Standard Chartered Buyout Fund Loss Shows CEO's Work Left to Do

(Bloomberg) -- One of the smallest parts of Standard Chartered Plc, the U.K. bank with operations sprawling across Asia and Africa, has become one of its biggest losers.

Losses at the unit that houses the Standard Chartered Private Equity business, or SCPE, more than doubled to $650 million in 2016 as its investments lost value, the London-based bank said Friday. The soured deals were a major reason why annual profit fell short of analysts’ estimates.

The losses shine a light on a division that makes up less than 1 percent of Standard Chartered’s balance sheet yet sums up the breadth of the challenges still facing Chief Executive Officer Bill Winters as he overhauls a lender saddled with bad loans and regulatory woes. Bloomberg News reported last year that losses and concerns about conflicts of interest prompted the lender to seek ways to exit the business, which will happen through a wind down after a scrapped sale and management tumult.

“It’s a massive mismatch,” said Chirantan Barua, an analyst in London with Sanford C. Bernstein Ltd. who recommended that Standard Chartered sell the SCPE unit two years ago. “A trade bank should have minimal risk, it’s the safest business in the world. Why all this risky stuff?”

Details Needed

SCPE invested Standard Chartered’s money in everything from a Nigerian energy firm that had to restructure its debts to a Singaporean chain renowned for spicy noodles. The bank wrote down the value of some of the investments because of “changes in the trading outlook,” without identifying the companies, prompting some analysts to question the division’s transparency.

“$650 million of losses is meaningful in the context of group earnings,” said Joseph Dickerson, an analyst in London with Jefferies LLC who has an underperform recommendation on Standard Chartered shares. “More granular portfolio details would be helpful. It would be nice to have enough information to model the shape of losses.”

Standard Chartered had about $1.2 billion in principal finance entities at the end of 2016, equivalent to just 0.2 percent of the bank’s total assets. Yet the division’s “key processes and controls” were subjects of “deeper discussions” held by Winters and Standard Chartered’s board of directors risk committee, led by David Conner, according to the bank’s annual report.

Principal finance, the bulk of which is SCPE, generated more than $600 million revenue in 2013 and 2014 combined as the private-equity unit made money investing Standard Chartered’s own funds as well as those of outside investors. The unit swung to producing losses in the second half of 2015 as a commodity bust affected companies it owned in emerging markets, and losses accelerated last year.

‘Very Careful’

The performance of SCPE contrasted with the recovery elsewhere for Standard Chartered. Loan impairments, which had soared at the lender as commodities prices crashed, fell 41 percent to $2.4 billion for 2016. Annual pretax profit of $409 million compared with a loss of $1.52 billion a year earlier.

“This has cost us some money during 2016 and, obviously, we’re now going to be very careful about managing the exit process,” Finance Director Andy Halford told reporters Feb. 24. “We decided in the latter part of 2016 that this is probably not a business that’s for us.”

Still, SCPE pushed ahead with two more deals in late 2016. The unit invested a combined $100 million in N Kid Corp., a children’s play center operator in Ho Chi Minh City, and Chennai-based finance firm IFMR Capital, people familiar with the matter said at the time.

Diamonds, Trump

Winters, 55, a former JPMorgan Chase & Co. executive who became CEO in 2015, has been seeking to change the risk appetite of a bank that expanded quickly amid rapid economic expansion in emerging markets. While the bank has shown some progress, with shares climbing 18 percent last year, SCPE is one of several issues still facing Winters.

Losses on debts in the diamond and jewelry sectors more than doubled in the year while an Indonesian lender it part-owns has “credit issues” that need addressing, the bank said. The election of Donald Trump as U.S. president has sparked fears of a trade war with China, one of its key regions.

The SCPE business was long profitable for Standard Chartered through buying up equity stakes in firms across emerging markets. Other investments include a Jordanian chicken company, a chain of shopping malls in Botswana and an Australian cattle firm. The bank found SCPE hard to sell as a single entity because there was little cohesion between its assets, which spanned various industries and geographies, Halford said.

Yet the level of risk in these kinds of deals didn’t make sense to Barua, the Sanford C. Bernstein analyst. Two years ago, he wrote a note to clients stating “a trade bank shouldn’t be in principal finance” and urging the lender to sell the unit immediately for a 10 percent discount. Wait any longer and losses could be “much higher,” he wrote.

Winters last year mulled a sale of the unit to some of its managers. Then, in November, he dismissed the head of SCPE, Joseph Stevens, and decided to exit the business.

“When you’re making money, investors don’t complain,” wrote Barua. “Wait until it blows up. Then everyone starts the questioning.”

To contact the reporters on this story: Donal Griffin in London at dgriffin10@bloomberg.net, Stephen Morris in London at smorris39@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Ross Larsen