Interactive Investor

Standard Chartered divides opinion

28th April 2015 17:37

Lee Wild from interactive investor

Its share price may be up by almost a quarter since February, but Standard Chartered continues to divide opinion. True, a rights issue seems less likely now, and the replacement of under-pressure CEO Peter Sands with former JP Morgan chief Bill Winters in June has been taken well. However, both weaker first-quarter revenue and 22% slump in pre-tax profit missed consensus estimates and the Far East-focused bank struggled Tuesday.

Operating income fell from $4.6 billion (£3 billion) to $4.4 billion in the three months to 31 March, down 4%, or 1% on a constant currency basis. An 80% increase in loan impairments to $476 million was, at least, lower than in the previous two quarters and better than expected. There could even be a small improvement in 2015, say some.

That's why underlying pre-tax profit - down from $1.88 billion to $1.47 billion due to lower income and rising costs - was largely in line with most forecasts.

"We are on schedule to deliver a Common Equity Tier 1 ratio of between 11% and 12% and sustainable cost saves in excess of US$400 million in 2015," said Sands. "Trading conditions remain challenging and the actions we are taking to de-risk, cut costs and build capital are having an impact on near-term performance."

It's fair to say the mood in the City is cautious. Even supporters like Gary Greenwood at Shore Capital "do not want to get carried away by one quarter of data".

Others are less polite. "We believe that management change increases shareholder risks for this stock," says Ian Gordon at Investec Securities. "We continue to forecast a cut in the dividend - from 86 cents in 2014 to 50 cents in 2015e - and although we do believe that STAN should be able to run with less capital than any other UK bank, we have reduced confidence as to whether such a situation will prevail. We are now cautious on all UK banks."

Gordon has Standard as a 'sell' with 970p price target. Deutsche Bank goes further. "We expect consensus EPS to fall on lower revenue forecasts, higher costs and a reluctance to assume lower-than-expected loan losses survive the arrival of Bill Winters as CEO," it says, repeating its 'sell' rating at 865p target.

Clearly, Winters will initiate a strategic review when he arrives in the summer. Shareholders will hope that heralds a turnaround in fortunes similar to Dave Lewis' impact at Tesco and Wilf Walsh at Carpetright. However, a dividend cut would be taken badly.

And Standard is hardly a bargain on just over 1 times tangible net asset value (TNAV) and trading in excess of 13 times earnings estimates for 2016.

On the plus side, the lender continues to mull a shift of headquarters overseas amid a sharp rise in the UK bank levy - it expects an increase this year to $540 million from $366 million. It's widely accepted that Standard would find such a move easier to execute than regional rival HSBC. Speculation may continue to underpin the share price.

However, watch out for significant technical support at around 1,050p. It's a long way down if a break below that level is confirmed.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.