Could Standard Chartered PLC Be Heading To Zero?

There’s no other way of putting it: Standard Chartered (LSE: STAN) is struggling. The emerging markets-focused bank has been seeking ways to restore investor confidence after replacing its long-time CEO Peter Sands in June. 

Standard’s new CEO, Bill Winters, has got straight to work, cutting around 5% of the bank’s total headcount and targeting cost savings of $1.8bn by 2017. More than $400m of savings have already been achieved this year. Within the past few days, the bank has announced that it is planning to cut a quarter of its senior banking positions. 

Troubles run deeper

Unfortunately, Standard’s troubles run deeper than just a high-cost base.  Bill Winters is trying to tackle what he has called a legacy of “growth over risk discipline”, which was born under the leadership of Peter Sands. This policy of quantity over quality is now coming back to haunt the bank. A spike in losses on legacy loans is eating away at Standard’s capital reserves. The bank has already been forced to cut its dividend payout to try save cash. 

And figures suggest that Standard’s financial situation could be deteriorating almost every day. During the first-half of the year, Standard was forced to write off $1.7bn worth of loans due to the deterioration in Indian economic growth and continued commodity market weakness.

But since the bank reported this figure, commodity prices have continued to slide, and the number of commodity companies falling into administration has increased. The longer the downturn lasts, the more pressure resource companies will face. 

Piling on the pressure

As I’ve written before, City analysts have estimated that around 20% of Standard’s total loan book is linked, directly and indirectly, to the commodity market — approximately $61bn in dollar terms, roughly 140% of the bank’s tangible net worth.

Management has been trying to reduce Standard’s exposure to commodities for more than a year now, so the bank’s actual exposure is likely to be lower than the figure above. Nonetheless, analysts at Australian bank Macquarie have predicted that Standard could be facing commodity-related losses $5.9bn during 2015 alone. 

These figures exclude any losses on loans made to Chinese customers. 

The China issue

British-based banks are the largest foreign lenders in China, with a total of $221.2bn outstanding loans to China. Standard and HSBC are the two of the biggest international lenders operating within the country. During the past year, the number of Standard’s outstanding loans to entities based in China expanded by 30%.

If China’s economic situation continues to deteriorate, there could be a surge of bankruptcies across China’s corporate sector, which is already awash with debt. And when coupled with Standard’s commodity-related losses, even a relatively minor loss on loans to Chinese customers could tip the company over the edge. 

Still, City analysts believe that Standard will tap investors for cash later this year via a multi-billion pound rights issue to try and shore up its balance sheet. Standard saw its common equity Tier 1 ratio, a measure of financial strength, fall to 10.7% at the end of last year, from 11.2 a year earlier.