StanChart resets on a high

Early 2024 may have been an auspicious time for former Bank of America investment banker Diego De Giorgi to take over as chief financial officer of Standard Chartered.

In late February, only a few weeks after he took on the job, the bank reported full-year profitability in double digits for the first time in a decade, while also announcing a new set of ambitious financial targets and strategic initiatives.

With underlying profit before tax rising 27% to $5.7 billion, the share price rose by 5% on the day of the results.

By contrast, it had been one of the worst-performing bank stocks after third-quarter results, when it reported higher impairments charges in China, thanks to the Chinese real-estate downturn.

As De Giorgi took his place next to chief executive Bill Winters on the call with analysts, it all gave the impression of a seamless transition from retiring CFO Andy Halford. And perhaps it showed that an eventual succession from Winters (who took over in 2015) could also be relatively smooth, not least because the CFO sits on the board of directors at big UK-based banks like StanChart, reinforcing the role’s seniority.

De Giorgi is almost a decade younger than Winters. Simon Cooper (head of corporate, commercial, and institutional banking) is seen as another potential successor to Winters and of a similar age to De Giorgi.

The importance of a smooth transition, meanwhile, is something De Giorgi knows much about, having been close to Jean Pierre Mustier during the latter’s messy exit from UniCredit.

StanChart is already looking for a successor for the chairman role, as José Viñals is reaching his maximum term on the board next year.

On his first results call, a bespectacled De Giorgi showed himself on top of the numbers – his investment banking past apparently long gone (he covered financial institutions at Goldman Sachs, before eventually occupying top jobs at BofA).

But the hard work is just beginning at StanChart. Although some believe its success in reaching a 10% return on equity is largely thanks to higher interest rates – RoE having previously been stuck in the mid-single digits – the bank is now targeting 12% by 2026.

That compares with a consensus 2016 RoE of 10.7%, according to analysts.

StanChart’s share price, to use Winters’ own words, is "crap". It trades at about half its book value.

As at some other big European banks, it increasingly seems as if StanChart’s management have done almost everything that they should and could from a strategic perspective, and that the remaining problems are so fundamental as to be unchangeable. That is perhaps why there has been so little talk of Winters getting ousted, despite the poor share price performance.

The stubbornly low valuation, despite it now earning a double-digit RoE, is of course primarily down to a relatively high cost of equity – something the bank naturally argues is unwarranted, with some justification.

StanChart’s common equity tier-1 ratio, at 14.1%, is now above its 13% to 14% target range. It is targeting $5 billion in shareholder distributions between 2024 and 2026, having previously surpassed its 2022 to 2024 target.

Although the bank has suffered more than $500 billion in Chinese commercial real-estate impairments over the past two years, that is arguably testament to the severity of the downturn in such a large and core market for the bank.

However, it needs to find more ways to grow revenue at a time when rising rates will give less of a boost to net interest margins across the industry (it is targeting growth in operating income of between 5% and 7% by 2026).

Winters said on the analyst call that the income growth it is seeing is largely structural, rather than merely supported by cyclical dynamics in financial markets, thanks to growth in fee-rich businesses in its financial markets and wealth-management divisions, including bancassurance.

He added that the bank would grow net interest income in 2024 and beyond, partly due to asset growth. Although the bank has only guided for low single-digit loan and risk-weighted-asset growth to 2026, this represents something of a shift away from the RWA optimization and shrinkage of recent years, according to Winters.

The bank, Winters added, has been underweight in commercial real estate, unsecured consumer finance and (in Europe and the Americas) in leveraged finance.

It is now seeking higher growth in these areas as part of its targets to boost profitability.

That is perhaps less reassuring in terms of its risks, even if it has reduced its Chinese real-estate book by 40% since 2021.

As Winters suggested on the call, now may be a better time to grow in areas such as CRE, although again that is assuming the market is at rock bottom.

Costs, above all, may be the main source of comfort to investors in StanChart over the next three years.

De Giorgi is overseeing a new restructuring plan called "Fit for growth" – involving, perhaps most importantly, a commitment to keep costs below $12 billion until 2026.

If Winters is to be believed about the progress the bank has made in technology and costs, does that mean low-hanging fruit in this area have gone?

He talked on the call of a final push in tech transformation. This involves learning from its new digital banks Mox and Trust, and moving to more of a shared-services model – going beyond what he said was an initial period of technology “clean up” under him, such as migrating to a single core banking system.

In terms of the share price, however, the clean-up remains to be done.