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Abu Dhabi, UAETuesday 20 November 2018

Standard Chartered shares hit despite increased profit as spending accelerates

Bank's costs grew 7 per cent in the first half versus a year ago, as it invested in digital initiatives to improve businesses

StanChart's Wealth Management Centre in Hong Kong. The firm's shareholders are concerned. Bloomberg
StanChart's Wealth Management Centre in Hong Kong. The firm's shareholders are concerned. Bloomberg

Asia-focused lender Standard Chartered said it was confident of delivering better returns in the medium term as restructuring measures pay off, while its limited exposure to the US-China trade dispute will also cushion the bottom line.

Despite higher profits and lower bad loans, StanChart shares fell 3.5 per cent in London as shareholders focused on the bank's higher expenses from investments aimed at improving performance, according to Reuters.

StanChart CEO Bill Winters played down the impact of tensions between China and the United States. The world's two largest economies have already imposed tariffs on $34 billion worth of each other's imports.

"Our direct exposure to increasing tariffs between the US and China is minimal, less than 1 per cent of income," Mr Winters said.

"It's not a disastrous thing for Standard Chartered ... but if the trade war escalates it could be more disruptive for the global economy and our clients," he added.

Some of StanChart's customers have slowed cross-border investment decisions because of the escalating trade tensions, Winters said, adding that would continue until there is clarity on the breadth and size of tariffs between the two countries.

Pretax profit for StanChart rose to $2.35 billion in the first half of the year, from $1.75bn in the same period last year, the lender said in a regulatory filing on Tuesday.

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The bank's costs grew 7 per cent in the first half versus a year ago, as it invested in digital initiatives to improve businesses including wealth management and retail banking, indicating the path to achieving its return on equity (ROE) target would be tough.

The bank said its ROE, a key measure of profitability, was 6.7 per cent in the first half, against a medium-term target of 8 per cent that analysts have described as "modest" when global peers are making 10 per cent or more.

"In the context of such subdued return expectations, we struggle to see overly material near-term upside for the shares," said Ian Gordon, analyst at Investec Bank in London.

Much of the bank's increased costs have come from its efforts to improve financial crime prevention after it suffered a series of penalties and regulatory investigations between 2012 and 2014 following lapses in anti-money laundering and sanctions compliance controls.

The bank last week has named Tracey McDermott as group head of compliance after the previous holder of the left the bank in June following an investigation into his behaviour.

StanChart has increased spending on financial crime compliance ten times since 2012, Mr Winters said, as it deals with the fallout from past misconduct that landed it with a deferred prosecution agreement with US authorities that was extended earlier this month.

“It wasn’t so much revenue as costs this quarter,” said Joseph Dickerson, an analyst in London with Jefferies Group, told Bloomberg.

“The guidance for flat costs in the second half, not including the bank levy, is likely to be taken negatively.”