StanChart plans rights issue to raise US$5.1b; 15,000 jobs to be axed

London

UNDER acute pressure from the emerging market crisis and commodity slump, Standard Chartered is raising US$5.1 billion, slashing costs and jettisoning underperforming loans and businesses.

The bank's strategy to counter a third-quarter loss of US$139 million and a fifth successive decline in revenue received a thumbs down from the market. The bank's share price slumped 10 per cent to 645 pence following the profit and share-issue announcement.

The shares have fallen 39 per cent from this year's high in March of 1,060 pence and by 64 per cent from its 2013 levels of 1,815 pence.

Bill Winters, a former JPMorgan investment bank head who became StanChart's chief executive in June, described the new strategy as an "aggressive and decisive set of actions" to rebuild the bank.

To begin what he hopes will be a long road to recovery, 15,000 employees or 17 per cent of the workforce will be sacked, and its dividend slashed. The intention is to cut costs by US$2.9 billion and either liquidate or restructure US$100 billion in poor-performing "risk weighted assets" (RWA) from the bank's portfolio of US$315 billion.

Mr Winters said that there would be US$50 billion in RWA relating to "low-returning relationships in corporate and institutional banking and commercial banking, where the group intends to improve returns or exit".

The bank will also cut exposure to US$30 billion in RWA in "specific focus countries" such as South Korea, Indonesia and some African nations. It will liquidate US$20 billion of loans and other RWA which the bank can no longer tolerate and dump US$5 billion in peripheral businesses.

Restructuring charges from potential losses on the liquidation of non-strategic businesses and assets, redundancy costs and goodwill write downs are estimated at US$3 billion by the end of 2016.

Looking ahead, the bank, which still faces more heavy US, UK and other regulatory fines, will focus on its presence on a city-by-city basis and aim for a return of 10 per cent on equity in the medium term, Mr Winters told analysts and media in a conference call.

StanChart will also continue to service profitable clients in China and be an active player in the nascent renminbi market in Hong Kong, Singapore and London.

To shore up the bank's capital, the US$5.1 billion rights issue of two new for seven existing shares will be launched in a week, at 465 pence per share, a 28 per cent discount to its Tuesday price.

Singapore's Temasek Holdings, the bank's largest shareholder with a 15.8 per cent holding, will be taking up the rights, Mr Winters said. The issue would raise the Tier 1 capital ratio to 12 to 13 per cent, he forecast.

Several analysts, however, are wary. Jefferies International, which has an "underperform" rating on the stock, contends that such are the losses and write-offs that the bank has not raised adequate capital.

Citibank expects that after restructuring and recapitalisation, StanChart will be stronger and more focused, but will remain a complicated work-in-progress.

Hugh Young, managing director of Aberdeen Asset Management Asia, was quoted as saying that he was supportive of the rights issue.

For the three months ended September, operating profits before impairment losses and taxation came to US$1.18 billion, down 41 per cent from the previous year. Following loan write-offs and provisions, the loss amounted to US$139 million, compared with a profit of US$1.53 billion for the 2014 third quarter.

Over a nine-month period, operating profits tumbled by 25 per cent to US$4.6 billion. But commodity and other loan losses and provisions, and a 44 per cent rise in regulatory fines of US$690 million caused pre-tax nine-month profits to slump by 65 per cent to US$1.69 billion.

Mr Winters said: "We have further tightened our risk tolerance levels and have reduced some of our higher portfolio concentrations, with our commodity exposure down 21 per cent and China exposure down 15 per cent."