Standard Chartered makes hay from volatility

Some readers of this publication may not have experienced a sustained period of inflation in their lifetimes, at least not when the retail price index is bobbing around the 10 per cent mark. But the point is that it’s the duration of an inflationary spiral which largely dictates its impact on risk assets. A short, sharp surge can push up valuations with minimal effects on the wider economy, but a prolonged period of inflation can destroy shareholder value.

It’s a point that won’t be lost on bosses at Standard Chartered (STAN). The Asia-focussed bank has released a solid set of interim figures, complete with news that it plans to launch a new $500mn (£413mn) share buyback as part of targeted $5.0bn return to shareholders over the next three years.

The news played well with the market on results day, along with the revelation that the bank generated record first-half income for its onshore China business. And last year’s revamp of its corporate, commercial and institutional banking (CCIB) business is having the desired effect, at least judging by the 110-basis point increase in the income return on risk-weighted assets.

Efficiencies are evident elsewhere in the group, with an improving cost-to-income ratio at the consumer, private & business banking unit. Management also noted gross expense savings of $199m, “more than offsetting increased investment spend in strategic initiatives”. The group’s capital base remains sound, with a CET1 ratio standing at 13.9 per cent. Further savings have been pencilled in and operations are to be streamlined with a digital transition at the heart of matters.

It hasn’t been all plain sailing. The bank booked a $70mn charge for a sovereign rating downgrade in Sri Lanka, following on from the political and economic turmoil in the country. And it was forced to take a $237mn credit impairment charge linked to its exposure to the commercial real estate in sector mainland China. Uncertainties linger on this score, as news emerges that Beijing is seeking to mobilise up to £122mn in loans designed to refinance real estate projects. Many overleveraged developers have already gone to the wall and you’re left wondering whether this will prove to be a case of throwing good money after bad.

Interest rate increases and wider volatility have boosted second quarter performance and many Asian economies, most notably China, are only now just emerging from pandemic restrictions, so near-term commercial prospects are improving in the region. However, global macroeconomic conditions could weigh on the regional economy, so we remain circumspect even with the bank's lowly forward rating of 9X consensus earnings. Hold.

Last IC view: Hold, 525p, 17 Feb 2022