Standard Chartered sets out an ambitious stall

Standard Chartered (STAN) didn't pull any punches in its full-year results. Management came out swinging with an ambitious target to generate an annual return on tangible equity (RoTE) of 10 per cent. The market reaction was decidedly sceptical, with the shares marked down by more than 4 per cent. This is partly due to the considerable heavy lifting required to achieve that target from an underlying base of 6 per cent. Part of this will involve $500mn (£367mn) of cost savings, with the aim of bringing the bank’s cost ratio down to 60 per cent from its current 76 per cent level. However, given Standard’s history of over promising, then under-delivering on its targets, it is no surprise that investors are taking a “wait-and-see” approach before a taking a position.

The results overall were flattered bycapital releases and lower impairments, but one technical factor in the bank’s favour is that rapidly rising interest rates will automatically improve its basic interest margin. This fell by 10 basis points during the year to 1.21 per cent, equivalent to $0.7bn of lost revenue, but along with the rest of the sector, Standard can look forward to better margins as inflation forces global central banks to act. A normalisation of trade flows meant greater demand for its letter of credit services, and trade banking revenues increased by 16 per cent to $1.15bn.

Analysts at Jefferies point out that an 8-10 per cent compound annual growth rate target through to 2024 would be a third higher than the current consensus. That sounds ambitious, but with the shares trading on a price/earnings ratio of 11 times forward consensus forecasts, management has room for manoeuvre – even if only to disappoint. Hold. 

Last IC View: Hold, 441p, 3 Aug 2021