Standard Chartered surges as first-quarter loan impairments fall

Standard Chartered posted a 59% drop in first-quarter profit amid depressed commodity prices, volatility in Chinese markets and weak emerging market sentiment, but investors welcomed signs the bank was beginning to turn things around as loan impairments dropped.

In its interim management statement for the quarter ending 31 March, the group reported statutory pre-tax profit of $589m (£405m) versus $1.4bn in the same quarter a year ago.

StanChart’s core equity tier one ratio – a key gauge of capital strength – was up 50 basis points since year end to 13.1%, benefitting primarily from the 3% reduction in risk-weighted assets, profits in the period and a small currency translation gain.

First-quarter revenue was down 24% on the same period in 2015 to £3.3bn, which was 6% below consensus estimates, but broadly stable compared to the fourth quarter. The bank said currency translation accounted for 3% of the year-on-year income decline and business divestments represented a further 2%.

Impairment losses on bad loans improved slightly to $471m from $476m in the same quarter last year, but significantly from $1.13bn in the final quarter of 2015.

Underlying pre-tax profit came in at $539m compared with a loss of $876m in the same quarter a year ago.

Meanwhile, total operating costs fell 10% year-on-year to $2.2bn. Excluding the benefits from currency translation, costs were down 6%, reflecting restructuring actions taken towards the end of 2015 and business disposals.

The company, which reported its first full-year loss in 26 years in 2015, said it remains on track to deliver the planned $1bn in gross cost efficiencies in 2016 and as previously disclosed, it will increase its investment spend in the remainder of the year in line with its strategic agenda, expensing some of this during the balance of the year.

Chief executive Bill Winters said: “Although trading conditions in the first quarter remained challenging, we continue to make good progress on our strategic objectives. The management team is in place, we are taking action to improve recent income trends, managing costs tightly, progressing on key investments, making early progress on the exit of the liquidation portfolio, and maintaining strong levels of capital and liquidity."

Steve Clayton, head of equity research at Hargreaves Lansdown, said: “Things aren’t great at Standard Chartered so far in 2016, but they’re a lot better than they were at the end of last year.

“If the bank can hit the 10% return on equity target, and pay out half of earnings as a dividend, then an attractive yield may one day be possible, given the shares are trading far below book value. However, getting there will be easier said than done.”

Atif Latif, director of trading at Guardian Stockbrokers, said: “Overall, the numbers have been taken well by the market, which was expecting a weak update. The EM banks have had a tough time over the last few quarters with the downturn in the commodity sector, market volatility and a decrease in client activity/revenues.

“The question the market is now addressing is the ability of Bill Winters to deliver on the strategy update. We see today as a step in the right direction with the potential for continual disposal of non-core assets, continual cost savings and group restructuring that will enhance and counteract low revenue trends in retail. With credit risks now starting to ease we should see material improvement in the investment case for STAN and are encouraged by the update but mindful that there is still much work to be done.”

At 1048 BST, shares were up 9.7% to 571p.