2econdsight

"to rescue truth from beauty and meaning from belief"

Standard Chartered Bank from Worse to “Worserer” for Temasek

6 Comments

Our friend, Chris Kuan, appears to have disappeared off the radar screen along with and about the time Richard Wan quit as TRE editor. Well, not to disappoint, he has written a commentary on the recent Standard Chartered Bank’s STG3.3 bil (S$7.1 bil) rights issue.

Isn’t it inexplicable that with Temasek Holdings (TH) playing with our CPF (and other monies belonging to Singapore and Singaporeans) nary a commentary on the rights issue’s implications is published when TH holds a 17.2% stake in SCB?

I guess 70% of voters trust the PAP so blindly, there’s no need for any transparency or accountability of our monies. Read on to understand why you, citizen, should be concerned, very concerned….

 

That must be painful for Temasek Holdings what happened to its 17.2% stake in Standard Chartered Bank. After earlier this year announcing a “new” strategy of reducing costs and risk weighted assets, which in plain speak means getting rid of loans, securities and businesses that are under-performing or no longer desired. After months of denying the need to raise capital to shore up its balance sheet, the CEO Bill Winters made a U-turn on Tuesday, announcing the bank indeed need to raise capital through a US$ 5.1b rights issue.

Its shares promptly fell 9% on the day, recovering a little at the close of business. In 1 year, the shares had fallen by more than 30% and in 5 years by nearly 65%. All in GBP terms so take note that GBP is still weaker to the SGD by around 25% from 7-10 years ago when Temasek first build its stake. As one Top 10 shareholder said

“It has been a hugely painful ride”.

Certainly, Temasek as a major shareholder would have been sounded out for this change of heart at the top of the bank. Almost certainly Temasek would have, in local parlance, “kow pei kow bu” but in this day and age, regulators rule the day. Those are UK regulators not Singapore’s own do-it-all MAS.

What does it mean for Temasek? Do nothing and its shareholding gets diluted. Maintain its current shareholding of 17.2% means having to divvy up US$877m for the right issue. Throwing in good money after bad? Mind you Standard Chartered has already scrapped its final dividend this year to shore up its capital. However even so, with the dividend cut, the reduction of costs and risk weighted assets and the rights issue, Standard Chartered’s return on equity expects to rise to only 8% in 2018 and 10% in 2020, extremely little for shareholders to get excited when in comparison UBS has already reach 15% this year. Didn’t another of our SWF sold UBS?

What gives for Temasek to hold on? A reluctance to admit it overstayed its investment? Or is it some kind of grand strategy of building an Asian champion by merging Standard Chartered with DBS? If the latter, Singaporeans should be afraid, be very afraid because the Singapore Government will be the lender of last resort since it is rather inconceivable for the government to allow DBS to be domiciled elsewhere. That ultimately means taxpayers bailing out the bank if it gets into trouble with losses even if these occur in other countries.

And those halcyon days of March when in its annual review Temasek announced a 19% rate of return from last year, seems a distant past. What with this Standard Chartered debacle on top of the meltdown in China.

Temasek prides itself a long term investor. An investor who can be patient and wait a long time for superior value to be realized. Or so the narrative went. Of course, the narrative did not say the same investor can also wait a long time for value to be destroyed. As Keynes said,

“In the long run we are all dead”.

Now, would not all those monies better spent investing in better lives for Singaporeans in order to build social capital rather than investing in ever more financial assets in the never ending chase for diminishing returns?

Advertisements

6 thoughts on “Standard Chartered Bank from Worse to “Worserer” for Temasek

  1. Yes, it’s better to invest in Singapore than spending money on other emerging economies. The WSJ does not think that the current round of capital raising will be sufficient. So expect to contribute more $$$ to the bailout of other economies next year. But why do I even bother with Singapore?!

    Like

  2. The WSJ is mostly likely to be correct. From personal experience of having helped execute a reduction in risk weighted assets in my previous day job, this process almost invariably takes longer and at greater costs than expected. So will be the least surprised if Temasek will need to divvy up more money in the future. Or they can sell out. Whatever grand strategy Temasek may have, are in tatters right now.

    Like

  3. In most rights issue offerings, shareholders are forced to throw good money after bad. Shareholders don’t have a choice unless they want to see their holdings devalued instantly. Their only ‘consolation’ is that they are getting the new shares ‘cheap’ LOL. (Maybe it makes Temasek’s new investment appear cheap in their book?!) The capital raise is the exact amount raised in 2010. Who would have thought they would need to raise twice the amount then? In all likelihood, they are still underestimating the cost of winding down the troubled assets. This looks to be another Olam in Temasek’s portfolio. (I am curious when Temasek will realize the loss or if they even mark their underwater investments to the market.)

    Separately, there is still significant regulatory risk/liability. The bank was fined a total of almost $1b in 2012 and 2014 by the US authorities. That is a good chuck of the capital raise.

    Like

  4. Down another 7% today due a credit rating downgrade by Fitch, the smallest of the 3 main rating agencies.The bank’s impaired-loan ratios remain above its peers’ and appear to have become more volatile as a result of concentrated sector and country exposures, Fitch said. “Standard Chartered remains vulnerable to volatility from a difficult operating and regulatory environment.” Fitch further added “ratings may be downgraded if the bank fails to strengthen earnings and reduce risks or if loan quality deterioration accelerated undermining its capital strength,” . “Outsized fines or material business restrictions from litigation could also lead to a downgrade.”

    Like

  5. Aside from the issues I mentioned above, the upcoming Fed lift-off will induce more pain in emerging economies. The flight of dollars will likely result in even more bankruptcies and potential currency crisis in those countries. Now back to the question why Singapore would risk losing monies on other people when it could invest in its own?

    Like

  6. A sovereign govt expenditures basically fall into 3 categories: operating, social and development. Only the last can be considered as investment, i.e. to increase the productive capacity of the sovereign state. Social expenditures are not investments under the IMF government budget analysis but there is nevertheless an acknowledged indirect benefit to the productive capacity, e.g. targeted out of work benefits which enable better skill to job matches and skills improvement. In SG social expenditure is lacking even though the way the budget is presented shows a large expense line item under the broad heading of social spending. But these include expenses for building and staffing hospitals, community centers, playgrounds etc. Such expenditures under both IMF and OECD criteria are not social spending. Social spending are direct and indirect financial transfers from the government to the individual.

    There are huge amount of spin in the government budget beyond the usual non-declaration of land sales revenues and returns on investments.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s