Emerging markets turn sour for global banks; Muddy Waters’ Carson Block Says He’s Shorting Standard Chartered Debt

May 13, 2013 5:54 pm

Inside Business: Emerging markets turn sour for global banks

By Patrick Jenkins

As growth has stagnated or gone into reverse across much of the western world in recent years, banks have understandably been burnishing their emerging markets credentials. Any lender with a credible plan to tap into the most dynamic markets of the world has been duly rewarded. It is no coincidence that the archetypal emerging markets bank, UK-based Standard Chartered, has seen its share price increase more than 130 per cent since its low point in early 2009 – outperforming the FTSE global banks index by 38 per cent. Rewind a few weeks, though, and that outperformance was all the more dramatic. Until the start of March, this was an unadulterated boom stock, with outperformance topping 65 per cent. The latest dip came as a result of some disappointing results last week. The bank only publishes skeletal quarterly information, but the disclosure that profits fell “slightly” in the first three months of the year has been enough to push its share price down more than 10 per cent over the four trading days since. The reason is simple enough. The bank’s core operations are no longer performing as they once did – high-risk emerging markets are delivering the same near-zero growth as lower-risk developed markets. StanChart is not alone. Other global banks with big operations in Asia and Latin America suffered a disappointing first-quarter performance, too.Take Santander, with a Latin American operation that for years provided rapid growth to offset to trouble in the group’s domestic Spanish market. So far this year that diversification benefit has turned into a drag. Despite continued increases in loans and deposits, the bank suffered a 13 per cent decline in its net interest margin, the surplus banks make from the difference between borrowing and lending. The situation was made worse by a worsening of loan losses in the region.

As in other markets around the world, ever stronger local banks are intensifying the competition for global operators. The resulting squeeze on margins has been compounded by the glut of cheap money being injected into the economy by policy makers around the world, particularly in the US and Japan.

For Santander, the end result was an 18 per cent fall to less than €990m in the amount the Latin American operation generated for its Spanish parent.

HSBC experienced similar developments. Its Latin American profits fell by a quarter during the first quarter of the year, as both net interest income and the group’s investment banking operations declined. In Asia, there were some parallel trends. While the overall result was clouded by a number of exceptional items, the underlying profitability of the group’s Asian retail and wealth management business was 44 per cent below the year-ago level. Investment banking profits slipped nearly 10 per cent.

Citigroup appeared to do a bit better in the two regions, with net income flat in Latin America, as the group offset a decline in investment banking and transaction services by expanding in consumer banking. Citi’s Asian business was also flat, undermined by consumer and transaction banking.

For HSBC and Citi, though, the benefits of global diversification bolstered their overall group performance. The UK-listed group delivered strong results in its two heartland markets – in Hong Kong and Europe, particularly the UK. Citi benefited from a dramatic recovery in its US market, with a particular fillip from a $652m release of loan loss reserves.

Overall HSBC reported a near-doubling of quarterly pre-tax profit to $8.4bn, while Citi made $3.8bn, up from $2.9bn a year ago. More to the point, both banks are still big restructuring stories.

HSBC has already reduced its workforce from more than 300,000 to less than 260,000, with several thousand more jobs set to be cut this year. Stuart Gulliver, a couple of years into his tenure as chief executive, is convinced there is more to be done to turn the group’s traditionally lumbering ways and excessively layered management structure into a meaner machine.

Citi, likewise, is cutting 11,000 jobs and Mike Corbat, the new chief executive, has accelerated a drive to find more efficiencies.

Restructuring benefits, of course, are finite. The likes of StanChart still potentially have that option to fall back on. But for everyone, the uncomfortable truth is that, unless underlying growth returns in emerging markets, even the best diversified banks will look a great deal less appealing.

Standard Chartered’s CDS Jump Following Block’s Wager

By Howard Mustoe and Saijel Kishan  May 13, 2013

(Corrects reference to gain in first paragraph.)

Carson Block’s bet against Standard Chartered Plc, the British lender that makes most of its profit in Asia, triggered a surge in the cost of protecting against losses on the British lender’s debt. Block, the short-seller who runs Muddy Waters LLC, said at a May 10 conference in Las Vegas that he’d bought five-year credit-default swaps on Standard Chartered for about 85 basis points. The cost of CDS tied to the lender’s debt jumped to 103.98 basis points today, according to data compiled by Bloomberg. The shares fell 1.9 percent to 1,552.5 pence in London trading. The investor cited the worsening quality of the London-based bank’s loans, saying a $1 billion loan to Samin Tan, chairman of Bumi Plc (BUMI), the coal company at the heart of a dispute between co-founders Nathaniel Rothschild and Indonesia’s Bakrie family, and loans toFar East Energy Corp. (FEEC) were “red flags.” “They are not saying short Standard Chartered, it’s going to zero — it’s more nuanced,” said Cormac Leech, a banking analyst at Liberum Capital Ltd. in London with a hold rating on the stock. “They’re saying CDS spreads are low and they are buying.” Block may have considered the CDS cheap compared with larger banks, said Leech. By comparison, Goldman Sachs Group Inc.’s CDS traded at 106.82 basis points and Morgan Stanley 121.17 basis points, according to data compiled by Bloomberg. Julie Gibson, a spokeswoman for Standard Chartered in New York, declined to comment on May 10. Doris Fan, a Hong Kong-based spokeswoman at the lender, also declined to comment.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

Carson Block Says He’s Shorting Standard Chartered Debt

By Saijel Kishan  May 13, 2013

Carson Block, the short-seller who runs Muddy Waters LLC, said he’s betting against the debt of Standard Chartered Plc (STAN) (STAN) because of “deteriorating” loan quality, triggering a 13.5 percent jump in the cost of insuring against losses on the debt of the British lender.

