Standard Chartered expects even better year after these Q3 results

In stark contrast to the poorly received HSBC Holdings (LSE:HSBA) update, Standard Chartered (LSE:STAN) has shot the lights out as its Wealth business continues to set new records.

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Indeed, the Wealth Solutions division is fast becoming a jewel in the crown. Income growth of 26% represented the third consecutive record quarter, while affluent net new money inflows of $20 billion was also an all-time high. Third quarter pre-tax profit growth of 16% to $977 million for the Wealth and Retail Banking unit overall is proving to be a vindication of the group’s strategy.

Alongside heavy demand for its investment products driving the growth, Standard previously stated that it was now aiming for $200 billion of net new money in Wealth Solutions over the next five years. If achieved, this stretching target would clearly represent the next level of growth.

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The Global Markets unit was another star performer, with 21% operating income growth to $1.01 billion, contributing to a 37% spike in pre-tax profit for the overall Corporate & Investment Banking unit to $1.61 billion. Elsewhere, loans and advances for the group overall increased by 4.1% compared to the corresponding period.

There is little to mar the overall figures, and a $90 million credit impairment charge is less than half the $188 million from the previous year. A further $34 million has been added to the $234 million attributable to the group’s Middle East exposures although, as has been widely seen across the European banking sector, the number represents a prudent provision rather than any actual underlying deterioration in credit.

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These are relatively minor distractions given the strength of this performance, however. Operating income rose by 14% to $5.78 billion, comprising Net Interest Income (NII) growth of 9% to $3 billion, and non-interest income growth of 19% to $2.8 billion. The improvement led to a pre-tax profit jump of 27% to $2.25 billion and of 46% to net profit to $1.5 billion, which breezed past expectations of $1.23 billion.

The key metrics also stood firm, with a capital cushion, or CET1 ratio of 13.8%, a Return on Tangible Equity (ROTE) of 15.7% a hard-won improvement from the 10.5% of the corresponding period and a cost/income ratio which fell from 61.5% to 59%, while earnings per share growth ballooned by 55% in the quarter, leading to a spike of 27% in the year to date.

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As such, Standard has raised previous outlook guidance, with operating income growth now expected to be above the 5-7% range (last estimated in the middle of the range), ROTE of around 14% (12%) and a 60% cost/income ratio. There were no announcements on shareholder returns as expected and, while the dividend yield is a somewhat pedestrian 2.6%, the group is well on track to deliver on its commitment to return $8 billion to shareholders between 2024 and 2026. That's a strong show of management confidence about prospects, including the $1 billion share buyback announced at the interims in July.

This is all being achieved despite the headwinds of Standard’s exposure to China and the real estate sector in particular, where its presence has been something of a double-edged sword, but the group’s general exposure to Asia has offset any immediate concerns.

Indeed, Standard previously highlighted that there were particular pockets of optimism throughout the region, such as the movement of capital away from oil in the Middle East and the inexorable economic growth in India, while the Wealth business is clearly reaping the rewards of targeting the affluent sector in the relevant regions.

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It has been a long slog for Standard, although the share price has now eclipsed its record 2010 highs. After some years in the doldrums having once been the darling of the UK banking sector, Standard finds itself reaping the rewards of a long-term, multi-faceted strategy. Even prior to this very warmly received update, the shares had risen by 37% over the last year, as compared to a rise of 10% for the wider FTSE100, and by 137% over the last two years.

Shareholder returns, cost management, growth in the Wealth business and a sector rerating have all played their part. The challenge for the group now is to maintain the momentum and capitalise on the significant opportunities which the Asian region could provide over the medium to longer term.

After such a stellar price run, the shares do not look obviously cheap, but the recent upgrade of the market consensus to a cautious buy has been fully vindicated given the strength of this update.