Standard Chartered closing US$2 billion diamond unit on risk fears

Passers-by walk in front of the main branch of Standard Chartered in Hong Kong, on Jan 8, 2015.
Passers-by walk in front of the main branch of Standard Chartered in Hong Kong, on Jan 8, 2015. PHOTO: REUTERS

LONDON (BLOOMBERG) - Standard Chartered is exiting its US$2 billion (S$2.7 billion) diamond financing business because it doesn't comply with stricter lending standards set by Chief Executive Officer Bill Winters.

The unit was placed under review this year, and initially Standard Chartered was demanding more loan protection from clients in the predominantly Indian and Belgian diamond trade, such as payment insurance or 100 per cent collateral, people familiar with the moves said in March. The bank has since determined the division is no longer viable amid increased compliance reporting and regulatory capital costs.

"When we announced our new strategy, we said that we would look to exit businesses that were non-performing or that did not meet our new risk profile," Simon Kutner, a spokesman, said in a statement. "It has been concluded that continuing to provide financing to the midstream diamond and jewelry segment falls outside of the bank's tightened risk tolerances. We are working with clients to ensure a smooth exit."

During his first year in charge, Mr Winters has conducted a root-and-branch review of the embattled bank, which reported its first annual loss since 1989 after growth slowed in its main Asian markets and about US$4 billion of loans went bad. Mr Winters has put US$20 billion of risky assets up for sale, pared back commodity lending and replaced almost all of the firm's senior executives. He's also tightened conduct rules and castigated managers after discovering some were ignoring expense and outside business policies for personal gain.

Diamonds aren't a huge part of Standard Chartered's balance sheet, accounting for less than 1 per cent of its US$261 billion of loans. Yet, an 18 per cent drop in prices last year led to a raft of defaults and bankruptcies at over-extended small firms.

The so-called midstream segment that the bank will no longer lend to is dominated by family-run firms that cut, polish and trade stones in hubs such as Mumbai and the Belgian city of Antwerp. These firms rely on loans to fund the purchase of rough gems from miners such as De Beers. Consulting firm Bain & Co. has estimated the average cutting and polishing firm had no profit margin last year, compared with profitability of as much as 4 per cent in 2013.

With Standard Chartered's exit, diamond firms could face a credit crunch. Antwerp Diamond Bank, which accounted for about 10 per cent of the financing market at its peak, was wound down by its Belgian owner KBC Groep NV in 2014. One of the few large European financiers left, ABN Amro Bank NV, has also curbed lending.

The midstream may look to the Middle East to plug the hole. Dubai is seeking to rival Mumbai and Antwerp as diamond trading hubs, and banks there including Emirates NBD PJSC, Mashreqbank PSC, and National Bank of Fujairah PJSC have also started financing diamond cutters, polishers and traders operating on the Dubai Diamond Exchange.

JCK, a jewelry industry magazine, reported Standard Chartered's decision to close the division earlier.