StanChart's biggest advantage? It isn't HSBC

Standard Chartered Plc Chief Executive Officer Bill Winters celebrates his fifth anniversary in the job this month. The overhang of a pandemic that remains far from over will ensure a muted celebration. First-half results that handily beat estimates may at least merit a small glass of champagne.

The London-based bank reported adjusted profit of $1.96 billion, compared with analysts' forecast of $1.53 billion, after setting aside less money than expected for soured loans. Like its Wall Street rivals, StanChart got a boost from buoyant trading in bonds, stocks and currencies as markets rebounded in the second quarter. Operating income at its financial markets division surged 16% in the three months through June from a year earlier, taking over from the transaction banking unit that houses trade finance and cash management operations as the top profit contributor.

Better still for shareholders, the bank held out the prospect of a return to dividends, saying it hopes "to reinstate them as soon as prudently possible." StanChart suspended payouts in response to a request from the UK's Prudential Regulation Authority to preserve capital amid the Covid outbreak. The bank said its core equity Tier-1 ratio rose by half a percentage point to 14.3% compared with the end of last year, well above a regulatory minimum of 10%, an improvement attributed to the sale of its stake in Indonesia's PT Bank Permata. That leaves plenty of room to return cash to shareholders if the economic hit from the pandemic recedes in the second half.

So much for the good news. There's plenty of gloom on the other side of the ledger. The benefits of an early recovery in some markets and the bank's geographic and product diversity "are unlikely to be enough to offset the impact of low interest rates and the probability of less buoyant conditions for our financial markets business," StanChart said. It expects activity in coming quarters to be volatile and uneven, after what Winters called "extremely challenging conditions" caused by the impact of Covid-19, including the decline in interest rates and low oil prices.

The emerging markets-focused bank forecast lower provisions in the second half, though with heavy caveats. Extreme economic pressures meant it wasn't possible to reliably predict "the quantum or timing of future impairments," which would depend on conditions not materially deteriorating in the coming months. The bank remains focused on cutting expenses after reducing its cost-to-income ratio to 58.6% in the first half from 64.6% a year earlier; it plans to eliminate several hundred jobs from its workforce of about 85,000 people, Bloomberg News reported.

There are further complications in StanChart's biggest market, Hong Kong, where China's passing of a national security law for the former British colony has stirred political controversy and the threat of US sanctions. Hong Kong's economy has also been ravaged by the pandemic, contracting by a greater-than-estimated 9% in the second quarter from a year earlier. StanChart doesn't expect "an easy or quick resolution," group Chairman Jose Vinals said in the statement, though it believes Hong Kong will continue to play a key role as an international financial hub.

The lender's biggest advantage in this situation may be what it isn't: namely, HSBC Holdings Plc. Like its bigger rival, which also counts Hong Kong as its largest market, StanChart voiced support for the security law, with Winters saying in an interview with Bloomberg Television that he hoped it would bring stability to the city. Yet the smaller bank has escaped most of the political ire that has been heaped on HSBC by both China and the UK Since the two lenders made their statements on June 3, StanChart shares have outperformed HSBC by more than 10 percentage points.

Most of the time, the bigger player can expect to have the edge. This is one occasion where StanChart may be happy that it can fly under the radar. A thin reed of comfort is better than none at all.

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.

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.