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Standard Chartered - earnings beat expectations

Standard Chartered reported a 13% increase in operating income over the first quarter, ignoring the effect of exchange rates, coming in at $4.4bn...

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Standard Chartered reported a 13% increase in operating income over the first quarter, ignoring the effect of exchange rates, coming in at $4.4bn. Net interest income rose 18%, as higher interest rates pushed net interest margin (a measure of the profitability of lending/borrowing) up from 1.58% to 1.63% quarter-over-quarter. Other income, from fees and trading, was up 9%.

The Group recognised a charge of $26m in preparation for loan defaults, well below company compiled market consensus. Income rose faster than costs, and the underlying cost-income ratio improved by 1.7 percentage points to 60.9%.

Underlying profit before tax of $1.7bn beat expectations and reflects a 25% increase on last year when ignoring exchange rates. The CET1 ratio (a vital balance sheet metric) was 13.7%, towards the top of the 13-14% target range.

For 2023, Income growth is expected at the top end of the previous 8-10% range. Net interest margin is expected to be around 1.7%, with return on tangible equity approaching 10%.

The shares were broadly flat in early trading.

View the Standard Chartered share price and how to deal

Our view

Given the turmoil we've seen in the banking sector over recent weeks, it's a breath of fresh air to see Standard Chartered post an earnings beat and a relatively upbeat outlook.

Higher interest rates take centre stage, with the vast majority of income growth coming either directly from retail deposits or the increase in activity that higher rates meant for the cash management division. The banking giant is very much an Asian bank, despite being listed in London, so it's not UK rates that move the dial. Rates in key areas like Hong Kong and Singapore have been rising.

Net interest margin, a measure of how much profit a bank can earn on its deposits and lending, is expected to settle at around 1.7% over the year. That leaves room to generate a healthy profit, but it's not the only cog for Standard.

Fee-earning businesses like wealth management, investment banking and financial market trading are vital. These help reduce reliance on interest rates and provide diversification when markets are choppy. Wealth management, for example, is highly correlated to market confidence and has struggled of late. But that very same volatility boosts the financial market division, which includes areas like macro and credit trading, where performance was only a touch lower than the record highs seen last year.

Investors will also be pleased to hear that turmoil affecting a subsection of western banks doesn't look to be systemic across the globe. Deposit levels have remained steady and if anything, uncertainty in other areas could act as a tailwind for some of Standard's trading operations.

Instead, issues with China's commercial real estate (CRE) sector have been a worry. But there were positive signs as provisions set aside for bad debt in the first quarter were significantly lower than expected. In fact, some of the previous provisions booked in previous quarters relating to CRE were unwound - albeit a small amount. But it's too early to call an end to the trouble.

Liquidity is front of mind for management, and the CET1 ratio (a key measure of balance sheet strength) is toward the top end of the target range. We like the caution, and it paves the way for more shareholder returns down the line, should conditions ease. Of course, there's no guarantee.

Overall, Standard Chartered has genuine promise, and we continue to admire its exposure to Asian markets and alternative sources of revenue. The valuation doesn't look overly demanding but we can't rule out ups and downs - especially in the current climate.

Standard Chartered key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt-Britzman
Matt Britzman
Senior Equity Analyst

Matt is a Senior Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors. He is a CFA Charterholder and also holds the Investment Management Certificate.

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Article history
Published: 26th April 2023