Argonaut Capital: Why we have increased our short position in Standard Chartered

If it is easy to be cynical about the current mission statement of Standard Chartered, then we must also admit to being skeptical about the prospects for the bank in general.

It has been suggested that first half results published 5 August might have seen a “kitchen sinking” of bad news by new management. We disagree. We think that asset quality will continue to deteriorate and the worst is yet to come. We also think that the company’s historic provisioning policy has been far from prudent and that the failure to take a sufficiently counter cyclical approach to provisioning in the good times will now lead to shareholders having to endure much greater cyclical pain as Asia and Emerging Market economies continue to slow. We would also suggest that the bank has experienced a much lighter touch than its domestic peers from the UK regulator and that this is about to change. We think all of this will result in further bad news for Standard Chartered shareholders.

It is easy to lose perspective. Standard Chartered (STAN) has been a fantastic success story, with shareholders equity increasing from $6bn to $46bn since 2000. Over the same time period its balance sheet has also expanded from $53bn of customer loans to $282bn. This corresponded (or rather was directly linked to) an abnormally long period of robust Asian and EM economic growth, broken briefly by the global financial crisis of 2008. However, just as many financial commentators have made the mistake of extrapolating EM economic growth since 2000 irrespective of any analysis of its sustainability, so we would argue STAN has fallen into the trap of believing that the EM credit cycle was dead: that they did not need to take insurance for bad loans on the balance sheet in the form of loan loss provisions (LLP) because they had not been experiencing any problems with asset quality. STAN wasn’t like other banks: it did not do bad loans.

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