Standard Chartered (LON: STAN) shares were worth as much as 723p in December 2019, before the covid-19 pandemic crash saw them sink to 337p by September 2020. But they had recovered to 571p last week, as the tantalising prospect of rising interest rates continues to grow.

However, as CEO Bill Winters warns the pandemic's 'considerable challenges' means a turnaround could take 'longer than expected,' Standard Chartered shares have fallen to 524p today.

Standard Chartered share price: full-year results

Full-year results present a mixed picture for the bank. Pre-tax profit rose to £2.4 billion ($3.3 billion), double the £1.2 billion it made in 2020. However, an average profit estimate of 16 analysts compiled by the lender had previously forecast $3.8 billion, leaving Standard Chartered $500 million short of estimates.

Moreover, the bank increased its staff bonus pool by 38% to $1.37 billion and is increasing the average salary by 4.8% in 2022. It argued that this increased pay reflects the normalisation of banking bonuses after a weaker 2020 and the need to up pay to retain staff in the face of the wider labour shortage. Across the Atlantic, similar pay rises at Morgan Stanley, JP Morgan, and Credit Suisse have all been justified with similar reasoning.

And according to Lattice, 38% of UK companies were forced to turn down work due to staff shortages during the pandemic, while 73% of workers value work-life balance as their top employment priority. Banking’s long-held reputation for long hours could see the sector’s margins harder than most, as employee priorities continue to shift.

But CEO Bill Winters argues 'confidence in our overall asset quality and earnings trajectory allows us to return significant capital to shareholders.’ Accordingly, the bank is spending $750 million on share buybacks, and has announced a 12 cents per share dividend for 2021, up from 8 cents in 2020.

However, this hasn’t stopped Standard Chartered shares from falling today. And the bank’s share price has fallen 45% since the CEO took over in 2015. But to get back on track, it plans to cut annual expenses by $1.5 billion, as part of a previously untimetabled goal to hit double-digit returns by 2024.

Overseas strategy

Chairman Dr Jose Vinals believes that ‘Asia, our largest region, is poised to remain the fastest-growing area in the world.’ And Winters thinks ‘China is opening up at an accelerating pace, supporting the opportunities for which we have positioned for the past decade.’ Accordingly, Standard Chartered is investing a further $300 million into China, as it steps up competition for market share with larger rival HSBC. But Asian banks are also increasing salaries fast, with titan DBS Group reporting a 9% increase in staffing expenses to $1.46 billion in H2 2021.

And it’s had to take a $300 million writedown on the value of its investment in China’s Bohai Bank, and a $95 million ‘management overlay’ as it expects further costs associated with the country’s troubled real estate sector. Moreover, with 30% of China’s GDP reliant on real estate, second-order contagion from the potential collapse of Evergrande could hit Standard Chartered operations hard.

More widely, Standard Chartered expects to see rising profits from increasing globally rising interest rates. In the UK alone, the Bank of England has already raised the base rate to 0.5%, and HSBC predicts it could hit 1.25% by the end of the year. Chief UK economist at Capital Economics, Paul Dales, believes the current environment is ‘a recipe for more interest rate hikes, perhaps from 0.5 per cent now to 1.25 per cent this year and to 2 per cent next year.’ Similar hikes are expected across the developed world.

Vinals thinks policy support will ‘scale back, as a number of central banks tighten policy to counter inflation leading to rising interest rates, and fiscal programmes are eased.’ And Winters concurs, highlighting the ‘significant opportunities emerging’ as ‘Government and Central Bank policies are in transition, creating volatility that can benefit our capital-lite Financial Markets and Wealth Management businesses…expected interest rate rises could add significant further upside to our income growth rate.’

Standard Chartered shares are falling today. The coming year could be a different story.

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Charles Archer | Financial Writer, London
18 February 2022 02:19