StanChart finds buffer against Asia slowdown risk

August 1, 2012

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Standard Chartered has found a new way to exploit an old advantage. Since the 2008 financial crisis, the emerging markets lender has made considerable hay trumpeting strong growth in its Asian markets. But even investors worried about a slowdown can take comfort from the fact that StanChart is taking a bigger slice of the cake.

StanChart’s first half contained something for both bulls and bears. The bank’s supporters can point to nine percent growth in both operating income and pre-tax profit, and the fact that chief executive Peter Sands reaffirmed that he expects double-digit top line growth for 2012. Importantly, operating income growth is outstripping cost growth. And in terms of liquidity and capital – where StanChart’s core Tier 1 ratio is likely to be 11 percent even after including all Basel III reforms – the bank is way ahead of the pack.

Yet detractors will worry about bad debt provisions, which spiked up by 42 percent year-on-year, albeit off a low base. For now, these seem focused on a number of wholesale clients in the United Arab Emirates and India, and from StanChart’s decision to gradually expand the amount of riskier unsecured consumer lending it does from 17 percent of its loan book back towards the pre-crisis level of 20 percent. Given the uncertain economic climate, how and when to take more risk remains a critical judgement call for Sands and the board.

Yet even if economic growth does slow, it has a fallback. As harassed euro zone banks retreat to domestic markets, StanChart and its UK peer HSBC are stepping in. The British duo accounted for almost three-quarters of the three percent uptick in European loans to Asia outside Japan between the start of the year and April, according to Morgan Stanley. Helping Western firms sell their wares in Asia allowed StanChart to boost wholesale revenue in the Americas, the United Kingdom and Europe by 25 percent year-on-year.

StanChart should be wary of becoming overly dependent on less predictable wholesale banking activities. But investors will be cheered that the bank remains capable of finding itself in the right place at the right time.

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