Last year was tough for Standard Chartered (LSE: STAN). Chairman Sir John Peace even remarked that the overall outcome for the Group was not as good as they would have liked. This year has provided no respite.
Savaged by the market
Even a brief look at the stock’s performance over the past 12 months and you can see just how on-the-nose the bank has been with investors.
Over the past six months, the stock is down 16%. Over the same time period the banking sector fell 2%. That compares with a fall in the FTSE 100 of 4%.
Over a 12-month time frame the stock is down around 25%. Again the banking sector only lost half that amount over the same period, and the FTSE 100 fell 4%.
What’s going on?
Yes, the regulators have tightened their grip on the banks, and admittedly there is more cautiousness in the market — especially given the outlook for the housing market and interest rates — but there are other pressing concerns for Standard Chartered at present.
Troubles in the United Arab Emirates
One such concern is its business in the United Arab Emirates. The world’s business press covered the story earlier this week saying the bank had been forced to close thousands of small to medium-sized business accounts in the region (that’s somewhere between 1,400 and 8,000 accounts), estimated to have a revenue of between $1 million to $35 million a year. It all relates to pressure that was applied to the bank from US regulators following a settlement with the New York State Department of Financial Services in August over charges of facilitating money laundering. Standard Chartered’s copped a $300 million fine and has been given a period of three months to end high-risk partnerships with businesses in the UAE.
Standard Chartered’s message to those customers was as blunt as its exit strategy. Thank bank said, “We regret to notify you that Standard Chartered Bank will no longer be able to provide banking services to you.”
Broader concerns in China
Standard Chartered though isn’t just putting out fires in the Middle East. China’s economic future is another worry for the bank. The world’s second largest economy is still growing rapidly (around 7.5%) but no one is under any illusion that this will continue indefinitely. It just so happens too that Standard Chartered has most of its assets in Asia. In fact, the bank said in its interim statement that its overall exposure to Chinese customers rose 30% to $58.3 billion in the six months to the end of June, according to The Wall Street Journal.
Analysts are concerned that tighter lending conditions in China and low global interest rates are pushing more Chinese companies to borrow offshore. Naturally if interest rates start to rise, many Chinese loans could sour. However, Standard Chartered says it’s not concerned given that loans to Chinese customers account for just 8% of the bank’s $690 billion of assets. Surely the bank realises though that the Chinese juggernaut is feeding Asia’s broader economic growth. So what happens when China eventually slows to below 6.5%? Then it might not just be Chinese loans that sour. Well, Standard Chartered simply doesn’t see that happening in the foreseeable future. It’s maintaining its economic growth rate forecast for the region of around 7 per cent.
And if that wasn’t enough
There are a couple of other niggly little things I should mention. It was recently reported that Standard Chartered took a $175 million impairment charge related to a commodities fraud scandal in China. It’s alleged the head of a Chinese commodities-trading firm put forward the same stocks of commodities multiple times as collateral to get loans. The bank’s said it has a $62 million exposure to the problem.
There are several things management at Standard Chartered would prefer you didn’t know about the bank. At a very basic level though — like many British-based banks — it needs to rebuild trust and credibility in the community. The company summed it up well in its latest annual report saying, “Put bluntly, society expects more of us. We must raise the bar on conduct … in everything we do.”.
Easier said than done. So far the market’s not convinced.