Will emerging markets submerge StanChart?

FT.com

Standard Chartered his week flew 20 of its top shareholders to Beijing for a three-day immersion into the intricacies of the bank's operations in China and elsewhere.

The roadshow was an attempt to kick-start a share price that, despite a year of continued profit growth that leaves most rivals in the shade, has stagnated. The stock is up less than 4 per cent compared with the 20-30 per cent gains racked up by global rivals Citigroup and HSBC.

Though part of that underperformance stems from other banks' stock rebounds after longstanding weakness, sentiment towards StanChart and its chief executive Peter Sands has been muted in recent months by homegrown factors.

Still hanging over the bank is a multi-agency regulatory inquiry in the US over StanChart's breach of Iranian sanctions. Already fined $340 million by one regulator, the bank is expected to settle with the others for a sum that in aggregate could match the first one by the end of the year.

A second cause for concern has been slowing emerging markets growth at a macroeconomic level – the lifeblood of a bank with a three-way focus on Asia, the Middle East and Africa. "We are seeing for the first time some signs of Asia really beginning to slow,” finance director Richard Meddings said last month.

The question now is: after nine years of record profits and an unscathed record through the financial crisis, is the fairytale over?

The group's message in Beijing has been in part an attempt to offset the cooling macro picture and convince investors that its ambitious targets remain achievable. It is standing by a pledge to deliver double-digit percentage profit growth, underpinned by an aspiration to double wholesale banking profits to $10bn in four years – a third more than its far bigger rival HSBC earns in its equivalent "global banking and markets” division.

But it is just that kind of growth ambition that concerns some investors.

A central tactic is to steal market share from rivals. One slide in a recent investor presentation showed that the bank with the largest share of a client's "wallet” tends to make four times as much money from that client as the bank with the third-largest share.

Between 2008 and 2011, StanChart's exposure to its top 100 clients around the world grew at a compound annual rate of 23 per cent, while its exposure to the next 600 increased only 10 per cent in the most recent year.

Overall, the wholesale loan book grew at a compound annual rate of 18 per cent in the past five years, close to the level where analysts begin to worry. There has also been an increased focus on lending on an unsecured basis, just as HSBC has signalled a shift towards safer, secured credit.

"They always want to make their clients dependent on them by taking a disproportionate share of their business,” says the head of another foreign bank in Mumbai. "Now, a large part of their business is with the most highly stressed companies here. They are potentially facing serious damage to their franchise.”

Analysts at Barclays recently highlighted concern over StanChart's bad debt trends, evident in a 42 per cent increase in loan impairments in the first half of the year, compared with pre-tax profit growth of only 9 per cent. "A sharp pick-up in non-performing loans and impairments in the first half of 2012, along with concerns about the economic outlook for Asia, have sparked concerns about credit quality in StanChart's wholesale division,” the analysts wrote. "NPL formation is the fastest since 2002.”

India and the United Arab Emirates have been problem areas, with mounting NPLs. But bears see worrying signs elsewhere, too. Indonesia is beginning to reflect the strains of the slowdown in China, to which it exports, and falling prices for many of its commodities. A few weeks ago, StanChart syndicated a $1bn loan for Borneo Lumbung Energi to help finance the purchase of a stake in Bumi. But the deal was not successful and the bank was left with a large portion of the loan. StanChart says since the deal closed, it has steadily sold down its exposure.

The big bets continue. In the first half of 2012, StanChart increased exposure to mining and quarrying 75 per cent year on year to more than $11bn, making that sector by far the largest in its wholesale bank – just at a time when prices were falling. Fund managers say this increase is largely accounted for by exposure to Indonesian interests including groups with close ties to the Bakries, the prominent business family that has been rattled by the economic slowdown.

StanChart's routine riposte is that it is a diversified group, present in 70 markets around the world, and that problems in one or two areas are typically offset by strengths in the rest. In contrast to NPL problems in India and the Middle East, for example, Chinese wholesale bank NPLs are running at less than 0.5 per cent, a quarter below the foreign competition.

The overall balance sheet is less risky than it used to be, executives say, with government debt holdings, rather than riskier commercial lending exposures, accounting for 16 of the top 20 exposures, double the tally a couple of years ago.

Nonetheless, Sands faces a tricky task persuading investors that the shares – which trade on an unusually high multiple of 1.5 times tangible book value – deserve to rise further in the short term. In addition to any operational worries, there is a stock overhang resulting from the revelation last month that top shareholder Temasek is open to offers for its 18 per cent stake – unless, of course, Temasek bosses, among those 20 investors in Beijing this week, can be reconverted into believers.

Copyright the Financial Times 2012.