Core views

Standard Chartered's 1H24 revenue growth remains strong, and ROT E continues to rise. As trends in core growth points such as global trade, financial markets, and wealth management improve, Standard Chartered's annual revenue forecast has increased to more than 7%. Considering that Standard Chartered's current guidelines for stable asset quality and a positive cost-to-revenue ratio remain unchanged, it is expected that ROT E will maintain its current excellent level throughout the year. With the announcement of a new round of $1.5 billion repurchases and raising the mid-year dividend to $0.09, the total shareholder return is expected to reach around $3.33 billion in 2024, and the current stock price corresponds to a dividend rate of 14%. Supported by strong performance, the dividend level is stable and sustainable, and has both high growth and dividend attributes.

occurrences

On July 30, Standard Chartered disclosed its 2024 mid-year report: 1H24 achieved operating income of 9.791 billion US dollars, up 7.3% year on year (1Q24:12.5%); adjusted one-time factor operating income of 9.958 billion US dollars, up 11.3% year on year (2023:17.2%); achieved profit before tax after adjusting one-time factors of 3.957 billion US dollars, up 19.7% year on year (2023:24.8%); realized net profit to mother of 23.78 US dollars, same The ratio decreased by 0.4% (1Q24:4.3%). The 2Q24 non-performing rate fell 6 bps to 2.36% quarter-on-quarter; provision coverage increased 0.3 pct to 75.27% quarter-on-quarter.

Brief review

1. Revenue performance continued to be strong, and the annual revenue growth guide increased beyond expectations. 1H24 Standard Chartered achieved revenue of 9.791 billion US dollars, up 7.3% year over year. However, after excluding one-off factors such as foreign exchange conversion losses due to the sale of the Zimbabwean business, Standard Chartered Group 1H24's revenue growth rate was 11.3% year-on-year, and revenue performance remained strong. On this basis, if the foreign exchange revaluation of the Egyptian currency and the $0.28 billion revenue generated by the two major projects of hyperinflation in Ghana are excluded, 1H24 Standard Chartered Group's adjusted revenue growth rate can still be maintained at 8.1% year-on-year.

Specifically, the 1H24 Standard Chartered Group achieved net interest income (NII) of 4.979 billion US dollars, a year-on-year increase of 4.2%, a slight increase over 1Q24. It was mainly due to structural improvements brought about by reducing income assets and the withdrawal of short-term hedging operations, which contributed to a month-on-month increase in Standard Chartered's net interest spread in the second quarter. In terms of non-interest income, 1H24's non-interest income after bank account adjustments was 4.979 billion US dollars, up 19.3% year on year. After excluding two major projects in Egypt and Ghana, non-interest income also increased by 12.6% year on year. Among them, net handling fee revenue increased 16.8% year-on-year, and continued to accelerate from the first quarter, strongly supporting the growth of non-interest income, mainly due to the rapid growth of wealth management business of more than 20% under the trend of multinational financial management. However, investment income was able to maintain a year-on-year increase of 8.6% even after excluding the capital costs in the transaction book and two major projects.

Looking ahead to the full year, Standard Chartered raised the adjusted revenue growth rate (excluding major projects) guidance for the full year of 24 from close to 7% to more than 7%, exceeding expectations.

On the one hand, the current market's expectations for interest rate cuts are significantly lower than at the beginning of the year. Standard Chartered's expectations for both the 24-year Fed interest rate and the Hibor interest rate are relatively optimistic compared to the beginning of the year, and in the early stages of interest rate cuts, the downward pressure on interest spreads can be mitigated through tools such as volume compensation, asset restructuring, and interest rate hedging, so there is not much downward pressure on net interest spreads in '24. On the other hand, under the trend of global industrial transfer, the increase in global trade volume in the second quarter, especially in the Asian region, continued the positive trend of the first quarter, laying the foundation for Standard Chartered's revenue to maintain a relatively rapid growth rate. Furthermore, demand for cross-border financial management is also strong, and Standard Chartered's wealth management business continues to grow. As expectations of interest rate cuts improve, and core growth points such as global trade, financial markets, and wealth management are trending positive, Standard Chartered's revenue is expected to continue the good trend of 1H24. Therefore, with the adjusted revenue growth rate of 8.1% in the first half of the year (excluding major projects), it is highly certain that a revenue growth rate of 7% or more will be achieved throughout the year.

After the adjustment, profit before tax remained at a relatively rapid rate of nearly 20%, credit impairment losses gradually improved, and ROTE continued to increase. 1H24 Standard Chartered achieved net profit of 2.378 billion US dollars to mother, a slight decrease of 0.4% over the previous year. However, after excluding the 1 billion dollar fee generated by one-time accrual of equity-linked securities in the Korean market and the one-time impact of $0.26 billion due to changes in DVA, Standard Chartered 1H24's adjusted pre-tax profit growth rate remained at a relatively fast level of 19.7%. After 1H24's adjusted ROTE increased by a relatively high level of 2 pct to 14% over the same period last year. In terms of performance attribution, the year-on-year increase in credit impairment losses continued to drag down profit release. 1H24 Standard Chartered Group ECL was 0.24 billion US dollars, up 49.1% year on year, and 1H24 annualized credit costs increased 6 bps to 0.16% year over year.

