Standard Chartered – distressed income and rising bad debts

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Standard Chartered reported third-quarter operating profit of $ 3.5 billion, down 11% year-on-year after the effect of currency fluctuations were removed. Quarterly profit before tax fell 62% to $ 435 million as provisions for bad debts increased and the bank wrote down the value of its business in the United Arab Emirates.

The bank said it “would consider (…) resuming returns to shareholders” in the annual results.

Standard Chartered shares fell 4.9% at the start of trading.

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Our point of view

Standard Chartered may be listed in the UK, but it is truly an Asian bank. That hasn’t exempted him from the Bank of England’s call for the industry to remove all dividends until next year, but it does make his position in the current crisis quite different.

The volatility of the financial markets translated into an exceptional result in investment banking, while the fall in interest rates reduced the margins of the loan portfolio. The bank has made significant provisions for higher defaults resulting from the crisis.

So far so familiar.

However, there are signs that the group’s Asian markets have weathered the current coronavirus storm better than their Western counterparts. While we remain cautious about the risk of a second wave of viral infections and the additional lockdowns that would ensue, it could mean Standard Chartered is turning the corner faster than its more focused rivals in the domestic market.

The bank is also more exposed to interest rates in dollars than in pounds sterling. And while the recent Fed interest rate cuts have lowered revenues by hundreds of millions of dollars, historically the US central bank has been better able to raise rates than the Bank of England.

Low interest rates are a problem because while the drop in rates will be passed on to borrowers largely (through a combination of base rate tracking loans, competition, and regulatory measures), the interest that banks pay to borrowers. savers are already on the ground. With little headroom to lower financing costs, the net interest margin (the difference between what the bank can do on loans and pay for financing) will be reduced. If dollar interest rates were to rise, it could help increase loan profitability.

It should be noted, however, that Standard Chartered is facing headwinds related to the weakening of emerging market currencies and the strengthening of the dollar. Companies that borrow in dollars but earn 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 Standard Chartered is relatively well capitalized, despite recent loan write-downs, and the current CET1 ratio of 14.4% is above the target range of 13-14%. We note that in the half-year results the bank said it will seek to return excess capital to shareholders when conditions become clearer. This probably bodes well for a full-year dividend – although with the growth to be funded, the size of any return to shareholders is less clear.

Early in my career I was told that “if you want to get exposure to a particular economy, buy a bank”. This remains true today. Standard Chartered is undoubtedly a direct game on a stronger recovery in Asian markets than in the West. Whether this is the right decision or not depends on individual investors.

Highlights of Standard Chartered

  • Price / book ratio: 0.21
  • 10-year average price / book ratio: 0.85
  • Potential dividend yield (next 12 months): 4.11%

All ratios are from Refinitiv. Remember that returns are variable and are not a reliable indicator of future income. Keep in mind that the key figures shouldn’t be considered in isolation – it’s important to understand the big picture.

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Third quarter results – at constant exchange rates

Third quarter net interest income fell 16% to $ 1.6 billion. This reflects a drop in net interest income (NIM – the difference between what the bank charges on loans and pays on deposits) from 1.61% a year ago to 1.23% this quarter, more than offsetting a modest increase in loans and advances to customers. The fall in the NIM reflects the decision of central banks around the world to cut interest rates.

Other income fell 7% to $ 1.9 billion as strong performance in Wealth Management and Financial Markets was offset by cash losses resulting from ineffective hedging.

Operating expenses were flat year-over-year at $ 2.5 billion, but lower revenues resulted in a substantial increase in the overall cost-to-revenue ratio from 62.9% to 70, 5%. Credit impairments (bad debt provisions) increased 32% year-on-year to $ 353 million, although they were well below the second and first quarters.

The bank’s CET1 ratio (a key measure of bank capitalization) of 14.4% is up from last quarter (14.3%) and at the start of the year (13.8%). This is above the banks’ medium-term target of 13-14%, despite a drop in credit quality reaching the overall ratio.

Return on tangible equity, an important measure of profitability, fell from 8.9% a year ago to 4.4%.

Standard Chartered expects conditions to improve during 2021, with net interest margins stabilizing slightly below current levels over the next two quarters. As a result, the bank will focus on its wealth management and financial markets activities, while reducing operating expenses where possible.

Learn more about Standard Chartered stocks, including how to invest

This article is original content from Hargreaves Lansdown, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including potential returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. The value of investments goes up and down, so investors could suffer a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No opinion is given on the current or future value or price of an investment, and investors should form their own opinion on any proposed investment. This article has not been prepared in accordance with legal requirements to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting transactions prior to research, but HL has controls (including transaction restrictions, physical and information barriers) in place to manage conflicts of interest. potential interests presented by such a transaction. Please see our full non-independent research for more information.

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