Standard Chartered (LSE: STAN) has reported its much-anticipated first-half results today. After six months of volatility across Asian markets and a commodities rout, Standard revealed that its first-half profit had slumped 44%. Pre-tax profits fell to $2.1bn from $3.25 as reported a year ago. A 50% dividend cut was also announced as management looked to save cash and “rebase the dividend to better reflect earnings expectation and outlook“.
Alongside the bank’s results, Standard’s new CEO Bill Winters laid out a brief plan of how he will return the bank to growth.
Winters stated that after a decade of rapid growth, Standard would now prioritise returns over growth. This change of strategy is required to ensure that Standard maintain profitability “at all points in the credit cycle”.
Winters stopped short of laying out a more detailed restructuring plan for Standard. The group plans to issue a more comprehensive strategy update later in the year. City analysts widely expect Standard to announce a rights issue as well as a broad cost-cutting plan to strengthen the group’s balance sheet. Some analysts believe that Standard could require $10bn of additional capital.
Commodity pain
Standard’s troubles can be blamed on the volatile commodity market, and as commodity prices are now falling almost every day, the bank needs to take drastic action. Analysts have estimated that around 20% of Standard’s total loan book is linked, directly and indirectly, to the commodity market — around $61bn in dollar terms, roughly 140% of the bank’s tangible net worth.
The bad news is that during the first half of the year, Standard was forced to write off $1.7bn worth of loans due to the deterioration in Indian economic growth and continued commodity market weakness.
However, Standard is taking action to lower its exposure to the commodity market. Within today’s interim results release management noted that the group’s direct exposure to the commodity market had declined by 11% since the end of 2014 to $49bn, and 21% since the end of 2013. Moreover, the group is looking to reduce its exposure to the commodity market further, given the market’s adverse trends.
Also, Standard’s management is taking action to reduce group-wide costs, and tighten lending criteria to boost credit quality. Standard is looking to deliver over $400m in sustainable cost savings during 2015. Over the next three years, the company is looking to achieve sustainable cost savings of $1.8bn.
Time to buy?
Unfortunately, today’s update from Standard failed to answer any key questions about the company’s future. The bank may still need to undertake a rights issue to shore up its balance sheet, and no concrete restructuring plan has been published.
Additionally, now that management has decided to slash Standard’s dividend payout, the bank is no longer an income investment. Investors will only receive a token dividend yield while they wait for a more comprehensive restructuring plan to be published.