However, judging from the trend, the ECL for the second quarter was only 0.075 billion US dollars, down 46.8% year on year, which is a significant decrease from 1Q24. On the one hand, the depreciation of real estate and retail loans has remained stable, and asset quality has not continued to deteriorate. At the same time, impairment losses on public sector loans have been significantly reduced due to the upgrading of sovereignty in some regions, hedging the impact of the impairment of some retail loans. In addition, the 2Q24 Innovation Division still had $0.02 billion in impairment, but considering that the CFO said that the Innovation Division's business will be adjusted reasonably to reduce impairment losses in the future, it is expected that the impact on ECL will gradually decrease in the future. Looking ahead to the whole year, considering that performance guidelines such as the 30-35bps loan loss rate and improved cost-to-revenue ratio remain unchanged, it is expected that ROT E will basically stabilize at the current excellent level in 24 with a revenue growth rate of 7% or more. The target of completing 12% ROT E in 2026 is highly certain, and is expected to be completed early.

2. Short-term interest rate hedging tools maturity reclassification+asset-side structure optimization, and the month-on-month improvement trend of net interest spreads on bank accounts continues. 2Q24 Standard Chartered Group's net interest spread was 1.93%, up 22 bps from quarter to quarter, up 22 bps year on year, and 1H24 bank account net interest spread was 1.85%, up 18 bps year on year.

On the asset side, the return on 1H24 interest-bearing assets was 5.25%, an increase of 76 bps over the previous year. On the one hand, the sharp increase in return on assets was related to the maturity reclassification of hedging instruments to hedge against declining interest rates. On the other hand, Standard Chartered actively reduced some low-yield treasury bond assets and mortgage loan portfolios due to increased demand for investment assets in trading books, and asset structure adjustments also boosted some net interest spreads. Loan investment increased, and the scale of 1H24 credit continued to decline by 4.9% year on year. This is related to relatively weak credit demand in regions such as Hong Kong and Singapore, but credit investment in core regions related to industrial transfers is still very strong. Among them, loan growth rates in the US, UAE, China, India and other regions are 32%, 19%, 15%, and 3%, respectively, and most loans from the US region are generated from cross-border business with the Asian region. On the debt side, the cost of 1H24 interest-bearing debt was 3.44%, an increase of 42 bps over the previous year. The increase in debt costs is related to the high interest rate environment. At the same time, the trend of regularization of residents' deposits continues. Standard Chartered's share of the retail business line CASA in the four largest markets continued to drop by 2 pct to 52% from quarter to quarter, while the share of CASA in the public business line remained flat to 64%. Structural factors also led to an increase in debt costs.

3. The recovery trend in global trade is obvious. Trade momentum in the Asian region is strong, and the scale drives the rapid growth of Standard Chartered Group's trading banking and financial market business.

According to the United Nations Trade and Development Organization, the global trade trend improved in 1Q24, and the volume of trade in goods increased by about 1% month-on-month. Among them, the trade dynamics of the US and large developing economies in Asia were strong. The export growth values of China, India, and the US were 9%, 7%, and 3%, respectively. This is basically in line with the main regions where Standard Chartered loans grew. Furthermore, Standard Chartered said that global trade trends in the second quarter basically continued the good trend of 1Q24, which strongly supported the continued improvement of transaction banking business. In terms of business revenue, Standard Chartered Group 1H24 Trading Bank (transaction services+global banking) revenue increased 3.2% year over year. Specifically, Transaction Services (Transaction Services) increased 1% year over year, with payments and liquidity (Payments and Liquidity) and Securities Services (Securities Services) growing 3% and 8% year over year respectively, mainly driven by growth in scale. However, trade and working capital business revenue declined 8% year over year (Trade & Working Capital), mainly due to lower margin rates. The Global Banking (Global Banking) business increased sharply by 12% year over year. Among them, Lending & Financial Solutions (Lending & Financial Solutions) and Capital Maket & Advisory (Capital Maket & Advisory) increased 12% and 14% year over year respectively, mainly due to significant increases in loan size and distribution volume under strong potential transaction volume. In addition, revenue from the financial markets business (Markets) also increased 2% year over year, mainly driven by a sharp increase of 40% year over year in the credit trading business (Cred it Trading).

The “diversification” of global trade due to industrial transfers will be more beneficial to the business development of Standard Chartered Group, which has an extensive global network. With recent changes in trade policies between China and the US, the market is concerned about whether the trend of global trade repair is sustainable. Judging from the current trend of industrial transfer and “China +1”, the “diversification” of global trade due to industrial transfer will not reduce the scale of trade, but will only increase some trade processes, such as trade flows from China to ASEAN and ASEAN to Europe and the US, and after the direct trade volume between China and the US has decreased, the trade volume between China and Asia, and between America and the Asian region has increased markedly. However, this trend is more favorable to Standard Chartered, an international trading bank that is deeply involved in Asia and has an extensive global network. This substitution effect is very compatible with Standard Chartered Group's characteristic of having clear advantages in core markets on both sides of trade. Looking at the cross-border revenue of 1H24 Standard Chartered Bank, the US region's cross-border revenue increased 6% year on year. However, direct cross-border business revenue between China and the US only accounted for about 1% of public revenue. In contrast, cross-border revenue between Europe, the US, ASEAN, and the Middle East increased 13% and 22% year on year, respectively, while cross-border revenue between China, ASEAN, and the Middle East increased 11% and 17% year on year, respectively. From this, it can be seen that the trend of industrial transfers driving the growth of Standard Chartered trading banking business is quite obvious. According to the Standard Chartered Interim Report, Standard Chartered aims to achieve an 8-10% growth rate of transactional banks' cross-border business revenue in the next three years.

