StanChart's Biggest Dividend Is a Place on Xi Jinping's Road
(Bloomberg Gadfly) -- A lower-than-forecast dividend may take some of the shine off Standard Chartered Plc's first payout in two years. Yet investors can pacify themselves by looking at the road ahead: Xi Jinping's move to scrap China's presidential term limits is good news for the London-based bank.
As Xi uses unbridled power to blast ahead with his favorite Belt and Road initiative, StanChart, being even more of a specialist emerging markets bank than rival HSBC Holdings Plc, stands to benefit. Particularly in Africa.
For Chief Executive Officer Bill Winters, this is the right time to bulk up the balance sheet -- risk-weighted assets are still 18 percent lower than in 2014.
After cutting swathes of jobs across Asia and exiting billions of dollars of risky assets accumulated in a drive for growth before 2015, the lender has been garnering higher revenue.
Return on equity has yet to reach halfway to the 8 percent promised initially by Winters. And at $3 billion, full-year pretax income came in slightly below analysts' estimates. Still, it was almost triple last year's profit. Dividends, suspended for two years when Winters took over the floundering ship, have been restored. At 11 cents a share, they're well below the 20 cents Goldman Sachs Group Inc. had predicted. But then, HSBC CEO Stuart Gulliver's farewell party, where earnings missed and share buybacks disappointed, was also an anticlimax.
Winters, having halved impairments to $1.2 billion in 2017, has more going for him. Credit costs have ebbed to more normal levels as stabilizing commodity markets stop the hemorrhaging on its Indian and Indonesian loan books.
The bank, which draws two-thirds of its revenue from Asia, will also benefit from Singapore's nascent real-estate recovery and Hong Kong's strong demand for loans as its property market keeps scaling new heights.
Once the dividend has become yesterday's news, it's really the Africa angle that should excite investors.
With Xi consolidating power in China to a degree not witnessed since Mao Zedong, he's bound to make a push for greater influence in the resource-rich continent. It accounts for a mere 3 percent of the world's GDP now, but has tremendous potential for profitable investments.
That could work very well for StanChart, which, according to German brokerage Berenberg, has a more prominent footprint within the Belt and Road pathway than rivals: It's present in 47 of the between 60 and 65 belt-and-road target countries, versus 44 for HSBC. Crucially, within Africa, StanChart is the only global bank with a meaningful presence.
As Gadfly has argued before, lending to belt-and-road countries is riddled with potholes. A trade-finance boom in Africa needs to be counterbalanced by carefully sidestepping the risk of large sovereign borrowers -- like Venezuela in Latin America -- turning turtle. Besides, considering that the lender's regulatory costs jumped 15 percent to $1.3 billion last year, any lending practices that run afoul of U.S. authorities could be risky for shareholders who have just got their dividend back.
Overall, though, Winters is on a strong wicket. For another global bank to try to replicate StanChart's Africa franchise amid today's elevated capital requirements is next to impossible.
StanChart recently signed a pact with Jack Ma's Ant Financial to bring fintech to belt-and-road countries. With Xi settling in as potential president for life, hewing to his favorite themes can't hurt.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.
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