StanChart reports first annual loss since 1989 after hefty restructuring charge
Only wealth management business delivered growth
Standard Chartered Bank reported its first annual loss in 26 years on Tuesday, weighed down by heavy restructuring costs and a global slowdown, and warned of a subdued year ahead and the necessity of more “painful action” to restore growth.
The bank lost US$1.5 billion in 2015 after costs of US$1.8 billion to cover restructuring and redundancies in South Korea and elsewhere. Excluding the charge, the bank reported a pretax profit of US$834 million, an 84 per cent decline from 2014 and below the average analyst estimate of US$896.5 million.
It will still pay shareholders a dividend, but its top directors won’t get a bonus for 2015.
StanChart is the second big bank in as many days to report weak earnings, after HSBC’s 2015 profit came in much lower than expected when it reported on Monday. Both cited tough global business conditions. Local lender Hang Seng Bank, however, reported a big rise in profit last year, although the gains came mostly from the sale of shares in a mainland bank.
“Given the way 2016 has played out so far, it is little surprise that StanChart has been the worst performing UK bank,” said Ian Gordon, head of bank research at Investec. “StanChart’s path back to ‘normalised’ returns is long and deeply uncertain.” Gordon has a sell recommendation on the bank’s shares.
Only StanChart’s wealth management business delivered growth, with revenue up 2 per cent to US$1.7 billion. In the final three months of last year alone, the bank lost US$3.8 billion, including the charges.
Its share price has dropped 27 per cent so far this year and 54 per cent compared to a year ago.
Benjamin Hung, StanChart’s chief executive for greater China and North Asia, predicted that the bank’s performance would remain subdued in 2016, which could lead to “necessary and sometimes painful action” to restart growth.
Yet he also struck an optimistic tone, saying he expected the bank would perform well in wealth management and in capturing business from the increasing internationalisation of the yuan.
“The bulk of the pain is behind us. We have had to reduce staff, force through involuntary retirements and restructure various businesses in 2015. We will take sharp action so the underlying business would be more resilient,” he said.
“I would be very disappointed if 2016 would be worse than 2015. It’s hard to predict the full year. But again, I would be very disappointed if 2016 would again turn out to be a loss.”
The bank had struggled recently in part due to its exposure to commodities, the prices of which have tumbled. It changed its chief executive last year and began restructuring.
Hung said the bank had reduced its exposure to loans to the oil and gas industry, where it had taken a big hit due to falling prices for the commodities. He said the bank was now “comfortable” with the reduced risk.
On another measure of its profitability, Standard Chartered became the worst performing bank both in Britain and the Asia-Pacific region with a return on equity of minus 0.4 per cent. Analysts had expected a positive return of 0.8 per cent, compared to the 7.7 per cent figure in 2014.
The bank is also under pressure over its creditworthiness.
Rating agency Standard & Poor’s dropped its rating to A- just ahead of the earnings announcement, while Moody’s has put its rating for the bank under review, meaning it could be cut. Fitch Ratings puts the bank at a higher A+, but with a negative outlook.
In London trading, its shares fell around 6 per cent after the announcement. In Hong Kong, StanChart’s stock closed 1.81 per cent higher on Tuesday at HK$47.75.
In the credit market, traders increasingly view StanChart as a potential default risk. Spreads for the bank’s credit default swaps – insurance contracts that credit traders take out for the bank’s debt – have widened by 20.1 per cent over the past day. Over the past year, spreads have widened by 273 per cent. The wider the spread, the greater the perceived risk of default.