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Standard Chartered warns on profits

Standard Chartered is expecting a grim first half, but its longer-term growth story isn’t really in doubt
June 27, 2014

What’s new:

■ First-half profits will be well down

■ Impairments are rising

■ Financial markets income is under pressure

IC TIP: Buy at 1200p

The headwinds facing Asia-focused lender Standard Chartered (STAN) are hardly new. Issues like tough investment banking conditions and currency weakness have already been well-flagged. But the bank’s latest update was nonetheless severe, and the shares fell 4 per cent in response.

Management now expects first-half operating profit to be around 20 per cent lower than in 2013, with growth in markets such as China and Africa offset by weak performances in India, Korea and Singapore. Asset quality, while still described as "good", is also under pressure, and loan impairments are expected to have risen by 15-20 per cent. That will partly reflect ongoing credit quality problems in Korea, where a government-sponsored debt forgiveness programme for struggling consumers has inflicted much pain on lenders.

The financial markets unit - essentially investment banking - looks especially challenged. Income there is expected to be down around 20 per cent, reflecting regulatory changes and lower trading volumes amid dampened market volatility. While those pressures aren’t unique to Standard Chartered, the head of the financial markets unit, Lenny Feder, has thrown in the towel. He’ll begin a 12-month sabbatical next month, and is thought unlikely to return to his current role. Back in January finance director Richard Meddings said he was stepping down, and after such a tough first half rumours are circulating that chief executive Peter Sands may not last.

Shore Capital says...

Buy. Trading momentum has been weak, with the financial markets operation having been a particular drag on the business. We’re likely to reduce our EPS estimate for end-2014 from 207¢ (122p) to around 180¢-185¢. But while the size of the revenue slippage in financial markets business was a surprise, the headwinds identified by the bank are not. What’s more, the comparatives will get easier as the year progresses and - reflecting the bank’s longer-term growth prospects in emerging markets - we’d expect the shares to rerate.

Canaccord Genuity says...

Sell. Standard used to lend to slightly riskier customers than HSBC (HSBA). That was fine when market conditions were healthy, but now impairments are ticking up in more challenging times. That the 15-20 per cent hike in loan impairments flagged in the pre-close statement is described as "in line" also strikes us as contradictory. Standard is now shifting its strategy away from higher-risk activities, and that will put margins under pressure. There are too many hurdles for the bank to jump, leaving the shares, priced at a premium to those of HSBC, looking pricey.