Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) is the archetypal emerging markets bank: the bank full of Eastern promise. But with blood spilled recently in a three-way boardroom fight, it looks more like the set of a Spaghetti Western. Let’s take a look at the good, the bad and the ugly.
The good
What was good about StanChart still is good. It has a great franchise in Asia, Africa and the Middle East. Though Asia Pacific provides the bulk of the profits, India and Africa are significant contributors and form the platform for the next phase of growth.
The bank was looking at doubling African revenues within four to five years, and is investing on the continent to exploit growing investment and trade links between Africa and Asia.
The bank’s management used to be well regarded. Double-act CEO Peter Sands and finance director Richard Meddings not only steered it safely through the financial crisis, but were drafted in by the Government to fix the UK’s broken domestic banking system.
The bad
Of course, it’s had its fair share of problems. 2012 saw the bank castigated in the US over apparent Iran sanctions-busting. That cost it a $340m fine, a trashed reputation and a badly-hit share price.
2013 saw a further 15% share price decline. Slowing growth in its core Asia Pacific markets came to a head with a profits warning. The bank suffered a $1bn write-off at its over-sized Korean consumer finance arm. And a surprise move by the Prudential Regulatory Authority to strip Richard Meddings of oversight of the risk function unnerved investors.
These are unfortunate developments, but the course of business does not run smooth and none of them fundamentally discredits the investment case.
The ugly
But if 2013 was bad, 2014 has been ugly. Richard Meddings and consumer finance boss Steve Bertamini are leaving following a reorganisation that will fold consumer banking into the wholesale arm that already generates 70% of profits. What makes it look more like a palace coup than a logical restructuring is that the announcement came out-of-the-blue, two full months after StanChart updated its strategy. Normally strategy and management structure go hand-in-hand.
The reorganisation leaves newly-promoted deputy CEO Mike Rees running all of the income-generating businesses. It begs the question what Mr Sands will do. The uncertainty led some analysts to speculate about a rights issue, despite StanChart’s strong capital ratios.
Dilemma
It presents shareholders with a dilemma. On the one hand, StanChart is now looking cheap and attractive on paper. On the other, poor communication and suspicions of self-serving management make it look accident-prone. And accidents, like profit warnings, often happen in threes. I’m more inclined to cut losses than double up.
