Standard Chartered Suffers Emerging Problems

Standard Chartered Suffers Emerging Problems

U.K. Lender’s Bias to the Developing World Finds It Out of Favor

ANDREW PEAPLE

Updated Dec. 4, 2013 1:19 p.m. ET

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When you fall out of fashion, it’s hard to get back. Standard Chartered proved a good bet for investors after the financial crisis: Its heavy exposure to emerging markets enabled it to outperform its more Western-focused peers.That has all changed this year. A trading update that predicted flat earnings for Standard Chartered in 2013 after a decade of growth prompted its shares to drop 6.5% Wednesday. That prolongs a miserable 2013 for the stock, which has fallen 15%. Investors have instead flocked to institutions that do business closer to home, such as U.K.-focusedLloyds Banking Group

LLOY.LN -1.59% whose shares are up 60% this year.

Standard Chartered may struggle to lure investors back.

 

That’s partly because the bank hasn’t proven immune from the issues facing its peers. In particular, its performance in fixed-income trading has suffered in directionless markets. That will help keep earnings from its wholesale bank, around 80% of its first-half profit, flat year-over-year.

But Standard Chartered is also finding that emerging markets are, well, emerging in different ways. This year its main problems have come in South Korea, where earnings in its retail bank are likely to fall 15%. The bank says it is restructuring its operations there, closing branches and reducing its unsecured lending. But 2014 looks like being another tricky year in a market where Standard Chartered has around 10% of its assets.

The question is whether Standard Chartered can avoid similar hiccups in the other markets in which it operates. Its downbeat update on Wednesday surprised analysts, who had received little warning of its worsening outlook. The bank does, though, remain confident its key markets, from India to Indonesia, offer strong long-term growth potential.

But competition is rising. New local entrants are challenging Standard Chartered in traditional areas of strength such as trade finance, where its profit margin is down 18% this year. Such trends will make it hard for Standard Chartered to achieve its medium-term goal of a midteens return on equity, in itself not much above a cost of equity of roughly 10% to 11%.

For a bank still trading at 1.5 times tangible book value, a roughly 40% premium to European banks, based on Berenberg Bank estimates, that looks a meager prospect.

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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