Could Standard Chartered PLC Fall Another 47% In 2016?

It’s been a rough year for Standard Chartered’s (LSE: STAN) shareholders. Very rough. Year-to-date the bank’s shares have lost nearly half their value, excluding dividends. A deluge of bad news and a rights issue are just two of the many factors that have weighed on the share price over the past 12 months. 

But will the bank’s shares stage a recovery during 2016 or are they set to fall further?

It’s hard to tell. Granted, some of Standard’s declines over the past year can be blamed on the bank’s rights issue. The group undertook a two-for-seven rights issue back in November and £3.3bn was raised by offering shares at 465p. That was a 38% discount to the prevailing market price when the issue was announced. However, there are still many factors that are likely to weigh on Standard’s shares going forward.

Capital problems 

Worryingly, initial figures showed that Standard Chartered’s capital level would have slipped below the required minimum of 6% in the Bank of England’s annual stress test. The test modelled the impact of a Chinese-led economic crisis that caused a £100bn reduction in the bank’s profits over five years, of which £40bn came from fines and other misconduct costs.

Still, Standard received the green light on its balance sheet from the BoE as the group’s drastic restructuring and a $5.1bn rights issue should put it on track to address the shortfall. 

The BoE’s analysis can be trusted and it looks as if Standard has put its balance sheet issues behind it for the time being. So, with much of the share price fall this year driven by concerns about the state of the balance sheet and with the issue behind it, declines should be limited. Or should they?

Standard is highly exposed to the high-risk commodity markets and emerging Asian markets, neither of which have been having a good time recently.

Borrowing binge

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, three pressures that continue to weigh on companies operating in Asia. 

What’s more, as the US Federal Reserve prepares to hike interest rates for the first time since the financial crisis, enough City analysts believe the situation in emerging economies is only going to get worse. 

Many Asian companies took advantage of low-interest rates to go on a borrowing binge and a large amount of the financing was done in dollars, not the home currency of the company doing the borrowing. As a result, with Asian economies slowing, interest rates ticking higher and the dollar becoming stronger, many companies are struggling to meet dollar-denominated borrowing costs. 

The bottom line

Overall, it’s difficult to tell what Standard’s shares will do next year. On one hand, its rights issue has gone a long way to alleviating concerns about the state of its balance sheet. On the other, a strong US dollar and higher interest rates are causing havoc in emerging markets, which is likely to be reflected in Standard’s earnings. 

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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.