StanChart in a war of attrition

After a period when investors found it difficult to believe any of Standard Chartered’s (STAN) assurances on income levels, the return of dividends, though low, and a $250m (£179m) share buy-back program went some way to mending fences with the City. In common with its peers, low impairment levels meant a net release of $47m of capital funds, an improvement of $1.61bn on last year and which fed directly through to the bottom line. However, a worrying decline in operating income of 5 per cent is a flashing indicator of future problems.

The decline in overall income was the result of interest rate cuts in several of the bank's key markets. The overall macro-effect was broadly positive, in the sense that rate cuts undoubtedly stopped many loans from going bad during the pandemic period. However, the bank only avoided a significant squeeze on its margins because operating expenses declined at double the rate, 8 per cent in these results. Also, while loan impairments were lower, it was clear that the disruption affected its bread and butter transaction banking business, which saw income decline by 16 per cent to $1.2bn.

Combined, this leaves the bank’s management with a significant strategic headache. StanChart is a fundamentally commercially focused institution that facilitates trade via underwriting letters of credit, or managing companies’ treasury funds for a small fee, plus interest. Against a backdrop where interest is hard to come by, the only real option is to focus on areas where it can earn decent fees. For example, in these results the disappointing performance of transaction banking was offset by much stronger growth in wealth management. Fees for this service topped $850m and now make up the single biggest proportion of fees the bank earns.

Investors will undoubtedly make the link with recent developments at Lloyds when it comes to StanChart’s emphasis on wealth management. It is an interesting turn of events but begs the question whether big banks will now compete directly with asset managers or, are content to take a smaller fee, and simply hand out the mandates? There is no doubt that the historically disappointing dividend is a sign that StanChart, along with other banks, is struggling for real growth. Consensus forecasts for 2022, based on adjusted EPS, put the bank at a forward P/E of 5.5. That is a big discount to peers but, given its small relative size in relation to the others, it is a fair rating. Hold.

Last IC View: Hold, 487p, 25 Feb 2021