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Standard Chartered moving past India woes with Essar payment

Wednesday, October 19, 2016 - 12:24
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Standard Chartered Plc can finally start to move beyond its woes in India.

[MUMBAI] Standard Chartered Plc can finally start to move beyond its woes in India.

The London-based lender is set to receive a US$2.1 billion repayment in the next few weeks from Essar Global, the steel-to-power conglomerate that's been one of its most problematic borrowers in the country, people with knowledge of the matter said. 

Standard Chartered may be able to write back around US$100 million of provisions it made to cover potential losses on Essar Global loans, according to the people, who asked not to be identified as the information is private.

  The bank, which gets most of its business from emerging markets, last year booked its first loss in more than a quarter century due to a sharp drop in revenue and surging loan impairments. Loan impairments from its ongoing business rose in the first half of 2016, due largely to provisions connected to Indian clients and the commodities industry.

A repayment would show progress in the turnaround plan of Standard Chartered Chief Executive Officer Bill Winters, who has been shrinking the bank's balance sheet and tightening lending standards since taking his position last year. 

Standard Chartered's woes in India are partly the result of an expansion there that failed to fully factor in the risk of lending to companies like Essar Global, current and former bank employees said in November last year, speaking on condition of anonymity. 

Spending Spree

Shares of Standard Chartered rose 1.7 per cent to HK$64.15 at 11:03am Wednesday in Hong Kong, bucking a 0.1 per cent decline in the city's benchmark Hang Seng Index. Global rival HSBC Holdings Plc gained 0.2 per cent to HK$59.10.

Standard Chartered is one of the biggest winners from Essar's deal to sell its refinery arm and related facilities to a group of investors including Rosneft PJSC at a US$13 billion enterprise value, Citigroup Inc wrote in a research note earlier this week.

The bank's non-performing loan portfolio may be reduced by about 20 per cent if the Essar debt is repaid, according to Citigroup, which reiterated its "buy" rating on Standard Chartered.

Essar Global, owned by the billionaire Ruia brothers, has been grappling with debt after it embarked on an US$18 billion spending spree before commodity prices fell. Standard Chartered, which has about US$3.1 billion of outstanding lending to Essar Global, plans to replace around US$400 million of its exposure with a loan to unlisted operating company Essar Ports Ltd and will write off the remainder of about US$600 million, people with knowledge of the matter said this week.

A representative for Standard Chartered declined to comment. Representatives for Essar Global's domestic lenders, ICICI Bank Ltd and Axis Bank Ltd, said they couldn't immediately comment. Essar said in an e-mailed statement its intent is to reduce debt at the level of both the holding company and its operating companies.

Holding On

"The final amounts will be decided at the time of closure of the transaction," it said in the statement.

Standard Chartered has been in India since 1858, but it was after the 2008 global financial crisis that the country became a main growth engine. The bank established ties with about 17 of India's biggest business groups, most of which are family-owned.

Unlike Standard Chartered, Essar Global's domestic lenders are holding on. The Indian conglomerate plans to pay a combined US$250 million to ICICI Bank and Axis Bank after completing the sale of Essar Oil Ltd, which is expected in the first quarter of 2017, the people said.

After that, the two banks will still keep about US$450 million of combined exposure to Essar Global, which will be backed by adequate collateral, according to the people. 

The domestic lenders haven't made any provisions for the Essar Global loans in the past and don't currently plan to make any writedowns, the people said.

BLOOMBERG