Banks have been accused of ‘underlyingitis’ — producing various versions of their profit figures to tell the story they want to. So I’ve taken to applying my own consistent, judgemental analysis to banks’ income statements, sifting them into two figures: underlying profits — generally, what the banks would like their profits to be; and statutory profits before the fair value adjustment of the banks’ own debt (FVA) — the warts-and-all bottom line.
Here are the last three years’ results for Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US):
| $m | 2011 | 2012 | 2013 |
|---|---|---|---|
| Underlying profit before tax | 6,775 | 7,518 | 6,958 |
| Exceptional/one-off items | – | – | (1,000) |
| Litigation | – | (667) | – |
| FVA | – | – | 106 |
| Statutory profit before tax | 6,775 | 6,851 | 6,064 |
| Statutory profit before FVA | 6,775 | 6,851 | 5,958 |
There are refreshingly few adjustments in this table, in stark contrast to the situation for RBS, Lloyds, Barclays, and HSBC.
Indeed, Standard Chartered is the WYSIWYG of UK bank reporting. It’s barely troubled by the arcane accounting treatment of own credit fair value adjustments, and it has little in the way of exceptional items. It paid punishing fines of $667m to US regulators in 2012 over allegations of Iranian sanctions-busting — a controversial subject on this side of the pond — and it wrote off $1bn goodwill in its Korean business.
Disappointing
Unfortunately what-you-see-is-what-you-get doesn’t equate to seeing what you want to see. Standard Chartered’s 2013 results were disappointing, however you look at them. 2013 saw its first fall in profits for over a decade. Much of the decline was due to an increase in loan impairments of more than a third. That’s an old-fashioned banking problem that has some analysts worried about Standard Chartered’s credit quality as it pursued growth. The bank also cited ‘margin pressure’ — fiercer competition and lowered credit quality often go together. Investors’ declining appetite for emerging market risk hit the wholesale division.
These are cyclical, transient factors. The departure of the finance director, lowered profit growth targets, an ill-explained corporate reorganisation, and fears that further growth will need to be sustained by a capital-raising have added to Standard Chartered’s woes. As a consequence the bank’s premium rating compared to the rest of the sector has been much diminished. Ultimately its great franchise in Asia Pacific, Middle East and Africa should see the shares recover.
