Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

(Updated )

The Bill Winters turnaround at Standard Chartered Plc is now officially a success, with the bank returning to a first-half net profit after last year's loss. With no dividend, however, it's time to take a page out of HSBC Holdings Plc's book and reward investors, and perhaps even start to grow again.

On Wednesday, the specialist emerging-markets lender said underlying operating income for the first six months of 2017 rose 6 percent to $7.2 billion from a year earlier. Underlying pretax profit for the first half increased to $1.9 billion from $994 million, and net profit came in at $971 million. 

StanChart didn't declare any interim dividend but said the board will review that at the end of the year. While Winters's restructuring is working, HSBC has gone further, and CEO Stuart Gulliver's pivot to Asia is bearing fruit. HSBC's adjusted revenue rose 4 percent for the second quarter ended June 30 and pretax profit climbed 13 percent, beating analysts' estimates. Armed with strong capital buffers, the London-based lender announced a $2 billion buyback earlier this week. 

To be fair, Winters has his reasons for reticence. The bank's private-equity arm chalked up a $650 million loss last year, having piled into risky assets including an energy company in Nigeria, and at $9.9 billion, its nonperforming loans remain elevated.

Fixer-Upper
StanChart stock has outperformed HSBC this year, even when the latter's dividend is included
Source Bloomberg
Data are for 12/30/2016 to 8/1/2017

But beyond the dividend, which has now been missing for two years, it's StanChart's uncertain growth prospects that should worry shareholders. As part of its Asia push, HSBC has been expanding in the Pearl River Delta; the lender's total China exposure was $158 billion in June, up from $146 billion at the end last year. While scary headlines about China's debt bubble might suggest that's a risky strategy, with a 0.2 percent market share of onshore corporate loans, HSBC can afford to be choosy about customers.

Go for It
Standard Chartered's capital position is still not as supportive of growth as HSBC's, but further improvement will make it possible for CEO Bill Winters to reinistate a dividend
Source: Bloomberg

StanChart has the capital strength to emulate the strategy, reporting a robust Tier 1 common equity ratio of 13.8 percent in the first half.

But Winters is still focused on slimming down. Private banking, the one growth engine he badly wants to crank up, is nowhere near his three-year target of $25 billion in new assets. Given the strong competition from regional Asian banks such as DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp., it's unlikely that wealth management will be the ticket to earn an 8 percent return on equity. (Winters scrapped even that modest goal last year.)

Time to Live a Little
Having slimmed down, HSBC is ramping up again, but StanChart's risk-weighted assets are barely changed
Source: Bloomberg

Ultimately, StanChart has to find its source of redemption in old-fashioned transaction banking, which generated $1.2 billion in revenue in the first half, up 16 percent from a year earlier. There's room for this to grow.

Bulking up the corporate loan book doesn't mean Winters should return to his predecessor Peter Sands's strategy of lending lumpy sums to Indian and Indonesian conglomerates chasing furious growth in cyclical businesses.  But Winters's comment that it's still "early days" in StanChart's transformation gives the impression he's being a little too cautious, not just on prospects for corporate growth, but also for rate increases in key markets such as Hong Kong plus an uptick in trading volumes.

If Winters can simply play to the strengths in the lender's 164-year-old DNA, he can pay investors, too. 

-- With assistance from Andy Mukherjee.

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

(Updates first chart to include total return comparison)

  1. One such borrower is the billionaire Ruia family from India, whose Essar Steel India Ltd. has offered to repay a $413 million offshore loan only after a 25-year moratorium on principal; StanChart is trying to push the firm into bankruptcy to squeeze out more. 

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net