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New StanChart boss faces cash call, dividend squeeze

Standard Chartered's incoming Chief Executive Bill Winters is expected to raise capital and cut the bank's dividend later this year, potentially forced to act by a tough stress test of its Asian loans, investors and analysts said.

[LONDON] Standard Chartered's incoming Chief Executive Bill Winters is expected to raise capital and cut the bank's dividend later this year, potentially forced to act by a tough stress test of its Asian loans, investors and analysts said.

Few believe the ex-JPMorgan rainmaker will miss the chance to bolster the balance sheet during his honeymoon at the Asian-focused lender, especially as Britain's Prudential Regulation Authority plans a fresh assessment on how shock-proof banks have become since the financial crisis.

The bank has already outlined ambitions to raise a key measure of its capital strength by the end of this year and Mr Winters is expected to sound out investors on further capital raising plans after he takes the reins on June 10.

If he chooses not to raise capital, he could find his strategic choices crimped for at least two years and profits have already shown the strain of trying to "muddle through", analysts said.

"The approach we think that would protect medium term shareholder value best would be to take decisive action by raising capital up front, followed by balance sheet and business restructuring and a return to growth in the ongoing core bank,"said Jason Napier, banking analyst at Deutsche Bank.

Mr Napier estimated the bank needs to raise US$5.25 billion.

"Given the choice, a highly regarded new chief executive would probably always plump for the budget to accelerate balance sheet growth and restructure the business as rapidly as the organisation can stand, and write down any existing assets that might be in doubt," he said.

This year's PRA "stress test" could hurt Standard Chartered as Asian exposures, a mainstay of its balance sheet, will be tested hard over a 5 year scenario.

The test will include a sharp slowdown in China's growth, deep recession in Hong Kong, a plunge in commodities prices and currencies and losses from trading book positions.

Several analysts and investors said the bank needed between US$5 billion and US$10 billion to get its common equity Tier 1 ratio (CET1) to the 12-13 per cent shareholders expect.

Its ratio was 10.7 per cent at the end of last year, and Standard Chartered said it has plans in place to lift this to at least 11 per cent by the end of this year.

"US$5 billion sounds sensible - the CET1 needs to head to 13 per cent over time and with some provision top-ups and restructuring charges, you could easily make a case for $5 billion," said one shareholder, who asked not to be named.

"The PRA stress tests this year may also add impetus to raise as it will be more rigorous than last time on emerging markets," he said.

Jefferies analyst Joe Dickerson said the capital position was "a cause for concern" for investors and estimated the bank needs US$8.8 billion in capital, while Investec analyst Ian Gordon estimated the capital need at US$4.5-US$7.5 billion.

Mr Winters could provide a clear indication of strategy alongside half-year results in early August, but he may not set out his full plans until later in the autumn, one banking industry source suggested.

The bank had a US$5.2 billion rights issue in 2010, but its capital advantage over most peers has been wiped out since.

Mr Winters could deploy less dramatic options to avoid a lengthy and complex rights issue, including cost cuts and simplifying the bank's structure by exiting some countries.

The bank is cutting assets by US$25-30 billion on a risk-adjusted basis, or one-tenth of its balance sheet.

Winters could supplement that by raising up to US$3 billion from a quick-fire share sale to institutional investors, which would follow a US$1 billion cash saving after investors opted to take its last dividend in shares. But that meant 69 million new shares were issued - effectively a mini rights issue.

Hugh Young, managing director of Aberdeen Asset Management Asia, the bank's second largest shareholder, said he was "ambivalent" about the need for a cash call, and said having lots of capital stashed away would keep the bank balance sheet strong but could drag down its returns.

Analysts are forecasting a dividend cut to 75c from 86c in 2014, but some said it should fall to 65c or less so payouts are less than half of expected earnings.

Mr Winters could also come under pressure to review whether the bank should move its headquarters to Asia from London - although analysts and investors said that should wait until after capital and strategic concerns have been addressed.