We were glad that Standard Chartered’s (STAN) first-quarter profit before tax of $1.5 billion, down 22% from the year-ago quarter, was not worse, and we plan to maintain our fair value estimate for the narrow-moat bank.
While the narrow-moat bank’s brief earnings release hints that revenue pressures may be a stronger headwind than we’d projected, the news was brighter on other fronts. Loan impairments of $476 million were up 80% from the year-ago quarter but were down from the prior two quarters and were in line with our projections. We’ll be very interested to see if this reflects under-provisioning or flat growth in non-performing loans when the bank releases its more detailed mid-year results.
Progress on cost inflation, a major issue for Standard Chartered in the past, is progressing slightly faster than we’d expected as well. Operating expenses of $2.5 billion were up 1% from the year-ago quarter, but down 3% excluding regulatory and compliance costs; we’d expected costs to increase more sharply, despite the bank’s efforts to control them.
Why Standard Chartered is the Best of the Banks
Standard Chartered’s focus on financing trade in emerging markets served it well during the financial crisis – it was one of the few global banks that was not deeply damaged and its profits grew about 14% annually between 2010 and 2012. Unfortunately for investors, this focus means the bank is among the most exposed to the steep fall-off in the prices of energy and other commodities that began in late 2014 and saw the price of oil cut in half.
We think its narrow moat remains intact – few banks can replicate the global trade network that it offers its customers – and its diversification – no market accounts for more than 25% of profits before tax and noninterest income accounts for nearly half of revenue – will help the firm smooth over any bumps in the road. Still, we project that slow growth and rising loan losses mean that results over the next several years are likely to be subpar, at best.
Under the 2014 reorganization, the bank now operates as one bank focused on three customer segments; corporate and institutional – formerly wholesale, commercial and private banking, and retail – formerly consumer. The biggest change is the creation of commercial and private banking, which will combine the small/medium enterprise and middle-market segments under one roof. This more clearly links the bank's commercial and private banking capabilities to better serve the wealthy owners of privately held business. Although we think this strategic move is a good one, we think the reorganization is otherwise largely window dressing--the majority of Standard Chartered's revenue will continue to come from its largely unchanged former wholesale division and it does little to address near-term cyclical pressures.
