If recent news and results are anything to go by, then Britain’s banks are almost as beleaguered as ever, with those “internationally diversified” ones suffering disproportionately for their adventurism.
HSBC underwhelmed everybody in January with its lacklustre performance and a later “climb-down” on efforts to rein in compensation costs, which is a central tenet of its strategy to improve shareholder value over the coming years. This week it was Standard Chartered’s (LSE: STAN) turn to impress.
High expectations were few and far between on the ground going into the release however, the bank still managed to jar investors after management reported an 84% fall in profits to $0.8 billion, as bad debts and lower commodity prices bit deeply into earnings.
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Looking past the headline numbers, operating income was 15% lower with much of this induced by macro factors such as the value of the US dollar and the fall in commodity prices and thus, this majority is likely to represent a semi-permanent reduction.
However, management have reduced operating costs by 7% ($630m) so far, which should help to offset a large portion of this deterioration, while additional cost savings are still on the blotter for the period ahead. The board also affirmed a strong post-rights balance sheet position, with an almost best in class CET1 capital ratio of 12.6%, while reaffirming the banks’ previous statement that is “in the right markets“.
Ticking the boxes
Flitting through analyst coverage of the sector there appear to be several key themes emerging in terms of what investors expect a bank to have if it is to prosper in today’s world.
External management is one of these things. Tried and tested managers from the outside, not those who have “grown up” under the defunct umbrellas of past regimes. Standard Chartered has this in the form of ex-JPMorgan executive Bill Winters, Barclays has it in Jes Staley.
Another is a “returns over growth” focus which requires that, rather than simply pursuing growth at any cost, a more reserved focus on adequate returns should be imposed in order to improve returns to investors and reduce overall balance sheet risk. Standard Chartered has this in the form of the board’s simplification and balance sheet strategy, which should see it rein in more risky activities in order to focus on its core retail and commercial banking business.
The last common theme is balance sheet and capital, in regards to which, we know that management have pledged to restructure the balance sheet and sought to assure investors that the bank has enough capital to weather any market turbulence or economic deterioration in the interim.
To the extent that us mere mortals can make any determination on bank capital, it is worth bearing in mind that this is a traditionally opaque area for everybody on the outside, where organisations always have enough capital until the moment that they don’t. It also seems a pertinent point that the current regulatory regime is largely untested.
However, Standard Chartered appears to tick most of the boxes on the analyst wish list. This is while, on a price/tangible net assets basis, the 0.29x valuation of Standard Chartered has never been cheaper even at the height of the emerging market crisis in the 90’s and during the dark days of the financial crisis in the noughties.
The takeaway
It ticks the right boxes with a lot of the scribblers while at this price, China could fall apart at the seams and investors would still be in with a shot at making some money!
Surely the shares can’t be that bad… can they?
