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Is Another Rights Issue On The Cards For Standard Chartered PLC?

It’s all change at Standard Chartered (LSE: STAN). Peter Sands, the group’s current chief executive and one of the longest-serving chief executives in British finance, will step down in June after a tumultuous few years. He will be replaced by William T. Winters, the 53-year-old former head of JPMorgan Chase’s investment bank. 

And many analysts believe that this power swap will be the first step on Standard’s road to recovery.

The Asia-focused lender has run into trouble over the past few years. Fines from regulators and unfavourable operating conditions within Korean have stalled growth and damaged the bank’s reputation. 

What’s more, analysts are becoming increasingly worried about Standard’s liquidity position as credit conditions across Asia deteriorate. 

Heading for trouble

Standard’s current management is well aware that the bank’s capital position is not where it should be. For example, at the end of the fourth quarter, Standard’s common equity tier one ratio — financial cushion — stood at 10.7%, which isn’t that bad, but the bank is facing multiple pressures on this front. 

In particular, the quality of the bank’s loans across Asia continue to deteriorate, with the volume of loan impairments rising 1.05% to $795m during the fourth quarter. In total, the value on non-performing loans on the group’s balance sheet hit $7.5bn during the fourth quarter, up around 4% during 2014. 

So to try and boost its capital ratio without asking shareholders for help, Standard has announced a restructuring plan. The bank will try to cut $1.8bn in costs over 3 years — that’s around 17% of group costs — reduce risk weighted assets by $25bn to $35bn — around 8% of risk-weighted assets — and the bank is targeting a higher common equity tier one ratio of 11% to 12%. 

Will take time

Unfortunately, this restructuring will take time, something Standard may not have. Indeed, a large portion of Standard’s commercial loans have been made to commodity-sector companies, which are under considerable pressure at the moment.

Loans to companies active in the energy sector, account for 20% of Standard’s commercial portfolio, metals and mining constitutes another 9% of the loan book.

And if large numbers of these loans start to turn bad at the same time — likely considering the current state of the oil market — Standard could be forced to ask the markets for cash.

No longer an income play

To bolster its balance sheet, City analysts believe that Standard could as the market for as much as $5bn, or £3bn, roughly 12% of the group’s current market capitalisation.

In addition, Standard’s new management could move to cut the bank’s lofty dividend payout, in order to save cash. So, if you brought Standard as an income play, it could be time to sell up and look for other income opportunities elsewhere. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.