StanChart forecast earnings fall stuns market

Bank surprises analysts with warning that first-half operating profit may tumble 20 per cent because of poor business in the financial markets

PUBLISHED : Friday, 27 June, 2014, 1:04am
UPDATED : Friday, 27 June, 2014, 1:04am

Standard Chartered warned yesterday poor financial markets business could drag first-half operating profit down by 20 per cent.

Group chief executive Peter Sands said “difficult trading conditions, particularly in financial markets”, would lead to a disappointing first half  for the bank.

“Across the industry, a number of regulatory and structural changes, combined with cyclical factors, have dampened volatility, put pressure on spreads and led to softer volumes, particularly impacting rates and foreign exchange,” the bank said.

It said underperformance in markets such as India, South Korea and Singapore had contributed to the decline, while business in China and Africa continued to fare better.

We have not seen such a decline in a long time. It was certainly unexpected

Sands said in a conference call  the bank’s  commodities-related exposure to Qingdao port in mainland China was about US$250 million. The port has been caught up in a scandal in which multiple receipts for commodities such as copper were misused as collateral for bank loans.

The bank also said  Lenny Feder, the head of financial markets, would take a sabbatical from  July 19, and it had started a search for a permanent replacement.

Analysts had downgraded Standard Chartered’s first-half performance but yesterday’s warning came as a surprise. 

“We have not seen such a decline in a long time,” said Dominic Chan, an analyst at BNP Paribas. “It was certainly unexpected.”

The bank’s share price fell more than 5 per cent in the first hour of trading in London before rebounding slightly. It had earlier closed 0.36 per cent lower at HK$166 in Hong Kong.

The depreciation of the yuan was likely to have had an impact on the bank’s foreign exchange business, Chan said. The mainland currency has shed 2.9 per cent of its value against the US dollar since late January.

While the news from the British bank was some of the worst guidance it has ever delivered, it could also be some of the most accurate, said Jim Antos, a banking analyst at Mizuho Securities Asia.

“This is the highest quality preview they have ever given,” Antos said, referring to the projected drop in operating profit. “They have never been as precise as that.”

Standard Chartered had not been upfront with shareholders on earnings guidance in the past but the disclosure could bode well for investor relations in the future, he said.

In March, the bank posted its first decline in earnings in a decade, citing many of the same challenges as it did yesterday. Profit before tax dropped 7 per cent to US$6.96 billion last year and statutory net profit  fell 17 per cent to US$3.99 billion.

The poor guidance could augur poorly for other global banks with high exposure to emerging markets.

HSBC Holdings’ share price fell more than 1 per cent in early London trade yesterday. Antos said Standard Chartered’s disclosure had likely dragged HSBC’s price down with it as the two banks’ Asia businesses were easily comparable.

HSBC’s profit fell 20 per cent in the first quarter  and analysts said at the time much of the same could be expected in the second quarter.
Additional reporting by Reuters