Standard Chartered down the buyback route again

Standard Chartered (STAN) booked half-year revenues of $4.6bn (£3.7bn), which beat consensus on the back of rising interest rates and a record performance for the investment bank’s trading unit. An increasingly hawkish stance from the US Federal Reserve and other central banks fed through to a one-third increase in net interest income to $2.4bn, while other income streams increased by 15 per cent to $2.1bn. Shareholders will also feel encouraged by the three percentage point increase in return on tangible equity (ROTE) to 12 per cent.

The Asia-focused bank stands to benefit further when the reopening of the Chinese economy gathers momentum. Net earnings increased by 14 per cent to $2.39bn, which fed through to a 50 per cent hike in the half-year dividend to 6¢ a share. In addition, the board decided to carry out an additional share buyback “commencing imminently” for up to a maximum consideration of $1bn, a reflection of the bank’s solid capitalisation. Its CET1 ratio was unchanged from the 2022 year-end at 14.0 per cent – the top end of the target range. It is thought that the newly announced buyback will reduce the ratio by approximately 40 basis points, a minimal strain on the capital base.

The flipside of the current interest environment is that it should theoretically lead to increased levels of distressed debt across the wider economy. Indeed, the bank booked a credit impairment charge of $146mn in the second quarter, an increase of $80mn year on year, which was primarily brought about by China’s faltering commercial real estate market. However, the overall level of impairments through the first half of 2023 was down by 35 per cent on HY 2022.

The customer deposit base has increased by 2 per cent since the first quarter, but there were commensurate falls in lending and the bank’s risk-weighted assets, although none of the outcomes are indicative of wider trends. Indeed, group chief executive, Bill Winters, points out that the bank remains “highly liquid with a diverse and stable deposit base and an advances-to-deposits ratio of 53.6 per cent and a liquidity coverage ratio of 164 per cent”.

Looking ahead, the bank is guiding for revenue growth of 12-14 per cent on a constant currency basis in 2023, up from 10 per cent, and to achieve ROTE of 10 per cent. These are positive expectations, but investors should keep one eye on China’s property sector – outcomes there are far from assured. And although the bank compares favourably with peers in terms of its forward rating and earnings growth expectations, we remain neutral given wider economic anxieties. Hold

Last IC View: Hold, 739p, 16 Feb 2023