Standard Chartered(LSE: STAN) hit a five-year lowthis week, after City analysts warned once again that the bank could be planning a dividend cut, or even rights issue.
These new, dismal forecasts have been driven by the recent sell-off in commodities, as around 20% of Standards total loan bookis linked to the commodity market.
Indeed, Standards has $61bn of loans on its balance sheet linked to commodities, which is roughly 140% of tangible net worth.Analysts expect around 7% of these loans to turn bad, indicating that the bank will have to raise an additional $4.4bn in capital to maintain its financial position.
Emerging market growth
Standard used to be the best bank in London to profit from emerging market growth. Since 2007 the bank has doubled lending to customers, in order to benefit from economic growth across Asia and Africa. However, it seems as if this rapid expansion is coming back to haunt management, now growth is slowing across Asia and defaults are rising.
The total value of impairment charges or bad debts reported by Standard jumped to $539m during the third quarter, more than double the figure reported for the same period a year ago. Total impairments for the year to the end of the third quarter hit $1.6bn and operating profit for the quarter fell 16% year on year.
To counter rising losses, the bank is slashing up to 4,000 jobs and closing loss-making businesses but it remains to be seen if this will be enough. Nevertheless, one thing is for sure, Standards period of rapid growth has come to a sudden halt.
As Standard Chartered flounders, theres another emerging market bank that looks to be a better pick:Bank of Georgia(LSE: BGEO)
Room for growth
Georgia is rapidly becomingtheplace to do business.Georgia now ranks eighth on the World Banks Ease of Doing Business Index. Thats better than the UK, which ranks tenth. Additionally, the countrys economy is growing at a solid 6% to 6.5% per annum and this is expected to continue until 2017. Unemployment is high at 14.6%, although this is below the peak unemployment level of 17% reported after the financial crisis.
Still, its clear that Georgia is an attractive region to do business and the Bank of Georgia is seeking to capitalise on this.
The bank is more of a holding company than anything else. Indeed, along with banking assets, the group also ownsa minority interest in Georgian Global Utilities Limited and ahospital business.
Whats more, the group is seeking to make other investments within Georgia. However, according to management the group will only consider investing if the investment has aminimum internal rate of return of 20% per annum, with the possibility of a full, or partial exit within a maximum of six years.
This is all part of the banks new 420% plan. Simply put, this plan outlines managements strategy to achieve a consistent return on equity of 20% per annum, a tier one capital ratio of at least 20%, a 20% per annum growth in customer lending and an IRR of 20% on any investments made.
These targets have helped the bank double net income over the past five years. Over the same periodreturn on risk weighted assets has expanded from 2.3% to 4% and the banks tier one ratio, or financial cushion has increased to 22.7%.
The bottom line
All in all, as Standard struggles with a rising number of defaults across Asia and a lower-than-average capital cushion, the banks future is uncertain. On the other hand, Bank of Georgia is still growing rapidly, the bank is well capitalized and theres room for further growth.
To me, Bank of Georgia seems to be the better pick.
Up to you
Only you can decide if Bank of Georgia is suitable for your portfolio.
If you’re unsure, the Motley Fool is here to help.To help you assess opportunities like Bank of Georgia, 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.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.