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The Risks Of Investing In Standard Chartered PLC

Today I am highlighting what you need to know before investing in Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US).

Chinese dragon out of puff?

Given the bank’s significant exposure to emerging markets, the possibility of rapid deceleration in the Chinese economy could significantly hamper Standard Chartered’s earnings potential. The bank generates 65% of operating profits from the Chinese dependent regions of Asia Pacific, and more than a quarter from Hong Kong alone.

In May the OECD took the hatchet to its Chinese growth projections for 2014, downscaling its previous 8.2% GDP growth forecast to 7.4% and which marks a meaty slowdown from the 7.7% expansion seen in 2013. With the group warning of significant banking and property crises in the country, not to mention overcapacity in key industries, the Chinese economy faces a multitude of risks which could send GDP growth spiralling even lower this year and beyond.

Problems persist further afield

As well, Standard Chartered is feeling the effects of financial cooling in other critical end markets, a point underlined by the firm’s latest Standard Charteredprofit warning announced last month. Operating profit is expected to sink by around 20% during January-June from the corresponding period last year, the firm noted, as problems in Korea, India and Singapore persist.

Not only does the bank face the effect of dulling economic activity in Asia, but the implementation of harsh banking regulations in the region — a factor which contributed to the $1bn writedown of the value of its Korean operations last year — also threatens to derail the bottom line.

Share issuance in the offing?

Standard Chartered has been the subject of frenzied speculation in recent months that its fragile capital pile may force it into a rights issue. Although talk has since died down considerably, the frankly underwhelming extent of the firm’s reserves — particularly compared with many of its listed rivals — could prompt a fresh issuance sooner rather than later.

The company’s Common Equity Tier 1 (CET1) ratio registered at 11.2% last year, and broker Investec expects this to fall to 10.8% this year before returning to 11.2% in 2015 and 11.4% in 2016. But given the firm’s worrisome revenues outlook, even these modest advances could come under the kibosh.

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Royston Wild has no position in any shares mentioned. The Motley Fool owns shares of Standard Chartered.