Standard Chartered yesterday announced record income of $16.2 billion for 2010, led by growth in its Asia wholesale banking business. Overall, income rose 6%.
"We maintain a buy on Standard Chartered on the back of strong 2010 results declared today," said Sunil Garg, head of Asia equity research and bank research for J.P. Morgan in an interview with FinanceAsia. "Management has been providing regular guidance and there were no surprises in the earnings the bank released.”
The wholesale bank continued to drive revenues, with pre-tax profits in the division growing by 17% to $4.8 billion. This is the ninth consecutive year Standard Chartered has managed double-digit profit growth in the wholesale bank – corporate finance, financial markets and cash management businesses all posted solid growth.
“One area of potential concern is that provisions have now been reduced to a level where limited future earnings growth will come from any further reductions,” said Garg. “However, loan growth is coming out much stronger than expected."
A recurring comment that competitors make about Standard Chartered is that it misprices risk. The comment is driven by the fact that Standard Chartered seemingly offers its wholesale customers credit at levels that other banks cannot match. However, some sources said this is because the bank takes a holistic view of clients so may pick up revenue in other areas that are not visible. Other sources say the bank is not mispricing risk so much as deliberately trying to win market share.
Standard Chartered seems to be getting its consumer banking strategy right as well. Although still considerably smaller than the wholesale bank, the consumer bank earned a pre-tax profit of $1.3 billion, a growth of 51% over 2009.
In its earnings statement, the bank cited mortgages, credit cards and personal loans as specific areas contributing to income growth. The private bank, which is based in Singapore, grew assets under management to $46 billion, on the back of 39% growth in Asia and 31% globally. Overall, private banking revenues grew by 23% to more than $400 million.
In 15 of the countries in which Standard Chartered operates it earned more than $100 million of profit. India led the pack with a pre-tax profit of $1.2 billion, making it the bank’s largest market by profits for the first time ever, and Hong Kong followed with $1.1 billion. Standard Chartered warned that growth in India would likely not continue at such a pace, but it remains bullish on the opportunities for its business in the country and continues to invest in products such as equities, private banking and improving its distribution beyond the current 94 branches.
“Standard Chartered has reaped the benefits of a focus on wholesale banking in India,” said a source. “Both Citi and HSBC, the other foreign banks which are well-entrenched in India, had aggressively grown their consumer banking businesses in India in the early part of the last decade and in the aftermath of the subprime crisis had to book losses and subsequently scaled back across all their businesses.”
The cost-to-income ratio at Standard Chartered increased last year to 56% from 51% the previous year, which was a theme in the HSBC results declared earlier this week as well. Operating expenses increased by 13% to $9 billion, driven primarily by staff expenses, which grew 17% to $5.8 billion. Standard Chartered attributed the increase to investments it made in staff, infrastructure spend on new branches and on distribution channels, adding that “greater competition for talent necessitated appropriate retention measures in [its] key markets”.
Retaining people was a theme Peter Sands, group chief executive for Standard Chartered, also touched upon in his remarks. “The aspect of competition that most concerns me is the war for talent,” he said, while remarking that “after a couple of years in which many of our competitors were in some disarray, we are seeing more competition across our markets, both from increasingly capable local banks and from international banks returning to the fray”.
“Inflationary pressures on costs in general and wages specifically continue to be a concern but we would note that Standard Chartered has demonstrated before that it can control costs if the operating environment becomes difficult,” said Garg.
Sands also mentioned in his remarks that the largest external challenge the bank faces is regulation. “Whilst we are broadly supportive of much of the regulatory reform agenda, the sheer scale of actual and potential changes, when applied across all the markets we operate in, represents a very considerable challenge and there is the real risk of unintended consequences,” he said.
Standard Chartered shares gained almost 5% on the London Stock Exchange to £1.689 ($2.75) in trading yesterday as the bank delivered on the promises it had made to investors.