Reasons for chasing Standard Chartered higher

At three-month high after these results, the Asia-focused lender is back in favour.

Fears that the US-China trade war and Hong Kong protests could scupper the turnaround at Standard Chartered (LSE:STAN) have been allayed by better-than-expected third-quarter results.

Shares rallied 3% to 715.6p as the Asia-focused bank reported a 16% jump in underlying profits to US$1.2 billion, aided by a particularly strong performance in its financial markets division.

Standard continues to focus on delivering a 10% return on tangible equity (ROTE) by 2021, although it admitted today that this key benchmark in its turnaround faced “growing headwinds” from geopolitical tensions and weak near-term economic growth.

As China/Asia accounted for over 60% of last year's underlying profit, the worries of investors have been growing louder in recent months. But like HSBC (LSE:HSBA) in its trading update on Monday, Standard appears to be weathering the storm with a resilient trading performance.

 Source: TradingView Past performance is not a guide to future performance

The all-important ROTE rose 160 basis points to 8.9% in the third quarter, but the bank still has plenty of work to do to convince analysts that the target is realistic. The current market consensus for the 2021 financial year is 7.9%, which means shares at their current level will look particularly cheap if the bank's CEO Bill Winters is successful in his mission.

He hopes to drive further improvement in ROTE by "relentlessly" focusing on areas where the bank has competitive advantage and delivering a step up in innovation and productivity.

Some progress on the productivity front was noted today with a 5% increase in income per full-time employee. Costs were flat at $2.5 billion, but this metric is set to be higher in the current quarter due to investment phasing.

Winters has also set his sights on annual income growth of between 5% and 7% for the three years to 2021. The company recorded growth of 7% to $4 billion today, taking the year-to-date figure up by 3% or 5% on a constant currency basis.

Standard is also encouraged by results in previously underperforming markets, such as India, Indonesia, Korea and the UAE where aggregate profit in these countries rose 16%. 

The bank's steady overall performance will add to speculation that it is planning another $1 billion buyback programme to mirror the one completed in September. The bank's core capital ratio is comfortably within the target range of 13% and 14%.