If you haven’t done so already, it could be time to ditch your holdings of Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US).
The emerging market bank was once a darling of investors, trading at a premium to its peers. It had a ‘good’ financial crisis, it moved early to restore its balance sheet with a rights issue in 2010, and it was a profitable play on growth in Asia.
But it seems the bank lost its poise in 2012 when it was accused of breaking US sanctions against Iran, for which it accepted a $667m fine. There has been a litany of bad news ever since: aggressive expansion in Korean consumer finance led to a big write-down, bad debts rose, a messy reorganisation put all business units under deputy CEO Mike Rees and saw the departure of respected finance director Richard Meddling, and there have been rumblings of another rights issue.
Then last month the bank issued a profits warning alongside a 20% drop in first half results. Since the beginning of 2012 its shares have underperformed HSBC (LSE: HSBA) (NYSE: HSBC.US) by 40%.
In reverse
This week, Standard’s shares wobbled after extensive reporting of the bank’s travails by the Financial Times. Based on interviews with “dozens” of analysts, investors, competitors and insiders, the FT thinks the bank’s growth strategy has slammed into reverse as its seeks to conserve cash. The accusation is that growth was bought at the cost of lower credit quality and lower provisioning for bad debts than its rivals. Now, the bank is losing competitive position. It has dropped from 8th place to 21st in Asian project finance and 16th to 23rd in trade finance, both core businesses.
That raises the risk of a further cash call or a cut to the dividend — at least one broker, Jeffreys, thinks the payout could be at risk. True, Standard Chartered still has a return on equity of over 10%, well ahead of many European banks, but that lead would evaporate if the bank was forced to make large provisions.
The FT has also led speculation that Peter Sands’ job is on the line – strenuously denied by the company.
Safer bet
For investors looking for a play on Asian economies, HSBC looks the safer bet. It has more globally diversified earnings, and after the debacle of its investment into US sub-prime lending a chastened management has a conservative attitude to risk, concentrating on costs cutting rather than expansion. Yielding 5%, the shares are a great income stock.
