A focus on Asia has helped Standard Chartered Bank stay profitable. Will it use its cash reserves to buy assets from its loss-making peers?
While other international financial institutions continue to report huge losses, Standard Chartered yesterday announced that its operating profits rose 13% in 2008, to $4.5 billion. A strong focus on Asia is a major factor behind the good news.
Other key figures for the latest financial year include a 26% increase in operating income to $13.9 billion, and a 19% gain in profit before tax to $4.8 billion. The normalised cost-to-income ratio was 56% in 2008, the same as it was in 2007.
By the time the results came out, at the beginning of the working day in London, there had been a full day of trading in Hong Kong, during which time the stock dropped by 5.2%. The markets in London responded well to the news, however, with the UK-listed stock up 7.3% to 630 pence.
Wholesale banking played a significant role in the strong results, with the division's income up 43% to $7.5 billion and operating profit up 27.8% to $3 billion. Income from the bank's top 50 clients rose by 45% in 2008 and the number of clients with an annual income of more than $10 million increased by 88%.
"To deliver record results in this exceptional environment is a great achievement," says John Peace, Standard Chartered's acting chairman, in a written statement. "The group has focused on building balance sheet strength and on maintaining high levels of liquidity. We are on a firm footing for the challenges and opportunities that will come during 2009."
Challenges could be on the way since many of the Asian markets that are so important to Standard Chartered are already experiencing severe economic difficulties. And credit losses at companies operating in this difficult environment will be the next hurdle for banks to face, say specialists.
Standard Chartered acknowledges that many of its target markets are in a cyclical slowdown but still seems optimistic. The downturn should be shorter in Asia, Africa and the Middle East than in the US and Europe, says the bank, because the developing markets do not have the problems associated with structural credit deleveraging. The bank says that comparisons with the Asian financial crisis over a decade ago are misguided because the region's economies have stronger fiscal positions and big stockpiles of foreign currency. It goes on to say that Asia's governments have been quick to take action to stimulate their economies.
Even so, Standard Chartered's loan impairments increased by 74%, to $1.3 billion, and other impairments rose to $469 million from just $57 million in 2007. There was $41 million worth of asset-backed security write-downs, impairments from private equity investments totalled $171 million, and there were further impairments worth $186 million from its strategic investment portfolio.
Standard Chartered is generally benchmarked against its larger rival HSBC, which on Monday announced a plan to raise $17.7 billion via a rights issue. But Standard Chartered is in the comfortable position of having pre-emptively tapped its shareholders for cash to strengthen its capital base. Last December, the bank completed a $2.7 billion, fully underwritten, rights issue which attracted a subscription rate of 97%. The bank still intends to pay a dividend of the same total monetary amount as would have been paid had there been no rights issue and the board recommends a final dividend of 42.32 cents per share, which is a 3% increase on last year.
The bank said it reduced directors' bonuses for 2008 by between 10% and 25% and imposed salary freezes on senior managers across regions.
Standard Chartered in November last year announced the acquisition of Cazenove in Asia. The deal was small but the bank said the synergies were compelling. Standard Chartered also confirmed at the time that it could be a buyer of other assets in its target geographies. And it is sitting on enough cash to make these deals happen.
One immediate possibility is the Asian assets being sold by Royal Bank of Scotland, which Standard Chartered was already rumoured to be looking at last year. But a number of banks have had their fingers burnt with acquisitions, including HSBC which yesterday admitted that it had not been able to extract value from the US consumer finance business that it bought in 2003. Some specialists feel that, in this market, maintaining a capital buffer is the most prudent move. All eyes will be on Standard Chartered to see what direction it chooses.