StanChart drops amid Winters’ struggle with profit, capital

Lender’s 3Q underlying pretax profit and capital miss expectations, while expenses rise due to a spike in regulatory costs

By BLOOMBERG

LONDON • Bill Winters’ (picture) struggle to restore growth and pay a dividend at Standard Chartered plc (StanChart) continues.

Underlying pretax profit at the emerging-markets focused lender missed expectations, while expenses rose, driven by a spike in regulatory costs. Capital also fell short of estimates, hampering the bank’s ability to reinstate payouts. The shares fell as much as 5.8% to a six-month low.

“Economic conditions are improving slowly in our footprint, but competition is strong and geopolitical tension remains elevated,” the bank said in a filing yesterday. “Accelerated investments” and spending on “controls and processes” helped drive expenses 4% higher to US$2.5 billion (RM10.57 billion), the bank said.

CEO Winters, 56, is in his third year of trying to rebuild StanChart’s reputation and balance sheet after an unchecked expansion into emerging-market lending led to billions of dollars of writedowns and regulatory fines. The CEO’s main priority is to kick-start growth after the bank shrunk between 2012 and 2016, curtailed risk-taking and closed underperforming units. The lender hasn’t paid a dividend in two years.

The results “dash any hopes for a capital distribution this year,” Joseph Dickerson and Kapilan Pillai, analysts at Jefferies International Ltd in London who rate the stock ‘Underperform’, said in an emailed note. “Trends were OK, but likely not good enough for bulls.”

Third-quarter (3Q) operating income rose 4% to US$3.6 billion from a year earlier, in line with the average estimate of five analysts surveyed by Bloomberg News. Underlying pretax profit rose 78% to US$814 million, falling short of the US$861 million average estimate.

The shares slid 5.4% to 709.9 pence (RM39.97) at 9:39am in London yesterday.

“We believe that the key issue for investors was to see the re-emergence of revenue growth, yet there is none,” said Ian Gordon, an analyst at Investec plc with a ‘Sell’ rating on the stock. “The run-rate needs to be 25% higher to make management’s (abandoned) return on equity targets plausible.”

The common equity Tier 1 ratio fell to 13.6%, 15 basis points lower than the end of June, missing the 13.9% average estimate of analysts at UBS Group AG and Credit Suisse Group AG.

StanChart said regulatory costs for the full year are likely to be “slightly higher” than 2016; in the 3Q, they rose to US$336 million from US$278 million a year earlier. “We are pretty close to the peak” on regulatory costs, while total expenses will probably be flat on the year earlier, CFO Andy Halford said on a conference call.

While Winters has vowed to clean up the culture of the firm after discovering senior staff flouted ethics rules, he’s still plagued by allegations of misconduct. Regulators in Europe and Asia are investigating StanChart over the role staff may have played in transferring US$1.4 billion of private bank client assets from Guernsey to Singapore before new tax transparency rules were introduced, Bloomberg News reported last month.

“We handle a huge number of client accounts across the world and occasionally there will be issues that do come up,” Halford said when asked about the Guernsey affair on a call with reporters. “We are working very, very hard to put in place controls so that the frequency of that happening does reduce, hopefully, over a period of time.”

An unfinished future regulatory regime for bank capital requirements, known in the industry as Basel IV, and new accounting standards, known as IFRS-9, have delayed the bank’s progress on resuming payouts. Winters suspended the dividend in 2015 alongside a US$5.1 billion capital increase from investors and a programme to cut 15,000 jobs and restructure or exit US$100 billion of risky assets.