Standard Chartered upgrades forecasts after strong year

With the Chinese economy open for business again, the environment for banks improving more generally, plus ongoing takeover speculation, the immediate future looks bright for this bank. Our head of markets reports.

Standard Chartered (LSE:STAN) is nearing a return to its previous status, when as something of a darling in the UK banking sector, prospects of global growth drove investor interest.

Indeed, its attraction of late culminated in the rumoured bid from First Abu Dhabi Bank. Despite FAB denying any intention to formalise an approach, speculation remains that this particular story may have further to run.  

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However, the crux of the investment case does not centre around bid speculation, rather the potential for growth in Asian economies and China in particular. Indeed, China has represented a blessing and a curse in the period of this report, although Standard is of the opinion that the worst could be over.

The bank’s exposure to the Chinese commercial real estate sector resulted in a credit impairment of $582 million being taken, and was the largest factor in an overall provision which totalled $838 million as compared to $263 million the year previous. At the same time, the Wealth Management unit saw an income decline of 17%, primarily driven by Covid-19 restrictions and wilting consumer sentiment in the region, while the group is mindful of ongoing geopolitical tensions which could muddy the waters.

However, the reopening of the Chinese economy could well prove to be a turning point, for which Standard would be a particular beneficiary. The group estimates that GDP growth in Asian economies generally will be more than 5% for the next two years, and with Standard’s established and trusted presence in the region, the bank is perfectly positioned to capitalise on such a return to form.

In the meantime, growth of 10% in its China onshore business and 21% for related offshore business is an early indication that fortunes are improving. Elsewhere, income at the Financial Markets unit rose by 21% to record levels, while the newly launched digital offering in Singapore, Trust Bank, rose to 450000 customers from a standing start in September 2022.

At a group level, there is certainly an overarching feeling of recovery. Income grew by 15% to its highest level since 2014, while pre-tax profit increased by 28% over the year from $3.4 billion to $4.3 billion. Most of the key metrics also improved, with Net Interest Income rising by 18%, Net Interest Margin by 0.2% to 1.41%, the capital cushion (CET1 ratio) stable at 14% and the cost/income ratio falling to 67% from a previous level of 74%. Meanwhile, the Liquidity Capital Ratio ticked higher to 147%, and the Return on Tangible Equity rose by 1.2% to 8%, with Standard now setting a target of a figure nearer to 10% this year.

Such strength has also enabled some notably heightened shareholder returns, including the prime announcement of a $1 billion share buyback programme. The dividend has also been increased, leading to a projected yield of 2%, although traditionally the bank has not been one for more generous dividend payments. Management confidence in prospects has been further underlined by a raft of upgraded expectations from the bank for the year ahead, such as a further improvement to the Net Interest Margin and a normalising of credit impairments.

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Standard may have missed some of the market expectations for the fourth quarter, but for the year as a whole the sense of progress is palpable. The strength of the US dollar continues to weigh on Sovereign risk in certain parts of the region, but Standard is adequately capitalised to withstand such challenges, while the Chinese economy in particular provides some significant opportunities in the short, medium and indeed longer term.

The share price has reflected the improving prospects, having risen by 32% over the last year, as compared to a hike of 5.2% for the wider FTSE100 index, and by 26% in the last three months alone. The market consensus of the shares currently stands at a 'strong hold', but upgrades could well follow on the back of these results.