Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) issued its full-year results for 2014 this morning, revealing a 25% slide in adjusted pre-tax profits, which fell from $6.9bn to $5.2bn, and a worrying 32% rise in bad debts.
Chief executive Peter Sands will not receive a performance bonus for 2014, but shareholders will be rewarded: the bank’s dividend was left unchanged, at 86 cents per share, defying City forecasts, which suggested a cut.
The bank’s shares rose by more than 5% as the better-than-expected dividend cheered investors, who are also celebrating the impending departure of Mr Sands, who will be replaced in June by the former co-head of investment banking at JP Morgan, Bill Winters.
How bad are things?
The City’s biggest concerns about Standard Chartered revolve around the quality of the bank’s loan book, and whether the bank will have to raise new funds through a rights issue, in order to strengthen its balance sheet while it deals with bad debts.
Today’s results showed that provisions and losses relating to bad debts rose by 32% from $1.6bn to $2.1bn last year. Mr Sands admitted that the firm had been exposed to a perfect storm of rising risks, including falling commodity prices, major losses in Korea and fraud in China.
In today’s results, Mr Sands pointed out that Standard Chartered’s Common Equity Tier 1 (CET1) ratio of 10.7% is sufficient to meet current regulatory requirements, and said that he believes the bank can hit its target of 11-12% by accelerating the disposal of poor quality and low-returning loans.
The City’s view is different: getting rid of underperforming assets will mean sharp losses, and incoming chief executive Mr Winters is widely expected to launch a rights issue to raise new cash and remove any possibility of future problems.
Is Standard Chartered a buy?
Standard Chartered shares have climbed 13% over the last month, but still look cheap: the bank’s shares are currently trading close to their tangible net asset value of about 1,050p.
In terms of earnings, even today’s disappointing results only place the bank on a P/E of 11 — hardly demanding, especially given the 5.4% dividend yield.
The problem is that Mr Winters may well cut the dividend, and Standard Chartered’s book value could fall if bad debts continue to rise.
It’s a finely balanced situation, but my view is that Standard Chartered remains an attractive buy below 1,100p.