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Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered's (StanLn)</a> decision to restart its share-buyback program while simultaneously aiming to achieve a 10% Return on Tangible Equity (ROTE) is not creditor friendly. The share-buyback is also inconsistent with trying to grow revenues at a cumulative annual growth rate of 5% to 7% over the medium term, as capital constraints may mean missing revenue opportunities. This is at complete odds with <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> wise decision to forgo buybacks through this year. Taken together with management’s plans toward achieving a higher ROTE, this is not credit positive. Pre-Covid-19, Standard Chartered’s problem was excess capacity in a fragmented distribution network. Covid-19 accentuated other weaknesses, including oversized net interest income reliance as well as bancassurance growth sensitivity to border crossing constraints. Underpinned by cost containment difficulties, StanLn is lost at sea, hoping for a return to higher interest rates, open borders, and greater globalization. We are in a world comprised of the exact opposite these days.Within this insight, we review StanLn’s 2020 annual and Q4 results as well as assess the firm’s plans to achieve a higher ROTE over the medium term. Our conclusion is that it is difficult to get excited about Standard Chartered’s US$-denominated Additional Tier 1 (AT1) bonds. In our view, most of these notes trade right where they belong, if not too dear, relative to other banks. If we had to buy a StanLn bond, we would favor the Singapore-dollar denominated AT1 note, despite the results and targets going forward.

Standard Chartered's (StanLn) decision to restart its share-buyback program while simultaneously aiming to achieve a 10% Return on Tangible Equity (ROTE) is not creditor friendly. The share-buyback is also inconsistent with trying to grow revenues at a cumulative annual growth rate of 5% to 7% over the medium term, as capital constraints may mean missing revenue opportunities. This is at complete odds with HSBC Holdings' (HSBA LN) wise decision to forgo buybacks through this year. Taken together with management’s plans toward achieving a higher ROTE, this is not credit positive. Pre-Covid-19, Standard Chartered’s problem was excess capacity in a fragmented distribution network. Covid-19 accentuated other weaknesses, including oversized net interest income reliance as well as bancassurance growth sensitivity to border crossing constraints. Underpinned by cost containment difficulties, StanLn is lost at sea, hoping for a return to higher interest rates, open borders, and greater globalization. We are in a world comprised of the exact opposite these days.Within this insight, we review StanLn’s 2020 annual and Q4 results as well as assess the firm’s plans to achieve a higher ROTE over the medium term. Our conclusion is that it is difficult to get excited about Standard Chartered’s US$-denominated Additional Tier 1 (AT1) bonds. In our view, most of these notes trade right where they belong, if not too dear, relative to other banks. If we had to buy a StanLn bond, we would favor the Singapore-dollar denominated AT1 note, despite the results and targets going forward.

Standard Chartered Results: Lost at Sea with No Credit Catalyst