5th Aug 2015 12:34
LONDON (Alliance News) - Standard Chartered PLC on Wednesday slashed its interim dividend and said it hasn't decided if it will ask shareholders for new capital, as the emerging markets bank reported a drop in first-half pretax profit and a jump in impairment charges for bad loans.
Standard Chartered has turned to Bill Winters, the ex-JP Morgan & Chase investment banker, to tackle its problems. Improving the bank's return on equity, a key measure of profitability which fell to 5.4% from 10.4% in the half, is a key focus for the new chief executive, and he said it will take "primacy" over growth.
"Clearly, 5% is not an adequate return, and even 10% will be marginal to many investors. The board and I consider this to be the minimum acceptable level which we should deliver as soon as possible," Winters said in a statement.
The emerging markets bank, which makes the bulk of its money in Asia, the Middle East and Africa, said its pretax profit amounted to USD2.10 billion in the six months to the end of June, compared with USD3.25 billion in the corresponding half of the prior year.
Operating income decreased to USD8.77 billion from USD9.25 billion, and operating expenses fell to USD5.04 billion from USD5.08 billion.
Impairment losses on bad loans and advances, together with other credit risk provisions, increased to USD1.65 billion from USD846 million.
Presenting the bank's first set of results since he succeeded Peter Sands as chief executive on June 10, Winters said he is yet to complete his review of the quality of Standard Chartered's assets, with a key focus on the company's past lending decisions and credit portfolio, impairment trends and exposures.
"The loan impairment outcome for the first half and the increase in non-performing loans is a continuation of adverse trends, and there are no signs of these reversing. The sources of impairment have been the same that the group identified previously: commodities, China and India," Winters said.
The emerging markets focused bank halved its interim dividend to 14.4 cents per share, and said it expects to make a similar percentage adjustment to the final dividend. Standard Chartered's common equity tier one ratio, a key measure of financial strength increased to 11.5% from 10.7% at the end of 2014, putting it within its targeted capital range of 11% and 12%.
"If we decide we need capital for the long-term benefit of the group, we will raise capital. If we decide we don't need it, we won't," Winters said.
The new chief executive told journalists that the decision on whether to go to shareholders for capital will partly depend on how the bank fares in the Bank of England's next round of stress testing scheduled for later this year, when the central bank will assess banks' resilience to a global downturn that hits Asia and the euro area in particular. A move to raise capital would also depend on the bank's ability to generate capital.
Joseph Dickerson, an analyst at Jefferies, which has an Underperform rating and 656.00 price target on the stock, said the jury is still out on a capital raise and that the company is not ruling out such a step.
Standard Chartered's plans to improve its capital position so far have been based on cutting risky assets that are more capital intensive and on selling poorly performing business. Winters has said he wants Standard Chartered to have the capital strength to give it competitive advantage and the ability to withstand tough economic conditions, and cutting the dividend will help the bank to accumulate further capital.
Winters said he will set out a "clear plan of action" by the end of the year.
Nomura's Chintan Joshi and Alexander Tsirigotis questioned: "In the near term, the key question for Standard Chartered is will it raise equity?". The Japanese bank has a Neutral rating and 1,170p price target on the stock.
"We regard this as a function of asset quality write-offs and rundown. If Standard Chartered decides that the size of the business currently, in risk-weighted asset terms, is not far from steady state, then it will likely decide to raise equity with [third-quarter] results. If that is through a rights issue, then there is material downside in the stock," Joshi and Tsirigotis said.
Winters has been putting his stamp on Standard Chartered, shaking up the management team and halving the number of regional businesses it has in a bid to improve performance and meet a previously set USD1.8 billion cost savings target by the end of 2017.
"Today's results show the group has some very real challenges, but they are fixable and it is important to remember that there is a strong business at the heart of the group," Winters said in a statement.
Standard Chartered shares were up by 4.0% at 991.00 pence midday Wednesday in London. The bank's shares have lost about 47% of their value since peaking at 1,860.50p in March 2013.
The bank suffered a "perfect storm" in 2014, when investor sentiment toward emerging markets was rocky, commodity prices experienced sharp falls, and interest rates remained low. Loan impairments continued their increase from 2013, when a USD1.0 billion goodwill writedown in its Korean business bumped Standard Chartered off its decade-long path of earnings growth.
"Until the recent past, I believe that the group saw most of the challenges it faced as cyclical, and maintained a focus on income and asset growth at the expense of returns. It is clear to me that we are seeing structural changes, and we need to reposition for this reality. Bigger doesn't necessarily mean better, especially if this is impacting returns," Winters said on Wednesday.
By Samuel Agini; [email protected]; @samuelagini
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