2Q22 results significantly beat our expectations
Standard Chartered announced its 2Q22 results: Revenue grew 6.6% YoY to US$3.93bn, and attributable net profit rose 11.1% YoY to US$913mn, significantly beating our expectations. We mainly attribute the increase to solid performance of the bank’s financial markets business and its low credit costs.
　　Trends to watch
　　Net interest income in line with expectations; the bank maintains NIM guidance for the next two years. Standard Chartered's 2Q22 net interest income grew 8.1% YoY, and its net interest margin (NIM) was 1.35%, up 6bp QoQ, in line with our expectations. The growth in net interest income was mainly driven by rising market interest rates (up 100bp). However, in 2Q22, average yield of its interest-earning assets rose only 0.6% YoY, and loans decreased 1.5% YoY, mainly dragged by US dollar appreciation. The bank revised downward its additional net interest income in 2Q22 to US$750mn from US$1,260mn due to Hong Kong SAR’s shift from HIBOR to Prime rate mortgage loans and the relatively low interest rate of its US dollar-denominated assets. However, the bank still expects its NIM to be 1.40% and 1.60% in 2022 and 2023.
　　Financial markets business remains strong; non-interest income increasing YoY. Standard Chartered’s 2Q22 non-interest income grew 5.4% YoY. Net fee income dropped 19.0% YoY, but other non-interest income rose 26.8% YoY mainly due to growth in the financial markets business. In contrast, wealth management income continued to decrease significantly YoY. We think the interest rate will remain high in 1H22 and market volatility will likely continue. We expect sound macro trading of the bank, but think that its capital market and credit trading may show a QoQ downward trend.
　　Credit costs improve QoQ; asset quality sound. Standard Chartered’s credit costs were 0.02% in 2Q22, down 5bp YoY. Non-performing loan (NPL) ratio fell 4bp QoQ to 2.36%. The bank booked a US$267mn loss provision, including US$237mn for China commercial real estate (CRE) exposures and US$70mn for the Sri Lanka sovereign rating downgrade. There was an around US$129mn COVID-19-related release in overlays. The bank's credit costs were low, as its core markets in the Asia-Pacific region, such as South Korea, Singapore and India, were recovering from COVID-19 and there was a time lag between economic changes in these markets and in European and US markets. We expect its credit costs to be 0.20% in 1Q22, up 11bp YoY.
　　CET1 capital ratio remains resilient; shareholder returns scheme steadily advancing. By end-2Q22, the bank’s Common Equity Tier 1 (CET1) capital ratio stood at 13.9%, approaching the upper limit of its target range. The bank’s interim dividend reached US$0.04/sh, higher than our estimate of US$0.03/sh. The bank also announced a US$500mn share buyback scheme, as it proposed in early 2022 US$5bn of shareholder returns over the next three years. It has completed US$1.4bn of returns to date.
　　Financials and valuation
　　Considering the bank’s lower-than-expected loss provision and higher-than-expected non-interest income, we raise our 2022 earnings forecast 12.5% to US$2.84bn and keep our 2023 earnings forecast unchanged. The stock is trading at 0.5x 2022e and 0.4x 2023e P/B. The bank's performance has been affected by short-term factors, but we think its long-term profitability is worth monitoring. We maintain NEUTRAL and our TP of HK$66.14 (0.6x 2022e and 0.5x 2023e P/B), offering 18.0% upside.
　　Risks
　　Overseas inflation and worse-than-expected recession.