Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered' s (StanLn)</a> capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see <a href="https://www.smartkarma.com/insights/standard-chartered-credit-versus-a-sovereign-cds-portfolio" target="_blank" data-smartkarma-citation="insights:47205" rel="noopener">Standard Chartered Credit Versus a Sovereign CDS Portfolio</a> for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a>.

Standard Chartered' s (StanLn) capital ratios remain above regulatory minimums, even after adjusting for Covid-19 forbearance amounts. While stronger than peers from a capital perspective, the slim real economic capital buffer could leave the bank sensitive to another downturn. In fact, given the relief cohort composition from a product perspective, combined with StanLn's optimistic macroeconomic assumptions, we anticipate higher credit costs over time.Like most banks globally, Standard Chartered’ s credit costs that were artificially engineered lower during 2020 via regulatory forbearance combined with legislated and bank provided Covid-19 relief. This helped StanLn report better results despite the ongoing health crisis. Lack of Covid-19 coverage also inflated StanLn’s capital ratios. The question is where are the stress points in the relief cohort?Covid-19 relief granted was largest against home mortgage borrowers. A higher level of real estate as security in the Covid-19 relief program should keep overall losses lower within this cohort. However, despite higher default rates in commercial real estate and amongst small and medium sized enterprises, Covid-19 relief assistance was materially lower in each of these areas. The limited assistance provided to SMEs may result in higher delinquencies within this portfolio over time.  Furthermore, StanLn’s 2021 economic projections, which feed into its provisioning models, may be overly optimistic. GDP expectations for Singapore, Hong Kong and India are higher than Bloomberg consensus estimates. These countries combined account for 33% of Standard Chartered’s credit risk. Please see Standard Chartered Credit Versus a Sovereign CDS Portfolio for more on StanLn’s country exposure.Against this artificially engineered credit cost background, StanLn’s Sub / Senior Credit Default Swap (CDS) curve appears to be pricing in a weaker fundamental credit profile over the next two years. StanLn’s Sub/ Snr CDS is materially higher than HSBC Holdings' (HSBA LN).

Standard Chartered: Capital, Forbearance and CDS