Hong Kong company reporting season

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

PUBLISHED : Wednesday, 03 August, 2016, 9:19pm
UPDATED : Wednesday, 03 August, 2016, 10:57pm

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.

Ever since the bank came in with a negative return figure last year, at -0.4 per cent, analysts have had little or no expectation that it would deliver this year. In its latest set of results, StanChart delivered just 2.1 per cent on a normalised basis

Sentiments in London appeared undented even as the bank said it could not say when it plans to resume its dividends payments, which had been put on hold as it entered restructuring modelast year.

“We just believe that the first half is too early... We completely understand the importance of dividends,” said Benjamin Hung, Greater China and North Asia chief at Standard Chartered.

“We are not moving away from our ROE drive towards improving returns to shareholders. If anything, the expectation of GDP growth has been adjusted downwards; interest rate expectations will be lower for longer... Brexit is having a bearing on group return. It may take a bit longer. It’s difficult to give an exact timeline to achieve this,” he said.

In February, StanChart chief executive Bill Winters warned that he expected the bank’s results to remain subdued in 2016 because of his ongoing restructuring plans. The bank’s chief financial officer, Andy Halford, reiterated the same guidance on Wednesday.

Winters has committed the bank to a two-year exercise that will drastically slim its vast emerging market footprint and cut down the number of relationships it serves in order to focus on areas he believes will produce long-term value and profits, such as global yuan services and digital banking.

StanChart is still currently awaiting on an indictment from Singapore authorities for lapses in anti-money laundering controls over the role it played in having allegedly facilitated certain trades in the plundered state fund 1Malaysian Development Berhad.

It recently appointed former IMF director Jose Vinals as its chairman, after a long shareholder revolt against the incumbent John Peace over the quality of his supervision as the bank fell into ever mounting regulatory difficulties. Winters said it was good to have these excised from the bank, leaving it with a cleaner book of business to build on for the future.