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Fitch: StanChart restructures amid strong external headwinds

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The Outlook on Standard Chartered's rating is Negative and risks are weighted to the downside following the US$2.2bn loss for 2015 that the group reported yesterday, says Fitch Ratings.

[HONG KONG] The Outlook on Standard Chartered's rating is Negative and risks are weighted to the downside following the US$2.2 billion loss for 2015 that the group reported yesterday, says Fitch Ratings. If it can successfully implement its new strategy, the Outlook could be revised but this looks increasingly challenging given the strong external headwinds and the scale of the transformation.

The restructuring, affecting one-third of the group's US$303 billion total risk-weighted assets, cost US$1.8 billion in 2015. This was split between US$968 million of impairments taken against a US$20 billion portfolio of risk-weighted assets held in the newly created liquidation portfolio, US$695m of redundancy costs, US$126 million goodwill impairments against Thai operations and US$56 million of fixed-asset impairments.

Management warns that the liquidation portfolio, which includes higher risk assets, may require further impairments in 2016 but they are confident that they can keep it to around US$1.2 billion. This is in line with the total US$3 billion restructuring charge outlined in November's strategic plan. The liquidation portfolio contains US$8 billion of loans, of which US$7.5 billion were impaired. Fitch believes that accelerated wind-down could exceed this budget considering that the un-provisioned portion in the legacy book was a high US$4.4 billion.

Impairment charges, booked outside restructuring costs, nearly doubled to US$4 billion and weighed heavily on 2015 results. These were split 60/40 between ongoing businesses and the liquidation portfolio. The bulk of impairments taken in the ongoing business units were across corporate, institutional and commercial client portfolios to reflect weak commodity prices and deterioration in India. Impairments at the retail business units were far lower, equivalent to 70bp of loss, which appears reasonable considering the group's broad geographical scope.

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The reduction in concentration risk is positive because interconnected exposures can result in sizeable simultaneous credit downgrades, as when US$3 billion of liquidation portfolio exposures were reclassified in 2015. The group's top 20 risks now represent 61 per cent of common equity Tier 1 capital, down from 83 per cent at end-2014. Geographical concentration is still high, however. In 2015, only 'Greater China' reported a pre-tax profit of any significance.

Operating income fell 15 per cent to US$15.4 billion in 2015. Wealth management was the only business line that increased its contribution at this level. At pre-tax level, only retail and private banking units were profitable, highlighting the challenge faced by management.

Fitch expects dim group results in 2016, impacted by lower client activity, depressed trade flows, emerging-market currency and commodity-price weakness, lower capital markets activity, weaker global economic growth and geopolitical tensions.

NPLs jumped to 4.5 per cent of gross loans at end-2015 from 3.8 per cent at end-September 2015 and the bank's total net impaired loans are sizeable at US$6.6 billion or 17 per cent of common equity Tier 1 capital. Standard Chartered's capital ratios, which strengthened following a rights issue in 4Q15, compare well with peers'. The common equity Tier 1 ratio reached 12.6 per cent at end-2015 (2014: 10.7 per cent) and the leverage ratio 5.5 per cent. We think it is important that the group maintains high buffers especially because internal capital generation prospects are poor.

Medium-term profitability targets are not over ambitious: the group is targeting an 8 per cent return on equity by 2018 and 10 per cent in 2020. Returns earned from corporate and institutional banking, representing 56 per cent of operating income in 2015, are well below these thresholds. Retail business generates returns well in excess of the targets in all areas except China and Korea.

FITCH

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