HSBC, StanChart feel the heat of equity meltdown

An HSBC logo on display outside an HSBC Holdings bank branch in London.
An HSBC logo on display outside an HSBC Holdings bank branch in London. PHOTO: BLOOMBERG

LONDON • Slower growth, lower revenues and rising bad loans from volatile markets may add to the woes of HSBC and Standard Chartered - two of the biggest foreign banks in Asia.

The banks, which had bet big on China and Asia, felt the heat of China's equity meltdown this week and witnessed a significant plunge in their shares since the start of this year.

On Wednesday, analysts at JP Morgan downgraded their recommendation on HSBC stock to "underweight" from "neutral", saying they see "a material headwind" for the bank if Asian bad loans rise from current low levels.

HSBC's London-traded shares are down more than 6 per cent since the start of the year, Wall Street Journal (WSJ) has reported, tracking broader market declines in Europe. Standard Chartered shares are down 10 per cent.

HSBC makes about 70 per cent of its profits in Asia, while StanChart makes 90 per cent of its revenue from Asia, Africa and the Middle East, WSJ said in a report published yesterday.

Global markets were spooked by China's stock plunge and a falling yuan this week, reviving worries about the grip of the Chinese authorities on the nation's currency, financial markets and economy.

The declines in the yuan and other emerging-market currencies have hit HSBC and Standard Chartered's dollar-reported earnings, Mr Chirantan Barua, a Sanford C. Bernstein analyst, said.

HSBC renewed its commitment to Asia last June with plans to invest in China and expand in Asian asset management and insurance. Standard Chartered is nursing rising bad loans from clients hit by the commodities downturn and pulling back from some businesses. Both banks were at the forefront of an effort by banks to help China turn the yuan into a global currency through offshore yuan trading and investment.

But attempts by Beijing in recent weeks to narrow the growing gap between the tightly controlled onshore yuan market and the freely traded offshore yuan market could hit the banks' revenues as client activity slows.

"HSBC and Standard Chartered have long promised investors the internationalisation of the (yuan) as a structural long-term opportunity but the currency has come back to bite the banks again," Mr Barua said.

Several foreign banks, including Standard Chartered and Deutsche Bank, have now been temporarily suspended from settling offshore clients' yuan transactions in the onshore market to help control the gap, as Beijing tries to stop traders from profiting on differences in the rates.

In addition, the market for "dim sum" bonds, or yuan-denominated debt sold outside mainland China, has dried up. HSBC and Standard Chartered are the biggest arrangers of such debt, according to Dealogic.

The chief executives of both banks addressed the challenges in the region last November.

While HSBC chief exec Stuart Gulliver said the bank still aims to move more capital into Asia, Standard Chartered chief Bill Winters said all the bank's markets are growing in terms of gross domestic product and trade volumes.

"Do we believe that the opportunity in Asia has gone away as a result of the current period of adjustment in China, Asean, South Asia, Middle East, Africa, falling commodity prices, slower export growth, sluggish economies from the West? Absolutely not," he said.

Meanwhile, other European banks have been pulling back in Asia to adapt to the clouding economic outlook and rising competition from local banks. Barclays is preparing to cut back its fixed-income and equities business as it shrinks its global footprint. BNP Paribas is also looking to cut costs in its global investment bank in Asia, sources told WSJ.

A version of this article appeared in the print edition of The Straits Times on January 09, 2016, with the headline 'HSBC, StanChart feel the heat of equity meltdown'. Subscribe