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[LONDON] Standard Chartered Plc's losses on bad loans will climb faster than expected in the second half, hurt by falling commodity prices and a devaluation in the Chinese yuan, according to Jefferies International Ltd.
Loan impairments will increase to US$3.3 billion both this year and in 2016, about a third higher than the analysts previously predicted, following a 70 per cent jump in losses to US$1.7 billion in the first half. Jefferies also cut its 2015 profit estimate by 15 per cent to US$2.6 billion as the bank's revenue falls faster than it can sell assets.
"We expect credit quality to worsen in the second half," Joseph Dickerson, who has an underperform rating on the stock, said in a report on Thursday. Southeast Asian loans "started to deteriorate markedly in the first half and we expect pressures on the commodity side to continue. The recent yuan devaluation will have negative consequences for Malaysia and Indonesia."
Chief Executive Officer Bill Winters, 53, last week cut the bank's dividend by half to save US$1 billion and stave off the immediate need to raise money as he grapples with dwindling profit. Some analysts had forecast a capital gap of as much as US$10 billion. Standard Chartered, which makes most of its earnings in Asia, has been cutting its exposure to commodities and has said it remains "watchful" as bad loans surge in India and China.
Winters took over as CEO from Peter Sands in June, sparking a rally in the shares after they plummeted 29 per cent in 2014.
Malaysia and Indonesia are the next Asian markets that could generate losses for Standard Chartered because their largest trading partner is China, where demand is "decelerating," Dickerson said. The Chinese central bank intervened to support the currency in mainland trading on Wednesday, causing panic selling that sparked the biggest rout since 1994. Southeast Asia is the bank's largest market after China, accounting for 26 per cent of the bank's customer loans.
Revenue at Standard Chartered will fall to US$16.8 billion in 2016 from an estimated US$17.1 billion this year, Jefferies said. All four of the lender's divisions reported a drop in revenue in the first half, led by a 19 per cent slump in the commercial clients business, the bank reported Aug 5.
"Loans are shrinking faster than we had expected as the company appears to have stepped up de-risking activity in a move to generate capital and improve returns," Dickerson said. "The earnings power of Standard Chartered is well below what the consensus expects."