Standard Chartered’s profit misses analysts’ estimates, warns growth in 2020 may slow

Chad Bray

Standard Chartered, one of three lenders authorised to issue currency in Hong Kong, reported a lower-than-expected annual profit and warned its income growth may slow this year as it faces headwinds from sluggish global economic growth, a weakened Hong Kong economy and the fallout from the coronavirus epidemic.

The lender recorded an underlying pre-tax profit of US$4.17 billion in 2019, below a consensus estimate of US$4.33 billion from 13 analysts compiled by the bank. Standard Chartered, which is based in London but generates much of its revenue in Asia, reported a net profit of US$2.3 billion for the year, compared with a net profit of US$1.05 billion in 2018.

The bank said on Thursday it expects 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.”

“We remain sensitive to external conditions generally and recognise that these could as easily recover as worsen,” chief executive Bill Winters said in a stock exchange filing. “We are prepared for moves in either direction.”

While these headwinds are expected to be “transitory,” the bank believes it will now take longer than envisaged to achieve its target of more than 10 per cent in return on tangible equity (ROTE) by 2021. The underlying ROTE increased to 6.4 per cent last year from 5.1 per cent in 2018.

Standard Chartered also said it would buy back up to US$500 million in shares after completing a US$1 billion buy-back programme in 2019.

The third straight year of profit reflected Winters’ push since 2015 to rein in costs and capitalise on opportunities in growth markets across Asia, the Middle East and Africa.

Standard Chartered’s results, however, were a sharp contrast to its rival HSBC, which this month reported a 53 per cent drop in its annual profit and announced a massive restructuring that includes as much as 35,000 job cuts.

Standard Chartered’s shares rose 0.59 per cent to end the day at HK$60 on Thursday in Hong Kong following the announcement. The shares have fallen nearly 17 per cent this year through Thursday, steeper than the 11 per cent drop in HSBC’s stock.

Banks reliant on Asia for growth, including HSBC and Standard Chartered, are facing a challenging environment this year as economies in the region have been hit hard, first by the 18-month trade war between the United States and China, and now by the coronavirus epidemic.

Hong Kong’s economy had already been clobbered by months of social unrest before the coronavirus outbreak and is expected to contract further this year. Standard Chartered is among nearly a dozen banks that have announced plans to provide relief to struggling small businesses and mortgage borrowers in the city.

The epidemic, which has infected more than 82,000 people globally, has slowed the return to work following the Lunar New Year holiday in China, closed schools in Hong Kong into April and forced the cancellation of public gatherings throughout the region, including the Hong Kong marathon, which Standard Chartered sponsors.

On Wednesday, Hong Kong’s government said it would hand out HK$10,000 (US$1,200) in cash to permanent residents who are 18 years old or older as part of a HK$120 billion relief package to try to boost the city’s economy.

The disruption to business in Hong Kong and other parts of the region has caused lenders ranging from DBS to HSBC to say they expect to set aside additional provisions for bad loans in the first quarter, but view the risk as short term and manageable.

“Who knows, with the virus, how this is going to progress. We hope that this is a little bit more of that V-shape [recovery] that we have been talking about, but we’ll see how that plays out," Winters told CNBC. "As it spreads to the rest of the world, the idea that it will be a quick recovery seems a little more remote.”

The bank said that its provisions for credit impairment, or loan losses, increased by $166 million to $906 million in 2019, driven in part by a deterioration in the macroeconomic outlook, including the downward revision to Hong Kong gross domestic product (GDP) in the second half of the year. The city’s economy fell into a technical recession in the third quarter.

Andy Halford, Standard Chartered’s chief financial officer, said it was difficult to put a precise number on potential loan losses in the first quarter as a result of the slowdown in Asia due to the virus, but momentum had been good in the first two months of the year.

“We expect March will be affected more by the coronavirus,” Halford said on a conference call with journalists. “How long it goes on and how many countries it impacts is clearly a question which most of us find quite difficult to answer with clarity at this point in time.”

For the year, operating income, which is similar to revenue in the US, rose 4 per cent to US$15.4 billion, led by gains in investment banking and commercial banking units. Net interest income declined by 1.6 per cent to US$7.67 billion, it added.

The investment bank reported a 12 per cent gain in pre-tax profit to US$2.32 billion for the year despite a 24 per cent drop in pre-tax profit in the corporate and institutional bank in the fourth quarter. Pre-tax profit in the commercial bank more than doubled to US$448 million last year.

Since joining the bank in 2015, Winters has flattened its management and cut thousands of jobs to restructure its business. The lender returned to a profit in 2017 after two years of losses amid its restructuring.

Underlying pre-tax profit in Hong Kong, the bank’s biggest profit centre, increased 4 per cent to US$1.7 billion in 2019.

On a conference call, Winters said the bank had relatively “low take-up” among customers in Hong Kong of its loan relief programmes, but that could increase as more businesses in the city are affected. The bank also has had a small increase in delinquencies, but the amount is not material at this point, he said.

Standard Chartered also provided a brief update on its planned virtual bank with PCCW, HKT and Ctrip Finance, saying the stand-alone lender is in “beta testing”. Eight virtual banks are expected to debut in Hong Kong later this year.

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