Standard Chartered Earnings: Decent Quarter on Low Credit Costs

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

Second-quarter net profit attributable to common shareholders of USD 982 million represents an annualized return on equity of 7.9%, slightly below where we assume the cost of equity to be. However, this is still a solid achievement for CEO Bill Winters, in our view, as the bank continues its recovery after tighter capital and anti-money-laundering regulations and penalties hit returns in the second half of the 2010s.

As in the first quarter, when annualized ROE was 9.4%, the bottom line was supported by expanding net interest margins and lower credit costs in the second quarter. These factors won’t persist indefinitely, but there are some indications of a more fundamental turnaround, including a declining cost/income ratio from elevated levels and strong capital levels that allowed Standard Chartered to announce another USD 1 billion buyback. Loan growth is difficult in Asia this year, given low credit demand with China’s delayed postpandemic recovery, but Standard Chartered was able to benefit from foreign-exchange volatility in emerging-markets fixed-income trading, where it has an advantage over many other banks.

We expect second-half profitability to lag that of the first half, given the likelihood of credit costs normalizing upward a bit (though management said it wasn’t aware of any specific risks at the moment) and normal seasonality such as the U.K. bank levy in the fourth quarter. Nonetheless, our profit forecasts for 2023 and also for 2024 and beyond assume that Standard Chartered will perform better than it has in the past decade, though not enough to bring its ROE above the cost of equity and merit a valuation above book value.