Shares in Standard Chartered (LSE: STAN) fell heavily this morning after the group hit investors with a surprise third-quarter loss and announced plans for a 3.3bn rights issue.
The bank reported a pre-tax loss of $140m for the third quarter of the year, missing analysts forecasts for an $898m profit. Its the first quarterly loss reported by Standard Chartered for 15 years the last time was during the Asian financial crisis in the late 1990s.
The losses are mainly the result of a $1.2bn provision for bad debts, which the bank says are largely the result of adverse trends in India and commodities.
Standard Chartered also said that no final dividend will be paid this year.
Whats going to happen?
Standard Chartereds decision to raise fresh capital through a rights issue isnt a big surprise. Indeed, at 3.3bn ($5.1bn), the banks rights issue is smaller than some analysts believed might be necessary.
The new shares will be issued at 465p, which is a 34.8% discount to Mondays closing share price. Shareholders will be entitled to buy two new shares for every seven they currently own. The bank believes that the fresh cash will be enough to increase its common equity tier 1 ratio (CET1), a key measure of regulatory strength, from 11.5% to a healthier 13.1%.
Alongside the rights issue, Standard Chartereds new chief executive, Bill Winters, is accelerating his plans to restructure the bank.
Mr Winters is targeting an additional $2.9bn of cost savings between now and 2018, and intends to cut 15,000 jobs out of a total of 90,000. The bank will focus more on retail banking and reduce its exposure to less profitable and more capital-intensive corporate and institutional banking business.
These restructuring changes are expected to cost $3bn, with some of the cost being met with cash from the rights issue. Mr Winters hopes that the result will be to lift Standard Chartereds return on equity from its current value of 5.4% to 8% by 2018.
Buy, sell or hold?
Is Standard Chartered a buy, sell or a hold after todays news?
Its hard to say. Theres a risk that Standard Chartered could become a value trap a stock that appears cheap but continues to perform poorly. The banks discount to tangible book value has been a key attraction to value investors, but this discount will be reduced as a result of the dilution caused by the rights issue.
Another weakness is that this years final dividend has been cancelled. I suspect we wont know whether the payout will be reinstated next year for at least another six months.
Finally, given todays surprise loss, Standard Chartereds earnings outlook for the current year seems uncertain. I expect City forecasts to be sharply downgraded after todays news.
On the other hand, Standard Chartered doesnt appear to have any unmanageable problems.
New brooms sweep clean. Mr Winters may have decided to dump as much bad news on the market as possible today, in the hope that future results will make his performance seem more impressive.
Personally, I suspect we are close to the bottom for Standard Chartered shares. As a shareholder myself, I dont think now is a sensible time to sell. I will be keeping hold of my own shares.
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Roland Head owns shares of Standard Chartered. 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.
