Standard Chartered may restart ‘shareholder returns’ next year as third-quarter profit beats estimates

Chad Bray
·6-min read

Standard Chartered, one of Hong Kong’s three big currency-issuing banks, said on Thursday it could begin returning capital to shareholders, including potential dividends, next year as it reported better-than-expected profit in the third quarter.

Following similar guidance by its larger Hong Kong rival HSBC this week, Standard Chartered said it was encouraged by the lender’s recent performance and would consider resuming “shareholder returns” after it reports its full-year results in February.

“I feel good about where Standard Chartered is six months into a global crisis. We’re profitable. We’ve got a strong capital position and are getting stronger,” Bill Winters, the Standard Chartered chief executive, said on a conference call with analysts. “Banking advances are made or not during the difficult times. I feel we are coming into this difficult time, have come into it and are going through it in very good shape.”

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Any decision on dividends or share buy-backs would be subject to discussions with its regulators, the bank said. In April, Standard Chartered and HSBC both cancelled their final dividends for 2019, suspended dividend payments this year and tabled share buy-backs at the request of their chief regulator in the United Kingdom.

Restarting dividends and share buy-backs have been a key focus for many lenders globally as they face pressure on their stock prices, despite stronger-than-expected performances in the third quarter and the International Monetary Fund’s prediction of a “somewhat less severe” global downturn sparked by the coronavirus pandemic.

The IMF, however, warned this month the recovery is likely to be “long, uneven and uncertain” and financial markets remain jittery about a recent spike in coronavirus cases in the United States and in Europe, which has led some countries to reinstate lockdowns.

Regulators from the US Federal Reserve to the Bank of England have asked banks to limit or suspend their dividend payments, as well as share buy-backs, to ensure they have enough capital to be able to continue lending during the economic downturn.

On Thursday, Credit Suisse said it intended to pay a dividend and begin buying back shares as soon as January despite reporting a 38 per cent decline in its third-quarter profit.

Hong Kong investors punished shares of Standard Chartered and HSBC this year after the banks suspended their dividends in April. The emerging-markets focused lender’s shares have fallen by nearly half this year, while HSBC’s stock has declined 47 per cent year-to-date.

Standard Chartered’s shares in Hong Kong fell 3.1 per cent on Thursday, ending the day at HK$37 following its results announcement.

“We don’t, as a management team and a board, have any intent on sitting unnecessarily on capital longer than we have to,” Andy Halford, the Standard Chartered chief financial officer, said on a call with journalists. “Equally, we want to make sure we have got enough to weather the next few quarters ahead of us.”

The bank, which is based in London but generates much of its revenue in Asia, reported an underlying pre-tax profit of US$745 million, above a consensus estimate of US$502 million by 16 analysts polled by the bank. The bank’s underlying pre-tax profit, which excludes certain items, fell 40 per cent from US$1.24 billion a year earlier.

On a net basis, profit fell 83 per cent to US$123 million in the third quarter, compared with US$725 million a year ago.

Operating income, which is similar to revenue in the United States, declined 11 per cent to US$3.51 billion in the third quarter, while net interest income fell 16 per cent to US$1.62 billion.

Standard Chartered expects lower impairment costs for potential soured loans in the second half of the year. Photo: Bloomberg
Standard Chartered expects lower impairment costs for potential soured loans in the second half of the year. Photo: Bloomberg

Minus provisions, the results were 2 per cent below consensus expectations, according to Ronit Ghose, a Citigroup analyst.

“The company’s shares may get support into the [full year] results on expectation of capital return,” Ghose said in a research note on Thursday.

Halford, the Standard Chartered financial chief, said the bank continues to expect lower impairment costs for potential soured loans in the second half of the year.

In the first nine months of 2020, Standard Chartered recorded US$1.92 billion in credit impairments because of weakening business activity from the coronavirus pandemic, nearly four times what it set aside a year ago.

“The expected economic recovery next year would support asset quality improvement, although we anticipate some sectors and markets will face continuing challenges,” Halford said.

New accounting standards adopted by Standard Chartered and its rivals in 2018 require banks 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.

At the same time, the bank said it would focus on generating more income from fee-based products as it navigated a period of “lower-for-longer” interest rates, which is weighing on the bottom line for Standard Chartered and other banking rivals.

The bank said in September it planned to merge some businesses and shrink management as it manages today’s more challenging operating environment. The bank said as part of its first-half results presentation that it would eliminate a “small number” of jobs this year.

Crosstown rival HSBC is in the middle of its own restructuring as it plans to eliminate 35,000 jobs over the next three years. HSBC said on Tuesday that it now expects to reduce its annual costs to below US$31 billion by 2022, a more ambitious target than previously announced.

Standard Chartered benefited from a 4 per cent jump in its financial markets business as market volatility ebbed from the first half of the year, and a 16 per cent gain in its wealth management business. Other product areas were weaker, with transaction banking and retail products reporting double-digit declines.

Hong Kong’s economy could contract by 6 per cent to 8 per cent this year, presenting a challenge for Standard Chartered’s biggest market. Photo: Jonathan Wong
Hong Kong’s economy could contract by 6 per cent to 8 per cent this year, presenting a challenge for Standard Chartered’s biggest market. Photo: Jonathan Wong

Underlying pre-tax profit in its Greater China and North Asia segment, which includes its biggest market, Hong Kong, fell 5 per cent to US$578 million in the third quarter from a year ago.

In its Hong Kong business, Standard Chartered reported an underlying pre-tax profit of US$332 million, a 27 per cent decline from US$453 million a year earlier.

The city’s economy has been hit hard by months of anti-government protests, followed by the effects of the coronavirus pandemic on tourism, trade and consumption. It is expected to contract by 6 per cent to 8 per cent this year, according to the latest government forecasts.

Standard Chartered’s investment banking unit reported an 11 per cent decline in underlying pre-tax profit to US$525 million in the second quarter, while underlying pre-tax profit in the retail bank fell 14 per cent to US$257 million.

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