Banks have been breathing sighs of relief, with their worst fears about the pandemic not coming to pass, allowing them to release money that had been put aside in case of higher loan defaults. The question for investors is: where does the sector go from here?
While numbers will be distorted by government measures to alleviate the pandemic, we can begin to see a way ahead. India is a reminder that it is too early to assume the worst is over and next winter will be a critical test of Covid-19’s resistance to vaccines. Banks have a vital role to play in the economic recovery, which will see closures and start-ups, bad debts and good loans. As such, they will be a key way for investors to share in that process.
Standard Chartered
The Standard Chartered motto “never settle” points to an aversion to complacency, but it can make it difficult for outsiders to obtain an accurate measure of how the bank is doing.
While the market welcomed its latest, first-quarter figures, Bill Winters, the chief executive, could not resist tempering a generally positive report with a warning that the recovery may be “volatile and uneven”. This was set against the backdrop of yet another strategic revamp, which included a merger of the north and south Asia regions, including Australia and New Zealand.
Hong Kong continues to dwarf the rest of Standard Chartered’s business. The bank has sailed over the territory’s recent unrest to add 30,000 customers to its Mox digital service in the past year and to convert 250,000 retail clients to its wealth management unit. Doubtless, it is also making a useful turn from Hong Kongers taking advantage of the new UK visa introduced in February. However, the territory’s Communist administration is well aware that it needs the banks in its longer-term efforts to integrate Hong Kong with the Greater Bay area. Citigroup’s decision to pull out of retail banking in Asia is further good news for Standard.
The other main story is the bank’s efforts to reduce its property footprint, cutting 800 of its 1,200 branches worldwide and allowing more staff to work from home. Apart from promoting Mox, the bank has discovered that its more sophisticated wealth management customers are becoming increasingly comfortable interacting on-screen.
Although the bank does not have a large American presence, Winters accepts that the US economy and that of China “will continue to drive the global economy out of recession over the coming quarters”. He expects income to start growing in the second half-year to produce a broadly flat income result for the full 12 months. Cost-cutting and continuing lower defaults should increase profits, though. The real carrot is to return to its medium-term guidance of 5 per cent to 7 per cent growth from next year. That does not look too ambitious if it can manage its ever-changing risks.
In the longer term, there is the perennial question of whether the bank can stay independent. Big mergers are off the agenda for the next few years, but they will revive in sunnier times.
Tempus recommended the shares after last July’s interim statement at 445p and they reached a year’s high of 529p yesterday, an outstanding 7 per cent gain. But the path has not been straightforward. Just before October’s nine-month update, the price had fallen to a 2020 low of 336p — until the chief executive pledged to resume dividends.
Shareholders can expect more whiplash from Standard Chartered than from most banks in this bumpy period, but the ride should be worth the discomfort for those who do not mind the occasional sleepless night.
ADVICE Buy
WHY Higher risks, but potentially higher rewards, from its Asian bias
NatWest Group
The announcement yesterday that https://www.thetimes.com/article/natwest-returns-to-profit-7037r3fz9 NatWest, the former Royal Bank of Scotland, would quit Edinburgh in the event of Scottish independence overshadowed a promising interim management statement for the first three months of this year.
What will have particularly stung Nicola Sturgeon’s followers was the remark from Alison Rose, the bank’s chief executive, that “our balance sheet would be too big for an independent Scottish economy”. That underlined the point that NatWest has been an arm of the Westminster government since the 2008 financial meltdown, and the fact that the state still owns 60 per cent of its shares.
NatWest’s international operations are minor and retail and private banking have become the backbone as its commercial side has declined. Customer deposits increased by £7.3 billion, or 4.2 per cent, compared with the last quarter of 2020, thanks to lower customer spending and increased savings. Commercial deposits increased by only 1 per cent. The bank gave 12,000 active mortgage repayment holidays, about 1 per cent of the total, and put 16,000, or 2 per cent, of its personal loan customers on financial vacation. Despite Rose boasting of an “intelligent approach to risk”, ending these will test the management.
Yet there is plenty of scope to plump up the profits the bank makes on lending retail deposits. In the first quarter, the net margin between the two fell to 2.06 per cent, compared with 2.13 per cent for 2020 and 2.47 per cent in 2019. If NatWest could get that back near 2.5 per cent, the benefit would flow to the bottom line and add a potential £300 million or so to profit. Although its litigation and conduct costs are far lower than they were in 2019, the bank is still mired in lawsuits involving alleged manipulation of interest rates and money laundering.
NatWest is still tied to nanny’s skirts for the foreseeable future, and that may be no bad thing. Having a former Goldman Sachs executive — Rishi Sunak, the chancellor — looking over Rose’s shoulder will be a valuable discipline at this stage in the economic cycle. Opportunities and dangers can only increase.
ADVICE Buy
WHY The recovery will deliver a steady flow of profits for the next couple of years