Shares in Asia-focused bank Standard Chartered (LSE: STAN) met with a warm reception this morning after the bank announced a return to profit and said it would restart dividend payments.
The bank’s pre-tax profit rose by 175% to $3bn last year, while return on equity — a key measure of profitability for banks — rose from 0.3% to 3.5%. Although that’s still low, it’s a significant improvement and shows the bank making real progress towards its initial target of 8%.
Shareholders will receive a dividend of 11 cents per share for 2017, giving a yield of about 1%. However, I believe this payout is likely to rise significantly over the next couple of years, making Standard Chartered a potential dividend growth buy at current levels.
What’s going well
The bank’s operating income (equivalent to revenue) rose by 3% to $14.3bn last year. One of the main factors behind this gain seems to have been a strong performance in Hong Kong. Management said that income from Greater China & North Asia — which includes Hong Kong — rose by 8% last year.
There was also good news on bad debt. Loan impairments fell by 50% to $1.2bn last year. This seems to suggest that the worst of the group’s problem loans have now been addressed, and that loan quality is improving.
The reduction in impairments helped to lift the bank’s net interest margin from 1.5% to 1.6%. Net interest margin is a measure of the difference between interest paid on deposits and interest earned on loans — in effect, it’s the bank’s operating profit margin.
What went badly
Not all operations managed to deliver growth last year. The main area of weakness was the Financial Markets business, which suffered from lower levels of volatility in global stock markets. This caused income from Singapore and from the bank’s European and American operations to fall.
Another concern is that costs remain quite high. Regulatory costs rose by 15% — or $1.3bn — last year. Although management said that 85% of its planned $2.9bn efficiency programme has now been delivered, the group’s underlying cost-to-income ratio only fell by 1.4% to 70.8% last year. That’s still pretty high.
Why I’m a buyer
I hold Standard Chartered in my personal portfolio and would be happy to buy more after today’s news. Although the bank isn’t as cheap as some rivals, I believe its focus on the faster-growing economies of Asia should help to improve returns. Rising interest rates could also provide a boost to profits.
Chief executive Bill Winters said today he’s “encouraged” by the start to 2018, which has delivered “broad-based double-digit” earnings growth compared to the same period last year.
The bank’s underlying earnings are expected to rise by 57% to $0.74 per share in 2018, putting the stock on a forecast P/E of 15.9. Analysts have pencilled in a dividend of $0.28 per share for this year, giving a prospective yield of 2.4%.
In my view Standard Chartered is one of the most attractive of the big banks at the moment. I continue to rate these shares as a buy.
