billion compared to $ 254 million for the same period last year. However, the impairments in the second quarter were lower than in the first 3 months of the year. The increase reflects the deteriorating macroeconomic environment and a small number of specific large customers in the corporate and institutional bank.
The bank’s cost-income ratio improved significantly compared to the previous year from 59.5% in 2019 to 49.8%. This reflects a decrease in operating costs of 5% or 2% on a constant currency basis and higher sales.
Standard Chartered’s Common Equity Tier 1 ratio rose to 14.3% and is thus above the upper end of the bank’s target range of 13-14%. Once the economic environment has calmed down, the group will return excess capital to shareholders once the growth opportunities are exhausted.
The bank expects some of its larger markets to “begin to drive the global economy out of recession” in the coming quarters. However, revenue is expected to be lower over the next half of the year, while spending is expected to increase (although the goal is for full year costs to be below $ 10 billion in both 2020 and 2021).
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