HSBC and StanChart hit by Asia focus as economies lose momentum

August 18, 2013 2:49 pm

HSBC and StanChart hit by Asia focus as economies lose momentum

By Sharlene Goff, Retail Banking Correspondent

Ever since the financial crisis, HSBC and Standard Chartered have trumpeted their exposure to faster-growing economies as a welcome differential among the UK banks.

But the recent slowdown in parts of their Asian heartlands – both reported weaker growth in markets including China, Indonesia, Malaysia and Taiwan in the first half of this year – means their reliance on the region is fast becoming a concern rather than a comfort for investors.The two star banking performers in the wake of the financial crisis – HSBC and StanChart generated a combined $66bn of pre-tax profit between 2009 and 2011 – are now being overshadowed by the resurging fortunes of more western focused UK banks.

Shares in HSBC have risen 25 per cent in the past year, while StanChart’s are up 8 per cent. But those rises have been eclipsed by Lloyds Banking Group, whose shares have soared 130 per cent in the past 12 months, as well as Barclays and Royal Bank of Scotland, which are both up about 50 per cent over the same period.

Analysts are braced for worse to come in Asian markets, as lending volumes are expected to fall on the back of rapidly rising bad debts.

“It is the very beginning of the downcycle in emerging markets for HSBC and StanChart, and the opposite for the rest of the UK banks,” said Chirantan Barua, an analyst at Bernstein Research. “If you screen the world for where the bubbles are, at the moment you land up in Asia.”

Two years ago, lending was booming across much of Asia and both HSBC and StanChart were investing in their businesses to take advantage of the strong growth.

The recent softening in the region is largely due to a decline in China, where the economy is reducing its reliance on exports and moving towards a lower – but expectedly more sustainable – growth pattern, fuelled by domestic consumption. There have also been a number of one-off events – StanChart’s problems in Korea,where banks have been forced to take losses on consumer loans, for example.

Mr Barua believes conditions will deteriorate further in Asia as the US recovers. Rising interest rates and a tightening monetary policy in the US would reduce the incentive for investors to seek out higher returns in Hong Kong and other faster-growing economies, he says.

HSBC would have a “natural hedge” against that, as its US business would likely be performing better if the economy was sufficiently recovered for interest rates to rise. But analysts believe StanChart, which derives less than 20 per cent of profits from western economies, would be more vulnerable.

“When you have naked exposure, you get the best of times and the worst of times,” says Mr Barua.

StanChart admitted earlier this month that it was no longer targeting double digit revenue growth this year. Its year-on-year revenue growth in the first six months was less than 5 per cent for the first time in 10 years.

However, Peter Sands, its chief executive, has argued that the bank’s exposure to emerging markets is sufficiently diversified.

“At a time when market sentiment towards emerging markets seems remarkably correlated, it is worth remembering that these economies don’t all rise and fall simultaneously,” he said, announcing the bank’s first-half results.

Hong Kong, for example, provided more than $1bn of pre-tax profit for StanChart in the first half, as trade flows improved, while India and Africa also performed well.

Another setback for HSBC has been Latin America, where an increase in provisions for bad debts has hit profits in Brazil and Mexico. But analysts are less concerned about the prospects for Latin America, where they say banks have already taken bigger hits against souring loans than they have in Asia.

Stuart Gulliver, chief executive of HSBC, has downplayed weaker emerging markets growth, saying that the bank remains well-positioned to benefit from long-term trends.

But with analysts expecting Lloyds to generate a higher return on equity than HSBC in 2014 for the first time since the financial crisis, the differential between the UK banks is fading.