Time for Standard Chartered to face up to emerging risks

When HSBC's chief executive has to promise to reduce the number of countries the group serves simply to keep the shareholders sweet, it is a sure sign that global consumer banking is seriously out of favour.

Last week, the UK-headquartered bank was shown to have done just that. The FT revealed that Stuart Gulliver intended to bring forward the sale of businesses in Brazil and Turkey as part of a plan to reassure investors by reducing its presence around the world - one that has already seen it pull out of 20 markets.

Mr Gulliver is not alone in brandishing the pruning shears. HSBC's main global rival, Citigroup, has been trimming too. The US group has since 2012 cut its global consumer coverage by nearly half to 24 countries.

There are good reasons why these banks want to do less. Their multinational empires may once have been hailed breathlessly as unique assets. But following the financial crisis, regulators worry about far-flung businesses which managers do not always seem able to control or enjoin to follow western standards of conduct. HSBC's problems in Switzerland, where it enabled clients in other countries to avoid tax, or in Mexico, where it was the house bank for a local drug cartel, neatly illustrate the risks.

There is also a dawning realisation that taxpayers in the UK or US would not stomach a bailout of a bank whose operations were largely overseas. It is one thing stumping up to keep the cash machines going in Scunthorpe or Spokane. It is quite another when the ATM is in a Dubai wall.

Shareholders, meanwhile, fret about the absence of synergies. Products and market practices do not mesh across territories. Nor are there balance sheet advantages now local regulators demand tightly ringfenced local subsidiaries.

One bank has, however, largely avoided the calls for shrinkage. Standard Chartered may recently have acceded to shareholder pressure to change chief executives: the former JPMorgan banker, Bill Winters, replaces Peter Sands in the top job next month. But the bank remains largely the unaltered product of Mr Sands's expansionary nine-year reign.

It has sold some non-core consumer finance assets in Asia and Europe, as well as a few banking operations. The group has closed its institutional equity capital markets business. But it still boasts a presence in some 60 countries, most of them emerging markets.

A change of approach may be hard for a bank that built its prowess on its bold decision to pile into Asian countries in the wake of the region's debt crises in the late 1990s, dumping less exciting developed market assets as it did so. But it may also be necessary. StanChart is more exposed to many of the risks that menace its larger rivals.

One concern is that the bank does not have enough capital to support its racy business mix. Not only is its 10.7 per cent core tier one ratio thinner than that of HSBC. It is well below the 12 per cent-plus average figure for Asian banking groups, most of which have a genuine country focus and are not dotted across many markets in which they are often the fourth or fifth challenger.

And while the group is not as sprawling, say, as HSBC, StanChart scarcely has an unblemished management record. Its two run-ins with the New York Department of Financial Services over sanctions-busting not only cost it $640m. They showed it had the same problem as others in controlling what subsidiaries did.

A further issue revolves around the possibility of another emerging market crisis - perhaps triggered by rising US interest rates and the consequent retreat of hot money back to developed markets. There are already questions about the rigour of Standard Chartered's credit policy, sparked by its exposures to commodities, debt-laden economies and single corporate names such as the Indian Essar Group. Non-performing loans have been creeping up.

But the worry is also that the whole process of rebalancing could hit its slender capital ratio. Basel rules would bite if the credit environment soured, requiring StanChart to reflect it by increasing the risk-weighting of loans and thus to increase the equity cushion it needs to hold.

StanChart is more at risk of such an outcome than HSBC and Citi. Unlike them, it has no developed market business to benefit from the resulting flight back to western assets.

An emerging market slump in the late 1980s left StanChart vulnerable and attracted a hostile bid from a British rival, Lloyds Bank. This time the concern is not that the vultures will gather. It is that banks' unwillingness to shoulder emerging market risk - whether as equity underwriters or potential buyers - will leave StanChart on its own.

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