The Anglo File: Standard Chartered, HSBC Results Tell Tale of Asia Pickup

The earnings results for the two banks could not be more different. But both show signs of a genuine recovery in Asia.
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LONDON -- Although the first-half earnings results from

Standard Chartered

and

HSBC Holdings

(HBC)

-- two of the leading banks in Asia -- were poles apart, both sets of results appear to support the idea that a genuine recovery is taking root in the region.

The earnings results of the two banks couldn't be more different. On Wednesday, Standard Chartered announced pretax profits in the first half of fiscal 1999 fell 35% to $438.9 million and earnings per share fell 33% to 27.7 cents. HSBC, on the other hand, beat all expectations when it reported on Monday a rise of 10% in pretax profits to $4.07 billion, and EPS grew 10% to 33 cents.

The London market reacted predictably to the numbers. Standard Chartered shares fell 1.9% to 941 pence on Wednesday, the day of its earnings report, while HSBC rose 3.6% to 765 pence on Monday, following its report. On Thursday, Standard Chartered closed down 5.4% at 888 pence and HSBC dipped 4.4% to 733 pence.

What do these results tell us, apart from that HSBC's profits are rising and that Standard Chartered's are falling? Similar things, actually.

A Chinese Puzzle

The principal reason for Standard Chartered's disappointing results was a drastic fall in revenue from foreign exchange dealing and an increase in provisions for loan losses in Hong Kong.

Income from forex dealing fell 50% over the year before. But to analyze the meaning of the drop, you must look at the turmoil of the past few years. During the Asian crisis in 1997 and 1998, Standard Chartered stayed open for business, while many other banks shut up shop. As a result, Standard Chartered was able to rack up sizable profits during those years. However, the more stable conditions in the region's markets this year have reduced the opportunities to make money.

The increase in bad debt provisions in Hong Kong rose a worrying 70% from the second half of 1998 levels, while provisions for the rest of Asia-Pacific region fell by 50%. Standard Chartered's nonperforming loans in Hong Kong rose to 4.2% from 2% in December.

The conclusion that Hong Kong remains a trouble spot appears borne out by looking at HSBC's results in the area. HSBC's nonperforming loans in Hong Kong rose to 4.6% from 3.7% in December 1998.

Yet the bad loan problem in Hong Kong is primarily because of the Chinese "window" companies in the territory. "Standard Chartered's numbers were wrecked by a few large Chinese loans," says one analyst, who wished to remain anonymous.

In fact, Standard Chartered's overall performance in Hong Kong was "excellent," the analyst says, particularly in the mortgage sector. Standard Chartered increased its mortgage book 21% and wrote 20% of the net new loans in the territory during the period.

John Bond, the chairman of HSBC, also placed the blame for the bad loans fairly on the shoulders of the Middle Kingdom. "Our exposures to certain mainland China-related companies showed continued weakness and approximately 30% of our net bad debt charge in Hong Kong and the rest of Asia-Pacific reflected this deterioration," Bond said in a statement.

Indeed, HSBC's Hong Kong operations made up 34.2% of its pretax profits in the first half of this year, which represents an 8.2% increase over the year before.

Migrating Bad Loans

The two banks' results for the rest of Asia showed remarkably similar trends. Malaysia continues to be a black spot, with HSBC gloomier on the country's prospects than Standard Chartered. HSBC's nonperforming loans in Malaysia rose 37% to $950 million from the second half of fiscal 1998.

Outside of China and Malaysia, the situation looks much better. HSBC's nonperforming loans in Indonesia, Thailand and South Korea fell 12.8% from the end of second half of last year to $1.09 billion, and Standard Chartered's bad loans in the region outside of Hong Kong fell 49.7% to $130 million.

"These results, or the management's comments, do both speak of greater confidence in Asian economic recovery -- but at different pace in different countries," says Martin Cross, an analyst at

Teather & Greenwood

. "The pattern of profits and bad debt charges between HSBC and

Standard Chartered can differ not only because of different individual exposures but also because of different bank policies on providing against bad debts -- and whether those policies are actually followed in very big exposures."

Teather & Greenwood has no investment banking relationship with either bank. Cross has a "hold" recommendation on Standard Chartered.

While the earnings results from the two banks at first appear to show a tale of two cities, the story they are actually telling is much the same: By all means take the Orient Express, but avoid that slow boat to China.