Standard Chartered to invest US$300 million in China operations, misses consensus estimates with fourth-quarter loss

Standard Chartered, one of Hong Kong’s three currency-issuing banks, said it would invest US$300 million in its China business and seek to cut another US$1.3 billion in costs over the next three years, as it reported a narrower fourth-quarter loss.

The London-based lender, which generates much of its revenue in Asia, said it would seek to double its China onshore and offshore profit before tax by 2024, as it sought to capture opportunities related to the continued opening up of the country’s financial markets.

The lender reported a pre-tax loss of US$208 million in the fourth quarter, missing a consensus estimate of a pre-tax profit of US$288 million, but it was an improvement on a pre-tax loss of US$449 million reported a year earlier. On a net basis, Standard Chartered reported a loss of US$457 million versus a loss of US$610 million in the prior-year period.

“We have never been better positioned in China and the opportunities never greater,” Standard Chartered CEO Bill Winters said on a conference call with analysts. “This, despite the current credit related challenges we all see.”

The quarter included US$285 million in restructuring costs, as well as a US$295 million impairment related to its investment in China Bohai Bank, a US$95 million reserve increase related to its China commercial real estate business and a US$94 million bank levy charged by the UK government.

For the year, Standard Chartered reported a net profit of US$1.91 billion, compared with US$329 million in 2020. Its shares declined 2.2 per cent to close at HK$57.05 Hong Kong on Thursday.

The bank also said it would buy back US$750 million in shares and pay a full-year dividend of 12 US cents a share.

“This was a weak quarter, weighed by one-offs and provisions. The new financial targets are ahead of market expectations,” Citigroup analyst Yafei Tian said in a research note. “There is upside to consensus forecasts, should management successfully execute the plan. However, Standard Chartered’s track record might warrant some skepticism in analyst forecasts.”

Standard Chartered also offered a more positive outlook on rising interest rates as central banks, from the US Federal Reserve to the Bank of England, tighten monetary policy to fight surging inflation. The bank and crosstown rival HSBC have seen their shares trade near two-year highs in recent weeks on investor optimism about rate hikes.

Winters said falling interest rates over the past two years, as central banks tried to jump-start economies hit hard by the coronavirus pandemic, had reduced the bank’s net interest income by more than US$2 billion. “With the interest-rate cycle showing signs of turning, and given our positive gearing to US-dollar rates, we should recover this lost income,” he said.

The bank said it is now confident that it can achieve a return on tangible equity (ROTE) of 10 per cent by 2024 as conditions improve. It achieved a ROTE of 6 per cent in 2021.

Ahead of the results, a consensus estimate by 16 analysts forecast the bank’s annual pre-tax profit would increase by 26 per cent by 2024, as central banks increase interest rates from historic lows, as economies recover from the fallout of the pandemic.

Standard Chartered said operating income, similar to revenue in US accounting, rose 5 per cent to US$3.3 billion in the fourth quarter. Net interest margin, an important measure of lending profitability, declined to 1.19 per cent in the quarter, down from 1.24 a year earlier. It declined four basis points from 1.23 per cent in the third quarter as well.

Operating income rose by 14 per cent to US$285 million in its trade business, and by 6 per cent to US$1.02 billion in its financial markets segment. In its wealth management business, operating income rose by 5 per cent to US$466 million.

Its Asia business reported an underlying pre-tax loss of US$50 million, compared with a pre-tax profit of US$403 million a year earlier.

The bank’s business in Hong Kong, its single largest market, reported an underlying pre-tax profit of US$30 million versus US$235 million in the prior-year period.

The city’s economy showed encouraging signs of recovery last year after contracting in 2019 and in 2020, but has been hit hard in recent weeks by a fifth wave of Covid-19 cases in the city. The surging number of cases prompted Chinese President Xi Jinping to take the unusual step of putting the city’s government on notice over the health crisis.

“The wealth management business and other type of face-to-face sales would be affected [in the first quarter] as a result of the fact that about one third of all bank branches in Hong Kong need to be temporarily closed,” said Benjamin Hung, CEO for Asia at Standard Chartered.

“However, other income from business that does not involve face-to-face meetings, such as trade finance, loans and other interest income, is expected to do well and can offset the loss,” he added.

In Standard Chartered’s corporate, commercial and institutional banking business, underlying pre-tax profit more than doubled to US$435 million. Its consumer, private and business banking segment rose to US$34 million, compared with a US$4 million loss a year earlier.

Additional reporting by Enoch Yiu