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StanChart's makeover still has a long way to go

Latest figures show costs are bloated, at just under 70% of income; return on tangible equity was just 5.1%

Stop and go: StanChart boss Bill Winters promises to do more to cut costs and double return on tangible equity to at least 10 per cent by 2021. Even then, the bank would lag its Singapore peer, DBS.


THE Standard Chartered makeover is barely halfway there.

The Asia-focused lender kept costs under control and curbed bad debts, but socking away US$900 million for potential regulatory fines restrained profit growth to 5.5 per cent last year.

Boss Bill Winters promises to cut costs more and to double return on tangible equity to at least 10 per cent by 2021. Even then, the bank would lag its Singapore peer, DBS.

Since Mr Winters took the helm in 2015, StanChart has been shedding riskier assets and improving its capital position. It is paying dividends and promising to return more cash.

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The common equity Tier 1 capital ratio was 14.2 per cent, above a newly raised target range. Better still, StanChart may be close to drawing a line under a US probe into breaches of Iran sanctions.

Last year's numbers, unveiled on Tuesday, reveal how much is left to be done. Costs are bloated, at just under 70 per cent of income, even if some of that is due to much-needed investment in new technology.

Its return on tangible equity was just 5.1 per cent, on an underlying basis, below a cost of capital probably nearer 10 per cent. Small wonder StanChart trades at just about half its book value.

Things looks worse against rivals. DBS is an imperfect comparison, given its narrower focus. With a similar revenue base, though, it reported a cost-to-income ratio in 2018 of 44 per cent. Its US$48 billion market value is almost double StanChart's and it fetches a 30 per cent premium to book value.

Digital investment is a big distinction. For DBS, digital customers in 2017 generated a return on equity of around 27 per cent, compared to 18 per cent for traditional ones.

Scaling back in less profitable retail businesses and others across some 60-plus markets should help Standard Chartered. It wants to wring more out of India, Korea, Indonesia and the United Arab Emirates, which account for a fifth of costs but just 13 per cent of profit.

An eventual sale of its stake in Indonesia's Permata might also help accelerate returns to shareholders. After a 40 per cent fall in the stock price since Mr Winters took over, there is clearly a long way yet to go.

On Twitter Standard Chartered said on Tuesday it would cut US$700 million in costs and exit smaller business over the next three years as it reported a 5.5 per cent rise in full-year pre-tax profit, to US$2.6 billion.

Excluding the impact of some restructuring costs and a US$900 million provision to cover fines from regulatory investigations in the United States and Britain, the bank's underlying pre-tax profit was US$3.9 billion, up 28 per cent and close to an average analyst estimate compiled by Refinitiv.

The volume of credit impairments improved to US$740 million, 38 per cent lower than in 2017.

Standard Chartered said its 2018 net interest margin was 1.58 per cent, compared to 1.55 per cent a year earlier.

Underlying return on equity improved year over year to 4.6 per cent from 3.5 per cent while underlying return on tangible equity grew to 5.1 per cent from 3.9 per cent. The bank said it plans to achieve a return on tangible equity of at least 10 per cent by 2021.

Cost growth is expected to remain below the rate of inflation over the coming three years while its income growth target will stay at 5 per cent to 7 per cent through 2021.

The bank paid a final dividend of 15 US cents a share, up 36 per cent from 2017. REUTERS

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