Standard Chartered PLC (LON:STAN) stock went up today in the London Stock Exchange (LSE) by around 5.5%. It surged 3.5% yesterday. The bullishness is a result of a major progress made by the bank in the first half of the year, by cutting the loan impairment charges by half. This shows the bank, like its competitor Barclays, is right on track of its restructuring plan.
The pre-tax profit of the bank for the first half of the year declined by 46% year-over-year (YoY), which also missed the analysts’ estimates. Despite these disappointments, the investors cheered as the bank is right on track. This makes its future brighter compared to other European banks, which look muddled at the moment.
In addition to the loan impairments, the bank witnessed a 10% decline in operating costs as a result of cut in the risk-weighted assets. The bank believes it will not be able to meet the return on equity (ROE) target for this year due to headwinds in the macro environment. However, analysts have appreciated the efforts of the bank to improve its condition.
Standard Chartered is amongst those few European banks, which were the least impacted by the decision of Britain to leave European Union. The bank holds a great exposure in the Asian markets and its exposure in the UK, despite having headquarters here, is very limited. Standard Chartered’s stock has increased by 8.26% year-to-date (YTD), which is surprising as the banking industry around the globe has been hit hard from the start of the year. All major banks have witnessed decline in share price so far this year. Nevertheless, bank’s shares have declined by more than 37% in the last 12-months due to commodities market crisis witnessed last year.
The lender’s stock has been trading at less than its book value for around two years and it has maintained a 52-week range of 373.40-965.12 pence. The future looks bright as operating costs will reduce further in the coming quarters as the bank has already incurred a huge part of the expected total restructuring cost. The bank maintains its common equity Tier 1 capital ratio of 13.1% so far. This is encouraging keeping in view the capital standing of its rivals.
The growth rates in Hong Kong and Singapore remained low for this half of the year. The high volatility in the international markets means the bank will need more time to reach its goals. The bank aims to reach 8% return on equity (ROE) by 2018. It expects ROE of 10% by 2020. The ROE in this half came in at 2.1%, compared to 5.4% in the first half of 2015.
The management has reduced the exposure of the bank to the commodities business to $37.1 billion. Commodities resulted in major bad loans of the bank last year, which reduced the exposure of commodities by $2.5 billion in the last six months. Oil, gas, metals and mining sectors gave tough time to the lender in the first half as loan impairments from Europe and Americas increased twice to $124 million.
Chief Executive Officer Bill Winters said: “Returns for most banks are at levels that are really not acceptable in terms of long-term prognosis for a healthy banking system.”
Business Finance News believes the bank is operating in a tougher economic environment and has also tightened its risk tolerance level. The current performance under the prevailing conditions is actually very good, but the bank needs to look after the non-performing loans, which are on the rise. The bank is terminating contracts with some clients as regulations get stringent. The regulations are giving tough time to banks, but they are necessary because banks play an important role in any economy they operate in.