Things have changed fast over the last year for Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US). The emerging market specialist was the darling of the UK banking sector during the financial crisis, but its share price has fallen by 25% from its 2013 high of 1,800p, as investors speculate that the quality of the bank’s loan portfolio may be deteriorating.
The rumour mill went into overdrive after famed US short seller Carson Block reported that he had gone short on Standard Chartered bonds, and having looked more closely at the firm’s latest results, I’m starting to see why.
Letting things slide?
When I started looking at Standard Chartered’s non-performing loan figures, things didn’t seem too bad. The bank’s impairment provision — money set aside against expected losses — had remained stable at around 2.5% of Standard Chartered’s loan portfolio.
However, I then noticed that a certain category of non-performing loan had been excluded from this reporting — loans where ‘forbearance’ had been successfully extended to the borrower.
As Standard Chartered explains, this means loans that have been “renegotiated on terms that are not consistent with those readily available in the market and/or where we have granted a concession compared with the original terms of the loan”.
For you and I, this would be the equivalent of going to our mortgage lender and persuading them to extend our mortgage term from 25 to 35 years, or perhaps switch our payments to interest only — fairly desperate stuff.
Sharp rise in forbearance
Standard Chartered has reported a big increase in forbearance and renegotiated loans over the last year.
In its consumer banking division, renegotiated loans rose by 9.1% from $729m in June 2012 to $795m in June 2013, driven in part by a sharp rise in loan impairment in Korea, where the government is operating a scheme to help borrowers restructure their personal debts.
However, the news was worse from Standard Chartered’s wholesale division, which lends to banks and businesses. Renegotiated loans to wholesale customers rose by a stunning 27% over the last year, to $1.1bn.
Restructuring a loan is sometimes successful, but it is often simply a way of postponing an eventual default. In my view, the sharp rise in forbearance suggests that Standard Chartered’s losses from bad debts are likely to rise over the next couple of years, as the bank is forced to recognise and write off non-performing loans.