StanChart braces itself for a weaker 4Q14 result

Small downgrades to be expected.

Standard Chartered's results look light relative to full year consensus expectations, as 3Q14 revenues as well as PBT were c49% of the implied 2H14 consensus.

According to a research note from Nomura, further, on a sequential basis, 4Q14 will likely be weaker, so this will lead to small downgrades.

The report noted that the main source of downside is impairments which are already at c58% of the 2H14 implied consensus, though some of the expected commodity related provisioning as already come through.

The price action on Standard Chartered has reflected this expected weakness, though no doubt the stock will be soft today as well.

Nomura said that while it did not expect earnings momentum to turn due to commodity related provisioning, it was hopeful that revenues would turn.

The main areas of weakness were ALM and Principal Finance, though revenues have been generally soft in 3Q14.

The group has announced USD 400mn of cost efficiency/productivity measure for 2015, which will likely be accompanied by restructuring costs of some tens of millions.

Here's more from Nomura:

Consensus has 2015 cost growth at 4%, and we would expect these measures to reduce that to c2%.

Pre-model adjustments, STAN is trading on c1.04x 14E P/TB against a 16E ROTE of c12% (c10% in 2014), so by no means is it expensive.

It is also trading at 23% discount to its sum-of-the-parts 1y forward P/E and a 39% discount to 1y forward P/B, having underperformed its Asian peers by c16% YTD and SX7P by 14% YTD. Thus while the stock will be soft today, we see limited downside from current levels.

Asset quality remains in focus: Cost of risk in 3Q14 came in at USD 536mn, with the runrate increasing from USD 846mn in 1H14. 50% of the total impairments were in Retail, which was flat year on year.

The increase is driven by corporate clients as STAN take specific provisions against a number of commodity related corporates, though the group has clarified that this increase has not been due to commodity fraud/Qingdao related issues.

Volumes have continued their downwards trajectory with 3Q14 loans down c3% year on year. This is driven by derisking the unsecured lending portfolio and some corporate exposures, reducing low profitability accounts, prepayment of facilities and cooling mortgage markets.

Capital position helped by EBA stress test readacross: STAN highlights that it was modestly capital accretive on an underlying basis. Consultation around the LGD methodology on FIs could still come to hit capital ratios, and we suspect negative RWA migration has continued.

The EBA stress test was a positive readacross for STAN’s capital requirements in our view. The drag to HSBC’s CET1 from 2013 baseline to 2016 adverse scenario was c1.5%.

Even if we double this, it would still not lead to a Pillar 2B buffer in our view. PRA might still impose higher requirements through other means, but outright dilution risk due to stress test has been materially reduced.