Standard Chartered looks safe as houses – but safety doesn’t mean growth. Avoid
IT takes time to build a team and even longer to turn out impressive results. Jurgen Klopp’s Liverpool side have been making the running at the top of the English Premier League this season but it has taken the best part of three years for the German manager to turn them into credible title contenders. It has been a different story for Liverpool’s shirt sponsor, Standard Chartered, where Bill
Winters took over as chief executive in 2015, four months before Klopp’s arrival in the dugout. The stock market performance of the Asia-focused bank has hardly been pushing for silverware: the share price has slid by more than a third on Winters’ watch.
He has made a radical break with the past, getting rid of a third of assets to lessen exposure to bad loans after the bank overreached itself. The clean-up job means that Standard Chartered, which remains under the supervision of US regulators after accusations that it breached sanctions on Iran and faces a $1.5bn (£1.2bn) fine over the matter, looks as safe as houses, having nudged up its “core tier 1” ratio – the group’s main measure of financial strength – to 14.2pc.
But safety does not go hand in hand with growth. The bank disappointed at the interim stage in July when operating costs rose by 7pc – faster than operating income, which was 6pc higher at $7.6bn.
Winters is up against it. No one can begrudge him pouring money into Standard Chartered’s technology platform to tighten compliance. The bank also needs sufficient manpower on the ground. It is unfortunate that local competitors are taking market share and that falling revenues have not been matched by falling costs. Morgan Stanley, the investment bank, pointed out that in Hong Kong, one of Standard Chartered’s two key markets alongside Singapore, the bank was 16 percentage points less efficient than its peers when revenues peaked in 2015. Now the gap stands at 29 percentage points.
Some of that comes from being a British bank. This year the bank levy will cost it around $310m. But the other question is one of scale. Even though it is worth more than £20bn, Standard Chartered is viewed as a perennial takeover target in an industry dominated by giants such as JP Morgan.
According to a sum-of-the-parts valuation by Berenberg, the broker, almost three quarters of the bank’s value is tied up in its Greater China & North Asia region. The year after next, Berenberg forecast that return on tangible equity for that division would pass 21pc while the bank’s four other geographies remained stuck deep in single digits.
Winters continues to hold out hope that the group will deliver a return on equity greater than 8pc in the medium term, compared with 6.7pc today and 5.2pc a year ago. However, several analysts doubt he will get there.
All eyes remain on China, whose factory sector recently reported stalled growth on softer export orders after 15 months of expansion. Winters has already played down the impact of a trade war with America, suggesting that Standard Chartered could benefit if Chinese trade with other regions is boosted as a result. But if China’s central bank again lets commercial lenders cut reserves to boost spending, investors’ fears over spiralling debt levels can be expected to rise.
Shareholders can take a crumb of comfort from the resumption of the interim dividend, a sign that financial performance is looking up. Standard Chartered is also trying to expand at nominal cost, with initiatives such as a digital-only bank rolled out across several African markets.
A cocktail of heavy regulatory costs, fines and low interest rates has made banks poor investments a decade on from the financial crisis. This column has yet to be proved right that Barclays has better times ahead. Its shares are down by 19.4pc since our tip in May even though its investment banking arm is rallying. The obvious frustration of the chairman, John Mcfarlane, plus an activist investor on the share register, means something has to give.
Back at Standard Chartered, there must be an air of frustration too. Even though its shares are trading at barely 10 times next year’s forecast earnings, there are better ways to gain exposure to emerging markets.
Questor says: avoid
Share price at close: 605.7p