Shares in Standard Chartered (LSE: STAN) fell heavily this morning after the group hit investors with a surprise third-quarter loss and announced plans for a £3.3bn rights issue.
The bank reported a pre-tax loss of $140m for the third quarter of the year, missing analysts’ forecasts for an $898m profit. It’s the first quarterly loss reported by Standard Chartered for 15 years — the last time was during the Asian financial crisis in the late 1990s.
The losses are mainly the result of a $1.2bn provision for bad debts, which the bank says are largely the result of “adverse trends” in India and commodities.
Standard Chartered also said that no final dividend will be paid this year.
What’s going to happen?
Standard Chartered’s decision to raise fresh capital through a rights issue isn’t a big surprise. Indeed, at £3.3bn ($5.1bn), the bank’s rights issue is smaller than some analysts believed might be necessary.
The new shares will be issued at 465p, which is a 34.8% discount to Monday’s closing share price. Shareholders will be entitled to buy two new shares for every seven they currently own. The bank believes that the fresh cash will be enough to increase its common equity tier 1 ratio (CET1), a key measure of regulatory strength, from 11.5% to a healthier 13.1%.
Alongside the rights issue, Standard Chartered’s new chief executive, Bill Winters, is accelerating his plans to restructure the bank.
Mr Winters is targeting an additional $2.9bn of cost savings between now and 2018, and intends to cut 15,000 jobs out of a total of 90,000. The bank will focus more on retail banking and reduce its exposure to less profitable and more capital-intensive corporate and institutional banking business.
These restructuring changes are expected to cost $3bn, with some of the cost being met with cash from the rights issue. Mr Winters hopes that the result will be to lift Standard Chartered’s return on equity from its current value of 5.4% to 8% by 2018.
Buy, sell or hold?
Is Standard Chartered a buy, sell or a hold after today’s news?
It’s hard to say. There’s a risk that Standard Chartered could become a value trap — a stock that appears cheap but continues to perform poorly. The bank’s discount to tangible book value has been a key attraction to value investors, but this discount will be reduced as a result of the dilution caused by the rights issue.
Another weakness is that this year’s final dividend has been cancelled. I suspect we won’t know whether the payout will be reinstated next year for at least another six months.
Finally, given today’s surprise loss, Standard Chartered’s earnings outlook for the current year seems uncertain. I expect City forecasts to be sharply downgraded after today’s news.
On the other hand, Standard Chartered doesn’t appear to have any unmanageable problems.
New brooms sweep clean. Mr Winters may have decided to dump as much bad news on the market as possible today, in the hope that future results will make his performance seem more impressive.
Personally, I suspect we are close to the bottom for Standard Chartered shares. As a shareholder myself, I don’t think now is a sensible time to sell. I will be keeping hold of my own shares.