While tumbling economies from Brazil to South Africa haven’t helped, Standard Chartered’s (LSE: STAN) recent poor performance is due largely to the high volume of low quality loans the bank offered during the Commodity Supercycle.
Now that this Chinese-boom is retreating, StanChart has been left holding a slew of bad loans. The past year saw a 70% rise in non-performing loans (NPLs), with a total of $14.1bn of loans now expected to bring in pennies on the dollar, if anything.
Impairments related to NPLs and high restructuring costs left the bank with a $1.5bn pre-tax loss in 2015 and necessitated an 83% cut to dividends to retain capital. Writedowns linked to these loans will continue as macroeconomic conditions weaken further in developing countries and commodities companies. Those countries and companies account for 8% of StanChart’s loans and they increasingly face the spectre of default.
Even if new CEO Bill Winters can clean up the mess left by the previous management team, the long-term outlook for shares may still be bleak. Although emerging markets will rebound eventually, the bank’s sprawling global operations make earnings highly cyclical and very volatile.
Making money from developing markets
Unilever (LSE: ULVR) has proven that not all companies are finding emerging markets a weakness. The consumer goods giant brought in 58% of 2015 revenue from emerging markets and saw sales grow 7.1% year-on-year. Developing economies now account for 12 of its 20 largest markets, making up for stagnation in developed countries.
The company hasn’t rested on its laurels and has been cutting costs even as the top line grew 10% last year. Core operating margins rose to 14.8% for the group and helped provide a staggering €4.8bn of free cash flow. This extra cash from operations is why the company can provide shareholders with both growth and significant income, with dividends yielding 3.2% last year.
In my eyes, Unilever’s ability to increase emerging market sales significantly in the midst of a challenging macroeconomic environment certainly sets the stage for continued growth as these economies rebound.
Like Unilever, insurance giant Prudential (LSE: PRU) bucked the trend in 2015 and actually increased profits from emerging markets. Profits in Asia, with Hong Kong and China being the largest contributors, grew a full 17% year-on-year, despite the dramatic doomsday headlines coming out of the world’s second largest economy.
The majority of this growth in China came from increased life and health insurance sales, a critical source of stable revenue year after year. This trend looks set to continue as the growing Chinese middle class demands more and more insurance products. Furthermore, despite the turbulent financial markets across Asia, the group’s asset management arm increased net inflows by 11% to £6bn.
Continued growth in China, as well as in Prudential’s other main markets the US and UK, sent operating profits up a full 26% in 2015. This growth allowed for a special 10p dividend to be paid, bringing full-year yields up to 3.6%. Prudential’s increasing penetration in mainland China and proven ability to extract profits even in challenging economic conditions lead me to believe it will continue to find emerging markets a strength in the coming years.