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Asia's souring debt a threat to StanChart magic

Source : REUTERS
Last Updated: Mon, Oct 29, 2012 21:20 hrs

By Kelvin Soh

HONG KONG, Oct 30 (Reuters) - Rising bad loans in some of Asia-focused Standard Chartered's main markets such as India could take some of the shine off an otherwise strong quarterly trading update on Tuesday - which is likely to say the bank is on track for a 10th straight year of record profits.

The increase in bad loans - as well as a run-in with the New York regulator over allegations it hid transactions with Iran, a slowdown in China, and a $1 billion loan to an Indonesian businessman that has raised questions about lending practices - have dented investor confidence in the bank.

Its Hong Kong-listed shares, valued at around $58 billion, are up 10 percent this year, half the benchmark Hang Seng Index's near-20 percent gain, and analysts polled by Thomson Reuters I/B/E/S have downgraded forecasts for pretax profit to $7.2 billion from $7.4 billion in June - still a rise of almost 10 percent.

The non-performing loan ratio in India has more than doubled to 10 percent, a potential cause for concern when coupled with declining provisions for bad loans, said Barclays analyst Sharnie Wong.

"Our India banks team remains cautious on corporate credit quality and we do not expect significant improvement in 2013," Wong said. "The industrial sector, which accounts for around 45 percent of bank credit at the system level, is particularly vulnerable."

Standard Chartered, though, is likely to set aside more of its profits to cover rising bad debts, with impairment charges - where companies write off goodwill - having risen about 40 percent in the first half. This comes as bad debt levels begin to rise from near record lows across Asia.

In South Korea, bad household debt has increased to a near 6-year high, while Australian lenders such as Australia and New Zealand Banking Corp are setting aside more in reserves to prepare for a rise in sour loans.

"As an emerging markets bank, asset quality at StanChart deserves careful attention, particularly if Asian economies are headed for a longer-term slowdown," Nomura analyst Chintan Joshi wrote in a research note.

RECORD RUN

Run by CEO Peter Sands, Standard Chartered grew at a rapid pace for much of the last decade, riding on Asia's rise and reporting a ninth straight year of record earnings in 2011 on the back of buoyant growth in markets such as Hong Kong and Singapore.

The bank is performing better relative to most peers of its size, many of which are cutting jobs and rolling back on plans to expand in Asia and other emerging markets as they look to preserve capital.

Shares in UBS soared on Monday on media reports the Swiss bank would announce up to 10,000 job cuts along with its third-quarter earnings on Tuesday, as it takes the knife to its investment banking operations. And Deutsche Bank, Germany's flagship lender which also reports on Tuesday, expects to axe more than the 1,900 positions already announced, also mainly in investment banking.

By contrast, Standard Chartered said in August it plans to add 1,500 jobs in the second half of this year.

Standard Chartered expects to double profit in its core wholesale banking business - which houses investment banking and includes trade financing, corporate lending, foreign exchange and M&A advisory - to more than $10 billion in the next 4-5 years as Asian markets grow faster than the West. The unit made a $5.2 billion profit last year.

"Given StanChart's management commentary that trading was good in both July and August, we believe the market may be under-estimating the group's underlying momentum," Cormac Leech, an analyst at Liberum Capital, wrote in a client note.




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