“We think the market misunderstands the amount of risk that’s presently in the book,” Block said at a conference in Las Vegas on May 10.

A $1 billion loan to Samin Tan, chairman of Bumi Plc (BUMI) (BUMI), the coal company at the center of a dispute between co-founders Nathaniel Rothschild and Indonesia’s Bakrie family, and loans to Far East Energy Corp (FEEC). were “red flags,” he said. Standard Chartered makes most of its profit in Asia.

Block said he’d bought five-year credit-default swaps on Standard Chartered at 85 basis points. The cost of CDS insuring against losses on the bank’s debt jumped to 102.75 basis points today, according to data compiled by Bloomberg. The shares fell 1.9 percent to 1,552.5 pence in London trading.

In a short sale, a trader sells borrowed securities to bet on a price decline.

Block is turning his focus to Standard Chartered after targeting Singapore commodity trader Olam International Ltd (OLAM)., which became more responsive to investors and won increased backing from Temasek Holdings (TMSK) Pte. A slowdown in China’s economy will lead to “considerable stress” at the British lender, Block said.

‘Little Ammunition’

“Carson Block is outside of the bank and does not have access to the bank’s loan files,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. “He has very little ammunition in his gun to shoot at Standard Chartered at this point. He’s got one example of a large loan that appears to be something that possibly would not have been prudent to book.”

Standard Chartered has been “stepping on the gas in mining,” increasing its loan book to the industry by about 22 percent, compared with 6 percent growth in its total wholesale book, Block said.

The world’s second-largest economy has grown less than 8 percent from a year earlier for four straight quarters, the longest streak in at least 20 years, reaching 7.7 percent in the first three months of this year. GDP may expand 8 percent in 2013, according to a Bloomberg survey of economists. The government has set a target of 7.5 percent growth.

Block said that while Standard Chartered’s business is diversified across various emerging markets, when China’s economy slows the correlation in the London-based bank’s loan books will be very high.

‘China Unwind’

“We think this is a very nice way to play the eventuality of the China unwind,” Block said at the SkyBridge Alternatives Conference.

Julie Gibson, a spokeswoman for Standard Chartered in New York, declined to comment on May 10. Doris Fan, a Hong Kong-based spokeswoman at the lender, also declined to comment.

The yield on Standard Chartered’s $2 billion of 3.95 percent notes due 2023 has risen 11 basis points to 3.804 percent since May 10, the highest in more than three weeks, prices quoted by Maxim Group LLC on Bloomberg show.

Block’s reports starting in 2010 triggered $7 billion in losses for Chinese stocks in two years. Tree-plantation operator Sino-Forest Corp (TRE). plunged 74 percent before eventually filing for bankruptcy. Block says Chinese government officials have hindered his analysts and “tattooed gangsters” came looking for him.

Olam International

Olam International slumped 20 percent after Block questioned its accounts in November. It later recouped those losses as the company scrapped its $1 billion 2016 earnings target and said it would cut capital spending to reduce debt. Olam dropped a lawsuit against Block last month after investor feedback.

Block said he didn’t understand why Standard Chartered lent Tan $1 billion, in what looks like a “very messy situation.” Bumi shares plunged 69 percent last year in London amid an investigation that started in September into “alleged financial irregularities.”

“Who knows what the truth really is, but I do think that’s a real red flag,” Block said.

Standard Chartered’s loan of $30 million to Far East, which has a market capitalization of about $42 million, “seems off,” he said.

Mizuho’s Antos said Standard Chartered is one of the world’s best capitalized banks and the possibility of defaulting on its debt “is not a question.”

Vipshop Holdings (VIPS)

The lender had a Tier 1 capital ratio of 13.4 percent, according to its latest regulatory filing.

Block reiterated that he thinks Chinese Internet company Qihoo 360 Technology (QIHU) Co. is a “fraud,” though he said he wasn’t currently betting against the stock. John Burbank, founder of $3.8 billion San Francisco-based hedge-fund firm Passport Capital LLC, said at the Las Vegas conference that his firm likes Qihoo.

Block said he has a “small position” on Vipshop Holdings Ltd. (VIPS), which he said “isn’t a fraud, but we think it has a fairly terminal business model in the medium to long term.”

U.S.-traded shares of the Guangzhou, China-based company fell 5.9 percent to $31.77 in New York on May 10.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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