Standard Chartered is a London-listed bank but the vast majority of its profits are derived from emerging markets. A relatively small exposure to Europe shielded the share price during the eurozone debt crisis but slowdown in Asia is taking its toll. The pro-democracy protests in Hong Kong forced the bank to close some of its offices during the turmoil. However, the financial impact of the unrest is not just confined to operational losses, it also deters investment and encourages capital flight out of the region.
In August, the finance house reported a 20% decline in first-half profits to $3.3 billion. This had little impact on the share price as traders were already warned in June that the interim profits would be ‘disappointing’. Income from its foreign exchange and interest rate swap business declined by 24% and 33% respectively — all major banks have been blaming tighter regulation and lower market volatility for drops in trading revenues. Standard Chartered’s head of financial markets, Lenny Feder, began a 12-month sabbatical in June and the search for a permanent replacement continues.
Banking regulation in South Korea has increased by nearly 20% in the past five years. A less competitive environment is partially the reason the bank wrote down $1 billion in the country recently, adding that there is ‘no quick fix’ in sight.
Standard Chartered hit by $300 million fine
The finance house was hit with a $300 million fine by the New York regulator for lax anti-money laundering controls; this echoes the $667 million fine that was imposed on the bank by the same body in 2012. The fines were in relation to US dollar-denominated payments on behalf of clients that the US deemed to be high risk. As a result, Standard Chartered’s US dollar clearing service will be monitored by the US watchdog for the next two years.
Equity analysts are broadly bullish on the stock, with 19 ratings as buys, 11 as holds and ten as sell recommendations. It is cause for concern that 25% of the ratings are sells, considering the average share price target is £13.04.
HSBC is another british bank with a large exposure to Asia and only 16% of its ratings are sells. Year-to-date the bank’s share price has lost 17% while in comparison HSBC lost only 4.1% over the same period.
Looking beyond the third-quarter update, the Federal Reserve will wind down its quantitative easing policy at the end of October. It is possible that may spark capital flight out of emerging markets which would only add to Standard Chartered’s woes. Last year was the first in a decade that the bank posted a drop in annual profits. Considering this year’s first-half profits fell by 20%, traders will be keen to find out the full-year outlook.
The share price has been in a downward trend since March 2013. and during the Hong Kong protests the stock dropped to a five-year low of £10.38. It has made a small recovery since, but if the outlook is still negative for the full-year the stock may drop below £10. Only a reassurance of a recovery could push the stock above £12 to the pre-profit warning level.