Standard Chartered’s growth strategy is coming home to roost.
Asia had been the growth engine of the U.K.-listed bank, which notched up double-digit annual profit increases frequently in the past decade. However. on Tuesday, the same region was behind the bank’s second profit warning this year, sending shares plunging 8% to a five-year low.
Impairment charges due to bad loans, made mostly in emerging markets, rose 86% in the third quarter and are up by 36% for the first nine months of this year. In its business-banking and financial-markets division alone, Standard Chartered’s main source of growth, impairments could rise by 60% this year, says Jefferies.
This sets off a potential domino effect: As well as taking a bite out of earnings, bad credit can mean higher risk weightings in its loan book, putting further pressure on capital ratios. As loans deteriorate, Standard Chartered has had to reduce risk in its portfolio. But that has resulted in a drop in lending—which in turn lowers future revenue growth. At the end of the third quarter, its loans to customers had fallen by 3% compared with three months before.
Standard Chartered has been hit by a perfect storm of macro events, with lower-than-expected growth in emerging markets, declining commodity prices and a strengthening dollar with the specter of rising rates.
But the bank is also suffering from idiosyncratic problems that hark back to its growth strategy of chasing revenues ahead of controlling risk. Compared with HSBC , another U.K. bank with roots in emerging markets, Standard Chartered has suffered a higher rate of loan impairments so far this year. The former hasn’t reported third-quarter results, but in the first half of 2014, HSBC’s loan impairments fell 40% year over year.
Meanwhile, Standard Chartered’s total loan-loss reserves compared with nonperforming loans in business banking dropped to 46% in 2013 from 91% in 2007, notes Jefferies.
Standard Chartered is trading at 8.3 times 2015 earnings, compared with HSBC at about 10 times. But as Standard Chartered battles its impairment problems, it also risks eating into tomorrow’s earnings growth. Investors still risk getting egg on their face.