4. Wealth management business is growing strongly under strong demand for cross-border financial management. 1H24 Standard Chartered's wealth management business increased 23% year over year, with investment products and insurance increasing 25% and 18% year over year, respectively. The sharp increase in wealth management business was mainly due to the sharp increase in customer account opening volume and AUM scale in the first half of the year, especially the rapid growth of wealthy customers. Standard Chartered's 1H24 AUM increased 15% year over year, with non-deposit A UM rising 21% year over year. In terms of customer base growth, the number of wealthy customers newly opened in 2Q24 reached 0.065 million, continuing to increase compared to 1Q24 (0.063 million accounts), fully reflecting the strong demand for cross-border financial management in emerging markets such as China. Furthermore, as of 1H24, Standard Chartered has 0.296 million international customers, and the international and wealthy customer business has added 23 billion US dollars in capital. According to Standard Chartered's wealth management business goals, Standard Chartered expects international and wealthy clients to increase capital of 80 billion US dollars within three years, while the number of international customers will grow by 0.375 million by 2026.

5. The bad generation rate remains stable, and mainland China's real estate exposure pressure continues to drop. The share of 2Q24 Standard Chartered Group's three-stage loans fell 6 bps to 2.36% from quarter to quarter. The loss rate of 1H24 annualized loans remained stable, slightly higher by 1 bps to 0.18% compared to '23, making it easy to achieve the annual loan loss rate target of 30-35 bps. The overall provision coverage rate for 2Q24 increased 0.3 pct quarterly to 75.27%, and risk offsetting capacity was further strengthened. In terms of key risk areas, total real estate exposure in mainland China decreased by 0.4 billion US dollars to 2.2 billion US dollars from quarter to quarter, which is 46% lower than at the end of '21. Due to the continued drop in total exposure pressure, the share of current phase 3 loans increased by 4.5 pct to 62.5% from quarter to quarter, and the total provision amount reached 1.19 billion US dollars. Of these, the coverage rate of the three-phase provision increased by 5 pct to 77% compared to the beginning of the year. The overall risk level was maintained at a manageable level, and provision was sufficiently improved. It is expected that subsequent impairment accrual pressure will continue to improve.

6. The opening of a new round of repurchases of 1.5 billion US dollars exceeded expectations, while the mid-term dividend was raised to 0.09 US dollars, and shareholder returns were stable and sustainable. Standard Chartered announced the launch of a new round of repurchases in the interim report. The repurchase amount was 1.5 billion US dollars, exceeding previous expectations. In addition, dividends increased 50% year over year to $0.09 in mid-'24, and shareholder returns grew steadily. If this round of repurchases is completed within 24 years, the total shareholder return is expected to reach about 3.33 billion US dollars in 2024, the return on shareholders' cash will reach 101%, and the current stock price corresponds to a dividend rate of 14%, which is in line with the company's guidelines for continuing to provide shareholder returns. In addition, Standard Chartered Group continues to maintain a steady upward trend in its core tier 1 capital adequacy ratio. 2Q24CET 1 has increased by 1 pct quarterly to 14.6%.

Shareholder returns are stable and growing continuously, and dividend attributes are constantly increasing.

7. Investment advice: Standard Chartered Group's 1H24 revenue growth remains strong, and ROT E continues to rise. As interest rate cuts change, and core growth points such as global trade, financial markets, and wealth management all show positive trends, Standard Chartered's revenue forecast for the full year of 24 increased to more than 7%. Considering that the current Standard Chartered Group's asset quality is stable and the cost-to-revenue ratio guidelines remain unchanged, it is expected that ROT E will maintain its current excellent level throughout the year. With the announcement of a new round of $1.5 billion repurchases and raising the mid-term dividend to $0.09 in 2024, the total shareholder return is expected to reach around $3.3 billion in 2024, and the current stock price corresponds to a dividend rate of 14%. Supported by strong performance, the dividend level is stable and sustainable, and has both high growth and dividend attributes.

Revenue growth in 2024-26 is expected to be 7.3%, 5.7%, and 5.0%, respectively, and profit growth rates of 8.2%, 10.6%, and 13.0%, respectively. The 2024-26 R OT E is expected to remain in the 10.7%-12.0% range. The current valuation is 0.61 times the 24-year P/TB (0.52 times 24-year P/ B), maintaining the buying rating and leading position in the banking sector.

8. Risk warning: (1) The extent or time of the Federal Reserve's interest rate cut 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.