[HONG KONG] Asia-focused bank Standard Chartered warned investors that profits would fall in the second half of this year, after quarterly earnings were hit by a surge in bad loans and higher regulation and compliance costs.
Standard Chartered said that as bad debts rise in key markets like India and China, it will step up its restructuring plan and aims to cut US$400 million more from costs next year.
Its London-listed shares tumbled more than 8 per cent to their lowest level for five years. Analysts said the grim results showed the tough task facing Chief Executive Peter Sands, as he tries to turn around the bank after its 10 years of record earnings came to a shuddering halt last year. "Not only has credit started to deteriorate and will be the driver of the next earnings downgrade cycle, but volume, revenue and cost trends are weak," said Joseph Dickerson, analyst at Jefferies.
He estimated average earnings forecasts for this year will come down by about 15 per cent and will also be cut for 2015. "The (Q3) numbers indicate the continuing challenges we face," CEO Sands told reporters on a conference call. "We are redoubling our focus on costs ... achieving this will require further rationalisation of our branches, more standardisation and automation and reconfiguration or exit of certain businesses." Operating profit for the July-September quarter fell 16 per cent to US$1.5 billion in the same period a year ago.
StanChart said it now expected underlying profits in the second half to be lower than the same period last year, partly due to higher regulatory and restructuring costs.
It will also pay about US$375 million under a UK bank tax in the fourth quarter, up from US$266 million last year.
The bank had previously said it expected profits to fall in 2014 for a second straight year, but that earnings in the second half would be higher than a year ago.
Standard Chartered has been hit by losses in South Korea and a slowdown in growth in many of its core emerging markets, as well as weak trading revenues.
It said impairments for the third quarter rose to US$539 million from US$250 million in the same period last year, as a small number of corporate and institutional clients were hammered by weak commodity markets. The bank took a US$175 million provision earlier this year to cover its exposure to suspected commodities fraud in China.
It said it was particularly "watchful" of potential problems in India, China and for commodity exposure more broadly, and had tightened its underwriting criteria. "China is going through some pretty radical changes ... and we have to be very watchful in the way we manage our business and exposure, simply because there's just so much going on in the Chinese economy," Sands said.
He said there had been no noticeable impact on the bank from recent protests in Hong Kong.
Standard Chartered is also under heavy regulatory scrutiny, having warned on Aug 6 that it faced its second fine in two years from New York's financial regulator for problems in its anti-money laundering controls.
The bank's problems have increased focus on its capital position. It had a common equity Tier 1 capital ratio of 10.7 per cent at the end of June, above minimum requirements.
Finance Director Andy Halford said the bank hopes to improve that position.
By 0915 GMT the bank's London shares were down 8.4 per cent at 1,003 pence, after falling to 996p, their lowest level since April 2009. The European bank index was up 0.4 per cent.
StanChart's shares have fallen 26 per cent this year, against a 5 per cent decline in the benchmark FTSE 100 index. "Standard Chartered will struggle to drive returns above cost of capital in the next 12-18 months. Structural issues around competition and reliance on low RoA (return on assets) businesses are biting," said Bernstein analyst Chirantan Barua.