Standard Chartered Earnings: Results in Line but Large Buyback Is a Positive Surprise

We maintain our fair value estimates of GBX 912 and HKD 89 for Standard Chartered, an upside of around 18% from current prices and 0.8 times tangible book value. Second-quarter profit was $946 million, representing a return on equity, or ROE, of 7.5% and return on tangible equity, or RoTE, of 10.4% (12.9% RoTE excluding one-time items such as the sale of Zimbabwe operations and equity-linked product losses in Korea). This was broadly in line with our expectations, as Standard Chartered continues to gradually improve its ROE, which had been well below its cost of equity since 2014 when CEO Bill Winters was first appointed to turn things around. We think the bank is increasingly close to generating a midcycle ROE in line with its cost of equity, but Winters says he aims to generate average returns not merely in line with but above cost of equity. In our view, Standard Chartered's lack of an economic moat will make such excess returns difficult, but we nonetheless view the three-year cost-savings program announced in February as positive to ensure that average returns at least stay near the cost of capital.