November 1, 2017 / 11:52 AM / a year ago

Breakingviews - StanChart has yet to reward shareholders’ patience

A Standard Chartered sign is seen outside of a building, with a branch of the bank, in Jakarta, Indonesia September 28, 2016

LONDON (Reuters Breakingviews) - Resurgence is proving more difficult than recovery for Standard Chartered Chief Executive Bill Winters. The former JPMorgan executive has shored up the Asia-focused lender’s balance sheet, shed risky loans, slashed costs and returned it to profitability. Restarting meaningful dividend payments is proving a tougher task.

StanChart shares dropped 6 percent after it reported third-quarter results on Wednesday morning. It now trades at less than 0.8 times its tangible book value – well below the valuation of bigger rival HSBC. The reason for such a steep discount is two-fold. Investors in an emerging market bank expect steady dividends of the kind delivered by HSBC, or loan growth which reflects the economic dynamism of the lender’s operating countries. StanChart currently offers neither.

A balance sheet cleanup means the bank’s loan book has shrunk by an average of 4.7 percent a year since 2013 even as Asian economies which account for 59 percent of its assets have grown by 6 percent a year, on average. Rival DBS Group has registered 6 percent net annual loan growth for the last three financial years, according to Eikon data. If the Singaporean bank has sacrificed lending standards in its pursuit of bigger volumes this has yet to show up in significantly higher bad loan charges.

StanChart says restarting dividend payouts – which it suspended in 2015 – will depend on “earnings momentum” and changes to capital rules. Though pre-tax profit more than doubled in the third quarter, this was almost entirely due to lower bad-debt provisions, which can only fall so far. Higher income from net loan growth of 3 percent during the quarter was cancelled out by rising costs. Meanwhile, the bank’s common equity Tier 1 capital ratio slipped to 13.6 percent, compounding investor anxiety over how much surplus capital StanChart potentially has.

Having cleaned up the mess left behind by previous CEO Peter Sands, Winters is understandably cautious. He might argue that competitors are mispricing risk and that prudence will be rewarded when the credit cycle turns. In the meantime, though, StanChart shareholders face a longer wait for their patience to be rewarded.


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