Company Reports

Standard Chartered, like its peers, is benefiting from interest rates staying higher for longer, coupled with strong wealth management activities as risk appetite returns in Asia. We raise our net interest margin, or NIM, assumptions by 2 basis points in 2024, which also carries over to 2025 and factor in stronger growth in noninterest income of 10% in 2024 versus 5% in our original assumption. As a result, our net earnings forecast is increased by 13% in 2024 and 5%-8% thereafter, and our fair value estimate to HKD 89 (GBP 9.12) per share from HKD 84 (GBP 8.30). StanChart remains in 4-star territory.

Standard Chartered’s massive upheaval has delivered improved profitability, with the bank now looking to increase returns closer to its cost of capital. The turnaround has been difficult, but CEO Bill Winters' approach appears to be working. He has addressed issues with risk controls, culture, and cost base, and the group has begun to trim markets and products where it lacks the scale to be competitive.

We raise our fair value estimate for no-moat Standard Chartered to HKD 83/GBX 830 per share from HKD 77.50/GBX 820. The rise in our valuation mainly reflects a higher net interest margin assumption and expected share buybacks through 2026 that reduce the share base by around 4.3%-4.9% per year. Management is targeting returns on tangible equity of 12%, but given the current economic outlook, we think maintaining estimated ROTE around 10% is more likely. Nonetheless, StanChart's share price remains attractive. Our fair value estimate prices StanChart at just a 2024 price/book of 0.6 and price/earnings of 8.6. We think the current share price more than reflects the group's lower-than-peer ROTE and limited capital flexibility. By comparison, banks like HSBC and DBS are expected to achieve ROTEs in the midteens to high teens, with common equity Tier 1 ratios in the midteens.

Standard Chartered’s massive upheaval has delivered improved profitability, with the bank now looking to increase returns closer to its cost of capital. The turnaround has been difficult, but CEO Bill Winters' approach appears to be working. He has addressed issues with risk controls, culture, and cost base, and the group has begun to trim markets and products where it lacks the scale to be competitive.

We have updated our models for Hong Kong banks in our coverage. Our fair value estimates for HSBC and Standard Chartered are unchanged, but we've cut our fair value for BOC Hong Kong by 7% to HKD 33 and for Hang Seng Bank by 19% to HKD 110. Despite these adjustments, we maintain the view that all banks are undervalued at current prices, with BOCHK showing the greatest potential upside.

Standard Chartered’s massive upheaval has delivered improved profitability, with the bank now looking to increase returns closer to its cost of capital. The turnaround has been difficult, but CEO Bill Winters' approach appears to be working. He has addressed issues with risk controls, culture, and cost base, and the group has begun to trim markets and products where it lacks the scale to be competitive.

We reduce our fair value for Standard Chartered's Hong Kong listed shares to HKD 77.5 from HKD 82 and maintain our fair value for its London shares at GBX 820. These are around 0.77 times the group's book value and 30% above the current share prices, meaning that we view StanChart as attractive relative to its intrinsic value.

We assign fair value estimates of GBX 820 and HKD 82 to Standard Chartered, equivalent to 0.8 times book value and about 10% above current share prices, as we transfer and resume coverage of the stock.

We are placing Standard Chartered under review pending a change in analyst. We will provide further updates on coverage resumption in January 2023.

As expected, Standard Chartered’s strong third-quarter result was underpinned by higher interest income in a rising interest rate environment. Income increased by 15% to USD 4.3 billion while good cost control saw underlying profit before tax increasing 32% to USD 1.4 billion.

While Standard Chartered reported a strong first-half performance we lower our fair value estimate to HKD 80 per share, from HKD 90 per share, and to GBX 850 per share from GBX 930 per share. The latter also factors in current USD/GBP assumption of 0.82, compared to 0.80 previously. The cut is mainly driven by our view that the cumulative increase in the net interest margin, or NIM, to 2024 will be 37 basis points versus 57 previously. We also factor in a decline in NIM from 2024 as interest rates are likely to normalize once inflation subsides and economic conditions slow. The shares are undervalued and we think the share price will find support after Standard Chartered announced a USD 500 million buyback after recently completing a USD 750 million buyback. While we believe the bank had further capacity for capital management initiatives, the timing was ahead of our earlier view of initiatives being announced at the full-year result.

Standard Chartered provided a strategic update on its financial markets division, building on positive momentum following restructuring of the division. Management guided to a slight increase in 2024 return on risk-weighted asset guidance for the division from 6.5% to 7.4% and return on tangible equity in the mid-teens by 2024. Return on tangible equity in 2021 was 11.4%, exceeding our estimate of the group’s cost of capital of 10%. At a group level, the bank is targeting return on tangible equity of over 10% by 2024 and we expect the bank to just meet the target in 2024.

Standard Chartered’s solid first-quarter result was above consensus expectation, mainly on higher-than-expected net interest income and trading income. The higher net interest income was underpinned by a 7-basis-point improvement in net interest margin against the same period last year and a 10-basis-point increase on the fourth quarter. The increase in net interest margin more than offset a decline in average interest earning assets. The latter was attributable to an earlier announced optimization of risk weighted assets, which declined by USD 10 billion against 2021 to USD 261 billion. Further optimization is expected to see risk weighted assets flat for the full year despite overall lending growth of 3% annually over the three years. The bank’s outlook was positive with full-year net interest margin now expected to be 1.4%. A further increase in 2023 is expected, and management noted net interest margin could return to its pre-COVID-19 (2019) level. As such, total income is expected to be above earlier guidance of 5%-7%. The higher income does provide the bank additional headroom to invest as operating expense is also expected to track higher. Overall cost guidance is unchanged, and cost to income is expected to decline to 60% by 2024.

