China remains both a blessing and a curse for Standard Chartered (LSE:STAN), with the country’s faltering economic recovery weighing heavily on these results.
Standard has issued a further impairment provision of $294 million, of which $186 million relates to the Chinese real estate sector. In addition, a charge of $700 million has been taken over its stake in China Bohai Bank, where subdued earnings and a challenging macroeconomic outlook has forced a revaluation of its holding.
These provisions have driven a bus through earnings, with pre-tax profit falling by 54% over the quarter to $633 million, which compares with $1.4 billion the previous year and expectations of $1.44 billion. Meanwhile, pressure remains on both Net Interest Income (NII) and Net Interest Margin (NIM), resulting in Standard’s shares plummeting by 7% in overnight Asian trade.
Excluding the provisions, on an underlying basis the performance is rather less harrowing. Operating income rose by 4.5% to $4.52 billion and adjusted pre-tax profit fell by just 2% to $1.32 billion, albeit slightly shy of City estimates. At the same time, there are no lingering concerns over the strength of the balance sheet, and most of the key metrics remain in good shape.
The CET1 ratio, or capital cushion, rose from 13.7% the previous year to 13.9%, although the number was marginally lower than the 14% reported in the second quarter. The cost/income ratio ticked slightly higher to 63.5%, while underlying NII rose by 20% to $2.4 billion, given the benefits of higher rates compared to last year.
In addition, while the Return on Tangible Equity slipped to 7% for the quarter, in the year to date ROTE stands at 10.4%, above the 10% target which the group previously guided. The Liquidity Coverage Ratio remains at a strong and stable 156%.
In terms of income, there is a mixed picture, with Financial Markets dropping by 8% against strong comparatives and reduced market volatility, while Wealth Management increased by 18%, primarily on strong flows of net new money. Customer deposits and loans also dipped by 3% in the period, reflecting some uncertainty in the Asian region in which Standard is primarily exposed.
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The group also announced that around $1.8 billion of the $2 billion share buyback programme had now been completed, and alongside the banks which have reported so far, made no further announcements on dividends. The current yield stands at 2.3%, although traditionally the bank has not been one for more generous dividend payments. The outlook guidance has also been maintained for the full year, including growth in income of between 12% and 14%, and a NIM of around 1.7%.
After some years in the doldrums after previously having been the darling of the UK banking sector, Standard has for the most part had something of a return to form.
Over the last year and prior to an opening decline which sharply compounded the Asian drop overnight, the shares had risen by 29% as compared to a gain of 5.1% for the wider FTSE100 and in stark contrast to the struggles which most of its UK competitors have faced.
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The currently parlous state of developments in China are an inevitable concern, although Standard is adequately capitalised to withstand such challenges. Indeed, in the medium and longer term the Chinese economy should provide some significant opportunities, and in a region where the bank has a well-established and trusted presence.
Despite any disappointment which this latest update has delivered, the market consensus of the shares as a 'cautious buy' encapsulates both current challenges and future prospects.
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