StanChart tweaks strategy as profits come in short
Standard Chartered said it plans to cut costs, sell its stake in its Indonesian partner and ramp-up investment in technology after the emerging markets lender's profits came in lower than expected for last year.
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The FTSE 100 group reported an adjusted profit before tax of $3.86bn for calendar 2018, up 28% on the previous year but 3% short of the £3.98bn average analyst forecast. Statutory PBT of $2.55m reflected $1.3bn of charges in the fourth quarter, including the $900m provision relating to past financial crime controls control, forex trading issues and a fine for Iran sanctions that was announced last week, plus $392m of restructuring and other charges.
Underlying PBT for the fourth quarter of $432m was 22% below consensus expectations, driven by higher impairments and provisions and lower income, partially offset by better than expected costs.
Income of $15.0bn was up 5% year on year, which was the bottom end of management's 5-7% guidance. Net interest margin increased to 1.58%, remaining stable in the fourth quarter.
Underlying earnings per share increased 30% to 61.4 cents and the dividend was lifted 91% to $0.21, which was slightly better than analysts expected.
The company did not announce a share buy-back as it awaits confirmation the size of a US fine relating to Iran sanctions, with some reports estimating it could be around $1.5bn.
Chief executive Bill Winters felt a third successive year of underlying profit growth showed the progress that had been made in "securing the foundations of the business" since he took the reins 2015, when he had cancelled the dividend, slashed costs and cleared out unwanted business after a period of rapid expansion had left the bank with high bad debts and unprofitable operations.
Winters said he was now unveiling "refreshed priorities" for Standard Chartered to "help realise the true value of the franchise". These included targetting a 10% return on tangible equity returns, versus adjusted RoTE of 5.1% last year, and a sizeable increase in shareholder returns by 2021.
These new aims are to be achieved by continuing to grow income 5-7% each year and with a new target to cut costs by $700m by 2021, which Winters predicted will fund investment and result in profitability improving "significantly".
With a new CET1 capital ratio range target lifted from 12-13% to 13-14%, further below the 14.2% achieved for 2018, plus the improvement in profits, Winters said the ordinary dividend "has the potential to double by 2021" and intend to distribute to shareholders any surplus capital not invested in growing the business.
Said Winters: "We will achieve this through relentlessly focusing on where we have a distinct competitive advantage, attacking the residual causes of lower returns and ramping-up innovation and productivity. We view the profound technology-driven changes in banking as an opportunity: we are big enough to be relevant to our most complex clients and partners, yet nimble enough to be a profitable disrupter."
Capital should be further boosted as StanChart also indicated that it may sell its near 45% stake in Indonesian bank Permata, having reclassifying the stake as "non-core". Divestment of the stake could reap close to $1bn, while also reducing group risk-weighted assets.
This will come alongside the operational restructuring of four low-returning markets, India, Korea, the UAE and Indonesia.
Framed by caution over geopolitical and political factors, the outlook statement noted the range of potential economic outcomes is wider than it has been in a long time. The group states that the year has started down slightly on strong prior year comparative and due to FX movements but is still sticking to its 5-7% medium-term income growth guidance.
StanChart shares were down 0.6% to 615.08p after almost an hour and a half of trading in London on Tuesday.
With the bank not giving any firm details on its plans to return surplus capital to shareholders, analyst Gary Greenwood at broker Shore Capital calculated surplus capital currently ranges from $0.6bn-$3.1bn based on the target range.
Despite costs being slightly better than expected, he said profits missed consensus due to weaker than expected income and worse impairments, albeit the latter were still down 38% on the previous year.
"Despite near-term economic uncertainties associated with the US/China trade wars and the withdrawal of QE, we believe that Standard Chartered’s exposure to relatively fast growing emerging markets (Asia and Africa) provides a supportive backdrop to its recovery prospects, which we expect to drive an improvement in returns and a significant re-rating in the shares over the longer-term," Greenwood said.
RBC Capital Markets said the potential sale of the Permata stake could benefit the company’s CET1 ratio by circa 55 basis points for a 1% reduction in group PBT.
RBC has estimated $1.25bn for the Iran litigation, providing some room for manoeuvre as the company noted that the UK and US cases "might ultimately result in a different level of penalties".