Standard Chartered Drops After 2016 Profit Misses Estimates (1)

(Bloomberg) -- Standard Chartered Plc posted annual profit that missed analyst estimates as the bank took losses on a private-equity business it’s shutting down and said efforts to clean up conduct issues affected performance. The shares fell as much as 5.4 percent.

Pretax profit for 2016 was $409 million, compared with a loss of $1.52 billion a year earlier, the London-based company said in a statement Friday. Operating profit excluding one-time items was $1.09 billion, missing the $1.42 billion average estimate of 13 analysts surveyed by Bloomberg.

Chief Executive Officer Bill Winters, more than a year and a half into the job, has yet to convince investors he can sustainably reverse the bank’s losses and restore a dividend, after a sharp drop in revenue and surging loan impairments in 2015 drove the Asia-focused lender to its first annual loss since 1989. Winters has also vowed to clean up the culture of the firm, where senior staff flouted ethics rules and considered themselves “above the law.”

“We have sharpened our focus on all aspects of conduct,” Winters said in the statement. “The pace and scale of those changes -- many of which were done in parallel and required intense periods of adjustment for employees -- undoubtedly impacted some elements of the group’s financial performance in the period. But they were the right things to do.”

Standard Chartered dropped 3.8 percent to 722.7 pence at 11:50 a.m. in London. The bank’s shares jumped 85 percent over the past 12 months before today, the best performance among major European lenders. The stock still trades at a steep discount to book value.

‘Traumatic’ Change

Revenue declined 11 percent to $13.8 billion, surpassing the average $13.7 billion estimate in the Bloomberg survey. Loan impairments fell to $2.38 billion from $4.01 billion in 2015. In August, the bank said it would probably miss a profitability target set only last year, blaming an uncertain regulatory and economic environment.

While bad-debt costs almost halved, the size of the "grade 12" category that houses the loans most at risk of default increased 26 percent to $1.5 billion last year. A “small number of exposures in the diamond and jewellery sector” drove loan impairments up to $511 million in Europe and the Americas. The bank said in June it was closing its $2 billion diamond-financing business because it doesn’t comply with stricter lending standards.

“There are still plenty of challenges, obviously, but they’re going in the right direction,” said Hugh Young, Asia managing director at Aberdeen Asset Management Plc, one of Standard Chartered’s largest shareholders.

The bank recognizes it must increase revenue to hit its targets, Winters said on a call with reporters Friday. Last year, the CEO said the annual loss “rips at our souls,” but he said Friday his outlook has improved in 2016, while acknowledging the “hill is still steep.”

“My soul is intact, I feel very good about the bank, but it has been a wrenching year and a half,” the CEO said. There’s been “a traumatic amount of change" as he instituted "a very different approach to business. No one harbors any illusions that we are done, we have quite a long way to go.”

Standard Chartered said it plans to exit its principal finance business, which includes a private-equity unit known as SCPE, after that division incurred losses of $650 million in 2016. The firm valued its assets in the principal finance business at $1.2 billion at the end of 2016, compared with $2.1 billion a year earlier, according to a company report.

Read more: The drama at StanChart’s private-equity unit

Standard Chartered also said it’s “addressing credit issues” and “bolstering its management team and risk discipline” at PT Bank Permata, a lender it part-owns in Indonesia. That nation’s government has changed rules on foreign-owned banks, meaning Standard Chartered must decide whether to merge the two lenders it owns in the country, or sell one of them. A decision probably won’t come until next year, Winters said today.

Standard Chartered said its common equity Tier 1 capital ratio, a measure of financial strength, rose to 13.6 percent from 13 percent at the end of September. That was higher than the 13.5 percent average estimate from five analysts.

No Dividend

Finance Director Andy Halford said the bank decided not to reinstate a dividend, after scrapping it in November 2015, because its turnaround was still in early stages. The lack of a payout “will be taken as disappointing,” Sanford C. Bernstein analysts said in a note to clients.

Despite planning 15,000 job cuts in a strategic review in 2015, full-time employees actually rose on a “scaled-up” basis to 86,693 at Dec. 31 from 84,076 a year earlier, the bank’s annual report shows.

Headcount costs are down 7 percent as the bank moved employees to lower cost locations, a spokesman said. The company has also hired in some strategic areas, including more than 1,000 full-time retail banking employees in India, Singapore and Bangladesh.

The bank identified “new uncertainties ahead, including threats to open trade and globalization” in its statement, and Winters said he’d seen Asian companies’ behavior start to change already.

“Clients in our markets are focusing on diversifying trading partners as much as possible to avoid a cliff-edge effect," if President Donald Trump’s administration implements protectionist policies, Winters said. “If the U.S. for whatever reason makes itself a less desirable trading partner, some other countries will be willing to fill that gap.”

(Updates with CEO comments starting in the seventh paragraph.)

To contact the reporter on this story: Stephen Morris in London at smorris39@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Ross Larsen

©2017 Bloomberg L.P.