Standard Chartered Q3 operating profit dropped 16% YoY

Weaker outlook is also expected in 2H.

Standard Chartered has stated that its Q3 operating profit has fallen 16% YoY while its 9M earnings were 19% lower YoY, with this weaker performance results in a downgrade to second-half guidance.

According to a research note from Barclays, this has led management to now expect 2H underlying profit to fall YoY compared to previous expectations for modest growth.

In contrast to most of the previous downgrades, which have been primarily revenue-driven, the weaker outlook is attributed to a higher UK bank levy (to be incurred in 4Q) and higher regulatory and restructuring costs as well as a deterioration in credit quality.

The company has announced $400m planned productivity improvements for 2015 (c4% of the cost base) along with ongoing business restructuring and will provide more details in investor presentations planned for November.

Barclays said it sees this as an important opportunity to meaningfully refresh the strategy.

Here's more from Barclays:

3Q14 PBT down 16% YoY: Within this, 1% YoY income growth was somewhat encouraging, driven mainly by Wealth Management but this was more than offset by 4% YoY cost growth resulting in pre provision profit being 3% lower YoY and the cost:income ratio rising to 56% from 55% in 1H14 and 54% in 3Q13. An 86% YoY increase in impairments is said to result from a small number of Corporate and Institutional accounts as some have been affected by weak commodity markets and the company continues to tighten underwriting criteria and reduce exposure in India and China.

Main divisions showing some revenue growth: Looking at revenue performance in more detail, Corporate and Institutional and Retail - the two largest divisions - delivered Q3 YoY income growth of 2% and 5% respectively. Corporate and Institutional has seen good levels of client activity being partly offset by ongoing margin and spread compression. Growth in Retail income reflects a good performance in the High Value segments of Priority and International and Business clients more than offsetting continued de-risking in unsecured lending. These positive performances were largely offset by a 21% YoY decline in Commercial income in Q3.

Wealth Management the standout positive product performance: Cutting revenues by product rather than operating division highlights that 3Q14 Wealth Management income was up 30% YoY to $442m, particularly benefiting from the new Bancassurance agreement with Prudential. Performance elsewhere was more muted, with Transaction Banking down 1% YoY as increased Cash volumes on lower margins more than offset lower Trade volumes but with a stable margin. Flat Financial Markets income of $899m does not compare well to the +c20% average FICC performance of the mainly US firms that have reported so far. Retail income is down 3% YoY as unsecured de-risking and the impact of property market cooling measures more than offset an improved deposit contribution.

Limited balance sheet disclosure: Deposits are up 1% QoQ and loan balances down 3%, reflecting a combination of de-risking, high liquidity and the optimisation of low-returning relationships. This may see some reduction in RWAs but there is no disclosure on the capital position apart from a comment that “the Group is highly liquid and well capitalised, with ratios well above the regulatory requirements”.

Ongoing strategic refresh: The company indicates that strategic repositioning is ongoing but there is little detail apart from the announcement of $400m productivity improvements for 2015 equivalent to c4% of the cost base. We will look to the November update for more detail on where this will come from as well as progress and any new initiatives in reprioritising investments, exiting non-core businesses, derisking certain portfolios and reallocating capital.