Winters Isn't Done Yet at StanChart

(Bloomberg Gadfly) -- Everyone loves a turnaround story. Having gone from being one of the most-loved banks after the global financial crisis to posting its first annual loss in 26 years for 2015, a focus on cost cutting and reducing soured debt turned Standard Chartered Plc into a stock star.

Third-quarter results Tuesday, however, show the affair may be briefer than most.

The London-headquartered bank that makes about 80 percent of its money from the Middle East and Asia unveiled profit that fell short of analyst estimates as revenue decreased at all four of its divisions. Adjusted pretax profit was $458 million compared with a loss of $139 million a year earlier, missing the $520 million average estimate of six analysts surveyed by Bloomberg News.

There was some evidence that Bill Winters, who took over

Operating expenses declined 4.5 percent from a year earlier, and the company said it remained on track to deliver more than $1 billion in cost cuts this year. Risk-weighted assets also fell, ever so slightly, helping the bank's Tier 1 common equity ratio remain broadly stable at 13 percent, the top end of the lender's target range. That was less than the 13.3 percent analysts expected, though.

So should more investors -- who had, before Tuesday's numbers dropped, bid the stock up 84 percent since February -- be taking a skeptical view?

StanChart trades at a blended forward 12-month price-to-book of 0.60 times, below HSBC Holdings Plc at 0.85 and well below the 0.89 times average of Europe's top 25 lenders. Worse, StanChart hasn't paid a dividend since scrapping it during the second half of 2015, and weak economies in key markets such as Singapore and Hong Kong, where mortgage wars are intensifying, aren't helping profitability.

Return on equity was a little below 3 percent, according to Bloomberg Intelligence analyst Jonathan Tyce, up from the second quarter's 2.1 percent but well off the 5.4 percent in the first half of 2015. That low level reflects restructuring costs and continued high nonperforming loan charges, he said.

There's a reason financial metrics aren't so rosy. The lender is still coping with corruption allegations surrounding its private-equity dealings in Nigeria and Indonesia, while pending fines associated with 1Malaysia Development Bhd. show the pain from over-expansion after the 2008 credit crisis hasn't subsided. StanChart also said it's being investigated by the Securities & Futures Commission in Hong Kong for its role in a 2009 IPO, which it didn't specify, a week after UBS Group AG said it could be fined and suspended for its work on some offerings in the city.

Furthermore, StanChart is largely still geared toward commodities and more specifically, oil and gas. Overall exposure is down from a high of some $55 billion at the end of 2014 but was still $37.1 billion at the end of the second quarter.

Even in nonperforming loans, all is not well. Soured advances at the bank's ongoing businesses, or those it isn't selling or restructuring, remain high at $6.2 billion versus a total figure of $12.8 billion. During the third quarter, StanChart's core bank had a nonperforming loan ratio of 2.3 percent.

StanChart is showing some green shoots, but Winters isn't done yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.