How deep is the hole? StanChart surprises with loss, job cuts
Bank to cut 15,000 jobs in 3 years as it embarks on strategy to restructure US$100 billion of assets
Standard Chartered investors were not expecting the bank to post a loss of US$139 million for the third quarter of the year. Nor did they foresee it launching a new strategy of restructuring or slash nearly a third of its risk-weighted assets and cut 15,000 jobs over the next three years.
The bank did both on Tuesday while also confirming a long-awaited rights issuance of US$5.1 billion to shore up core regulatory capital.
The latest strategy under the direction of new chief executive Bill Winters will set out to save US$2.9 billion through 2018 as the bank drops risky clients and wrangles with poorly performing businesses and markets.
It will also cut about 17 per cent of its 87,000-strong global workforce although much of the reduction in headcount would come from natural attrition.
The new strategy was not expected until early December, after the Bank of England performs a stress test for the entire banking system.
Investors’ fears seemed to be realised on Tuesday as the bank reported an 18 per cent drop in income.
Whether it was the dive into the red, low-return targets set by Winters or the cancelling of the full-year dividend, investors sold off the bank’s shares in Hong Kong and London. Shares were down by more than 10 per cent to 639.6 pence at noon in London. In Hong Kong, the stock closed down 3 per cent at HK$82.65.
Winter’s plan will seek to wring higher yields from, or simply cut, US$100 billion in assets that today produce between zero and 5 per cent return on equity, a dismal rate compared to peers. Just two years ago, former chief Peter Sands attempted a major overhaul as well.
Among the assets on the chopping block, the bank will liquidate US$20 billion in exposures that it has deemed too risky, some of which are large loans to one borrower, presenting high risk in the case of a default.
“The big uncertainty is the deterioration of assets over the next quarters,” said David Grinsztajn, an analyst at AlphaValue in Paris. Impairments on loans at the bank jumped to US$1.2 billion in the third quarter from US$536 million a year ago.
Another US$50 billion in assets exposed to client relationships in investment and commercial banking will be restructured or simply exited, suggesting that the bank could be on the verge of dropping many clients that cost too much to bank after factoring in regulatory expenses.
Out of Standard Chartered’s total US320 billion in risk-weighted assets, it will also restructure and reposition US$30 billion in Korea and Indonesia while exiting US$5 billion in periphery businesses.
Some of those cuts have already been announced. Last week, the bank said it was getting rid of its equities derivative business after shuttering institutional cash equities in January. Since the start of the year, the bank has closed 20 businesses.
For analysts, the biggest disappointment of the day may have been the bank’s near-term target for return on equity.
Standard Chartered’s plan will aim for a 10 per cent return on equity although management declined to give itself a deadline for hitting what was by most accounts a low target.
In a presentation to analysts, a slide showed the bank reaching an 8 per cent return by 2018 and 10 per cent by 2020, though the dates were not defined as deadlines.
Asked why the bank was shooting for a return far lower than peers over a long period of time, Winters said this was meant “to reflect the depth of the hole we find ourselves in today”.
Following the global financial crisis, the bank, under the direction of Sands, pushed fiercely into high-risk markets in Africa, Asia and the Middle East, only to watch bad loans and regulatory costs tally up for the new customers.
From the perspective of Winters, who took the top job in June, the bank has suffered from a long period of overinvestment in credit-intensive lending while ignoring investments in infrastructure and its core businesses.
The US$5.1 billion rights issue will add two new shares for every seven shares outstanding, or a share-count dilution of about 28 per cent, according to Sanford C Bernstein analyst Chirantan Barua. It would also lift the bank’s common equity tier-1 ratio to about 13.1 per cent, a safe level although the Bank of England had yet to run a stress test that could require a high level.