Theres no other way of putting it:Standard Chartered (LSE: STAN) is struggling. The emerging markets-focused bankhas been seeking ways to restore investor confidence after replacing its long-time CEO Peter Sands in June.
Standards new CEO,Bill Winters, has got straight to work, cutting around 5% of the banks total headcount and targeting cost savings of $1.8bn by 2017. More than $400m of savings have already been achieved this year. Within the past few days, the bank has announced that it is planning to cut a quarter of its senior banking positions.
Troubles run deeper
Unfortunately, Standards troubles run deeper than just a high-cost base. Bill Winters is trying to tackle what he has called a legacy of growth over risk discipline, which was born under the leadership ofPeter Sands. This policy of quantity over quality is now coming back to haunt the bank. A spike in losses on legacy loans is eating away at Standards capital reserves. The bank has already been forced to cut its dividend payout to try save cash.
And figures suggest that Standards financialsituation could be deteriorating almost every day. During the first-half of theyear, Standard was forced to write off $1.7bn worth of loans due to the deterioration in Indian economic growth and continued commodity market weakness.
But since the bank reported this figure, commodity prices have continued to slide, and the number of commodity companies falling into administration has increased. The longer the downturn lasts, the more pressure resource companies will face.
Piling on the pressure
As Ive written before, City analystshave estimated that around 20% of Standards total loan book is linked, directly and indirectly, to the commodity market approximately$61bn in dollar terms, roughly 140% of the banks tangible net worth.
Management has been trying to reduce Standards exposure to commoditiesfor more than a year now, sothe banks actual exposure is likely to be lower than the figure above. Nonetheless, analysts atAustralian bank Macquarie have predicted that Standard could be facingcommodity-related losses $5.9bn during 2015 alone.
These figures exclude any losses on loans made to Chinese customers.
The China issue
British-based banks are the largest foreign lenders in China, with a total of $221.2bn outstanding loans to China. Standard and HSBC are the two of the biggest international lenders operating within the country.During the past year, the number of Standards outstanding loans to entities based in China expanded by 30%.
If Chinas economic situation continues to deteriorate, there could be a surge of bankruptcies across Chinas corporate sector, which is already awash with debt. And when coupled with Standards commodity-related losses, even a relatively minor loss on loans to Chinese customers could tip the company over the edge.
Still, City analysts believe that Standard will tap investors for cash later this year via a multi-billion pound rights issue to try and shore up its balance sheet. Standard saw itscommon equity Tier 1 ratio, a measure of financial strength, fall to 10.7% at the end of last year, from 11.2 a year earlier.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
