Asian Slowdown Hits Standard Chartered, HSBC; Weak Emerging-Market Growth Threatens to Bring Two of Europe’s Highest-Flying Banks Back Down to Earth

Updated August 6, 2013, 1:11 p.m. ET

Asian Slowdown Hits Standard Chartered, HSBC

Weak Emerging-Market Growth Threatens to Bring Two of Europe’s Highest-Flying Banks Back Down to Earth

MAX COLCHESTER

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LONDON—Asia’s economic slowdown is threatening to bring two of Europe’s highest-flying banks back down to earth. Standard Chartered PLC said Tuesday that net profit fell 24% in the first half of the year, as weakening growth in Asian markets and a $1 billion write-down at its South Korean business put a brake on earnings. The announcement came one day after HSBC HoldingsHSBA.LN -2.23% PLC said underlying profit before tax stagnated at its Asian-Pacific unit, which excludes Hong Kong, and warned it was bracing for slower growth in China. The jittery results underscore a nascent problem for the two U.K.-based banks, which both lean heavily on Asian economic growth to bolster their results and tout their substantial emerging-market presence to differentiate themselves from Europe’s crisis-hit banks.The lenders say they are in good position to earn money from trade flows entering and exiting emerging markets, while tapping into the banking needs of a growing middle class. But this pitch is looking less attractive as China struggles to rebalance its economy away from the export- and investment-driven model.

The potential end of a steady flow of money from Western economies into emerging Asia, where investors have searched for higher returns, also is a concern for economies there.

“What investors are starting to realize is that the West is not as bad as they thought and the East is not as good as they thought,” says Chirantan Barua, a banking analyst at Bernstein Research. “Everyone in Asia is anxious about the end of quantitative easing.…We are seeing what could be the early stages of a damaging Asian cycle.” Executives at both banks cited mitigating factors that they say should limit the impact of lower growth in Asia. Standard Chartered STAN.LN +1.66% Chief Executive Peter Sands said that a slowdown in Asia was being counteracted by improving growth at its Indian and African businesses.

“These economies don’t all rise and fall simultaneously,” Mr. Sands said on a call with reporters.

Still, revenue growth will be hampered. Standard Chartered, which gets about three quarters of its revenue from Asia, said that, unlike last year, it doesn’t expect to record annual double-digit revenue growth and will focus on increasing revenue at “a good rate.”

Mr. Sands said that, because of Standard Chartered’s relatively small size, it has room to expand in many markets, even if the markets contract.

HSBC Chief Executive Stuart Gulliver noted that China is still gaining significantly faster than most mature economies. In June, the bank’s economists downgraded their prediction for Chinese economic growth to 7.4% from 8.2% for this year, before it rebounds in 2015.

“We believe that China’s reform agenda, which covers financial, fiscal, deregulation and urbanization reforms, will provide the basis for more-sustainable growth in the medium to long term,” Mr. Gulliver said.

As Asian markets slow, the two banks have been wrestling with greater competition both from local lenders eager to maintain market share and U.S. and European banks looking to deploy excess stocks of cash into the Asian market.

“There is margin pressure, because U.S. banks and French banks have been trying to get market share,” said Shailesh Raikundlia, an analyst at Espírito Santo, an investment bank. This could push up impairments as lenders eager to maintain revenue dish out loans to less-creditworthy customers, analysts say.

Standard Chartered said loan impairments rose by $155 million, or 27%, to $730 million. The bank reported net profit of $2.13 billion for the first half of the year, down from $2.81 billion a year earlier.

South Korea remained the bank’s main sore spot, as income fell 5%, the economy rose slowly and impairments increased. Standard Chartered announced a $1 billion write-down in the value of its South Korean business, where the banking sector has been hit by a popular government program that lets customers restructure their debts and forces banks to write off 30% to 40% of what they are owed.

The bank said it would seek to simplify its operating structure there, reconfigure branch networks and review options for some noncore businesses. The bank warned that the second half of the year would also be “very difficult” in South Korea.

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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