Why I’m Avoiding Standard Chartered PLC And HSBC Holdings plc

Standard Chartered (LSE: STAN) and HSBC (LSE: HSBA) have been leading the FTSE 100 lower over the past three months. Since the end of April, HSBC’s shares have fallen 12.8%, and Standard has declined 12.4%. Over the same period, the FTSE 100 has fallen 7.3%.

Investors have been avoiding these two Asia-focused banks as they are highly exposed to China and the commodity markets. For example, Standard is one of the biggest lenders to Asian resource companies, which are struggling as commodity prices plummet to 13-year lows. 

Cash call on the cards?

Around 20% of Standard’s total loan book is linked to the commodity market. In dollar terms, 20% of Standard’s loan book is around $61bn, which is roughly 140% of the bank’s tangible net worth. 

So, it’s pretty easy to see that the commodity slump will hit Standard… the question is, how big will the bank’s losses become?

Unfortunately, there’s no simple answer to this question. Back during January, one set of analysts estimated that around 7% of Standard’s commodity loan book would turn bad, leaving the bank with $4.3bn in non-performing loans. 

These toxic loans are already starting to show through. Standard’s total value of impairment charges — or bad debts — doubled during the second half of last year.  What’s more, Standard’s Indian arm now has the second-largest gross non-performing asset ratio among Indian banks. 

As all of the above figures were reported before the commodity sell-off intensified, it’s probable that the number of non-performing commodity loans on Standard’s balance sheet has increased dramatically during the past few months. 

According to analysts at Mizuho Securities Asia, Standard may need to raise as much as $10 billion from investors in the near future to create a buffer for loan losses and recapitalise its balance sheet.  

Contagion risk 

Like Standard, HSBC has been falling as investors fret about the bank’s exposure to Asian markets. 

Specifically, investors are afraid of the prospect of a hard landing for the Chinese economy and the knock-on effects this will have on the rest of the region. It’s almost certain that the effects from a hard landing for the Chinese economy will spill over into Hong Kong, where HSBC has substantial operations. 

Based on these concerns, analysts have been consistently downgrading HSBC’s growth outlook. This time last year analysts were expecting HSBC to report earnings per share of $1.00, around 64p for full-year 2015. Now, earnings of $0.82 or 54p per share are expected, a 16% reduction. 

Nevertheless, for the time being analysts expect HSBC’s dividend payout to be maintained at its present level. The bank currently supports a dividend yield of 5.7% and the City expects this payout to increase by 2% over the next two years. 

The bottom line

So overall, I’m avoiding HSBC and Standard due to their exposure to the erratic Chinese economy and commodity markets.