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[HONG KONG] Without the sort of ambitious, large-scale loans that fueled its business for more than a decade, where does Standard Chartered go?
That's the question investors will be asking as the emerging-markets lender tries to offload US$4.4 billion of stressed debt.
STANCHART'S BAD LOAN RATIO 4.8%
If CEO Bill Winters gets rid of those loans, about half the US$8 billion of mostly nonperforming advances the bank has said it wants to liquidate, he will have made concrete steps in clawing back some of the lender's bad debt problems. But it'll be hard to reward him for what will probably be a series of fire sales of loans made to highly leveraged Indonesian miners and troubled Indian infrastructure companies.
StanChart, which is listed in Hong Kong and London and focused on Asia, the Middle East and Africa, emerged from the global financial crisis relatively unscathed. However, an aggressive build-out under former Chief Executive Officer Peter Sands left it vulnerable to spiraling bad debt as core markets slowed and commodities tumbled.
The bank, whose biggest shareholder is Singapore's Temasek, posted its first annual loss since 1989 for 2015, while its nonperforming loans ratio rose to 4.8 per cent as of December from 2.7 per cent 12 months prior.
The bad debt up for sale includes US$1.4 billion of loans to Indian companies including GMR Infrastructure, which was identified by Credit Suisse as one of India's most highly leveraged corporates, and US$3 billion lent to firms in China, Indonesia and Malaysia.
Some of the biggest advances to go awry include a US$1 billion line of credit to Indonesian mining tycoon Samin Tan, inked at the height of the commodities boom five years ago.
Private equity firms looking to invest in distressed debt in India may be one solution. Asia's third-largest economy now allows creditors to swap their debt into equity stakes, and pending bankruptcy reforms may make long and drawn-out trials a thing of the past.
Should StanChart manage to offload the whole US$4.4 billion (only about a third of the some US$12.7 billion of total bad debt on its books), the bank would move closer toward the upper end of its common equity Tier 1 target ratio of 12 to 13 per cent, according to Fitch Ratings analyst Sabine Bauer. Its nonperforming loan ratio would drop to about 3 per cent, she said.
But even if Mr Winters manages to get a decent price, key will be whether he has a viable business strategy that steers the bank away from the sort of commodity-heavy lending it indulged in for much of the last decade.
Mr Winters, an ex JPMorgan banker, has said he plans to restructure or cut US$100 billion of the bank's US$315 billion in underperforming risk-weighted assets over the next three years to get "lean and focused."
This, of course, is easier said than done and it's also the same sort of strategy UBS, Credit Suisse and a slew of Singaporean banks are exploring. Every financial institution worth its salt wants to be in the capital-lite, albeit highly competitive, area of wealth management, plus to be bulking up in China.
StanChart also isn't alone in its wish to improve the technology that's becoming the backbone of retail banking.
Then there's the question of Hong Kong, which is an important market for StanChart. The city is weathering a significant drop in property prices and a groundswell of political unrest that, longer term, could threaten its status as a laissez-faire business hub.
Mr Winters certainly has his work cut out, and, notwithstanding a jump in the bank's stock this week, convincing investors he can repair the venerable lender will be a difficult task. Merely hiving off problematic legacy assets won't be enough to ensure a successful future.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.