It’s been a rough year for Standard Chartered (LSE: STAN) and Santander’s (LSE: BNC) shareholders. Year-to-date both banks have seen the value of their shares fall by around 40% excluding dividends. Shares in Standard are down by 50% from the year’s high-water mark.
Uncertainty ahead
2016 may prove to be yet another rough year for Santander. The bank is now facing severe headwinds in its two largest markets. Brazil has fallen into a recession and unemployment is rising, while Spain has been thrown into political turmoil after last weekend’s elections.
And to see how dismal the Santander outlook has now become, all you need to do is take a look at the City’s earnings forecasts. Specifically, back in October City analysts were expecting Santander to report earnings growth of 7%-8% per annum for the next three years. Three months later, analysts are expecting growth of 3% per annum for the next few years and forecasts could be reduced further if the economic situation in Brazil and Spain deteriorates.
Stormy waters ahead
Unfortunately after a terrible 2015, Standard could also be facing yet another rough 12 months. Indeed, all of Standard’s troubles over the past few years can be traced to rising levels of bad debt, falling profit margins and weakening Asian currencies.
What’s more, the group’s exposure to the commodity sector has only added to its troubles. As commodity prices fall, loans that the bank has helped commodity producers finance are quickly turning bad. During the first half of the year, Standard was forced to write off $1.7bn worth of loans due to the deterioration in Indian economic growth and continued commodity market weakness. Since the bank reported this figure, the number of commodity companies falling into administration has only increased.
As a result, Standard is now targeting cost savings of $1.8bn by 2017. Five percent of Standard’s global workforce is set to go as part of this restructuring.
Outside factors will continue to weigh on Standard for the time being. The biggest of these external influences is the US Federal Reserve’s decision to hike interest rates for the first time since the financial crisis. The central bank is planning to increase its key lending rate by 0.25% per quarter during 2016, which could be bad news for emerging markets.
Many Asian companies took advantage of low-interest rates to go on a borrowing binge and a significant amount of the financing has been done in dollars, not the home currency of the company doing the borrowing. Now, with Asian economies slowing, interest rates ticking higher and the dollar becoming stronger, many companies are struggling to meet dollar-denominated borrowing costs. So it looks as if 2016 is going to be yet another turbulent year for Standard Chartered.
