Be strong, says Bill Winters. Standard Chartered shareholders will need a reminder of its chief executive’s new philosophy very soon. On Thursday the Asia-focused lender suggested the opposite, with weak fourth-quarter earnings and a wobbly outlook.
Underlying pre-tax profits fell 25 per cent to $325m. Its share price dropped 3.5 per cent following a warning that income growth would be lower this year. Credit impairment charges surged 22 per cent to $906m. Profits in Asean and South Asia plunged 80 per cent in the last quarter. Corporate banking profits fell by almost a quarter.
To be fair, Mr Winters’ turnround plan for the bank has been reasonably effective: at least return on statutory tangible equity last year has swollen by nearly 3 percentage points since 2017 to 4.8 per cent. On a full year-basis, expenses look under control. Years of investing in technology should yield results, with its Hong Kong virtual banking system launching soon. Profit from Greater China and north Asia improved by 3 per cent.
Any recovery though is fragile. And Mr Winters does not have a Plan B, other than more cost reduction. Those two regions, more than half its profit, have been hardest hit by coronavirus. Hints of problems already appeared last quarter. The bank blamed the US-China trade dispute and a slowdown in China for softness in earnings. Its most important region, Hong Kong, has entered recession.
It gets worse. Hong Kong banks will need to pitch in as the outbreak spreads. It will waive fees and cut loan repayments for small businesses and borrowers. That will further dent profits. Low interest rates already put pressure on net interest income, with net interest margin down 7 basis points last year. Mr Winters’ target return on tangible equity of 10 per cent seems a distant hope.
Shares in rival HSBC, with similar regional exposure, have dropped 14 per cent in the past year, compared with just 4 per cent at StanChart. Even with the latter’s price-to-book value at a three-year low, expect its shares to fall further.
Mr Winters may ask for courage, but he must be quaking in his chair. He says credit conditions in Hong Kong are not yet material. Give that some time. Hong Kong banks’ exposure to China’s assets are almost a third. More cost-cutting will not counter that potential credit damage. Avoid the shares.
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We amended this article after publication, inserting the word “statutory” in front of “tangible equity” to avoid any confusion with figures for “underlying” tangible equity quoted in other media.
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