Core views

Standard Chartered's revenue for the first quarter exceeded expectations, and ROTE improved as scheduled. As the two major revenue engines, transaction banking and financial market businesses are expected to continue to increase revenue beyond expectations while interest rates remain high for a long time. In terms of asset quality, mainland China's real estate loan exposure continues to drop, and the pressure on depreciation accruals has been greatly reduced. In the context of higher interest rates for longer, it is expected that there is a possibility that revenue will continue to exceed expectations, that ROTE will increase steadily, and that dividend repurchases will proceed according to the guidelines to jointly promote valuation repair.

occurrences

On May 2, Standard Chartered disclosed its 2024 quarterly report: 1Q24 achieved operating income of US$5.130 billion, up 12.5% year on year (2023:10.4%); operating income after adjusting one-time factors of US$5.152 billion, up 17.2% year on year (2023:10.3%); achieved profit before tax after adjusting one-time factors of US$2.119 billion, up 24.8% year on year (2023:22.2%); realized net profit to mother of US$1,403 million, up 4.6% year on year (2023: 17.7%) The 1Q24 non-performing rate decreased by 5 bps to 2.42% quarter-on-quarter; the 1Q24 provision coverage rate increased by 3.4 pcts quarter-on-quarter to 74.96%.

Brief review

1. Revenue growth is strong and is expected to exceed expectations throughout the year. Standard Chartered achieved revenue of US$5.130 billion in the first quarter, up 12.5% year over year, up further from 10.4% in 2023. If the impact of each adjustment is removed, revenue of US$5.152 billion was achieved, an increase of 17.2% over the previous year. It is expected that the annual growth rate will exceed the current 5-7% guideline. 1Q24 Standard Chartered achieved net interest income (NII) of US$2,419 billion, a slight increase of 3.3% over the previous year. In terms of attribution, the steady performance of net interest income was due, on the one hand, to Standard Chartered's interest rate hedging operation, which began last year, which provided support on the revenue side. On the other hand, it benefited from positive adjustments to its own debt structure. The combination of measures on both sides provided a guarantee for the steady performance of net interest income.

Benefiting from the outstanding performance of Wealth Solutions (Wealth Solutions) and Financial Markets (Markets), Standard Chartered's non-interest revenue growth rate increased markedly, strongly supporting revenue growth. 1Q24 Standard Chartered achieved non-interest revenue of US$2,733 billion, a sharp increase of 33.0% year over year. If the effects of one-time factors such as currency depreciation and inflation were excluded in the Egyptian and Ghanaian markets, it was still a significant increase of 21.6% year over year. Among them, net fee revenue of US$965 million was achieved in the first quarter, an increase of 13.8% over the previous year. The wealth management business benefited from the active performance of overseas capital markets and the continued promotion of affluent client business (Affluent Client), which increased 21% year over year, which was the main driving force for revenue growth.

In terms of investment income, thanks to the increase in interest rates and macro-commodity transactions, the financial market business increased sharply by 12.9% year on year, driving Standard Chartered Group's investment income to increase sharply by 27.1% year on year, which is the main support for its non-interest income.

The performance was steady, and ROTE improved as scheduled. 1Q24 Standard Chartered achieved net profit of US$1.403 billion, up 4.6% year on year. Higher year-on-year increase in credit impairment losses was the main factor behind the slowdown in performance growth. Specifically, the risk exposure of retail business lines in the Hong Kong and South Korean markets is the main source of their credit impairment losses, and the public business line benefited from reduced pressure on real estate impairment calculations in mainland China, which was offset by other depreciation rebates. Furthermore, the slowdown in Standard Chartered Group's performance growth in the first quarter was also related to the impact of one-time accrual of equity-linked securities in the Korean market. After deducting the relevant influencing factors, Standard Chartered Group's pre-tax profit grew 24.8% year over year. ROTE rebounded 2.39pct to 13.50% from 2023, improving as planned.

Looking ahead to the whole year, considering the continued decline in the current market's expectations for interest rate cuts from the Federal Reserve, Standard Chartered Group Bank Net Interest Spread (NIM) is expected to further continue the month-on-month improvement trend. It is expected that the annual revenue growth rate will exceed the current 5-7% guideline, and it is expected to perform strongly over a long period of time, achieving continued growth exceeding expectations. Furthermore, with the gradual elimination of the negative impact of various one-time factors on performance, its performance is expected to pick up significantly from the first quarter.

2. Interest rate cuts in US dollars are expected to continue to be delayed, and net interest spreads on bank accounts continue to improve month-on-month. The 1Q24 Standard Chartered Group net interest spread (estimated value) was 1.14%, down 19 bps from quarter to quarter. Among them, the return on 1Q24 interest-bearing assets was 5.18%, up 20 bps from quarter to quarter, while the cost of interest-bearing debt (estimated value) was 4.14%, up 31 bps from quarter to quarter. The increase in debt costs was mainly a drag on capital transfer pricing costs within the financial market business. After deducting related costs, its 1Q24 interest-bearing debt cost was 3.52%, up only 12 bps from quarter to quarter, supporting a 6 bps increase from quarter to quarter. , the year-on-year increase was 14bps to 1.76%. Looking ahead to 2024, considering that the Federal Reserve will start cutting interest rates on the US dollar is undecided, the market's increase in the dollar interest rate center this year will benefit Standard Chartered Group's asset pricing and drive the continuation of the month-on-month improvement trend in net interest spreads on its bank accounts.

