Standard Chartered (LSE:STAN) shares are unfamiliar to me. The bank has been a member of the FTSE 100 for as long as I can remember, but I’ve never taken an interest. Last week, it released its results for 2022. I therefore decided to learn more about the bank and find out how its been performing.
Taking an interest
Income and earnings are both going in the right direction. When comparing 2022 with 2021, these increased by 10% and 13%, respectively.
Also, operating costs appear to be under control.
| Metric | 2021 | 2022 | Change (%) |
| Underlying operating income ($bn) | 14.71 | 16.26 | +10 |
| Operating expenses and impairments ($bn) | 10.52 | 11.49 | +9 |
| Underlying profit before tax ($bn) | 4.20 | 4.76 | +13 |
| Net interest margin (%) | 1.21 | 1.41 | |
| Underlying return on tangible equity (%) | 6.8 | 8.0 |
One key financial measure for banks is their net interest margin (NIM). This reflects the difference between the interest charged on loans and that paid on deposits.
With central banks across the globe increasing interest rates, Standard Chartered should benefit. Indeed, its NIM increased from 1.21% in 2021 to 1.41% in 2022. And it’s expecting this upward trend to continue. NIM is forecast to be 1.75% in 2023, and 1.8% in 2024.
This is helping to drive another key metric of the banking sector higher — Return on Capital Employed (ROCE).
Last year, the bank’s ROCE was 8%. But the directors have set a target ROCE of 10% for 2023, and 11% in 2024. These are both higher than previous estimates. Assuming capital remains unchanged, an additional $755m of income could be generated this year, and $1.13bn in two years’ time.
Structure
The business is divided into three divisions: corporate banking, consumer banking (which also includes smaller businesses) and ventures.
The latter is a newly created segment that has recently established virtual banks in Hong Kong and Singapore. It’s still in its infancy and therefore remains loss-making. However, the profits of the other two divisions both grew by around 30% last year.
| Profit / (loss) before tax by division ($bn) | 2021 | 2022 | Change (%) |
| Corporate, Commercial and Institutional Banking | 3.12 | 4.10 | +31 |
| Consumer, Private and Business Banking | 1.22 | 1.60 | +30 |
| Ventures | (0.26) | (0.36) | -39 |
| Central and Other Items | 0.11 | (0.57) | |
| Combined | 4.20 | 4.76 | +13 |
In terms of geography, Asia is the most important territory. The continent contributed 77% of profit before tax in 2022.
The Asian economy is expected to grow by 5% in each of the next two years. This should benefit the bank, although there is a general concern over the recoverability of loans made to the commercial real estate sector in China.
When assessing banks, I like to keep an eye on how their loans are performing.
If the risk of loan defaults is increasing, an impairment charge is booked in the accounts. Conversely, if the situation is improving, then a credit (income) entry is made.
The bank is seeing a deterioration in the quality of its loan book — its impairment charge increased from $263m in 2021 to $838m last year. But the directors don’t appear to be overly concerned.
What have I learned?
Now that I know more about Standard Chartered, I can see why its share price has risen by more than 35% over the past 12 months.
The bank is growing and well positioned to benefit from the post-Covid recovery, particularly in Asia.
One area of concern is its exposure to the Chinese property market. In response, the directors have decided to write down the value of the bank’s stake in China Bohai Bank by $308m. Hopefully, there’s no more bad news to come here.
After doing my research, I like what I see. It’s certainly not a case of familiarity breeding contempt. I’m therefore going to include the bank on my shopping list, for when I’ve some spare cash to invest.
