Update: Standard Chartered Earnings

| About: Standard Chartered (SCBFF)


Standard Chartered’s interim profit before tax fell 20%, in-line with its June guidance.

The bank faces new fines on issues related to the bank’s anti-money laundering controls.

I reaffirm my bearish medium-term outlook.

Standard Chartered's (OTCPK:SCBFF) profit before tax before exceptional items fell 20% to $3.27 billion from $4.09 billion in the first half of 2013. The decline in profits was mainly attributed to weaker investment banking revenue, worsening credit quality and shrinking net interest margins. Revenue fell 5% to $9.27 billion. Stricter regulatory requirements have also contributed to rising costs. The cost to income ratio for the first half had risen to 54.6%, from 51.4% last year. The bank has left its interim dividend unchanged at 28.8c per share. But with declining profitability, worsening credit quality and stricter capital requirements, the bank would face continued pressures on its balance sheet.

Standard Chartered's balance sheet remains relatively strong, despite a slight decline in the Basel III common equity Tier 1 capital ratio to 10.7%. Gross non-performing loans increased to $7.19 billion, which represents a rise of 11% on December 31, 2013. The bank faces ongoing structural and cyclical issues in Korea, which continued to be loss-making. As expected, Standard Chartered, the sale of the bank's consumer finance businesses, have had a negative impact to income to the first half results, even though the disposals make sense in the longer run. We should expect further impact to earnings from the bank's changing priorities in capital allocation.

Reuters has also reported that Standard Chartered faces new penalties from U.S. financial regulators on issues related to the bank's post-transaction surveillance systems, which is a part of its anti-money laundering controls. The penalty, which had been largely unanticipated, could cost the bank between $100 million and $340 million. Standard Chartered has already paid a total of $667 million to U.S. regulators over violations of U.S. sanctions. I remain cautious on the medium term outlook for Standard Chartered (see my previous article on the bank, "Standard Chartered's Low Valuation Seems to be Justified").

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