StanChart Plunges as Troubled Outlook Overshadows Revenue Gain

Updated on
  • Dividend remains suspended as bank blames regulatory limbo
  • Stock falls 6% as analysts say revenue momentum is weak

Bill Winters’ overhaul of Standard Chartered Plc has stalled.

The emerging-market-focused lender fell the most in almost nine months after the chief executive officer sounded caution about growth prospects and blamed “extraordinary uncertainty” around regulations for a decision not to reinstate the dividend. The comments overshadowed a second quarter of revenue gains and pretax profit that doubled.

Bill Winters

Photographer: Simon Dawson/Bloomberg

“The absence of a dividend is a negative surprise,” said Ian Gordon, an analyst at Investec Bank Plc. “Revenues remain weak, improving only by $6 million quarter on quarter. The run-rate is far too low to generate the scale and pace of recovery” investors expect, he said, noting the “sheer scale” of the $5 billion decline in income between 2012 and 2016.

Winters, 55, is in his third year of trying to rebuild Standard Chartered’s reputation and balance sheet after an expansion into risky emerging-market lending led to billions of dollars of writedowns and misconduct fines. He’s led efforts to clean up the culture, while reducing risk and pulling back from underperforming businesses, such as an internal private-equity arm that lost $650 million last year.

“The external environment is still weighing on our full potential. Some of our markets are beginning to recover nicely, others are still in the doldrums,” Winters said on a call with reporters Wednesday. The bank has “a clear need to improve earnings,” with income rising at “a relatively modest pace.”

Standard Chartered plunged as much as 6 percent, the biggest drop since November, and was 4.3 percent lower at 810.2 pence at 12:16 p.m. in London, paring its gain this year to 22 percent. The stock trades at less than half its peak valuation in September 2010, and is priced about 20 percent less than the book value of its assets.

An unfinished future regulatory regime for bank capital requirements, known in the industry as Basel IV, and new accounting standards, known as IFRS-9, were the main factor in a decision not to pay a dividend alongside weak earnings, executives said. Some have estimated the rules together could add hundreds of billions of dollars to banks’ capital buffers as it forces them to increase their risk-weightings on assets and expected losses on loans.

“The combination of the relatively early stage of our recovery and the uncertainty on the regulatory outlook led to our decision to not pay a dividend at this point,” Winters said, adding the decision would be reconsidered at the end of the year. “We’re a cautious group. We’re cautious a bit by nature, but also because of what we’ve been through.”

Winters suspended the dividend in 2015 alongside a $5.1 billion capital raise from investors and a program to cut 15,000 jobs and restructure or exit $100 billion of risky assets. He has been shrinking the balance sheet and tightening lending standards after his predecessor, Peter Sands, was replaced after eight years at the helm as loan losses snowballed.

Operating income rose 6 percent to $7.2 billion in the first half from a year earlier, in line with estimates, the London-based bank said in a statement Wednesday. Underlying pretax profit rose to $1.9 billion from $994 million, the lender said. That beat the $1.8 billion average estimate of four analysts surveyed by Bloomberg News.

Revenue dropped in all but one of the bank’s geographical regions, with Greater China and North Asia recording 9 percent growth in the period. Private banking and commercial banking revenue declines were more than offset by gains in retail and corporate and institutional banking.

The results were “in line, but not good enough,” Credit Suisse Group AG analysts led by Claire Kane said in a report. “Loan momentum has stalled,” with lending remaining roughly flat in the second quarter of the year, and the “outlook comments remain fairly cautious,” she said.

Loan impairments, which have marred the company’s performance in recent years, almost halved to $583 million in the first half. However, the bank cautioned that “stresses remain in some areas” and the loss-rate could rise again.

“The external operating environment has shown some signs of improvement in the first half as expected, but in other respects, the pace and extent of recovery remains uncertain,” Chairman Jose Vinals said in the statement. “Meanwhile, the geopolitical outlook is mixed and competition remains strong in most of our markets.”

Winters said his efforts to root out what he’s described as “bad eggs” among the bank’s managers have curtailed income. The CEO, who took over in June 2015, has vowed to clean up the culture of the firm after discovering senior staff flouted ethics rules and saw themselves as “above the law.”

“With the amount of change that we’ve put through the organization, there’s been an inward focus, and that has impacted income no doubt,” Winters said. “The opportunity for us now, as the organization settles and matures, is to really shift outside.”

The bank’s woes at its buyout division also continued. Standard Chartered Private Equity, which Winters is trying to shut down, helped cause about half of the bank’s $165 million in “restructuring charges” for the period, Chief Financial Officer Andy Halford told reporters. The division that housed the business lost almost $700 million before tax in 2016.

SCPE spent billions buying stakes in risky companies across emerging markets, ranging from a Nigerian energy company to a Singaporean chain known for its spicy noodles. Many of the deals soured and Winters decided to pull back from the business last year, ousting the head of the unit and seeking to exit the bulk of its investments over time.

“We will draw a line under that at a point in time and move forwards,” Halford said, declining to be more specific as to when that would be.

— With assistance by Donal Griffin

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