London: Investors usually see buying Standard Chartered shares ahead of its annual strategy meeting in Asia as an easy way to make a quick buck. They expect shares in the emerging markets-focused bank to pop when everyone returns home full of enthusiasm.
But, as one big institutional investor says: “It is different this time.”
When StanChart puts on its three-day investor event in Hong Kong during the second week of November, bank executives are likely to be bombarded with questions about its strategy from disappointed fund managers. A growing number of sceptics say Peter Sands, one of the longest standing chief executives of a big global bank, has his work cut out to convince investors that he can turn round the bank’s performance.
Shares in the bank fell almost 9 per cent after it presented quarterly results on Tuesday that included its third profit warning in the past 12 months. The shares closed below 10 pounds for the first time in more than five years — down from 18 pounds less than two years ago.
This year has marked a stunning fall from grace for the London-listed bank that emerged from the financial crisis in the best shape of its British peers and achieved a fivefold increase in assets and a quadrupling of its profits in the past decade.
Publicly, the board of directors, under chairman Sir John Peace, remains supportive of Sands and his strategy, talking of evolution rather than revolution. “What the board is not going to do is a knee-jerk reaction that could be wrong for the bank,” says a person familiar with the board’s thinking.
But critics, including some of the top shareholders, think Sir John should replace Sands if there is no sign of a rebound before the end of the year. “It is still going down the same track of saying we are right and everyone is wrong,” says one fund manager.
And some of them say they believe the board privately agrees. “It was pretty clear from the chairman that we would see change if the performance did not improve in the second-half of the year,” said a top 20 shareholder. “Given what’s happened, I would expect to see that now.”
For now, Sands used an interview with the Financial Times to highlight three main areas where the company is focusing to address investors’ concerns. Firstly, the bank has plans to cut $400 million of costs through “productivity improvements”.
These will involve not only some jobs cuts — Sands says that “people account for 70 per cent of our cost base” — but also branch closures in the bank’s retail network, as well as standardising IT systems and rationalising back office functions.
Secondly, he says the bank, which specialises in Asia, the Middle East and Africa, is responding to rising regulatory pressure and the changing economic environment by reallocating capital away from low-return clients and sectors and redeploying it in more profitable uses. “We are recovering capital from relationships with lower returns or where we don’t like the risk-return balance to create capacity for investment in areas of higher growth potential,” he says.
In addition, the bank is taking a more cautious approach on doing business in China, India and the commodities sector more broadly. “There is a lot of change happening in China and that change is leading to a lot of stresses and strains,” Sands says.
Finally, he points out that the bank is reinvesting in promising areas, such as wealth management, which generated a 30 per cent rise in revenues in the third quarter — in sharp contrast to declines in many areas of the group.
However, the complaint from investors is that Sands is not moving fast enough to respond to the changing regulatory climate and the deteriorating outlook for emerging market economies.
In particular, investors say the bank needs to cut costs more quickly to stem the decline in its profits. “The revenue line looks OK, but costs went up 4 per cent in the quarter — they have to get that under control,” says the top 20 investor.
Analysts say the $400 million of “productivity improvements” look insufficient as they represent less than 4 per cent of total costs and will be absorbed by increases in other costs such as wages and compliance expenses.
The other area that is worrying investors and analysts is whether the bank has enough capital. While it gave more figures than it usually does in third-quarter releases, there was grumbling from analysts that it gave no update on its capital position.
“We expect management to be pushed on potential for plans to raise equity to bolster growth and provide the space to provision more aggressively against weaker credits,” said Jason Napier, analyst at Deutsche Bank.
The big worry is that if provisions for non-performing loans keep rising — they almost doubled in the last quarter — the bank could find its capital being eroded and its 5 per cent dividend coming under pressure. “At a 5 per cent yield, sustainability of dividends will also be a focus,” said Napier.
The board may be backing Sands for now. But some investors say that unless Sands can convince them that he has the right plan to fix StanChart’s problems at next month’s meetings in Hong Kong, his position could soon become untenable.
— Financial Times
