- Provisions for China business sink profits
- Board sticks to full-year targets
- £1.8 billion of market value erased
Investors rounded on Asia- and Africa-focused bank Standard Chartered (STAN) after it missed earnings expectations for the third quarter due to provisions in China and a higher UK tax rate.
The shares fell as much as 18% to a new six-month low of 588p shortly after the open, although they quickly recovered to trade 11% lower at 633p.
That still made them the worst performers in the FTSE 100 index by some margin and meant more than £1.8 billion was wiped from the firm’s market value.
PROVISIONS PROMPT SELL-OFF
The group posted a 7% increase in total income to $4.4 billion driven by a 20% jump in net interest income to $2.2 billion thanks to the impact of higher interest rates, even though its net interest margin dipped slightly from the second quarter.
Revenue from Wealth Management, an area the bank has focused on to drive group returns, increased 18% due to ‘continued strong Affluent client onboarding’, while the Financial Markets division, which is considerably smaller than those of rivals such as Barclays (BARC) and HSBC (HSBA), saw an 8% drop in revenue.
However, pre-tax profits plunged 55% from $1.39 billion to just $633 million due mainly to an increase in provisions for bad loans in the Chinese real estate sector and a $697 million impairment to the valuation of the bank’s stake in China Bohai Bank (9668:HKG).
In addition, the tax charge jumped from $313 million to $494 million, despite the lower earnings figure, representing an effective tax rate of 38% instead of 24%, due to the mix of profits and increased losses in the UK where the bank can’t recognize a tax benefit.
The only comfort for shareholders was the fact the board stuck to its full-year targets for revenue growth, net interest margin, operating improvements, loan losses and return on tangible equity.
Chief executive Bill Winters said the bank had made ‘strong progress in the third quarter’ against the strategic actions he outlined last year and delivered a strong set of results.
‘We remain highly liquid, and well capitalised, with a CET1 ratio towards the top of our target range and confident in the delivery of our 2023 financial targets, including a return on tangible equity of 10%’, added Winters.
EXPERT VIEWS
Joseph Dickerson, senior banks analyst at US firm Jefferies, described the third-quarter report as ‘noisy’, whereas the market was expecting a nice clean set of results.
‘The silver lining is that the ROTE (return on tangible equity) targets of 10% for 2023 and over 11% for 2024 have been reaffirmed and capital is robust at 13.9%’, which was better than estimated, observed Dickerson.
Danni Hewson, head of financial analysis at AJ Bell, suggested problems in the Chinese real estate market and today’s sell-off left the company ‘vulnerable to a takeover’, noting First Abu Dhabi Bank – which expressed interest in Standard Chartered in February of this year when the shares were trading around 750p – was free to return with a bid under UK takeover rules.
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Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Martin Gamble) own shares in AJ Bell.
