Bill Winters Delivers a Mature Riposte for StanChart

(Bloomberg Opinion) -- Investors who think Standard Chartered Plc CEO Bill Winters is overpaid should probably look at the operating-expense line in Thursday's first-half results. They might want to give him the benefit of the doubt, for now.

Costs accounted for less than 68% of operating income in the six months through June, down from 90% in the previous period. Along with lower impairment charges and higher earnings from associates and joint ventures, that helped turn a near-$500 million loss in December into net income of roughly $1.5 billion. Adjusted pretax profit was $2.61 billion, beating analysts' estimates. The shares rose as much as 4.1% in London.

Costs are only a starting point, though. The next stop has to be capital if Winters is to execute his ambitious plan to turn around the specialist emerging-markets lender.

StanChart's “grow with Africa” strategy has started well with its first digital retail bank in Cote d'Ivoire; replicating it will require boosting digital capabilities. Additionally, Winters wants to work with corporate clients of China's belt-and-road infrastructure program; participate in Beijing's grand plans for a Greater Bay Area centered on Hong Kong; and chase corporate banking business of multinationals active in Asia, Africa and the Middle East. Other targets include scaling up in what it considers the high-potential markets of India, Indonesia, South Korea and the United Arab Emirates. StanChart has also won one of eight licenses for a new Hong Kong virtual bank, with which it will aim to win millennial and mass-market customers. All this will need investment.

The trouble is that shareholders want more out of StanChart than they want to put in. The $1 billion buyback Winters announced in April to appease investors kicked in just as risk-weighted assets rose by $12 billion. As a result, higher profit couldn't prevent the bank's common equity tier-1 ratio slipping to 13.5% in June, from 14.2% in December.

That slippage should be somewhat worrisome. HSBC Holdings Plc has promised to boost its near-9% return on tangible equity to more than 11% by 2020 while keeping its common equity tier-1 ratio higher than 14%. Winters has promised a 10% return on that measure by 2021, a level that StanChart hasn't reached for several years. Whether the 8.4% return on tangible equity in the first half of this year was a flash in the pan will also depend on pricing of loans and deposits.

That's the third most important issue for investors after cost and capital – the business climate. With the U.S. Federal Reserve cutting its benchmark interest rate for the first time in more than a decade, StanChart's net interest margin could come under pressure. The metric stood at 1.59% in the six months through June, up 3 basis points from the previous three months. As analysts at Citigroup Inc. note, every 50-basis-point reduction in rates lowers net interest income by $200 million. Not much help can be expected from loan volumes, with the trade war between Beijing and Washington showing little sign of abating.

Winters kicked up a storm after he called the largely British investors who voted against his pay at the bank's May annual general meeting “immature.” Temasek Holdings Pte, Singapore's state-run investment firm and the bank's biggest shareholder, wants the board to stop the bickering, the Financial Times has reported.

StanChart's shares have had a good year so far, outpacing traditional rival HSBC. But Winters won't be able to lean on his strong first-half for long. Just ask Citigroup's Mike Corbat, who's facing pressure from activist shareholders even after the bank's stock climbed 37% this year. Immature or not, shareholders have a habit of asking: What have you done for me lately?

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

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

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.