StanChart expects impairment to remain low in 2021 as profits rebound

Standard Chartered PLC expects credit impairment to remain at a low level for the remainder of 2021, barring any major unforeseen events, after booking a net impairment release of $47 million in the first half after a charge of $1.57 billion a year earlier.

The U.K.-based banking group posted an 81% increase in first-half statutory after-tax profit to $1.93 billion from the year-ago $1.07 billion, bolstered by improved loan impairments and "strong" underlying business momentum. For the second quarter, its statutory profit after tax rose 51% year over year to $829 million.

"Clearly, the profits are up significantly on the back of a much-improved loan impairment story," CEO Bill Winters said in an Aug. 3 earnings call. "This, we think, is fundamentally attributable to the high quality of our credit portfolio."

Impairment release

The lender booked a net release of $67 million in credit impairment in the second quarter, compared to a year-ago charge of $611 million. Most indicators with respect to impairment are moving in a positive direction, according to CFO Andy Halford.

The loan-loss rate, or total credit impairment for loans and advances to customers over average loans and advances to customers, is expected to normalize to 35 basis points to 40 basis points over the medium term, but it is likely to come slower than the group originally anticipated.

The bank's net interest income in the first half amounted to $3.38 billion, up 4% on a yearly basis, including a positive $73 million IFRS 9 interest income catch-up adjustment with respect to interest earned on historically impaired assets, increasing the second-quarter interest margin by 5 basis points.

"We did not previously record income from impaired assets. We have now aligned with what the industry is doing," Halford said, noting the group expects some more of this to come over the coming quarters.

"We'll expect probably a similar amount to come through in the second half, possibly more in the third quarter, a little bit in the fourth quarter," Halford said.

The favorable adjustment gave the group a $470 million benefit on income in the first half, worth about 5 basis points.

ROTE targets and buybacks

Winters said the group is "absolutely committed" to achieving its return on tangible equity targets. StanChart expects to deliver an ROTE of greater than 7% by 2023 as it progresses toward its medium-term ROTE target of more than 10%.

"[We're] very confident that we could [hit our current targets] by taking advantage of the business momentum that we got, pulling every strategic lever at our disposal, managing capital hard, continuing to manage our expenses extremely well and not hesitating to innovate and to disrupt," the CEO said.

As of June 30, StanChart's common equity Tier 1 ratio stood at 14.1%, allowing the group to resume the interim dividend and to commence an additional share buyback program of up to $250 million, its second buyback of 2021. The new buyback is expected to reduce the group's CET1 ratio in the third quarter by approximately 9 basis points.

"We continue with our previous mindset and saying, if there are profitable opportunities to invest capital, whether that be organic or inorganic, we will absolutely look at those first," Halford said, noting the group will look to return capital should there still be surplus after investing it in potential profitable opportunities.

"We absolutely are prepared to do buybacks, but only if there are not more valuable ways to deploy that money," Halford added.

StanChart said it will pay an interim ordinary dividend of 3 cents per share for the first half.