Idea of the Week: Don’t count StanChart out despite recent weak earnings

• StanChart’s operational performance remained fairly resilient, with management guiding for high-single-digit income growth next year.
• Nonetheless, we acknowledge headwinds from China-related impairments (China Commercial Real Estate and Bohai Bank) which weighed on StanChart’s net income.
• StanChart remains well-capitalised with key ratios well within management guidance ranges and above regulatory minimums, even after accounting for the effects of aforementioned headwinds.
• We like StanChart’s Nov 2025, Jan 2027, and Feb 2027 USD bonds for their relatively shorter tenor compared to other StanChart issuances.

About Standard Chartered plc

Standard Chartered plc (StanChart) is a leading international bank with almost 170 years of history. While it is headquartered in the UK, it serves clients in over 120 markets worldwide and primarily derives its income from Asia, followed by Africa & Middle East (AME)).

StanChart recently released its results for the third quarter ending in 30 Sep 2023 (3Q23), where it delivered a weaker-than-expected performance. This contributed to a share price decline of -11% (on the HKEX) on the day of the release of its results (though its share prices have since clawed back some losses).

Financial highlights

Operating performance

3Q23 operating income came in at USD 4,403m, representing a decent +6% increase YoY from 3Q22 (USD 4,138m) but also a slight -3% decrease QoQ from 2Q23 (USD 4,555m) (Table 1) Across either timeframe, three segments stood out for their better performances: Transaction Banking, Wealth Management, and Retail Products.

• Transaction Banking: Transaction Banking benefited from the strong growth (+61% YoY) in Cash Management, helped by the rising-rates environment. StanChart management also cited “strong pricing discipline and passthrough rate management” as important contributors to this sub-segment.
• Wealth Management: Wealth Management was supported by broad-based growth in Bancassurance (+30%) and Treasury Products (+14%), with strong growth in net new money (especially with affluent net new money more-than-doubling) offsetting adverse market movements with AUM remaining broadly stable (as guided by management).
• Retail Products: Retail Products was driven by a sharp 48% increase (YoY) in Deposits income, which also benefited from the rising-rates environment. There were nonetheless some headwinds arising from the Mortgage segment, which management attributed to the presence of a cap on the Best Lending Rate (which affects the extent of passthrough StanChart can make from higher rates).

We also highlight a significant YoY loss in the Treasury segment of USD -274m in 3Q23, mainly due to hedge losses in a rising (US) rates environment. However, on a YoY basis, underlying net interest margins (NIMs) still increased by +20 bps (from 1.43% to 1.63%) despite the significant -12 bps drag from hedges, showcasing StanChart’s continued ability to benefit as a Group from the rising-rates environment.

Meanwhile, on a geographical level, Singapore and Hong Kong continued to be key drivers for StanChart in 3Q23 (Table 2). Operating income in these two markets grew by double-digits YoY, helping to offset slightly weaker performances in markets like China.

In all, we would summarise StanChart’s operating performance as resilient. The Group has clearly been a beneficiary of the rising-rates environment, with segments like Wealth Management also doing well despite being less directly affected by rates.

Table 1: StanChart delivered steady operating incomes in 3Q23

Table 2: StanChart’s operating income was driven by strong growth in Hong Kong and Singapore

Profitability

Underlying profit before taxation (PBT) seemed stable at USD 1,316m in 3Q23, just marginally down from USD 1,346m in 3Q22 (-2% YoY). However, its reported PBT came in much weaker than expected at USD 633m, not only well below the USD 1,391m figure in 3Q22, but also significantly under consensus expectations of USD 1,412m.

These were mainly due to higher credit impairments from China Commercial Real Estate (CCRE) and China Bohai Bank (Bohai).

• StanChart suffered an impairment of USD -186m in CCRE in 3Q23, resulting in a higher credit impairment charge of USD -294m in 3Q23 (3Q22: USD -232m).
• StanChart also suffered another impairment of USD -697m from Bohai in 3Q23, recorded under the “other impairment” line item which totalled USD -734m in 3Q23 compared to USD -31m in 3Q22. This was due to Bohai’s lower net interest income (NII) in 1H23, coupled with the “materially lower domestic interest rate outlook” in China.

We also note that taxation costs came in at USD -494m, higher than the USD -313m in the previous year (3Q22). This was attributed to a higher effective tax rate of 31% (YTD 3Q23) compared to the previous 25% (YTD 3Q22), owing to higher losses within the UK with insufficient profits for tax benefits. This meant that profit after tax for 3Q23 came in at USD 139m, significantly lower than the USD 1,078m in 3Q22.

To summarise, we find that while operating performance remained resilient for StanChart, various factors like impairments within China and higher tax costs all weighed on StanChart’s headline profit numbers. We also like that despite the multiple headwinds in 3Q23, management has retained its income guidance for income at 12% – 14% in 2023 and 8 – 10% in 2024.

