Standard Chartered Bank: First-Quarter Earnings and 2020 Outlook

Shares of Standard Chartered PLC (SEHK: 2888), one of the largest emerging market banks with substantial business operations in Asia, haven’t done well in 2020 as Covid-19 has triggered a global recession.

Due to lower expectations and the economic fallout from the coronavirus outbreak, Standard Chartered shares have declined from HK$73.30 at the beginning of the year to HK$39.60 on 29 April.

Given that Standard Chartered recently reported its earnings, here’s how Covid-19 has affected the bank and how it did for the first quarter.

Earnings

For the first quarter, the bank faced many headwinds including a low interest rate environment, a weakening global economy, and government-mandated lockdowns caused by the coronavirus.

As a result of the headwinds, Standard Chartered’s underlying profit attributable to ordinary shareholders fell 12% year-on-year to US$810 million.

Meanwhile, the bank’s underlying return on tangible equity for the first quarter fell 100 basis points to 8.6% from the prior year period.

While the bank’s financial earnings weakened, Standard Chartered is strongly capitalised. For the first quarter of 2020, Standard Chartered reported a common equity tier 1 ratio of 13.4%.

That was down 45 basis points from the end of 2019, but nevertheless within the bank’s 13-14% medium-term target range.

Covid-19

In terms of the coronavirus outbreak, Standard Chartered stated that the impact of Covid-19 “was felt increasingly in March and will continue through 2Q 2020”.

Due mainly to the virus, Standard Chartered’s credit impairment costs rose to US$956 million for the first quarter, up from the prior year period’s US$78 million.

Covid-19 triggered lower interest rates which also hurt. Standard Chartered said, “the decisions by the US Federal Reserve in March to drop its benchmark interest rate in total by 150 basis points along with actions undertaken by other central banks is estimated to have an impact of a further US$600 million for the Group’s income in 2020”.

Standard Chartered has risk in terms of exposure to sectors really hurt by Covid-19 as well.

As of 31 March, 2020, Standard Chartered had net notional exposures of US$21 billion for the oil and gas sector, US$14.7 billion worth of exposure to commodity traders, US$8 billion exposure to metals & mining, and US$7.6 billion of exposure to aviation.

The bank’s outlook

In terms of its outlook, Standard Chartered expects a gradual recovery, with “major contraction in economic growth rates across most of the world in the second quarter, before the global economy moves out of recession in the latter part of 2020”.

In the meantime, the bank is prepared for a protracted period of “severe dislocation” and is managing its costs prudently.

In terms of costs, the bank is aiming for total costs (when excluding the UK bank levy) of under US$10 billion for 2020 by pausing new hiring, reducing variable compensation in some areas, and reducing discretionary investment spend.

While the bank is cautious in terms of its outlook, Standard Chartered is “seeing encouraging early signs” in China in terms of the rate of recovery.

Barring a potential second wave, China has successfully contained COVID-19 and the country is beginning to return to normal.

If the global economy recovers faster than expected, Standard Chartered’s financials could recover faster as well.

Foolish conclusion

Standard Chartered has and will face strong headwinds due to the coronavirus outbreak for the first two quarters of 2020.

However, the bank is adequately capitalised and management expects the beginning of a recovery in the latter part of the year.

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