Standard Chartered’s fiscal 2021 was solid but came in below our forecasts on a USD 300 million impairment on its investment in China Bohai Bank. Underlying profit before tax for the full year was up 61% to USD 3.90 billion, compared with our USD 4.28 billion forecast. Along with the full-year result, management provided a strategic update and announced an expected USD 750 million share buyback. Increasing operational efficiency, acceleration in optimising risk-weighted assets within the corporate and institution banking division, and continued focus in affluent and mass markets in consumer and private banking are expected to lift return to tangible equity to 10% by 2024. The latter guidance is more explicit in the timing in reaching the 10%, and earlier guidance of return on tangible equity, or ROTE, of greater than 7% by fiscal 2023. There is no change in our view that the focus should be on positive trajectory in improving profitability, though the tailwind of a positive interest rate environment should see the bank actually reach its target by fiscal 2024.

While Standard Chartered posted a good third-quarter result in line with consensus expectations, the bank’s share price declined sharply during London trading. In our view, the market was expecting further capital management initiatives at this result, after completing its USD 250 million share buyback announced at the second-quarter fiscal 2021 result. The bank remains well capitalised with higher profitability and a lower level of risk-weighted assets resulting in a 50 basis point increase in common equity Tier 1 ratio to 14.6%. This is above the bank’s target of 13% to 14% and management expects the common equity Tier 1 ratio to be at the top end of guidance at 14%. The bank noted further capital management is expected for the fiscal 2021 result with an intention to lower the common equity Tier 1 ratio to be at the lower end of the range closer to 13%.

With the U.S. Federal Reserve making a 50-basis-point cut to its target interest rate to 1%-1.25% ahead of its monthly meeting, we expect lower interbank rates in Hong Kong and Singapore to flow through to weaker net interest margin and profitability for the banks under our coverage. Under our base-case scenario previously, our U.S. team did not expect moderation in global growth to cause the U.S. Federal Reserve to lower the target rate again in 2020. Our base case for the Hong Kong and Singapore banks did assume declining net interest margin in 2020 and 2021 from earlier interest-rate cuts. With CME interest-rate futures implying a further interest-rate cut in the March 18 meeting, we factor in another 50-basis-point cut. From a sensitivity perspective, we estimate the impact of a 25-basis-point cut on net interest margin is 2-5 basis points for the Singapore banks and 3-5 basis points for the Hong Kong banks. Uncertainty remains high given the diverse outcome of the coronavirus situation and the following monetary responses by central banks. While we remain positive on the banks' long-term growth prospects, positive catalysts are lacking in the near term, although dividend yields of 4%-6% are attractive.

No-moat Standard Chartered’s fourth-quarter results were slightly weaker against our expectation. Underlying profit before tax of USD 4.2 billion was slightly below our forecast of USD 4.3 billion. For the full year, return on tangible equity increased by 130 basis points to 6.4%. In our third quarter earnings note, we indicated that we believed the target of ROTE of at least 10% by 2021 may be challenging in an environment of lower interest rates and slower economic growth. We are not surprised that management said the target would take longer to achieve.

Standard Chartered posted another strong quarterly result with income rising across most client segments and geographies against the same period last year. However, growth has slowed on a quarterly basis with most client segments seeing a slight decline in revenue. Still, higher treasury and corporate finance income underpinned income growth in Europe and Americas while core markets in North Asia were up 2% against last quarter, and South Asia was flat. Overall underlying profit before tax increased 16% to USD 1.2 billion, translating into a 160 basis points improvement in return on tangible equity, or ROTE, to 8.9%. The bank continues to track toward its ROTE of at least 10% by 2021 though achieving the target may be challenging in a low interest rate and slowing economic growth environment. We reiterate the focus is on continued operational improvement and the bank is benefiting from its earlier restructuring effort. Operating expense was up 1% on a constant currency basis and guidance of below inflation growth was maintained. Our forecasts factor in a reasonable increase in operating expense in the fourth quarter, in line with guidance of higher investment spending in the latter half of the year. Our income forecasts are adjusted slightly lower to factor in slightly weaker net interest margins and offset by time value of money, our fair values of HKD 80 is unchanged. Our fair value for the U.K. listing is lowered to GBX 810 from GBX 860 assuming current exchange rate.

Standard Chartered’s massive upheaval has delivered improved profitability with the bank now looking to increase return closer to its cost of capital. The turnaround has been difficult, but we think CEO Bill Winters had the right approach. He’s rectified issues with the bank’s risk controls, culture, cost base, and across markets and products where it lacks the necessary scale to be competitive. In our view, structural changes in the banking sector from heightened regulatory compliance and capital requirement mean the bank’s days of consistent midteens return on equity are behind it. The bank is targeting a return on tangible equity, or ROTE, of 10% by 2021, and we forecast increases toward this target over our explicit forecast period.

Standard Chartered maintained its march toward its return on tangible equity, or ROTE, target of at least 10% by 2021 first-half ROTE of 8.4% was solid though operating expense is generally higher in the second half. Still, the bank continues to benefit from its earlier restructuring with operating expense steady on a constant currency basis. Operating income increased 4% and operating leverage within the business propelled underlying profit before tax 13% higher to $2.6 billion. All divisions posted positive jaws, or operating income growth outpacing operating expense. This has seen improved profitability in corporate and institutional banking, and commercial banking, which struggled prior to the restructuring. ROTE for the two divisions are 10% and 9.1%, respectively, and improvement is key to lifting group ROTE above 10%, in our view. Underlying profit also benefited from a benign credit environment. First-half credit cost of 20 basis points, annualised, of total loans was below management guidance of a normalisation to 40 basis points in a three-year timeframe. Our forecast assumes steady increase toward 40 basis points by the back end of our forecast period.