Standard Chartered increased its reserves for bad loans to nearly US$1.6 billion in the first half, topping up its provisions for a second time this year as additional waves of the coronavirus pandemic continue to weigh on economies stretching from Hong Kong to the United Kingdom.
The London-based lender which generates much of its revenue in Asia reported credit impairments of US$611 million in the second quarter, it said in an announcement on Thursday, compared with US$176 million a year ago. That was on top of US$956 million previously reported in the first quarter, but better than analysts expected.
It is the latest global bank to massively increase its provisions for soured loans this year and foreshadows how big a hit Hong Kong rival HSBC could take when it reports next Monday. HSBC warned in April that its bad loan provisions could reach as much as US$11 billion this year, but the global outlook has worsened since then.
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“I am pleased we came through that period with a clean bill of operational health and with higher income, lower costs and therefore significantly better pre-provision operating profit compared with last year,” Bill Winters, the bank’s chief executive, said in a stock exchange filing. “We remained profitable despite higher impairments, which together with our strengthened capital position enabled us to build substantial reserves in the face of the heightened uncertainty and tougher conditions.”
Standard Chartered, one of three banks authorised to issue currency in the city alongside HSBC and Bank of China (Hong Kong), reported an underlying pre-tax profit of US$733 million in the second quarter, ahead of a consensus estimate of US$310 million by 12 analysts compiled by the bank.
On a net basis, profit declined 30 per cent to US$339 million in the quarter, compared with US$482 million in the second quarter of 2019.
Shares of the emerging markets focused lender decline 0.12 per cent to HK$42.55 at the midday break in Hong Kong, ahead of the earnings announcement.
The coronavirus, which causes the disease Covid-19, has weighed on economic activity across the globe for much of the year, as second and third waves of the virus in recent weeks forced governments from Hong Kong to the United States to slow reopening efforts or encourage businesses to keep most of their employees at home.
Last month, the International Monetary Fund revised downward its outlook for the global economy, saying it expects growth to contract by 4.9 per cent this year and the recovery to be “more gradual than previously forecast”.
The worsening outlook has prompted global lenders to take additional provisions for soured loans, with the five biggest American banks setting aside more than US$60 billion since the beginning of the year.
On Wednesday, Spanish rival Banco Santander said it fell to an €11.1 billion (US$13 billion) second-quarter loss after it increased its loan-loss provisions to €7 billion and took €12.6 billion in goodwill impairments related to the pandemic.
Like its European rivals, Standard Chartered adopted new accounting standards in 2018 that require the bank to recognise potential credit losses over the life of a loan and more aggressively write down loans if they have experienced a significant increase in credit risk.
On Wednesday, Hong Kong – Standard Chartered’s biggest market – put more drastic social distancing measures in place to try to tackle a dramatic spike in cases recently.
The city’s economy has been hit hard, first by months of anti-government street protests and then by the fallout from the pandemic. The city also has found itself at the centre of deteriorating US-China relations after the passage of a controversial national security law in June.
Like its larger rival HSBC, Standard Chartered was caught in the controversy over the national security law after if came out in support of the legislation alongside many of Hong Kong’s largest businesses.
“We are convinced that more collaboration – not less – is the best way to find a sustainable equilibrium in these complex situations, but we do not expect an easy or quick resolution,” Jose Vinals, the Standard Chartered chairman, said. “We do believe, however, that Hong Kong will continue to play a key role as an international financial hub and we are fully committed to contributing to its continued success.”
Financial Secretary Paul Chan Mo-po warned in his blog this week that Hong Kong’s economy could take longer than expected to recover during a third wave of the coronavirus in the city. Hong Kong’s jobless rate hit its highest level in 15 years between April and June and the city’s economy contracted by 9 per cent in the second quarter.
Standard Chartered and other lenders have curtailed branch hours and closed some locations as cases spiked.
Underlying pre-tax profit in Standard Chartered’s Hong Kong business fell 19 per cent to US$705 million in the first half of the year, compared with US$872 million in the prior-year period.
Standard Chartered did not break out a quarterly result for its Hong Kong business. Underlying pre-tax profit in its Greater China and North Asia segment, which includes Hong Kong, fell 28 per cent to US$484 million in the second quarter.
The bank previously warned in February that it expected income growth in 2020 below its medium-term target range of 5 per cent to 7 per cent because of “lower interest rates, slower global economic growth, a softer Hong Kong economy and the impact of the recent novel coronavirus outbreak”.
On Thursday, Andy Halford, the Standard Chartered chief financial officer, said income is likely to be lower on a year-on-year basis in the second half, saying the early-stage recovery in some markets is “unlikely to be enough to offset the impact of low interest rates and the probability of less buoyant conditions for our financial markets business”.
Halford said the bank’s credit impairments are likely to be lower in the second half of the year if conditions do not deteriorate further.
Overall, operating income, which is similar to revenue in the US, declined 4 per cent to US$3.72 billion in the second quarter. Net interest income fell by 14 per cent to US$1.67 billion.
The investment banking unit reported a 23 per cent loss in underlying pre-tax profit to US$476 million in the second quarter, while underlying pre-tax profit in the retail bank fell 72 per cent to US$93 million.
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