Standard Chartered slashes dividend 50%, analysts cheer 'great move'

Standard Chartered slashed its interim and full year dividend in half as incoming chief executive Bill Winters admitted the "very real challenges" the bank faced.

Winters, the former boss of JPMorgan's investment bank, has moved quickly to strengthen the Asia-focused bank's capital ratio, de-risk the business and cut costs, as well as "raise the bar" on risk and conduct.

However, management's positive actions have coincided with an earnings slump at the business.

"The decision to rebase the dividend has not been taken lightly," StanChart said. "The board is acutely aware of the importance of the dividend to our shareholders, but it is equally critical that the dividend is set at a level which is sustainable and reflects the current lower earnings expectations of the group."

The dividend cut will save the StanChart roughly $1bn a year

The dividend cut will save the group approximately $1bn per year, which some analysts said was a “great move” as it would as the reduce the chances of a rights issue.

Winters says the bank will "look at both our capital targets and our ability to continue to generate capital, which will also be informed by the upcoming Bank of England stress test" and said no decision had been taken on a capital raising, but that securing it against macro-economic shocks is the priority.

"If we decide we need capital for the long-term benefit of the group, we will raise capital. If we decide we don't need it, we won't," he added.

Numbers squeezed

Net interest margin declined 33 basis points to 1.7% and operating income fell in the six months to 30 June of $8.50bn was down 8% compared to the same period last year, primarily due to currency translation, disposals and closures, and mark-to-market valuations on loan positions.

Profit before tax tumbled 44%, driven by the income fall and a 15% rise to $1.7bn of loan impairments

Excluding these factors, the FTSE 100 company's income was broadly flat as growth in wealth management, forex trading and rates income was balanced by lower income from financing, and asset and liability management.

Profit before tax tumbled 44% to $1.42bn, driven by the income fall and a 15% rise to $1.7bn of adverse loan impairments since the second half of last year, mostly from India and commodity business.

Normalised earnings per share shrank 50% to 48.7 cents.

On the upside, the CET1 ratio improved 80 basis points to 11.5% over the six months, while on cost saving Winters said the business was on track to deliver in excess of $400m saves in 2015 and also $25-30bn savings in low returning risk-weighted assets by 2016.

But these actions have hit together with return on equity, which almost halved back to 5.4%, which when combined with the disappointing earnings performance and the current near-term outlook for the group, led to the 50% cut in the dividend to 14.4 cents per share, with a similar percentage adjustment expected for the final dividend.

Said Winters: "Today's results show the group has some very real challenges, but they are fixable and it is important to remember that there is a strong business at the heart of the group."

On the controversial matter of the the group's future domicile, in light of an estimated bank levy charge of around $500m for 2015, the company welcomed Chancellor George Osborne's recent budget announcement on the reduction of the bank levy over the next six years.

Analysts encouraged

Analysts at Bernstein said Standard Chartered offered “significantly” more upside than downside over next 2 years, and investors should start to build positions.

The US bank said cutting the dividend to preserve capital is “great move”, as the decision reduces the chances of a capital increase greater than $5b in months ahead. It added that the CET1 ratio beat consensus by 11% and saw return on tangible assets (ROTA) rising from current level of 50bps to 70bps and may even rise from 70bps to 90bps on US rates, a turn in commodity cycle, and a return to growth in Asia.

Shore Capital said that while its earnings and dividend estimates will need to be cut materially on the back of this update, "we welcome the much improved capital position and believe this should help reduce a key concern of shareholders".

"The big challenge for management is improving the normalised return on equity, which...is well below any reasonable estimate of the cost of equity."

Read more: Nomura stays neutral on StanChart as rights issue concerns remain