StanChart's Surging Costs Hinder Profit Growth for Winters

(Bloomberg) -- Standard Chartered Plc Chief Executive Officer Bill Winters is struggling to contain rising costs at the emerging markets lender, which are outpacing growth in revenue.

The London-based lender’s shares fell on Tuesday as expenses in the first half of the year jumped more than expected. Standard Chartered also indicated those costs were unlikely to decline over the rest of 2018. It increased and brought forward spending in areas including technology, the Chief Financial Officer Andy Halford said in a Bloomberg Television interview.

The bank, which finances trade across Asia and Africa, said it’s confident it can weather the hit to trade from tensions between China and the U.S. CEO Winters has spent much of his three-year tenure cleaning up Standard Chartered’s balance sheet and trying to overhaul a multitude of compliance problems. The costs of those improvements are taking their toll, stirring concern among analysts.

“It wasn’t so much revenue as costs this quarter,” said Joseph Dickerson, an analyst in London with Jefferies Group LLC, who has a “underperform” rating on Standard Chartered shares. “The guidance for flat costs in the second half, not including the bank levy, is likely to be taken negatively.”

Standard Chartered’s costs climbed 7 percent to $5.1 billion for the period because of “accelerated investments to improve the business,” according to a presentation, compared with the $4.9 billion average estimate of five analysts surveyed by Bloomberg. The bank said that expenses are likely to stay at a similar level for the rest of the year.

The lender also said it was confident that it would meet its 8 percent target for return on equity in the medium term -- a goal viewed as critical for Winters’s turnaround efforts.

Revenue increased just under 6 percent to $7.6 billion, falling short of the 6.5 percent gain expected by analysts. Standard Chartered requires full-year income of about $17 billion to hit its ROE target, Deutsche Bank AG analyst David Lock wrote July 9. Standard Chartered also missed expectations for adjusted pretax profit.

“What is disappointing is that management seem to think that they have delivered a good cost performance,” said Ed Firth, an analyst with Keefe, Bruyette and Woods in London who has an “underperform” rating on Standard Chartered shares. “There does not seem to be any urgency to deliver materially improved performance -- never mind a return on equity above cost of equity.”

Standard Chartered shares were down 1.5 percent to 686.5 pence at 12:36 p.m. in London trading. The stock is down almost 14 percent this year, making it one of the worst performers on the Bloomberg Europe 500 Banks Index.

Winters, a former top executive at JPMorgan Chase & Co., has spent three years since taking the Standard Chartered job helping the lender recover from emerging-market loan losses and cracking down on a lax compliance culture, and has claimed his efforts are gathering momentum. Some investors agreed this morning.

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“The turnaround strategy is very much on track and this is just noise,” said Alasdair McKinnon, who helps oversee about 1.1 billion pounds at Scottish Investment Trust Plc, including shares in Standard Chartered. “It’s much more important to us that the big picture is going in the right direction.”

On trade, the bank’s “direct exposure to the risks of of U.S.-China trade tensions is limited,” Chairman Jose Vinals said. “We generate far more income financing commerce between China and other markets in our footprint -- meaning we stand to benefit over time if that were to increase -- than we do on trade between China and the U.S.”

However, the bank also described escalating protectionism and geopolitical tensions as “potential headwinds.”

Key numbers from Tuesday’s earnings statement:

• Operating income rose 5.6 percent to $7.63 billion in the first half, led by transaction banking, wealth management and deposits. That compared with the average $7.69 billion estimate of five analysts surveyed by Bloomberg News
• Statutory pretax profit rose 34 percent to $2.35 billion, beating analysts expectations
• Expenses increased 6.5 percent to $5.19 billion
• Interim dividend resumed at 6 cents a share, which the bank said reflected “improved financial performance and strong capital”
• Credit impairment charges dropped 67 percent to $214 million
• Common equity tier 1 ratio increased 60 basis points from the end of 2017, to 14.2 percent

--With assistance from Stefania Spezzati and Gavin Finch.

To contact the reporters on this story: Donal Griffin in London at dgriffin10@bloomberg.net;Alfred Liu in Hong Kong at aliu226@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Jon Menon

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