StanChart takes bet on management incompetence

October 9, 2015

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

Standard Chartered has to hope that a quarter of its top brass really aren’t very good at their jobs. That is the portion of the UK-listed emerging markets bank’s 4,000 most senior staff who will find themselves surplus to requirements, Reuters reported on Oct. 9. Although StanChart could gain from a big cull, it’s a risky move.

Like John Cryan at Deutsche Bank and Tidjane Thiam at Credit Suisse, StanChart’s Bill Winters has to do something significant. StanChart’s shares have underperformed the European peer group by 30 percentage points this year. The bank’s 7.7 percent return on equity in 2014 was unacceptable, especially as it was earned on a relatively low 10.7 percent Basel III capital ratio.

UK regulatory stress tests could soon lead to demands for more capital. Winters might regret choosing not to sell new shares over the summer, since Credit Suisse is set to jump in first and soak up much of the demand. But he has halved the dividend. The bank’s core Tier 1 ratio should jump to 12.2 percent this year, Bernstein Research reckons.

However, more capital with identical profit means even lower returns – Bernstein expects a 5.3 percent return on equity in 2015. Cutting top brass could provide a significant boost. Assume, modestly, that the 1,000 higher-ups are paid an average of $200,000. If costs fall $200 million, expected pre-tax profit rises by 6.5 percent, and the return on equity by roughly 30 basis points, Breakingviews estimates.

This calculation, however, implies that the directors are merely costs which can disappear without any effect on revenue. Winters may believe that. More likely, though, these executives were adding some value, so the profit boost from their departure will be more modest than expected.

Besides, expensive headcount may not be the bank’s worst problem. Some bearish analysts reckon Winters should completely cover the bank’s $8.7 billion of non-performing loans to better match Asian peers like DBS. That would cost $4 billion, more than StanChart’s expected $3.1 billion of forecast 2015 pre-tax profit.

That number may well be exaggerated. But this bank clearly needs more than just fewer people.

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