Credit Update: StanChart ends off 2023 on a solid note

• StanChart’s operational performance remained fairly resilient, with management guiding for high-single-digit income growth next year.
• Profit before tax also grew by double-digits in percentage terms. Impairments from Bohai weighed on profits, though this was not too surprising with the bulk of impairments already reported in the previous quarter (3Q23).
• StanChart remains well-capitalised, and its CET1 ratio continues to have a strong buffer against regulatory minimums, even after accounting for its upcoming share buyback and potential Basel 3.1 regulations.
• StanChart has quite a number of shorter-tenor USD bonds that investors can consider. We provide 5 recommendations with call / maturity dates in 2027 or earlier, and investors may consider them depending on their respective profiles.

Standard Chartered plc (StanChart) recently released its results for the year ending 31 December 2023 (FY23). We would summarise its results as resilient, with its profitability continuing to see positive growth, and its credit profile remaining healthy.

(Note: Dollar amounts refer to USD and growth rates are YoY unless otherwise stated. Results are on an underlying basis unless otherwise stated.)

Operating performance

On an underlying basis, FY23 operating income grew +10% from $15.8b to $17.4b (just under consensus of $17.5b), or +13% on a constant currency basis (from $15.4b). We observe that this was largely driven by the ‘Cash’ and ‘Deposits’ segments, where StanChart benefited from strong passthrough rate management amidst a rising rates environment (Chart 1). Wealth Management (WM) also saw a solid +10% growth (by $179m) helped by solid growth in new-to-bank clients and net new money. Overall, StanChart mainly benefited from the broader rates environment, with some support from less rates-sensitive segments like WM.

On a yearly basis, net interest income (NII) grew by a strong +20% (+23% in constant currency) to $9.6b in FY23 (in line with consensus), helped by a similarly large increase in net interest margins (NIM) from 1.41% to 1.67% (+26bps). On a quarterly basis (3Q23 to 4Q23), NIM climbed slightly to 1.70% for the quarter but NII remained stable at $2.4b in 4Q23 (3Q23: $2.4b), due to a small 2% QoQ decrease in average interest-earning assets. As a whole, we like the strong YoY growth rates observed in NII and NIM in FY23, though investors should note that both NIM and NII appear to be starting to level off (Table 1).

Apart from these rate-sensitive segments, StanChart also saw positive growth in the less rates-sensitive WM segment. This was a result of strong growth in net-to-bank client onboarding and fund inflows from affluent clients (affluent net new monies), including in 4Q23 itself (Table 2). StanChart management also observed that despite ‘adverse market movements’, the strong growth in net new sales ($14b in FY23) helped to keep AUM ‘broadly stable’. We like that StanChart has multiple potential drivers of growth moving ahead, and is not fully dependent on a supportive interest rates environment to drive profits through NII.

Chart 1: Change in operating income from FY22 to FY23

Table 1: Solid growth in NII and NIM

Table 2: Client onboarding was robust while net new money growth remained strong

Profit highlights

Operating expenses (underlying) grew by +7% to $11.1b in FY23 (FY22: $10.4b) (Chart 2). Management attributed this increase in expenses to a combination of multiple factors, including inflation, business growth, and targeted investments. Nonetheless, productivity savings continues to be a key focus of StanChart, and its ability to make $426m in gross productivity savings helped to mitigate the increase in expenses. resulting in a positive +4% income-to-cost jaws.

On the other hand, impairments continued to be a key (negative) driver, similar to 3Q23. A major item was $850m in impairments from China Bohai Bank (Bohai), but this figure was not a major surprise to us given that StanChart had already reported $697m in impairments in just 3Q23, making this latest FY23 figure an increase of just over $150m. Another impairment item of note was higher charges related to the China Commercial Real Estate segment ($282m in FY23, $186m in 3Q23). While impairments had a significant negative effect on profits, we note that there at least were no negative surprises on a similar magnitude this quarter (and for FY23).

Underlying profit before taxation (PBT) grew by +22% to $5.7b in FY23 (FY22: $4.6b), above consensus estimates of $5.6b, while reported PBT came in lower than underlying PBT at just $5.1b in FY23, though it still saw strong double-digit growth of +19%. The main difference between underlying and reported PBT figures arose from the $850m Bohai impairment (discussed above) which was only counted in the latter. However, PBT generally saw strong growth regardless of the metric (underlying / reported) used.

To summarise, similar to what we described in our previous article, we find that China-related impairments continued to weigh on StanChart’s headline profit numbers, despite a solid operating performance. However, we are heartened that there weren’t any major negative surprises this time (compared to in 3Q23) and that StanChart’s earnings remain very much in the green.

Chart 2: Operating expenses rose slightly YoY

Management has forecasted net interest income to fall within the $10b - $10.25b range for FY24, about a 4% - 7% increase from FY23’s actual figure of $9.6b. One assumption is a -$0.3b negative impact from lower rates (Chart 3). Specifically, StanChart assumes a fall in currency-weighted market rates from 453bps in 4Q23 to 360bps in 4Q24 (i.e. -93bps), based on forwards pricing of 5 rate cuts (25bps each) in the US and 7 cuts in Hong Kong. Given our team’s expectation of no major rate cuts by the Fed this year, we expect this negative impact might turn out to be overstated. As we do not expect drastic rate cuts, NIM and NII may remain more resilient than expected in 2024.

