WSJ
Standard Chartered Suffers Emerging Problems
U.K. Lender's Bias to the Developing World Finds It Out of Favor
When you fall out of fashion, it's hard to get back. Standard Chartered proved a good bet for investors after the financial crisis: Its heavy exposure to emerging markets enabled it to outperform its more Western-focused peers.
That has all changed this year. A trading update that predicted flat earnings for Standard Chartered in 2013 after a decade of growth prompted its shares to drop 6.5% Wednesday. That prolongs a miserable 2013 for the stock, which has fallen 15%. Investors have instead flocked to institutions that do business closer to home, such as U.K.-focused Lloyds Banking Group, whose shares are up 60% this year.
Standard Chartered may struggle to lure investors back.
That's partly because the bank hasn't proven immune from the issues facing its peers. In particular, its performance in fixed-income trading has suffered in directionless markets. That will help keep earnings from its wholesale bank, around 80% of its first-half profit, flat year-over-year.
But Standard Chartered is also finding that emerging markets are, well, emerging in different ways. This year its main problems have come in South Korea, where earnings in its retail bank are likely to fall 15%. The bank says it is restructuring its operations there, closing branches and reducing its unsecured lending. But 2014 looks like being another tricky year in a market where Standard Chartered has around 10% of its assets.
The question is whether Standard Chartered can avoid similar hiccups in the other markets in which it operates. Its downbeat update on Wednesday surprised analysts, who had received little warning of its worsening outlook. The bank does, though, remain confident its key markets, from India to Indonesia, offer strong long-term growth potential.
But competition is rising. New local entrants are challenging Standard Chartered in traditional areas of strength such as trade finance, where its profit margin is down 18% this year. Such trends will make it hard for Standard Chartered to achieve its medium-term goal of a midteens return on equity, in itself not much above a cost of equity of roughly 10% to 11%.
For a bank still trading at 1.5 times tangible book value, a roughly 40% premium to European banks, based on Berenberg Bank estimates, that looks a meager prospect.
Write to Andrew Peaple at andrew.peaple@wsj.com
