A man leaves the StanChart bank building in the Central district of Hong Kong on Nov 3. The Asia-focused British bank said it would axe 15,000 jobs and raise US$5.1bil in capital after posting a "disappointing" third-quarter loss as it struggles to return to growth. - AFP PHOTO / ANTHONY WALLACE
SINGAPORE: It's telling that Moody's revised the outlook for Singapore's big banks to negative the same week that Standard & Poor's downgraded Standard Chartered, and as shares of Australia & New Zealand Banking Group completed their worst quarter since the global financial crisis.
While the reasons for the three events differ slightly, the common thread is that these banks are being forced to retrench after years of heavy lending internationally, especially to commodities producers.
They're cleaning up after a massive post-2008 credit party, and as the lights go on, the pile of junk is bigger than anybody expected.
Standard Chartered, which has lost its standing as an A- rated bank with Standard & Poor's, perhaps embodies the troubles affecting institutions that sought to boost returns on equity by lending to riskier overseas borrowers.
Since Chief Executive Officer Bill Winters took over in June last year, he has written off or provisioned against more than $4 billion of loans, mostly made during the tenure of his predecessor, Peter Sands.
Among the impairments was a $300 million reduction of so-called legacy stick positions, a term used by loan bankers to indicate large advances that a bank made to a borrower and wasn't able or didn't want to resell to other lenders.
Standard Chartered 2015 credit impairments
The bank made headlines in 2011 with a controversial $1 billion loan to an Indonesian coal miner, Borneo Lumbung, that helped with the takeover of London-traded Bumi Plc.
That acquisition started a multi-year legal battle between then shareholder Nathaniel Rothschild and Borneo controller Samin Tan, who ultimately defaulted on other loans.
It's unclear whether or how much of the exposure was ever resold, but in its 2014 annual report, Standard Chartered said that loan impairments in the Asean sub-region had increased 76 per cent, to $698 million, partly because of "higher provisions on a small number of corporate clients in Indonesia, Thailand and Malaysia” related to the commodities business.
Commodities and international growth are also behind the worries surrounding ANZ.
The Australian bank has started to revisit its international strategy under Chief Executive Officer Shayne Elliott, who was promoted to the top job from chief financial officer just three months ago.
In his first quarterly update he was promising to “reduce costs, to tightly manage the credit environment and capital, and to simplify and reposition the business.”
One of the ways he's doing that is by restructuring the institutional unit, where most of the corporate loans are parked.
Elliott has been saying that ANZ has good growth prospects in its core business of retail banking at home, in stark contrast with his predecessor Mike Smith, who preferred seeking growth abroad.
That division was at the center of the bank's latest negative surprise.
On March 24, ANZ told shareholders that it expected to increase credit charges for loans in the institutional unit by $100 million from the previously announced $800 million in the first half of 2016, which ended March 31.
Singapore's banks are facing issues with loans to commodities-related companies, too, but their biggest headache is in China, where a few years ago they had the highest hopes for earnings growth.
That was among the reasons Moody's revised down their outlook.
In the ratings company's words: “Singapore banks are also facing increased headwinds from slowing growth in regional economies, because foreign loans constitute around one- half of their gross loans.”
DBS, the biggest local lender, said its nonperforming assets in Greater China had increased 35 percent in 2015, to S$820 million ($607 million), the largest increase in any region where the bank operates.
As usual, the lesson is learned with hindsight. When liquidity abounds, every loan looks good. When the music stops, the mess is shocking, and cleaning up is never pretty. - Bloomberg
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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