Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 bank Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) — and what they mean for investors.
Standard practice
There was a time when Standard Chartered could do no wrong. Double-digit growth saw record results posted year in, year out. Good management, and the good fortune of being focused on the Asia Pacific region, even enabled the company to march through the 2008/9 financial crisis without a break in its stride.
However, 2013 proved to be more challenging. Standard Chartered posted an annual drop in income and profits for the first time in over a decade. There were various factors: transactions were down in wholesale banking, bad loans were up in the consumer division, and the group’s business in Korea moved from profit to loss.
With economic growth in many emerging markets becoming less dynamic than in previous years — making top-line income growth harder to come by — Standard Chartered’s management recognised during the course of 2013 that it needed to make some fundamental changes.
Previously, the company had been content to let its fast-expanding top line drive growth, with costs rising at the same kind of rate. Now, though, in an environment of slower top-line growth, the Board is seeking to ensure that costs rise more slowly, in order to keep the bottom line growing at a good clip.
Management says this change, which it admits is challenging, “should help us achieve our aspiration of double-digit earnings-per-share growth, even at lower than double-digit rates of income growth”.
Another change to past practice is in the area of risk-weighted assets (RWA). Previously, RWA grew in line with retained earnings. Now, though, management is looking to grow RWA at a slower rate; which means that the capital buffer against the assets will increase.
While Standard Chartered already has good capital ratios, management says:
“Given the ongoing uncertainty about regulatory expectations, we think it makes sense to manage for a positive capital trajectory to give us greater flexibility and resilience”.
Looking to the future
In going for higher quality profitable and sustainable growth, Standard Chartered has been systematically reviewing areas of its business that are underperforming, or less aligned to the core strategy.
As a result management is exiting or reconfiguring a number businesses. Also — and making for “some tough conversations” — it’s been exiting or reshaping relationships with clients where the returns haven’t been attractive enough.
However, the business in Korea, which is substantial and particularly problematic, will be a drag on the group for some time. Management says: “We cannot achieve this transformation as swiftly as we would like”.
Standard Chartered is currently out of favour with the market. The shares trade at 1,285p, on a P/E of 10.4 compared with 13.7 for the FTSE 100. That looks decent value to me for a company, which, despite near-term headwinds, remains well placed to profit from the secular trend of investment, trade and wealth creation across Asia, Africa and the Middle East.
