Standard Chartered reaping record rewards of long-term strategy

The bank’s logo on a building in Poland. Photo: Jakub Porzycki/NurPhoto via Getty Images.

Standard Chartered (LSE:STAN)’s multi-year strategy is reaping record rewards, and the outlook is equally promising.

Overall operating income, both Wealth and Global Banking income and pre-tax profit for the half all surged higher to new record levels for the group. There is little to mar the overall figures, except for the $446 million (£335 million) credit impairment charge, which was 33% higher than the previous year. Within this figure, some $234 million is 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 6% to $11.6 billion, comprising Net Interest Income (NII) growth of 4% to $5.7 billion, and non-interest income growth of 8% to $5.9 billion. The improvement led to a pre-tax profit jump of 9% to $4.78 billion, comfortably ahead of the $4.52 billion which had been estimated. Net profit of $3.37 billion was 10% higher and breezed past expectations of $3.01 billion.

The Wealth Solutions business is fast becoming a jewel in the crown for Standard. Operating income growth of 38% to $2.1 billion included affluent net new money inflows of $33 billion. Second-quarter profit growth of 76% to $1.01 billion for the Wealth and Retail Banking unit overall and indeed the entire half represented a record and 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, and if achieved this stretching target would clearly represent the next level of growth.

The Global Banking unit was another star performer, with 20% operating income growth to $1.31 billion, including a spike in the Capital Markets & Advisory business where increased M&A activity and bond issuance fees boosted revenues. Elsewhere, both loans and deposits for the group overall increased compared to the corresponding period.

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The key metrics also stood firm, with a capital cushion, or CET1 ratio of 14.2%, a Return on Tangible Equity (ROTE) of 17.6% a hard-won improvement from the 16.4% of the corresponding period and a cost/income ratio which fell from 57.3% to 54.6%, leading to a statement of management confidence in prospects. Previous outlook guidance was reiterated or raised, with the group aiming for operating income growth around the middle part of a range of between 5% and 7% in the coming year, ROTE in excess of 12% and NII broadly flat. 

In addition, a new $1 billion share buyback programme was announced alongside a 66% increase in the interim dividend, although for the latter this does little to improve a pedestrian 2.5% projected yield. Even so, the group is well on track to deliver on its commitment to return $8 billion to shareholders between 2024 and 2026, which is a strong show of management confidence for prospects.

Despite the headwinds of its exposure to China and the real estate sector in particular, where its presence has been something of a double-edged sword, 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.

It has been a long slog for Standard although the share price has finally 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. Prior to this warmly received update, the shares had risen by 57% over the last year, as compared to a rise of 19% for the wider FTSE 100, and by 190% over the last two years. Shareholder returns, cost management, growth in the Wealth business and a sector rerating have all played their part. 

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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 and Standard will need to deliver on its projections for the next leg of growth, although in the meantime this update could prompt an upgrade to a market consensus which currently stands at a hold, albeit a strong one.