On the asset side, in a high-interest environment, demand is relatively weak, and the scale has shrunk in most regions. 1Q24 Standard Chartered Group's loan and asset size decreased by 1.2% and 1.3%, respectively, and the share of loans in assets remained flat at 35.5% from quarter to quarter. Among them, the size of public loans increased 0.4% from quarter to quarter, and the size of some hedged personal loans declined. By region, thanks to the active performance of core Asian markets such as China, Hong Kong, and Singapore, the loan size in the above regions increased by 10%, 1%, and 2%, respectively, while markets with relatively poor profitability such as South Korea showed a clear trend of shrinking. The loan size in the Korean market decreased 11% from quarter to quarter. In addition, the loan scale in the UK market decreased by 10% quarterly, dragging down scale growth.

On the debt side, the trend of fixed-term retail deposits continues, and the share of public low-cost deposits is still high. 1Q24 Standard Chartered Group's deposits and liabilities decreased by 2.1% and 1.4%, respectively, and the share of deposits in debt decreased by 0.5 pct to 60.3% from quarter to quarter. It is expected that this is mainly due to a decrease in high-cost deposits, and debt costs have been optimized to a certain extent. In terms of term structure, in an environment with a high interest rate rotation rate, the trend of regularization of residents' deposits continues. The share of current and savings deposits in the four largest markets fell 2pct to 54% from quarter to quarter, while the share of current and savings accounts for public business line (CIB) current and savings deposits remained flat to 64% from quarter to quarter.

3. The pressure on mainland China's real estate loan exposure has dropped drastically, and the pressure on depreciation accruals has abated significantly. 1Q24 Standard Chartered Group's share of three-stage loans decreased by 5 bps to 2.42% from quarter to quarter, and the loan loss rate increased by 15 bps to 23 bps from quarter to quarter, and overall remained stable. Among them, the share of three-stage loans to the public sector decreased by 0.6 pct to 8.2% from quarter to quarter. In terms of key risk areas, mainland China's real estate loan exposure decreased by US$200 million quarterly. Since the end of 2021, it has been reduced by 40% to US$2.4 billion. The relevant exposure pressure has dropped sharply. The current phase 3 loans account for 62.5%, the total provision amount is US$1.21 billion, and the provision coverage rate is 80.7%. The overall risk remains manageable, and provision calculation is expected to continue to improve in the future. The 1Q24 provision coverage rate increased by 3.4 pct from quarter to month to 74.96%, and risk offsetting capacity was further strengthened.

4. The two major engines, transaction banks and financial markets, are jointly driven to enable business growth. In April, Standard Chartered reorganized its own business lines and made changes to specific business divisions. Under the new caliber, the revenue of its 1Q24 transaction services business (Transaction Services) and corporate banking (Banking), the two major sectors split from the original transaction banking business, increased by 3% and 15%, respectively, over the same period last year, mainly due to the continued rise in trade, investment scale and interest rates in the core market. Meanwhile, financial market business (Markets) revenue benefited from interest rates, outstanding performance in the commodity market business, and a sharp increase in credit trading business (Credit Trading) driven by the scale of initiated distribution, with a year-on-year increase of 13%, which is another major driving engine for Standard Chartered Group's revenue growth. Looking ahead, the trade corridors currently focused on by the Standard Chartered Group, such as ASEAN, the Middle East, and mainland China, performed well in the first quarter. It is expected that trade volume in core markets will maintain a steady growth trend, strongly supporting revenue growth.

5. Investment advice: Standard Chartered's revenue for the first quarter exceeded expectations, and ROTE improved as scheduled. As the two major revenue engines, transaction banking and financial market businesses are expected to continue to increase revenue beyond expectations while interest rates remain high for a long time. In terms of asset quality, mainland China's real estate loan exposure continues to drop, and the pressure on depreciation accruals has been greatly reduced. In the context of higher interest rates for longer, it is expected that there is a possibility that revenue will continue to exceed expectations, that ROTE will increase steadily, and that dividend repurchases will proceed according to the guidelines to jointly promote valuation repair.

Revenue growth rates for 2024-26 are expected to be 6.5%, 5.7%, and 5.0%, respectively, and profit growth rates of 18.8%, 11.5%, and 16.4%, respectively. In terms of dividends, the total shareholder return is expected to be more than 2,746 billion US dollars and share repurchases of more than 2 billion US dollars in 2024. The total return on shareholders' cash is expected to be 75%, and the total dividend rate is expected to be 12.2%. At the same time, the company said it will continue to raise the level of dividends per share, and the dividend attributes will continue to strengthen. ROTE is expected to remain in the 10.7%-12.0% range in 2024-26. With strong support from performance, the dividend level is stable and sustainable. The current valuation is 0.57 times 24-year P/TB (0.49 times 24-year P/B), maintaining the buying rating and leading position in the banking sector.

6. Risk warning: (1) The extent or time of the Federal Reserve's interest rate cut has exceeded expectations. (2) The global macroeconomy has entered a new round of recession, or real estate companies in mainland China continue to be exposed to risks, affecting the asset quality of HSBC Holdings and leading to a sharp decline in profits. (3) The company's dividend rate may fall short of expectations due to special reasons such as policy restrictions. (4) Some regions where HSBC Holdings operates may have sovereign credit risk. (5) Global industrial transfers are uncertain, geopolitical frictions, or US industrial restrictions may hinder the globalization process, which in turn has led to a sharp decline in the scale of global trade and capital flows, causing the development of the company's transaction banking business to fall short of expectations.