Temasek 'to bide its time' as StanChart restructures

Standard Chartered, in which Temasek is the biggest shareholder with an 18 per cent stake, has launched a painful restructuring under new CEO Bill Winters after being hit by bad loans in emerging markets and suffering a 70 per cent tumble in its shar
Standard Chartered, in which Temasek is the biggest shareholder with an 18 per cent stake, has launched a painful restructuring under new CEO Bill Winters after being hit by bad loans in emerging markets and suffering a 70 per cent tumble in its shares over the past 2 1/2 years.PHOTO: AGENCE FRANCE-PRESSE

SINGAPORE • Temasek is willing to give Standard Chartered (StanChart) time to work on its turnaround before deciding on the fate of its underperforming US$4 billion (S$5.7 billion) stake in the UK bank as part of a portfolio reshuffle, people familiar with the matter said.

Pressured by weak returns from low interest rates and a commodities rout, the investment fund is taking a hard look at its US$190 billion portfolio and may exit unprofitable assets, the sources told Reuters.

This approach was evident last week when Temasek sold at below book value a controlling stake in shipping firm Neptune Orient Lines (NOL), its biggest disposal since 2009.

StanChart, in which Temasek is the biggest shareholder with an 18 per cent stake, has launched a painful restructuring under new CEO Bill Winters after being hit by bad loans in emerging markets and suffering a 70 per cent tumble in its shares over the past 21/2 years.

"Temasek is giving them time. They've had a lot of engagement with the board, and Bill has sort of managed expectations in terms of turning this ship around," said one of the sources familiar with Temasek's thinking.

Temasek declined to comment. It was not clear how long Temasek will wait to see the results of the restructuring.

By subscribing this month to its allotted portion of StanChart's US$5 billion share sale, Temasek has buttressed that position for now. But it may become increasingly uncomfortable with the investment if shares in the bank do not recover.

Its paper loss on the StanChart investment was US$1.2 billion, excluding dividends, just on the 12 per cent stake it bought in 2006, according to calculations by Reuters. Temasek raised its stake to 18 per cent in December 2007.

Since then, StanChart's shares have lost about two-thirds of their value. "Clearly, Temasek wants to pro-actively manage its underperforming portfolio and get rid of stocks that are causing pain," said one Hong Kong-based banker who works closely with Temasek. "That means even the Standard Chartered stake could be on the block if a right solution comes around."

The size of Temasek's portfolio has doubled since it lost US$40 billion during the global financial crisis of 2008/2009 due to losses on Western banks such as Bank of America.

But returns lagged Temasek's own internal metric of making gains above the cost of capital in five out of the last eight financial years, its annual reports show.

A concentration of investments in a few large-cap stocks mostly in Singapore and China limits its ability to outperform. Ten companies, including Singapore Telecommunications, DBS Group and China Construction Bank, account for half of its assets.

To boost returns, Temasek could sell some underperforming assets, such as Jakarta's No. 6 lender Bank Danamon and the rail business of Singapore train and taxi operator SMRT, a senior South-east Asian banker said.

Danamon, which is 68 per cent owned by Temasek, is trading below its book value and its return on equity is the second-weakest among Indonesia's top 10 lenders over the last financial year, according to Thomson Reuters data. SMRT is under pressure after suffering a series of operational breakdowns.

Mr Bertrand Jabouley, credit analyst at Standard & Poor's, said that even though the timing of the NOL disposal seemed sub-optimal given the ongoing crisis in the sector, Temasek may want to use the proceeds for more profitable investments.

"They may have much more profitable investment opportunities in the pipeline to put the disposal proceeds to work," he said.

REUTERS

A version of this article appeared in the print edition of The Straits Times on December 18, 2015, with the headline 'Temasek 'to bide its time' as StanChart restructures'. Print Edition | Subscribe