Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) shocked investors yesterday when the bank issued yet another profit warning.
Management revealed that it now expects the bank’s income for the first-half of 2014 to be down by a mid-single digit percentage, compared to the figure reported for the same period last year.
And on a constant currency basis (ie, excluding the negative impact of currency conversion) profits are expected to be down by a low single-digit percentage compared with the previous first-half.
Still, Standard’s management believes that first-half profits will be comfortably ahead of profits reported for second-half of last year.
Underlying themes
On the face of it, this profit warning from the bank looked pretty bad, but after digging into the numbers, I’m not concerned.
Indeed, it would appear that Standard’s income is falling as the bank, like many of its peers, is doing some spring cleaning.
For example, the bank’s lower first quarter income is attributable to a rising number of loan impairments. Loan impairments are expected to be up by a high-teens percentage in the first half of 2014.
Management has stated that these impairments are a result of:
“…property cooling measures across several Asian markets…and continued de-risking of unsecured products in the Retail Clients segment…“
Further, Standard’s management commented that:
“…Income across Retail Products is expected to be down by a mid single digit percentage year on year, impacted by the continued de-risking of our unsecured portfolio…“
So, it would seem as if this higher rate of impairment charges will be a one-off. Of course, we’ll have to wait until the bank’s next quarterly update to see if these trends persist.
Making progress
Nevertheless, despite being held back by rising impairments, other parts of the group performed well during the quarter. Operations within China and Africa continue to report growth and rising levels of income, while operating costs across the group have been kept under control.
Wealth management income for the first half is expected to be up by a mid-single digit percentage. The division is reporting broad based growth by product, particularly in Bancassurance.
Unfortunately, like many of its peers, Standard’s financial markets division is struggling, reporting a 20% decline in income during the period.
Key takeaways
Overall, there are several things to be taken away from this update. Firstly, it would appear that Standard is doing some housing keeping, reducing its exposure to risky assets and writing off non-performing loans, which should be good for long-term stability.
And secondly, the bank continues to make good progress expanding its wealth management arm, targeting higher returns.
All in all, investors should not be worried about Standard’s profit warning, the bank’s turnaround story is still progressing well.
