Standard Chartered Climbs as Impairment Drop Signals Turnaround

Johannesburg, South Africa, Capital Markets in Africa: Standard Chartered Plc rose as much as 5.7 percent in London trading as first-half loan impairment charges fell by a third, showing further progress in Chief Executive Officer Bill Winters’s plan to turn around the bank.

The shares were up 5.3 percent at 11:01 a.m. in London, after provisions for bad loans declined to $1.1 billion in the first half, below the $1.56 billion Citigroup Inc. analysts had estimated. Operating costs decreased 10 percent as the bank further cut its risk-weighted assets in the first six months of the year.

Investors gave the bank credit for progress even as revenue hit the lowest level since 2008 and the lender said it would probably miss return on equity targets set last year. First-half adjusted pretax profit dropped 46 percent to $994 million, the London-based lender said in a filing Wednesday. That fell short of the $1.12 billion average estimate of five analysts surveyed by Bloomberg News.

“Management continues to make progress with its optimization efforts around risk-weighed assets and cost,” said Raul Sinha, an analyst at JPMorgan Chase & Co. “While the first half performance shows a remarkable turnaround from the 2015 challenges, the outlook remains challenging.”

Delayed Targets 
The bank said it’s now taken about $2 billion of restructuring costs, two-thirds of the total it expects to spend under Winters’s strategic plan. The common equity Tier 1 capital ratio, a measure of financial strength, remained at 13.1 percent, the same as at the end of the first quarter.

Standard Chartered cited lower growth rates in Hong Kong and Singapore and uncertainty caused by the Brexit vote in pushing out its profitability goals. It had been targeting an 8 percent return on equity by 2018, rising to a 10 percent return by 2020. The bank made a 2.1 percent return in the first six months of the year, compared with 5.4 percent in the first half of 2015.

“It is likely to take longer than we had hoped to reach these levels of return on equity,” the bank said in its statement. “We believe many of these external challenges are cyclical rather than structural and remain confident that the actions we set out in November last year will eventually allow us to generate returns in excess of our cost of capital.”

‘Muted’ Growth 
Winters, 54, in his first year in the job raised capital, suspended the dividend, and laid out plans for cutting 15,000 jobs and restructuring or divesting $100 billion of risky assets. A sharp drop in revenue and surging loan impairments drove the Asia-focused lender to its first annual loss since 1989 last year. Jose Vinals, an International Monetary Fund executive, was named the bank’s new chairman last week, adding to Winters’s rebuilt management team.

The bank cut its exposure to commodities to $37.1 billion, the sector responsible for many of its bad loans after the price of oil plunged to about $40 a barrel amid a wider rout in natural resource prices. That’s a reduction of about $2.5 billion in the past six months, and down from $54.9 billion at the end of 2014, the filing shows.

“Although our performance has substantially improved, income growth remains muted and returns are weak,” Winters said in the statement. “The progress we have made has been hard won and has been achieved against a backdrop of deteriorating external conditions. Interest rate expectations are lower for longer than previously predicted, growth in our markets is slow and global trade volumes are down.”

HSBC Holdings Plc, the other U.K. bank that gets most of its profit in Asia, said Wednesday that second-quarter pretax profit fell 45 percent from a year earlier to $3.61 billion. The bank also pushed out the return on equity targets. 

Standard Chartered trades at about half its book value after the stock plunged 39 percent in 2015. The shares have climbed 4.6 percent this year before today, avoiding the plunges many other U.K.-based banks have faced after the nation’s vote to leave the European Union.

Winters has been shrinking the balance sheet and tightening lending standards after his predecessor Peter Sands was replaced in June 2015 after eight years at the helm. The CEO has also hired several senior executives and cracked down on ethics within the bank after discovering some employees were acting “above the law.”

Source: Bloomberg Business News