Standard Chartered(LSE: STAN) andHSBC(LSE: HSBA) have been leading the FTSE 100 lower over the past three months. Since the end of April, HSBCs shares have fallen 12.8%, and Standard has declined 12.4%. Over the same period, the FTSE 100 has fallen 7.3%.
Investors have been avoiding these two Asia-focused banks as they are highly exposed to China and the commodity markets. For example,Standard is one of the biggest lenders to Asian resource companies, which are struggling as commodity prices plummet to 13-year lows.
Cash call on the cards?
Around 20% of Standards total loan book is linked to the commodity market. In dollar terms, 20% of Standards loan book is around $61bn, which is roughly 140% of the bankstangible net worth.
So, its pretty easy to see that the commodity slump will hit Standard the question is, how big will the banks losses become?
Unfortunately, theres no simple answer to this question. Back during January, one set of analysts estimated that around 7% of Standards commodity loan book would turn bad, leaving the bank with $4.3bn in non-performing loans.
These toxic loans are already starting to show through. Standards total value of impairment charges or bad debts doubled during the second half of last year. Whats more, Standards Indian arm now hasthe second-largest gross non-performing asset ratio among Indian banks.
As all of the above figures were reported before the commodity sell-off intensified, its probable that the number of non-performing commodity loans on Standards balance sheet has increased dramatically during the past few months.
According to analysts atMizuho Securities Asia, Standard may need to raise as much as $10 billion from investors in the near future tocreate a buffer for loan losses andrecapitaliseits balance sheet.
Like Standard, HSBC has been falling as investors fret about the banks exposure to Asian markets.
Specifically, investors are afraid of the prospect of a hard landing for the Chinese economy and the knock-on effects this will have on the rest of the region. Its almost certain that the effects from a hard landing for the Chinese economy will spill over into Hong Kong, where HSBC has substantial operations.
Based on these concerns, analysts have been consistently downgrading HSBCs growth outlook. This time last year analysts were expecting HSBC to report earnings per share of $1.00, around 64p for full-year 2015. Now, earnings of $0.82 or 54p per share are expected, a 16% reduction.
Nevertheless, for the time being analysts expect HSBCs dividend payout to be maintained at its present level. The bank currently supports a dividend yield of 5.7% and the City expects this payout to increase by 2% over the next two years.
The bottom line
So overall, Im avoiding HSBC and Standard due to theirexposure to the erraticChinese economy and commodity markets.
But don’t just take my word for it, I strongly suggest that you do your own research before making a trading decision.
To help you assess the two banks, our top analysts have put togetherthis new report.
The report guidesyou through the seven key steps all successful investors follow, helping you to assess your own personal risk profile and make more informed trading decisions. What’s more, the report is designed to help you accomplish your goals with just 20 minutes of work a month.
Click hereto check out the report—it’s completely free and comeswith nofurther obligation.