Standard Chartered Plc’s 2012 earnings are yet another confirmation of how the economic slowdown is affecting banks in India. The bank’s Indian operations (wholesale division) reported a spike in bad loans, the highest barring its Middle East operations. Gross non-performing assets as a portion of advances in India jumped to 6.8% in 2012 from 2.9% a year ago.
That jump in bad loans accounted for 40% of the total increase in Standard Chartered’s overall bad loans in its wholesale banking division. That, plus the volatility in the rupee also meant that Standard Chartered’s income from India fell 12% and profit before tax by 16%.
Overall, the bank reported a drop in profit before tax in five out of the eight regions it operates in. However, its biggest region, Hong Kong, reported a 7% increase in operating profit to $1.6 billion and Africa witnessed a 23% gain to $771 million. Korea also saw profits treble to $514 million as operating expenses came down; but that was because the bank had to set aside money for an early retirement programme in 2011.
Thus, despite the bank having to pay a fine of $667 million fine for breaching US sanctions on Iran, it reported a 1% increase in profit to $6.9 billion. Although it fell a bit short of analyst consensus estimates, Standard Chartered shares rose 2.72% at 2pm UK time on the London Stock Exchange.
The bank said it hired 2,000 people in 2012 and was expecting to expand at the same rate in the current year as well. Note that 85% of Standard Chartered’s loan profits come from Asia, which still boasts of a higher growth rate than the rest of the world.
“Our economists expect EM (emerging market) growth to rise from 4.6% in 2012 to 5.1% in 2013E whereas growth in DM (developed markets) is likely to fall from 1.2% in 2012 to 0.8% in 2013E,” wrote J.P.Morgan Securities Plc. analysts in a recent note.
The brokerage further said that, with the “strengthening of trade finance conditions and strong pickup in demand for trade finance in Q4 particularly in Asia... we believe that the outlook for revenue growth is positive in this area due to the re-pricing already carried out in 2012 by the banks.”
What does this mean for Standard Chartered’s Indian depository receipt (IDR) holders? After the Securities and Exchange Board of India allowing partial fungibility in August, the IDRs have gained 26.8% compared with 17.63% for the Bankex. The underlying shares had risen 22.89% in the same time when converted into Indian rupees. With fundamentals looking strong, the IDR gains should continue.