StanChart’s surging costs hinder profit growth

London • Standard Chartered plc (StanChart) CEO Bill Winters is struggling to contain rising costs at the emerging markets (EMs) lender, which are outpacing growth in revenue.

The London-based lender’s shares fell the most in about six months yesterday as expenses in the first half (1H) of the year jumped more than expected. StanChart also indicated those costs are unlikely to decline over the rest of 2018. It increased spending in areas including technology, the bank said as it reported earnings.

The rise in costs has been “very deliberate”, CFO Andy Halford said in a Bloomberg Television interview. “We brought forward some of the investment we’re making to improve the systems in the business.”

Winters, who is also facing a potential hit from a brewing trade war between the US and China, has spent much of his three-year tenure cleaning up StanChart’s balance sheet and trying to overhaul a multitude of compliance problems. The costs of those improvements are taking their toll, stirring concern among analysts.

“It wasn’t so much revenue as costs this quarter,” said Joseph Dickerson, an analyst in London with Jefferies Group LLC, who has an ‘Underperform’ rating on StanChart shares. “The guidance for flat costs in the 2H, not including the bank levy, is likely to be taken negatively.”

StanChart’s costs climbed 7% to US$5.1 billion (RM20.71 billion) for the period because of “accelerated investments to improve the business”, according to a presentation, compared to the US$4.9 billion average estimate of five analysts surveyed by Bloomberg. The bank said that expenses are likely to stay at a similar level for the rest of the year.

The lender also said it is confident that it would meet its 8% target for return on equity (RoE) in the medium term — a goal viewed as critical for Winters’ turnaround efforts.

Revenue increased just under 6% to US$7.6 billion, falling short of the 6.5% gain expected by analysts. StanChart requires full-year income of about US$17 billion to hit its RoE target, Deutsche Bank AG analyst David Lock wrote on July 9. StanChart also missed expectations for adjusted pretax profit.

“What is disappointing is that the management seems to think that they have delivered a good cost performance,” said Ed Firth, an analyst with Keefe, Bruyette and Woods in London, who has an ‘Underperform’ rating on StanChart shares. “There does not seem to be any urgency to deliver materially improved performance — never mind an RoE above cost of equity.”

StanChart’s shares fell 3.5% to 673 pence at 9:38am in London trading yesterday, the biggest drop since February. The stock is down almost 14% this year, making it one of the worst performers on the Bloomberg Europe 500 Banks Index.

Winters, a former top executive at JPMorgan Chase & Co, has spent three years since taking the StanChart job helping the lender recover from EM loan losses and cracking down on a lax compliance culture, and has claimed his efforts are gathering momentum. Some investors agreed yesterday.

“The turnaround strategy is very much on track and this is just noise. It’s much more important to us that the big picture is going in the right direction,” said an economist. — Bloomberg