Troubled London-based Asia-Pac specialist Standard Chartered has posted pretty dismal fiest half results today.Profits are down 35% from $3.25bn to $2.1bn and it's cutting its interim divi in half.
Revenues also fell and impairments - that’s charges on loans that are going bad - more than doubled. Oh dear. And yet despite all this undiluted bad news, shares in the emerging markets specialist bank jumped over 3% to 985p this morning.
Why? Well for starters it’s no secret that Stanchart is in trouble - indeed the chilly-monickered Winters was hired from JP Morgan precisely to sort out the mess. So these numbers have clearly come as something of a relief to the City - they’re bad but they could have been worse.
No doubt keen to keep up with the turnaround CEO pack, Winters is probably also indulging in a spot of kitchen sinking, the corporate fad de nos jours. This is the practice of a new leader trying to get all the bad stuff out of the way in one go, so as to be able to make like Tony Blair and say with a (reasonably) clear conscience that ‘Things can only get better’.
In principle it’s a sound plan - it certainly hasn’t done the likes of ‘Drastic’ Dave Lewis at Tesco or even John McFarlane at Barclays any harm. Making an impression, ideally a slightly scary one, is arguably one of any new boss’s most immediate priorities - particularly when the business is in trouble. It says to beleaguered and demoralised staff two important things:
1. The stick. Things have changed around here and backsliding will no longer be tolerated.
2. The carrot. Those who are prepared to change can expect rapid and rewarding advancement.
When combined with a swift boardroom clean out, such as Winters has already undertaken, kitchen sinking also makes it quite clear that all the bad stuff was down to the last lot, while all the good things to come will spring entirely from the wisdom and munificence of the new regime.
In the absence of a new strategy, it also reassures investors and the City generally that ‘something is being done’.
So far Winters has played in entirely according to the hardball book, and today’s figures plus the bad news about the interim divi should leave no-one in any doubt that he means business.
But exactly what kind of business remains to be seen - he is still chewing over the big question of how to tackle StanChart’s underlying problems, particularly it’s puny capitalisation. The bank’s equity tier one capital ratio of 10.7% (a key measure of financial stability for banks) compares badly with arch-rival HSBC at 11.6%, and he is under lots of pressure to shore it up.
Doing so will require more than tough messaging. His two main options appear to be either the big bazooka of a hefty rights issue (maybe as much as $10bn), or the slower but more shareholder-friendly slim rapier of a planned pruning of riskier assets from its balance sheet.
A clue as to which way he is likely to go may be the hiring of Mark Smith - poached form the aforementioned HSBC - as new chief risk officer. But in reality it will probably take both more capital and a balance sheet workover before Winters can get the sun shining on StanChart again.