As emerging markets sold off over the spring and summer on fears that Fed tapering might prick an emerging market asset bubble that liquidity from developed markets had inflated, shares in Standard Chartered underperformed its domestic benchmark badly. The stock price of what is often categorized as a bank for the Bric countries, even though it’s not big in Russia or Brazil, peaked at £18.30 at the end of February and had fallen by almost 25% to just under £14 in June.
Analysts that rate the bank highly, such as Ian Gordon at Investec, were tearing their hair out at a perceived injustice that persisted even after the bank reported strong earnings for the first half of the year, ahead of consensus estimates, at a time when most other UK banks were missing consensus.
"We regard the basis upon which Standard Chartered’s spring de-rating was justified – a generic argument around emerging market risk – as utterly spurious," Gordon said. He noted that loan impairments have been concentrated just in India and the Middle East and have amounted to a mere $224 million or 27 basis points of average customer loans. "We believe it is entirely reasonable to expect wholesale banking impairments to remain largely inconsequential relative to the revenue-led profitability of the group."
Now that the immediate fear of tapering has receded, what is the outlook for the bank?
Its chief executive, Peter Sands, has conceded that whatever the shifts in sentiment – which categorized emerging markets as good throughout most of the five years since the financial crisis and developed markets as bad, but that then suddenly switched round during the spring and summer – banks focused on Asia must not be complacent. Sands warns: "Asia’s economic growth is easing off, and policymakers are rightly taking aim at potential credit bubbles in property lending and consumer borrowing. Basle III will have more impact on Asian banks than many suppose and, as the US begins to bounce back, emerging markets are no longer the unquestioned favourite of the capital markets."
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| Mike Rees, head of the wholesale business at Standard Chartered |
When Euromoney catches up with Mike Rees, head of the wholesale business at Standard Chartered, which accounts for over 60% of group revenues, he shares some of Gordon’s frustration. "Since the financial crisis we have lived under the assumption that there is always a crisis somewhere. In recent months we saw a shift in sentiment, with financial markets in the developed world going from strength to strength and much of that negativity switching to emerging markets. Investors are suddenly saying the Brics are not doing very well. But that is only a shift in sentiment, not in the economic fundamentals. The reality is that while Brazil has its issues, Russia never has done particularly well and India has been in a three-year political malaise which recent RBI [central bank] actions have merely drawn attention to. In fact, the world’s macro fundamentals are in good shape, although still a little fragile. We think many still underestimate the strength of US growth, but that spreads have got a little irrational in much of Europe. Meanwhile China’s third plenum next month, which sets policy for the next 10 years and completes leadership change, will be a seminal event. And next year we may well all be talking about the US and China as twin engines of world growth."
Standard Chartered has enjoyed low loan impairments because the biggest components of its wholesale banking division are transaction banking and typically short-dated trade finance lending. In trade finance it has maintained share and grown volumes by 18% in the first half of 2013, even as the headline prices of many traded commodities fell.
Rees says that he is worried about the ability of some commodity-trading companies to adjust their business models, which thrived amid rising commodity prices, to a world of declining ones. As a trade finance lender, he has seen margins decline partly as a consequence of liquidity injected into developed world banking systems. "US banks have lent a lot in dollars to local and regional banks in emerging markets that have in turn recycled that funding into trade finance, so lowering margins. But I think we may see a bounce in trade finance margins next year." He adds: "We have seen the same phenomenon impacting syndicated-loan margins, which are 30% down this year, often through large bilateral loans from big regional banks in turn funding from US lenders. But we’ve still picked up market share in syndicated loans."
Is that a smart thing to do if loans are being extended at below market rates? Rees says: "Our aim is to be a top-three bank for our clients and we are focusing on our relevance to them and depth of relationship. We look at our balance sheet as something of a warehouse for assets to be put through, but we will certainly keep some skin in the game, retaining perhaps 10% of syndicated loans. If we sell everything, then the owners of the paper have no line of sight to the underlying credit and we help maintain that for them and we have good insights because we often handle borrowers’ payments and transaction banking."
Standard Chartered continues to expand its emerging markets franchise, with a focus on energy markets. Later this year it will open two branches in Iraq, with a third due next year. It has negotiated a full joint venture in Angola with a local insurer, satisfying regulations that big dollar payments for oil and gas go through a local entity. It is talking to regulators about entering Mozambique. It already has a rep office in Myanmar. "Why? Because our clients are doing business in these countries," says Rees.
