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The grim realities facing Standard Chartered shares

StanChart has lost 34 per cent of its value in 2015.

Standard Chartered has been the most spectacular international banking meltdown since the failure of Lehman Brothers in September 2008. I had recommended a strategic short on StanChart shares at 1,500 pence since I thought the bank's foray into global investment banking was a flawed strategy, given its DNA as a stodgy old British colonial bank with a penchant for falling for banking snake pits as diverse as Mocatta Metals, Harshad Mehta/Big Bull, South African mining loans, finance for Singapore metals traders, Indian oligarchs, South Korean chaebols, etc, at a time when China's hard landing was going to devastate South-east Asia, Africa and the Gulf. StanChart's loan underwriting and risk management culture was a disaster, as evidenced by $4 billion in provisions and successive earnings misses since 2014. Temasek, the Singapore sovereign wealth fund that is the bank's largest shareholder, reportedly forced out CEO Peter Sands and approved ex-JPMorgan investment banking head Bill Winters as the new CEO. Yet the share price collapsed 70 per cent amid one of history's greatest bank bull markets. I have now more ex-StanChart friends in the bank's London and Dubai trading pits.
Winters' capital raise and restructuring of one-third of the group's risk-weighted assets was inevitable, if highly dilutive to shareholders. Thousands of managing directors and exec directors, let alone lower-ranked managers, have been sacked worldwide. The balance sheet of the bank will continue to shrink in the next three years and Winters is realistic enough to drop his return-on-equity target to only eight per cent by 2018, far below the bank's cost of capital, which City bank analysts estimate in the 11-12 per cent range. StanChart was mired in an ugly Iran sanctions violations spat with Uncle Sam. Will this capital raise be the last to dilute shareholders? I doubt it as the bank will take massive losses in China, commodities, Asian consumer debt and even restructuring costs that will hit earnings. Hong Kong and Singapore (25 per cent of risk-weighted assets) face significant property market declines in 2016, as does India and the GCC. To add insult to injury, China's hard landing means even world trade is shrinking, hitting the bank's core trade finance franchise. The bank will face significant loan losses in the Middle East, Africa, India, China, at least 40 per cent of its global loan book.
The new strategy attempts to focus on recurrent fee businesses such as private banking and wealth management. This strategy is doomed to failure in a world where Chinese growth scares will devastate Asian wealth creation. In any case, can StanChart, whose private bank was run by retail bankers in Singapore, remotely compete with Goldman Sachs, JPMorgan, Morgan Stanley, UBS, Credit Suisse, UBP and other luminaries of private banking? Absolutely not. Washington is also outraged by the ex-finance director's arrogant responses to the Iran sanctions violations. This means the wrath of the Justice Department and billions of dollars in punitive fines.
There is no immediate turnaround in StanChart's future; I see the shares range trading between 500-650 pence. The bank is now valued at only £15.8 billion in London, a disgrace for the world's largest pure-play emerging markets bank with a 160-year pedigree. StanChart has lost 34 per cent of its value in 2015. The bank trades at 0.8 times tangible book value. There is no dividend yield because Winters cut the dividend I expect tangible book value to be hit by settlement/restructuring costs/operating losses. Consistent profit growth in 2016 will prove a pipe dream.
Yet StanChart under Winters is a potential banking turnaround story in the long run, though 2016 will see a rise in non-performing loans in its core banking markets, a fall in fees/commissions, compression in net interest rate margins and (billion-dollar) Uncle Sam regulatory fines. This means returns on tangible equity could well fall to a dismal two per cent. There is nothing sacrosanct about my 500 pence bottom or 0.45 times tangible book value. I simple see no investment case in Standard Chartered, at least for now. I wonder why the board thought an ex-JPMorgan, All-American investment banker was the best candidate to resurrect an old Brit commercial bank. Nostalgia for Bob Diamond at Barclays?