StanChart sees further cuts to bad loan provisions in China, India

LONDON (REUTERS, BLOOMBERG) - Standard Chartered expects to further cut provisions for bad loans in its key markets of China and India, and is also looking to lower exposure to the heavy industry sector, the bank's Greater China and North Asia chief said on Thursday.

A sharp spike in non-performing loans in China and India had weighed on the Asia-focused bank's balance sheet in the last few years, as a slowdown in the two countries' economic growth hit clients in the infrastructure and commodities sectors.

But the British lender on Wednesday reported that loan impairment levels in China and India more than halved in the first six months of 2016 compared to the year-ago period; to US$42 million (S$56.3 million) in the case of China and US$224 million in India.

"That's a direction we are driving," Benjamin Hung, who is also part of the bank's top global management team, told Reuters in an interview.

Standard Chartered's income from Greater China and North Asia, which includes Hong Kong, China, South Korea, and ASEAN and South Asia, within which Singapore and India are most important, accounts for nearly 70 per cent of its total revenue. "What we have been doing is establishing a new risk tolerance framework and appetite, ensuring that the bank doesn't get overly concentrated in any particular single borrower or single market or single industry," Mr Hung said. "The market remains highly uncertain, but at least we believe that this is a step in the right direction in terms of making us control our loan impairment."

The bank, which swung back into profit in the first half of the year, is also looking to reduce its exposure to "old economy" companies in the region and focus more on sectors including technology and pharmaceuticals, he said. "You just have to look a little bit ahead of the curve and be able to tune your portfolio before everybody does it."

The bank's total credit exposure to the commodities sector, including oil and gas producers that have been hit by the drop in prices, has fallen from US$60.7 billion in the first half of 2014 to US$37.1 billion in the January-June period of this year.

The bank has increased lending to oil refineries just as companies across that industry face a slump in profit.

The lender said Wednesday it had US$7.3 billion (S$9.79 billion) of loans to oil refineries at the end of June, a 24 per cent increase since the end of 2015. While Standard Chartered cited the industry's "broadly steady" profit margins for the period, some of the world's biggest oil producers have since reported that this metric has tumbled amid a glut of gasoline.

Investors cheered the lender's drop in loan impairment charges Wednesday as a signal that it has moved past the worst of credit issues that peaked last year when Standard Chartered posted more provisions against bad loans than HSBC Holdings, a bank four times its size. The increase in refiner lending shows risks remain even as Chief Executive Officer Bill Winters shrinks the bank's overall commodities exposure.

"I'm not sure it's the area where most investors would like to see them growing at the moment," said Joseph Dickerson, an analyst in London with Jefferies Group who has an underperform rating on the shares. "Hopefully they're getting paid for the risk."