Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Standard Chartered CEO Bill Winters is taking a kitchen sink approach to the bank's losses from emerging markets. The market thinks he needs a bigger sink.

Winters announced a pretax loss of $1.5 billion for 2015, the bank's first reverse in more than two-and-a-half decades. The results -- much worse than the $1.37 billion profit analysts surveyed by Bloomberg had expected -- were hit by goodwill impairment charges, ratcheted up loan loss provisions and restructuring costs. The bank has scrapped its dividend and senior executive bonuses too.

Pretax Loss
Standard Chartered swung into a pretax loss in 2015
Source: Bloomberg data

The results sent the shares down as much as 12 percent, bringing their decline over the past year to more than 50 percent. The stock trades at about a third of book value, a sign investors believe there's much more pain to come.

Under Pressure
Standard Chartered has one of the lowest ratios of share price to book value among global banks
Source: Bloomberg

Winters has been busy since taking over at the emerging markets focused bank last year. A $5.1 billion rights offering in December shored up the balance sheet. He has more or less entirely overhauled the management team, cleaning house after the previous regime went on a lending binge that left Standard Chartered over-exposed to commodities and to slowing Asian economies. The bank has taken a hard look at its loan book: impairments rose 87 percent to $4 billion from the year-earlier period.

That has earned him some backers. Only five of 30 sell-side analysts tracked by Bloomberg had under-perform or sell ratings on the stock before the earnings announcement, whereas 11 rated the stock a buy. On average, the analysts have set a 12-month target price for the shares of 589 pence -- 40 percent above where the shares currently trade.

In contrast, though, London-based hedge fund Marshall Wace has taken out a short position equivalent to about 0.6 percent of the shares. That's important because the hedge fund typically uses a systematic strategy that makes investments based on an algorithm of recommendations taken from investment banks' sales teams.

The optimistic view is that Standard Chartered has a strong underlying core business facilitating trade among clients in Asia. Winters said on Tuesday the bank is the biggest provider of transaction-banking services in Asia with a 22 percent share of the market, and that it makes more from each of its clients in this area than competitors. Standard Chartered's private bank is also adding clients and assets under management.

Here's Bernstein analyst Chirantan Barua, who expects the stock to rise to 1,000 pence in the next 18 months:

"For a bank which has been driving with its brakes on for the past few years, it's only a matter of time before the street revises their numbers for the better."

Submerging Markets
Standard Chartered stock has lost more than half its value in the past 12 months
Source: Bloomberg data

The big question, though, is how much time?

Winters and his new management team is busily writing down bad loans and exiting relationships with clients that don't deliver adequate returns.

But a return to form for Standard Chartered relies on factors that are outside the bank's control. Low commodity prices, persistently low interest rates and the ongoing weakness in China mean that 2016 promises little improvement.

As Winters noted, wider economic turmoil is masking the progress Standard Chartered is making on its transition from an aggressive lender to a transaction banking and wealth management business. The problem is that even if he gets the balance sheet in order, it's hard to envisage a return to profitable growth in the short term.

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

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net