Outlook

Looking ahead, we expect StanChart’s operating performance to continue benefiting from the rising-rates environment. Management continues to forecast a 2023 average NIM of 170 bps and a 2024 average NIM of 175 bps (for reference, 3Q23’s was 163 bps). This optimistic forecast was helped by the expiry of some short-term hedges (management expects an 8 bps tailwind from this), especially considering that hedges were a big drag on NIMs in 3Q23 as explained above. We also see potentially additional benefits from the rising-rates environment especially with our team’s views on higher-for-longer inflation and rates, contrasting with (higher than) StanChart’s own assumptions for SOFR to fall by about 60 bps in 2024.

For CCRE, we expect the persistently anaemic real estate sector within China to continue posing as headwinds, especially with management also remaining cautious themselves. For Bohai, the weak macro and rates outlook could also hurt its profit outlook, though we note that its market value (as a listed entity) has somewhat stabilised in the past quarter (and that StanChart has indicated it may also reverse the impairments if Bohai’s performance improves in the longer-term). In all, we expect StanChart’s China exposures in CCRE and Bohai to continue posing downside risks for StanChart’s profitability.

As for taxation, while we noted above that the higher effective tax rates did hurt StanChart’s headline profitability, we do not expect it to further worsen materially given management’s guidance of an effective tax rate of 30% for 2023 (YTD 3Q23: 31%).

To summarise, we think that StanChart’s profitability outlook remains fairly resilient, helped by our expectation of a higher-for-longer rates environment. We acknowledge weakness in China which has already led to some impairments in 3Q23, though we emphasise again that StanChart’s business operations ex-China (especially Singapore and Hong Kong) continue to see decent growth.

Solvency profile

In 3Q23, despite the higher USD 294m in credit impairments (highlighted above mainly due to CCRE), StanChart’s loan-loss rate nonetheless remained fairly decent at 20 bps (1H23: 18 bps), remaining well within StanChart’s guidance of 17 – 25 bps (though management is forecasting it to normalise towards 30 – 35 bps). High-risk assets were up USD 0.5b QoQ (+6%), with an increase in Early Alerts (USD 1.0b) mitigated by a slight decrease in Credit Grade 12 (USD -0.2b) and Net Stage 3 loans (USD -0.3b).

StanChart’s risk-weighted assets (RWAs) (Table 3) fell slightly by 3% QoQ to USD 241.5b, partly due to the Bohai impairment, but also due to management’s drive to optimise RWAs – thus far, they have achieved USD 21.9b of optimisation (about USD 3.7b in 3Q23 itself) and are very close to their USD 22b target by 2024 (well ahead of schedule). Their CET1 ratio of 13.9% fell slightly from that in the previous quarter (2Q23: 14.0%), primarily due to the ongoing share buyback (-40 bps) as well as other factors like the Bohai impairment (-18 bps), though these were mitigated by tailwinds like a reduction in RWA (+22 bps) and underlying profit accretion (+36 bps). Despite this slight decline, their CET1 ratio remains well above the regulatory minimum of 10.5% and in the upper band of their 13% to 14% target range. StanChart also disclosed its leverage ratio (4.7%) and liquidity coverage ratio (156.3%) both remained fairly stable, and well above their regulatory minimums.

In all, we find that StanChart remains very solvent despite some adverse effects from events like Bohai, with its ratios consistently above regulatory minimums and in line with management guidance.

Table 3: StanChart’s solvency metrics generally remain on target with healthy buffers over regulatory minimums

Recommendations

As StanChart has many outstanding bonds, we first narrow down our universe to (i) just its USD-denominated bonds; and (ii) those maturing before 2030, given our preference for shorter-duration products (Table 4). We list our three recommendations below, in order of maturity (earliest first):

1. Our first recommendation is STANLN 7.776% 16Nov2025 Corp (USD), which have the shortest maturity and duration within the list, offering an attractive yield-to-call (YTC) of 6.14% and yield-to-maturity (YTM) of 7.24%.
2. We also recommend the STANLN 6.170% 09Jan2027 Corp (USD), for the slight yield pickup over the aforementioned 2025 bonds (YTC: 6.37%), though investors should also be mindful of the additional maturity and duration risks.
3. Finally, we recommend the STANLN 4.300% 19Feb2027 Corp (USD), which offer a decent YTM of 6.54%. Investors should however be mindful of additional maturity and duration risks once again, as well as subordination and loss-absorption risks as well given this paper is Tier 2 Subordinated. Nonetheless, this option provides additional flexibility for investors who wish to purchase smaller denominations on our Bond Express.

Table 4: StanChart USD bonds maturing before 2030 (recommendations bolded)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in STANLN 4.300% 19Feb2027 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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