StanChart gives up on ROE target as first half pretax profit falls 46 per cent
London-based lender still faces long road ahead in terms of restructuring its way back to profitability
Standard Chartered Bank has abandoned its target to restore return on equity to above 8 per cent by 2018 and 10 per cent by 2020 as it announced a 46 per cent year on year decline in pretax profit for the first half to US$994 million under a challenging operating environment of a dour economic outlook and volatile global markets.
The figure was better than the US$783.7 million in pre-tax earnings that analysts were expecting in a Reuters consensus poll. The result is the bank’s first major report card investors have been waiting for since it booked a US$1.8 billion restructuring charge that last year tipped the lender into its first annual loss since 1989.
StanChart announced the figures after the Hong Kong market close on Wednesday, where trading of its shares remained muted on Wednesday, ending 0.72 per cent down at HK$61.70 a share. But in London morning trading, its shares immediately jumped by 6.92 per cent to £630.4 after the announcement.
“The delay in achieving the 8-10 per cent ROE target is already captured by consensus. With better first half numbers we would expect the stock to react positively,” said Jason Napier, head of European banks research for UBS.
an Gordon, head of bank research at Investec said: “With the outlook for revenues and earnings still appearing challenging, the management’s targets to restore 8 per cent return on equity by 2018 and 10 per cent by 2020 are out of reach.
“Revenues are likely to remain weak. It’s already been sharply lower year on year – although the extreme weakness seen in early 2016 should be non-recurring – it would be sufficient to deliver a modest quarter on quarter recovery, even with more planned balance sheet contraction ahead,” he said, although StanChart’s progress on reworking its balance sheet could potentially now look more “comfortable”.
The average forecast for the bank’s return on equity – a metric that measures how efficiently it employs capital to deliver profits – has been trending at just 4.2 per cent for the first half of this year and 0.9 per cent for the full year. An above 10 per cent return is considered normal for a bank to be operating profitably and deliver business at above its cost of capital.