Shares of Asia-focused bank Standard Chartered (LSE: STAN) fell by as much as 6% this morning, after the third-quarter results missed analysts' forecasts.
Despite this, I believe that today's figures still contained a lot of good news. In this piece I'll look at the highlights from today's results, and consider the potential challenges facing the bank. I'll explain why I think the shares are still cheap enough to offer decent upside potential.
Although it may be slower than hoped for, Standard Chartered's recovery certainly seems to be under way.
Underlying pre-tax profit for the third quarter was $814m, 78% higher than during the same period last year. There were also signs that the credit quality of the bank's customers is improving. Loan impairments during Q3 totalled $348m, 42% lower than in Q3 2016.
Total income for the period was $3.6bn, 4% higher than last year. Meanwhile net lending has risen by 3% to $277bn since the end of June.
Not such good news
The drive to reduce costs hit a speed hump during the third quarter. Total expenses rose by 4% to $2.5bn. Management said that this is a result of "accelerated investments in areas of competitive differentiation" plus the cost of stronger controls and processes.
Measured over the full year, regulatory expenses are expected to be "slightly higher", while other expenses are expected to be broadly flat.
Another potential concern is that growth in the group's largest division -- Corporate & Institutional Banking -- remains slow, at just 2% so far this year. There's a risk that the firm could start to lose market share in its core business.
Standard Chartered shares have risen by 50% from their 2015 rights issue price of 465p. But at 700p, the stock still trades 30% below its last-reported net asset value of $13.56 per share (about 1,020p).
The question for shareholders -- including me -- is whether chief executive Bill Winters can improve the profitability of the company's operations enough to justify a higher valuation.
The main measure of banking profitability is return on equity. The firm didn't provide an update on this today, but the half-year results in August showed that underlying return on shareholders' equity rose to 5.2% during the first half, from 2.1% during the same period of 2016.
So 5.2% is still too low, but the rate of increase here is encouraging. Given the improvement in pre-tax profits seen during the third quarter, my view is that it makes sense to continue holding Standard Chartered for the full year in the hope that return on equity will continue to rise. That's certainly what I intend to do.
Broker consensus forecasts suggest the board may decide to restart dividend payouts this year, after suspending them in 2015. Analysts have pencilled in a final dividend of $0.14 per share, giving a prospective yield of 1.5%.
I'm not sure how likely a payout is for 2017, but I do believe we can be more confident of a payout in 2018. Analysts are forecasting a payout of $0.33 per share for next year, equivalent to a yield of 3.5%.
In my view that's worth holding on for, given the potential for long-term growth.
Roland Head owns shares of Standard Chartered. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.