Management has also guided for a 5% - 7% growth in (operating) income for 2024 – 2026, with 2024 growth expected to be at the top end of that range. This is a relatively modest forecast compared to their guidance provided last quarter (8% - 10% in FY24). We think these management forecasts are fairly achievable, considering our expectations for NII above.

Finally, in terms of expenses, management continues to focus on managing costs, with operating expenses expected to be kept below $12b in 2026 (representing just a 3% CAGR from FY23’s $11.1b), helped by expense saves of $1.5b from 2024 – 2026 under its new ‘Fit for Growth’ initiative.

Taking these together, we think StanChart can continue to grow its income while keeping costs manageable, and we think these should help the issuer deliver positive earnings growth in the years ahead.

Chart 3: Net interest income expected (by management) to see headwinds from rates impact

Credit profile

StanChart’s loan-loss rate remained stable at 17bps in FY23, lower than FY22’s 21bps. This was on the back of lower impairments of $528m in FY23 (-37% versus FY22), though stage 3 impairments saw a smaller decrease of -9%. One key positive was that China Commercial Real Estate impairments (a notable pain point in 3Q23) did not deteriorate significantly, coming in at $18m in 4Q23 (3Q23: $186m) and $282m in FY23 (FY22: $582m). While we expect loan-loss rates to normalise upwards over time, we do not expect a massive deterioration and emphasise that existing rates remain very manageable.

StanChart’s risk-weighted assets (RWA) remained fairly stable at $244.2b in FY23 (FY22: $244.7b). RWA optimisation has been a key point of focus for StanChart as it aims to utilise its capital more efficiently – it achieved $10.3b in optimisations in 2023 itself. With CET1 capital also remaining stable at $34.3b in FY23 (FY22: $34.2b), StanChart’s CET1 ratio saw a slight improvement from 14.0% in FY22 to 14.1% in FY23. We like that StanChart’s CET1 ratio remains well above the regulatory minimum of 10.5%, and also above management’s target range of 13% - 14%.

Looking ahead, StanChart has forecast a pro-forma (post-share buyback) CET1 of 13.6%. Incoming Basel 3.1 regulations may also result in StanChart adding ‘no more than 5% incremental RWA’ based on management guidance. A conservative estimate assuming a 5% increase in RWA and the pro-forma CET1 ratio of 13.6% would indicate a CET1 ratio of just under 13%. While this is technically under management targets (13% - 14%), we think StanChart remains well-capitalised, with (i) CET1 ratios still well above the 10.5% regulatory minimum; (ii) the possibility of profit accretion in FY24; and (iii) the possibility of further RWA optimisations all helping to bolster these ratios.

We also highlight that its leverage ratio of 4.7% and liquidity coverage ratio (LCR) of 145% in FY23 continue to see healthy buffers over their regulatory minimums. While LCR has fallen in recent quarters, this is more of a normalisation to historical averages, and we do not see this as a significant negative event.

In all, we find that StanChart’s key solvency ratios remain healthy, with decent buffers over regulatory minimums.

Table 3: Ratios remain healthy

Recommendations

StanChart continues to be a well-capitalised issuer with the ability to deliver resilient earnings, similar to our views expressed in our previous article (see below). Its credit rating continues to be investment-grade - BBB+ (Stable) by S&P, A (Stable) by Fitch), and A3 (Stable) by Moody’s. Its bonds also continue to be rated investment-grade – based on ratings by Fitch, senior unsecured bonds are rated A, T2 subordinated bonds are rated BBB+, and perpetuals are rated BBB-.

Within the universe of StanChart’s USD-denominated bonds, our recommendations are mainly on the shorter tenors, given our broader preference for shorter-duration bonds due to our expectation of a higher-for-longer interest rate environment (Table 4). We explain our rationale below.

1. STANLN 7.776% 16Nov2025 Corp (USD) was our previous recommendation and we maintain our call. Bondholders should continue holding on and enjoying its attractive coupons and yields. However, new investors should note that spreads look fairly tight (currently about 70bps), and should also be mindful of reinvestment risks with less than 1 year to call.
2. Shorter-tenor recommendations with slightly higher yields include STANLN 6.170% 09Jan2027 Corp (USD) and STANLN 6.187% 06Jul2027 Corp (USD). Both are senior unsecured bonds with a call date 1 year before maturity, with fairly attractive yield-to-calls of 5.49% / 5.68% respectively. New investors should note the possibility of non-calls which affects when they receive their principal.
3. Investors who prefer a fixed-tenor bond can consider the STANLN 4.050% 12Apr2026 Corp (USD). Its yield (5.36%) is slightly lower than the two 2027 bonds highlighted above, but investors will have certainty over the timing of principal repayment.
4. Finally, investors who wish to purchase bonds in smaller denominations (i.e. below $200k) can consider STANLN 4.300% 19Feb2027 Corp (USD), available on our Bond Express. New investors should note that this bond is T2 subordinated (unlike the others above which are senior unsecured) and comes with loss-absorption risks.

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

Table 4: StanChart USD bonds (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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