Bullish outlook boosts Standard Chartered shares

• Fourth-quarter earnings miss forecasts but full-year pre-tax profits and dividend at their highest since 2014
• New buyback programme and higher-than-expected dividend
• Management brings forward timeline for profit target by a year to 2023

“In many ways Standard Chartered’s 2022 results are similar to those of Barclays, but the shares are getting a much warmer reception because the outlook statement reads much more positively,” says AJ Bell investment director Russ Mould. “Both banks recorded multi-year highs in profits and dividends last year, even if both were held back by loan losses and other one-off costs, and they have each extended share buyback programmes for this year. Each is warning of an increase in loan losses for 2023 as well, but the key difference seems to be that Standard Chartered is much more optimistic on net interest margins on its loan book than Barclays and a result chief executive Bill Winters seems more confident that the bank can achieve its key profitability target in 2023, a year earlier than scheduled.

“Standard Chartered’s reported pre-tax profit of $4.3 billion for 2022 represents an 28% advance on the prior year and takes earnings to their highest level since 2014. The dividend, at $0.18 a share, also represents an eight-year high.

Source: Company accounts

“Income rose 9% and expenses by just 4%, as net interest margins rose, strong activity in foreign exchange and commodities trading offset weakness in credit trading and also a lesser result from Wealth Management, where COVID-19 and lockdowns in China and Hong Kong in particular knocked sentiment among even the most well-heeled savers.

“However, 2022 ended on a scruffy note with a jump in both restructuring costs and loan losses. Standard Chartered took hits from sovereign debt defaults in Ghana, Sri Lanka and Pakistan, the Chinese commercial real estate market and also its exposure to the Chinese bank Bohai. As a result, 2022 pre-tax profit actually missed analysts’ forecasts by around 10%.

Source: Company accounts

“This makes the fourth quarter Standard Chartered’s weakest of the year. However, this seems to be standard operating procedure at the bank and it is not stopping boss Bill Winters from talking more optimistically about 2023.

Source: Company accounts

“Thanks to an expectation that net interest margin will rise to at least 1.75% in 2023, compared to prior expectations of 1.65% and 2022’s out-turn of 1.41%, Standard Chartered now believes that its target of a 10% return on tangible equity is within reach in 2023, a year earlier than expected.

“Based on 2022’s average tangible equity base of $37 billion, that implies net profits of $3.7 billion, all other things being equal, compared to $2.9 billion in 2022 and current consensus analysts’ forecasts for the coming year of $3.3 billion.

“This is a contrast to Barclays, which flagged only a modest uptick in net interest margin for its UK operations in 2023, to around 3.2% for the whole year from 2.86% in 2022 (and 3.16% in Q4).

Source: Company accounts

“It is also despite Standard Chartered joining Barclays in acknowledging that loan loss ratios and asset impairments will continue to ‘normalise’ from the low levels seen in the past few years, when zero interest rates and Quantitative Easing programmes have squashed the cost of debt worldwide and government and central bank support programmes have seen businesses large and small through the pandemic and lockdowns.

“Barclays flagged a rise in its loan loss ratio to between 0.50% and 0.60% and Standard Chartered to between 0.30% to 0.35% for the coming year, compared to 0.30% and 0.21% respectively in 2022.

Source: Company accounts. *Analysts’ consensus estimates.

“Even so, a reopening of China and Hong Kong could provide Standard Chartered with an economic tailwind, even if central banks continue to tighten global liquidity, and the fresh $1 billion buyback suggests there is no lack of confidence in the bank’s future.

“The buyback also makes financial sense, given that Standard Chartered’s shares continue to trade at a substantial discount to its stated, tangible net asset, or book, value per share of $12.49. It may also be this tempting valuation which means that rumours of a bid from First Abu Dhabi bank continue to swirl, even if January’s denial of any formal approach forbids the Middle Eastern concern from tabling any sort of new bid for six months.”

Source: Company accounts, Marketscreener, analysts’ consensus forecasts, Refinitiv data