Back in August, we warned that things were about to get much worse for Standard Chartered, whose EM focus makes the bank especially vulnerable to the ongoing downturn in commodities and the generally poor outlook for the emerging world in an environment characterized by slowing global growth and a persistently strong USD.
At the time, the Standard had just reported a 44% decline in H1 profits but investors were pacified by a 50% “rebasing” of the dividend. “The underlying business looks to be headed downhill in a hurry,” we warned, noting that trouble among corporate and institutional clients contributed to a 158% increase in impairments.
Needless to say, the outlook for EM hasn’t brightened since then. On Tuesday, we got a look at the bank’s full year results and boy, oh boy were they bad. Standard posted an annual net loss for the first time in more than 25 years with pre-tax red ink totaling $1.5 billion.
Impairments skyrocketed by 87% to more than $4 billion primarily due (again) to the Corporate & Institutional Clients and Commercial Clients business. "We have reviewed the portfolio extensively through 2015 and have increased provisioning, largely to reflect lower commodity prices as well as further deterioration in India," the bank said.
NPLs jumped 70% to $12.8 billion and net interest income fell $4.1 billion from $4.65 billion the previous year.
But perhaps the biggest surprise was operating profit which, at just $800 million, was wildly below consensus which stood at around $1.4 billion going into the report. The bank missed on the top line as well, as revenues plunged 15%. Even the Tier 1 ratio - which banks can sometimes manage to improve even amid poor results, slipped to 12.6% from 13.1% at the end of September. Compliance spend jumped 40% to $1 billion.
CEO Bill Winters won't get a bonus for 2015. The aggregate bonus pool was cut by nearly a quarter to $855 million. But don't worry, Winters will be fine. He still "earned" $2.4 million last year.
Shares fell as much as 12% in early trading before recovering some ground.
"Our 2015 financial results were poor," Winters, who took over in May and has embarked on a difficult journey to right the ship amid a troubling outlook for EM, said. “We expect the financial performance of the group to remain subdued during 2016.”
So do we. And so does the Street. "Net interest income weakness is particular cause for concern and may reflect balance sheet reduction from revamp," Barclays said. "Softness in revenue and the surge in NPLs won’t ease concerns," Keefe, Bruyette, & Woods added while RBC noted that revenue stabilization "seems elusive." Here's a bit from Deutsche Bank (which knows a thing or two about reporting abysmal results):
"The revenue performance is particularly worrying, given that we think this should drive long-term valuation of the franchise once impairments reduce. The results leave Standard Chartered with significant revenue improvement to achieve in order to hit 2018/2020 targets, and given the current environment it is unlikely to be an easy 2016. We had previously estimated implied revenues of US$17.4bn and US$18.6bn for 2018 and 2020 respectively. 2H15 annualised revenues were US$13.9bn – leaving significant revenue improvement required, whilst still cutting RWAs and costs. We expect negative consensus revisions today.
And here's Citi:
C&I has reported a 2H15 pre-tax loss of -$2.0bn, an extremely poor result. Furthermore every line looks weak, with sizeable revenue attrition, little evidence of cost savings and huge impairments. 2H15 revenues of $3.5bn are -31% yoy, with 4Q15 revenues -44% yoy (-32% qoq), hit by de-risking, unfavourable FX translation and mark-to-market loan losses. 2H15 costs of $2.8bn (including $0.2bn relating to restructuring) are +5% yoy. 2H15 loan losses are 2.5x heavier yoy at $2.6bn (including $1.0bn relating to restructuring).
Perhaps CFO Andy Halford put it best: "As we look forward, stresses remain apparent in our markets, and the external headwinds are not improving."