Standard Chartered boosts cash return plans

• First-quarter results beat expectations
• Increased net interest margins, cost efficiencies and very low credit impairments drive earnings growth
• Bank increases cash return plans to $5 billion by the end of 2024

“Standard Chartered is already running a $1 billion buyback and expected to pay out $1.2 billion in dividends across this year and next, but chief executive Bill Winters is now targeting total cash returns to the bank’s shareholders in excess of $5 billion by the end of 2024 – that is around a fifth of the company’s current market capitalisation,” says AJ Bell investment director Russ Mould. “The shares rallied Asia after the release of the figures, despite ongoing worries over US regional banks after another collapse in First Republic’s share price and wider macroeconomic concerns, but if anything, right now, Standard Chartered is enjoying a macro tailwind thanks to the reopening of China and Hong Kong after three years of lockdowns.

“Asia generated 80% of first-quarter pre-tax profits and earnings from the region jumped by two-thirds year-on-year to drive a 23% increase in headline earnings.

Source: Company accounts

“Underlying pre-tax income of $1,706 million also handily beat the consensus forecast of $1,470 million, helped by three factors – higher revenues, thanks to increased net interest margins and trading from financial markets; efficiencies which meant that costs rose more slowly than income; and very low credit losses.

Source: Company accounts

“Net interest margins rose to 1.63%, their highest level since Q2 2019, thanks to interest rate increases around the world (367 in 2022 and a further 71 in 2023 worldwide, according to the website CBRates). The Q1 outturn compared to 1.29% a year ago and while an improvement of thirty-four basis points (0.34%) may not sound a lot, it all adds up on a $301 billion loan book.

Source: Company accounts

“Income rose 8% and expenses by just 5%, even as headcount rose and the bank continued to invest in the digitisation of its services. Cost efficiencies helped and Standard Chartered is exiting its onshore operations in seven nations across the Middle East and Africa and downsizing in two more.

“Finally, loan loss impairments were very low at just $26 million. Last year had ended on a scruffy note with a jump in loan losses in Q4, thanks to hits from the Chinese commercial real estate market, its exposure to the Chinese bank Bohai and sovereign debt defaults in Ghana, Sri Lanka and Pakistan. In this quarter, Standard Chartered wrote back some of its Ghanian losses with the result that the impairment fell from $739 million in Q4 and $203 million from the equivalent quarter a year ago.

Source: Company accounts

“The good start to the year means boss Bill Winters continues to talk optimistically about 2023, despite the wider macroeconomic challenges posed by higher inflation, as well as worries over the US regional banks and commercial real estate, to name but three pressing issues.

“There seems to be no sign of any spill-over as yet from America’s banking woes. Customer deposits were unchanged quarter-on-quarter at $462 billion (and thus 1% higher than a year ago). If there is a niggle, it was a drop in the loan book to $301 billion from $308 billion in Q4. That represented 2% growth from a year ago, although this is a trend that must be monitored. Equally, some shareholders may be reassured to see that Standard Chartered is not harvesting deposits and expanding its loan book at a break-neck rate, as this is what has left some of the US regional banks in such a tangle.

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 outturn of 1.41%, Standard Chartered still believes that its target of a 10% return on tangible equity is within reach in 2023. Current consensus forecasts are looking for 9.4%.

“Based on 2022’s average tangible equity base of $37 billion, that implies net profits of $3.5 billion, all other things being equal, compared to $2.9 billion in 2022.

“This is despite Standard Chartered’s prior acknowledgement 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.

“Mr Winters has flagged a rise in its loan loss ratio to between 0.30% to 0.35% for the coming year, compared to 0.21% respectively in 2022.

“Expectations of improved earnings and Standard Chartered’s strong capital ratios also underpin its plans for cash returns to shareholders. Last year’s dividend of $0.18 a share was the highest since 2018 and analysts are currently looking for $0.23 a share in 2023 and $0.29 in 2024. They would be worth around $1.2 billion in aggregate so the planned $5 billion cash returns by the end of 2024 implies an increase in the current $1 billion share buyback scheme.

“The buyback 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 $12.79 (or £10.49 at the sterling/dollar exchange rate which prevailed at the end of the first quarter).

“It may also have been this tempting valuation prompted First Abu Dhabi Bank to look at a potential bid, even if January’s denial of any formal approach forbids the Middle Eastern concern from tabling any sort of new bid until at least July.”

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