By Sumeet Chatterjee and Lawrence White
HONG KONG/LONDON (Reuters) - Standard Chartered's (L:STAN) core emerging markets face increasing risks from the escalating Sino-U.S. trade war, the bank warned on Wednesday after reporting better than expected quarterly profit.
The downbeat comments on global trade reflect a more pessimistic tone than the Asia-focused lender's statement in July, in which CEO Bill Winters said he saw a "minimal" hit to the bank's performance from the U.S.-China spat.
The 150-year-old British lender is particularly sensitive to such tensions, given its focus on financing trade between Asia, Africa and other parts of the world.
StanChart's pretax profit for the three months to Sept. 30 jumped 31 percent year on year to $1.1 billion, beating consensus analyst forecasts of $978 million. The outperformance was helped by a reduction in non-performing loans, while worse than expected revenue of $3.7 billion demonstrated the bank's continuing struggle to boost the top line.
"Escalating trade tension and other macroeconomic factors are affecting sentiment in emerging markets," StanChart said in one of the grimmest predictions on the issue by a global bank.
The world's top two economies are already waging a tariff war, with U.S. duties placed on $250 billion worth of Chinese goods and Chinese duties on $110 billion of U.S. goods.
RISK-OFF ATTITUDE
StanChart finance chief Andy Halford said that, as "an indirect effect" of the trade war on its wealth management and parts of the financial markets business, the bank had seen some clients transacting less and adopting a risk-off attitude.
Wealth management income in the quarter dropped 4.7 percent from a year earlier to $465 million.
" Standard Chartered is a poster child for all the major risks circulating the sector – global slowdown, trade wars, regulatory overhang," said KBW analyst Edward Firth, adding that the bank's share price has reflected those risks.
The better than expected profit, however, cheered investors. The bank's London-listed stock was up 6 percent in morning trade, making it the best performer on the blue-chip FTSE 100 index (FTSE).
British rival HSBC (L:HSBA) this week posted a surprise 28 percent rise in third-quarter earnings and said the impact of the trade war was "not yet manifesting itself".
StanChart reported operating expenses of $2.51 billion for the quarter, up 1.2 percent year on year, and said income growth had been hit by sluggish business in Africa and the Middle East.
"But growth fundamentals remain solid across our markets and we are cautiously optimistic on global economic growth," CEO Winters said.
The bank is pressing on with its application for a banking licence in Saudi Arabia, CFO Halford said on Wednesday, despite global outrage over the murder of a journalist in the country's Turkish embassy.
COSTS IN FOCUS
Winters embarked on a sweeping restructuring in 2015 to weed out a persistent bad loan problem and improve senior bankers' accountability, but StanChart has struggled in recent years to grow income. It has poured money into its retail banking business and wealth management technology platform but has yet to see that translate into significant returns.
StanChart said it would set out a refreshed strategy when it reports full-year results in February, which Halford told reporters would include "some impact" on staff numbers.
Halford this month warned staff in an internal email seen by Reuters that it faces a "significant challenge" to meet its 2018 cost-reduction targets.
The message said the bank had made "virtually no progress" in meeting cost targets and urged senior managers to consider cutting jobs, paring back travel expenses and freezing recruitment.
The leaked internal email said managers could consider cutting investment plans, which Winters has hailed as the solution for hitting the bank's modest near-term return on equity target of 8 percent.