Company bosses love a bit of flattery, and Bill Winters could sorely use some following a bruising few years at the helm of Standard Chartered . A $1 billion share buyback - the first in nearly two decades - should add further vim to his turnaround of the emerging markets lender. Still, one-off gains in the first quarter mean he remains some distance from a more self-assured 10 percent return-on-tangible-equity goal.
A buyback makes sense at a bank whose shares, even after a 15 percent rise this year, still trade at a 25 percent discount to their tangible book value even though outstanding US legal risks are largely addressed. Winters can also afford it: the transaction is expected to depress StanChart's common equity Tier 1 capital ratio by 35 basis points, but to a still-robust 13.5 percent. Lastly, an underlying return on tangible equity of 9.6 percent in the first quarter suggests operational performance is already close to leapfrogging the return threshold originally earmarked for 2021.
But there are reasons to be cautious. Operating income actually declined by 2 percent year-on-year and, while expenses fell by broadly the same amount, the reason Winters could boast of a heartening 5 percent increase in pre-tax profit was due to flightier markets revenue and sharply lower impairment charges which, by their nature, are unlikely to recur. Finance chief Andy Halford offered a more cautious message when he advised, in comments reported by Reuters on April 30, that full-year returns have "typically been about 60 to 70 percent of Q1", implying a 2019 ROTE of 6.7 percent at best.
That could feasibly be boosted by the start of a $700 million three-year cost-cutting programme and more buoyant market conditions, especially in Asia, seen at the end of the first quarter. But assuming a probable 10 percent cost of capital, investors who sent shares up 6 percent risk hiking StanChart's valuation beyond what can be justified.
Standard Chartered announced a $1 billion share buyback on April 30 after it reported a 5 percent year-on-year increase in pre-tax profit to $1.24 billion, on operating income which declined by 2 percent to $3.8 billion.
Excluding one-off charges, the Asia-focused lender made a 9.6 return on tangible equity for the quarter, up from 8.6 percent over the same period a year ago. The bank reported a common equity Tier 1 capital ratio of 13.9 percent, down 30 basis points from the end of 2018.
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