Strong Second Quarter for Standard Chartered PLC

Rebound in wholesale banking activities helps reverse first-quarter disappointment for Standard Chartered PLC (LON:STAN).

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Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) had a good spring as the emerging market-focused bank’s second quarter was nicely ahead of a rather disappointing first quarter.

After reporting a drop in operating profits for the first three months of the year, Standard Chartered reported improvement in the second quarter and is now expecting mid-year operating profit to be up around 3%.

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Some good, some bad

The news was mixed — as should be expected from a bank doing business in 68 countries — and the Wholesale Banking division was significantly sunnier than the Consumer Banking division.

Since Standard Chartered generates nearly three-quarters of its profits from the short-term, trade-related financing of the Wholesale Banking division, there is generally good news for all.

Thanks to strong volume in the second quarter, management expects to see the Wholesale division’s operating profit up around 7% in the first half of the year despite continued pressure on interest rates.

The news out of the Consumer Banking arm wasn’t as good, but it wasn’t all bad, either. Strong growth in credit card and mortgage lending — both of which saw double digit income growth in the first half — was offset by shrinking margins and loan quality issues in Korea.

Isolated pain

In fact, 40% of the bad loans on the Consumer Banking balance sheet originate in Korea. That number is a bit startling, but it is important to note that Korea accounted for 2% of the bank’s overall profits last year.

This disappointing performance has prompted Standard Chartered’s number crunchers to re-evaluate the goodwill associated with the Korean operations, and we may see a write-down included in the year-end numbers.

Management reported Consumer Banking activity in several other, larger markets — namely China, India, Hong Kong, and Africa — is going much better, but still expects to see mid-year operating profit for the division down over 10%.

Eyes forward

A good second quarter is a nice rebuttal to the fears surrounding Standard Chartered’s first-quarter numbers, as well as the negative publicity from short seller Carson Block’s bet against the bank.

However, as investors we’re more concerned about what lies ahead than what has already happened, so the question remains what is in store for Standard Chartered?

The bank’s shares have been out of favour with investors since March, and the recent fears around rising interest rates, a slowing China and what impact those will have on global emerging markets hasn’t helped things.

Shares are down almost 25% from the peak on 5 March and the bank is trading at 1.4 times tangible book value. This is still a premium to fellow London-listed emerging market bank HSBC — trading at 1.1 times — but is well down from 1.9 times back in March.

Should investors be worried about Standard Chartered’s asset quality? Is the bank’s impressive growth streak — built on the back of rapidly growing emerging markets — at an end? Are these fears priced into the shares?

These are the questions you need to ask yourself before investing in shares of Standard Chartered.

If you think there is too much uncertainty surrounding Standard Chartered and its target markets then perhaps you’d be more comfortable with the companies in this special wealth report from The Motley Fool.

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> Nate does not own any share mentioned in this article. The Motley Fool owns shares of Standard Chartered.

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