Standard Chartered Surges on Surprise Drop in Impairments

Loan Surprise Boosts Standard Chartered Shares
  • Pretax profit drops 64% as revenue falls short of estimates
  • Bank's capital ratio climbs, costs fall 12% from year earlier

Standard Chartered Plc shares surged after the bank reported a surprise first-quarter decline in loan impairments and capital increased more than some analysts estimated.

Pretax adjusted profit fell 64 percent to $539 million, from $1.5 billion a year earlier, the London-based bank said in a statement Tuesday. Losses on bad loans fell 1 percent to $471 million in the quarter, well short of the $1 billion estimated by Raul Sinha, an analyst at JPMorgan Chase & Co.

Chief Executive Officer Bill Winters, 54, brought in a new management team and is seeking to restructure or exit $100 billion of risky assets to turn around the Asia-focused lender, which had its first annual loss since 1989 last year. Revenue dropped 24 percent in the quarter to $3.35 billion, as income from every business unit declined.

‘‘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,” said Steve Clayton, head of equity research at Hargreaves Lansdown. “Investors duly let out a sigh of relief and pushed the share price up.”

The stock climbed 10 percent to 573.8 pence at 11:22 a.m. in London, the highest price this year. The bank had traded at about 50 percent of its book value after plummeting 39 percent in 2015.

Capital Increase

Standard Chartered said its common equity Tier 1 capital ratio, a measure of financial strength, rose to 13.1 percent from 12.6 percent at the end of last year. The capital increase was better than expected and the “key highlight” of the quarter, JPMorgan’s Sinha, who has an overweight rating on the stock, wrote in a note to investors.

The loan impairments were the lowest in two years, and the bank reiterated its target of taking $3 billion in restructuring charges by the end of this year, $1.9 billion of which it has already recognized. The bank said it’s still aiming for an 8 percent return on equity by 2018.

“It seems like the new management team is settling in well, and the new CRO hasn’t found any other unexploded ordnance,” wrote Sandy Chen, a bank analyst at Cenkos Securities Plc., referring to the firm’s chief risk officer, Mark Smith.

Non-performing loans in the firm’s ongoing business climbed $425 million in the quarter, primarily related to commodities. The non-performing loan ratio increased to 4.9 percent from 4.8 percent in the fourth quarter, Winters said on the call.

“Let’s keep in mind we don’t feel we’ve fully rounded the corner at this point given that NPLs are still increasing, albeit at a slower pace,” CEO Winters said on a call with reporters about future prospects for loan impairments. “In no way we are declaring victory.”

Standard Chartered had $123 million of restructuring costs, down from $1.82 billion in the fourth quarter. Operating expenses fell 12 percent from a year earlier to $2.01 billion.

About $107 million of the quarter’s restructuring charge related to provisions for its liquidation portfolio of loans. The bank is seeking to sell at least $4.4 billion of assets in Asia, including $1.4 billion of distressed loans to Indian companies, and wants to dispose of more loans from Africa and the Middle East, people familiar with the matter said this month.

The bank cut its exposure to commodities by a further 8 percent to $37 billion. Since mid-2014, the lender has reduced loans to oil and other resource companies by more than a third, partly because investors had been concerned about loan losses after the price of a barrel plunged to about $40.

Winters has been shrinking the lender’s balance sheet after unchecked growth under his predecessor Peter Sands, who was replaced last June after eight years as CEO. Total assets at the lender shrank to $640 billion last year after climbing to a peak of $726 billion at the end of 2014, company filings show. Risk-weighted assets fell to $295 billion from $303 billion at the end of Dec., according to the filing.

“We still remain in very difficult and volatile times,” Winters said. “We are very well prepared for that from a capital perspective, a liquidity perspective.”

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