Winters Must Unfreeze StanChart

(Bloomberg Gadfly) -- This summer, Bill Winters completes two years at Standard Chartered Plc, the emerging-markets lender whose share price is still 32 percent below where it was when the former JPMorgan Chase & Co. executive took over as CEO.

While the bank's drop in first-quarter impairment costs is making investors optimistic about asset quality, further upside will depend on Winters becoming a little more adventurous.

A comparison with top lenders in StanChart's main markets shows the bank's clean-up act is threatening to become a drag.

In two years of deleveraging, the London-headquartered firm has shed risk, though it looks to have forgone future rewards in the process. Moody's Investors Service made that point on Tuesday when it cut StanChart's senior unsecured debt rating by one notch to A2 from A1. The bank's profitability, Moody's said, will be "structurally lower" because of management's efforts to "de-risk the balance sheet."

Despite StanChart's recent promise to improve income trends, Winters may have reason to be cautious. At $6.1 billion, nonperforming loans haven't exactly disappeared. The buffer against losses from soured debt, meanwhile, has thinned to 66 percent, from 69 percent in December. With the property-driven business cycle recovery in China looking tired, it's not certain if last quarter's impairment costs, which were 71 percent lower than in the previous three months, are sustainable.

StanChart first-quarter profit before tax

$1 billion

If StanChart keeps shunning risk, however, there's little hope that return on equity can rise to the 10 percent levels of DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp., despite the Singapore banks' losses on offshore and marine industry loans.

The first quarter for StanChart was exceptional. Yield curves steepened in both India and Hong Kong. Yet strip out the $176 million quarter-on-quarter gain in income from asset and liability management, and the $75 million pickup in operating income in the three months through March vanishes.

Even if the quarter wasn't entirely a fluke, the $1 billion pretax profit -- after a net loss for 2016 -- translates to a return on equity of 5 percent to 6 percent. According to S&P Global Ratings, Winters needs to tweak the business model, put to use the fresh capital raised in January, and increase ROE to 10 percent. 

A 6 percent ROE is embarrassingly low for an emerging-markets specialist. Even Japanese lenders like Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group and Mizuho Financial Group earn that much. Considering their shares trade at a price-to-book multiple of about 0.6 -- the same as StanChart -- the only way Winters can create some wealth for shareholders is by taking his bank's risk tolerance out of the deep freeze.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.