Standard Chartered (SCBFF) shares surged the most in nine months Tuesday after the emerging market bank announced a big bet on the beleaguered shipping industry.
The London-based bank said it closed three trade finance deals totalling $1.6 billion in value during December, providing funding to merchants transporting liquefied natural gas (LNG) and other types of energy, at a time when banks are pulling back en masse from the shipping industry.
Strandard Chartered shares rose more than 8% in early London trading before paring gains to 5.67% by 10:00 GMT to change hands at 764 pence each, still the biggest gain since April 26.
A group of nine banks, led by Standard Chartered, arranged a $684 million twelve year finance facility for BW Gas JuJu LNG. The funds will support a fleet of tankers transporting LNG between Singapore and Nigeria.
The bank also provided $350 million of senior loan facility to the National Shipping Company of Saudi Arabia, and a $542 million credit line to Reliance Group to support the transfer of ethane gas between the U.S. and India.
Standard Chartered did not release any details of the commercial terms but the deals show a turning-around bank effectively buying at the bottom when many other shipping industry financiers have ran for the hills.
The Baltic Dry Index, which measures freight rates across many of the world's major shipping routes, has tripled to 927 since the beginning of 2016. Although it still sits substantially below the 2,208 peak that it saw in 2014.
Collapsing commodity prices, a lackluster global economy and oversupply of available freight capacity were the principal drivers behind the downturn of the Baltic Dry Index and a concurrent increase in nonperforming loans in the shipping industry.
A rising tide of bad loans in the sector led most of the major trade finance banks to cut back their exposure to shipping throughout 2015 and 2016.
Deutsche Bank (DB - Get Report) reported that provisions for credit losses increased 58% during the third quarter, when compared with one year ago, mostly due to continued weakness of the shipping as well as oil and gas sector.
This is while Commerzbank (CRZBY) has long been attempting to wind down its exposure to the shipping industry, as it restructures and attempts to satisfy an ever more stringent European Central Bank.
Smaller German lenders, merchant banks such as HSH Nordbank, Bremer Landesbank and NordLB have all ran aground, to varying degrees, over their shipping loans.
Royal Bank of Scotland (RBS) has around £6 billion of shipping assets that are sat within its 'capital resolution' bad bank, that it has long been seeking to offload.
Standard Chartered itself was forced into an emergency rights issue and restructuring at the end of 2015 as its commodity and emerging market exposure, at a time when China was in meltdown mode, came back to bite it in the capital buffer. The lender suspended dividend payments and embarked upon a reorganization of itself.
While the business has since stabilized, analyst opinions on the stock remain mixed. The shares bottomed out at just below 400 pence last February, prompting analysts at Berenberg to rate it a buy and add it to their 'Alpha list', with a 750 pence price target. They still rate it a buy but the price target remains the same, indicating little immediate upside for investors.
Meanwhile, analysts at Jefferies rate the stock underperform, the equivalent of a sell, on concerns over its exposure to India - which also has a nonperforming loan problem. Jefferies has a price target of 348 pence attached to the stock, implying downside of more than 50% from current levels.