Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

In banking, no bad surprises count as good news.

That explains why Standard Chartered shares surged as much as 10 percent on Tuesday after the bank posted a 64 percent drop in first-quarter profit.

Top Line
First-quarter revenue stabilized at Standard Chartered but a return to meaningful growth is still a concern
Source: company

Tuesday's gain puts the stock into positive territory for the first time in 2016, and marks a 47 percent rise from its low in early February.

Standard's Surge
The bank's stock jumped to the highest this year after first-quarter results
Source: Bloomberg
Intraday times are displayed in ET.

A sign the worst is over? Not quite. It's more a sign investor expectations had hit a rock bottom in recent months amid a rout in emerging markets. Standard Chartered still has a long way to go before it can be said to have recovered from its ill-judged lending spree in places like India and Southeast Asia.

The bank still trades for 39 percent less than its book value, a steeper discount than HSBC's 25 percent, according to Bloomberg Intelligence.

Discount to Book
Standard Chartered still trades at a steeper discount to book than HSBC
Source: Bloomberg Intelligence
Figures refer to Bloomberg Estimates Price/Book Ratio

CEO Bill Winters said the outlook remains tough and returns are weak. But he did note bank has halted the decline in income, made some progress on costs and steadied the balance sheet.

This, it seems, is enough reason for the gloom to lift. Income is down by a quarter from last year, but it's up 3 percent from the fourth quarter of 2015. Costs were down 10 percent and the bank says it remains on track to hit a targeted $1 billion in cost savings in 2016.

Loan impairments were more-or-less in line with other years. The key Common Equity Tier 1 capital ratio, a measure of financial strength, climbed to 13.1 percent from 12.6 percent at the end of 2015.

Winters noted he is "in no way declaring victory." He's right to hold off.

The potential for a deeper slowdown in China -- with its impact on commodities and the global economy -- is a worry. Commodity prices broadly have a significant impact on the bank's trade finance business and its loan book generally. Management says that efforts to further shrink the balance sheet are complex and will take time.

The biggest concern from here will be how to manage investors' increasing expectations. How long are shareholders going to get excited about a lack of negative surprises?

Jefferies analyst Joseph Dickerson notes that first-quarter revenue suggests the full-year figure will be 6 percent less than what analysts are expecting, and there's the potential for loan impairments to rise later in the year given what Standard Chartered called the still "challenging" environment.

That big jump in the stock price Tuesday is vindication of management's efforts to staunch the bleeding. But Winters still has a long way to go before the patient can be discharged.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Duncan Mavin in London at dmavin@bloomberg.net
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net