Standard Chartered posted record first-half profits for the 10th consecutive year yesterday as its conservative strategy and emerging-market focus continue to protect it from the ravages its European rivals are suffering.
Pre-tax profit grew to $3.9 billion, up by 8.6% on the first half of last year and 25.8% on the second half. The bank earned a healthy 13.3% return on equity thanks to continued investment in its target markets of Africa, Asia and the Middle East, where it has managed to grow its business without paying through the nose — indeed, its cost-to-income ratio fell slightly to 52%.
The main engine of growth remains the wholesale bank, with strong double-digit returns from both its trade finance and cash management businesses.
“These results represent a very positive start to the year,” said Peter Sands, Standard Chartered’s group chief executive, in a statement accompanying the earnings announcement. “Our record of consistent delivery is testament to the resilience of the bank’s business model, and underscores the sheer diversity of the income engines we have.”
The bank has been through its own trials during the years, but during the past decade Sands and his management team have built a business that is almost a mirror image of some of its peers. Leverage is low, loan-to-value ratios are conservative, most of its book is secured and its income is balanced fairly evenly across some of the most promising emerging markets in the world.
It has already met Basel III requirements with core tier-1 capital of 11.6% and, as it pointed out yesterday, it is the only major international bank to be upgraded by all three rating agencies since the onset of the financial crisis.
And, while other global banks are busy re-organising their businesses, Standard Chartered has developed a clear long-term strategy of how to make money and deliver reliable returns for shareholders.
It has also stayed out of trouble at a time when confidence in the banking industry is at an all-time low — it is the only big British bank not under investigation for rigging Libor, it is one of the few not facing heavy charges for mis-selling payment protection insurance and has no direct exposure to sovereign debt in the peripheral eurozone countries.
That clean performance has earned it a decent premium among investors, with its stock currently trading at 1.3 times its book value. “Standard Chartered is one of our favourite banks because it is one of the few global banks that wasn't deeply damaged by the financial crisis — and we think its future looks equally bright,” said Erin Davis, an analyst at Morningstar, in a research note.
“Its footprint in some of the world's fastest-growing markets ... has helped the bank to increase profits about 20% annually in recent years and should allow it to continue to grow profitably without straying from its proven strategy or taking excessive risks. We're especially impressed that Standard Chartered is controlling costs in fast-growing markets better than some of its competitors.”
Indeed, the bank’s performance has been so solid that some rivals have occasionally sneered in private, questioning the sustainability of its winning streak. We asked Sands what he thought about the sceptics earlier in the year (see the article here), and this is what he said: “Absolutely people are going to be sceptical, but the first thing I would say is that it isn’t as if we haven’t encountered problems. We have, and we have dealt with them. It is not as if we were unscathed by the crisis. But I think we had the resilience and mindset of trying to work out what the next problem is. We try to shape the business and the book in a way that allows us to respond. But this is a risk business and in turbulent times you are going to have risks that play your way.”
Given the state of the banking industry today, Standard Chartered stands out like a diamond in the rough.