StanChart's equities downfall complete

The emerging markets bank exits the troubled business after profits and market share plunge.

Standard Chartered’s decision to abandon its loss-making global equities businesses marks an abrupt end to a bold and expensive five-year expansion that struggled to make headway in competitive Asian markets.

The UK-based emerging markets bank said on Thursday it will close its global institutional cash equities, equity research and equity capital markets businesses.

StanChart’s move – effective immediately – will result in 200 job cuts, mostly in Hong Kong, Singapore, Korea, India and Indonesia, with minimal reductions in the UK and US.

"StanChart has sensibly decided to reduce the scope of its product ambitions," said Jason Napier, an analyst at Deutsche Bank.

The move is part of a broad restructuring with StanChart also announcing on Thursday it would cut a further 2,000 jobs in its retail division on top of 2,000 already flagged.

However, the equities business has proved a particular misstep and it has been under review for about a year, with consultancy McKinsey advising chief executive Peter Sands to exit the business at the end of 2013, a person close to the situation told FinanceAsia.

Sands declined at the time and the decision to cut it was a tightly-guarded secret until Thursday, leaving bankers to huddle in corridors speculating on their future as marketing meetings were cancelled on Wednesday without explanation.

StanChart continued to hire senior equities bankers up to the end of 2014, including Stewart Callaghan as head of equity research in December, highlighting the abruptness of the business’s downfall.

The ignominious end was a far cry from 2009 when StanChart bought brokerage firm Cazenove Asia for $73 million and hired a string of high-profile veterans as it sought to branch out from lower-margin commercial banking.

Simon Brookhouse, a banker with more than 20 years of experience in ECM, was hired as global head of equities in August 2010, while another 20-year industry veteran, Tom Welch, was brought in as global head of cash equity sales in November of the same year.

Its position as an emerging markets-focused bank gave it an edge in the wake of the financial crisis at a time when most rivals were hurting as investors shied away from the US and Europe. Profits were consistently strong in the years that followed but this only served to create a false sense of security.

Reversal of fortunes

“The problem was that, for equities and broader investment banking you really need a global platform,” a StanChart investment banker who was axed in the past month told FinanceAsia.

“When they saw the announcement people in [the bank] were mocking ourselves – what do you mean ‘we’re shutting down global equities?’, we don’t have global equities,” the person said.

As conditions improved in developed markets over the past few years, StanChart has found itself less able to compete with banks with a more global footprint, such as Citi and HSBC, a problem that has seen profits ebb. Also its strategy was faltering.

“They thought because we lent to clients they would give us investment banking business – but it didn’t follow,” said the axed investment banker, who was involved in the buildout.

The bank is not alone and enters a graveyard of mid-sized brokers that sought to build out an Asian equities platform only later to pull back after failing to achieve scale.

Intense competition, falling trading volumes since 2009, low volatility, a shift towards cheaper electronic trading and regulatory pressure on fund managers to reduce commissions have squeezed already thin margins in cash equities businesses across Asia.

“[The bank] did not have a meaningful global equities business against which they could defray their loss-making Asian equities business, and neither could they come out of the J-curve,” one head of Asia equities trading at a large investment bank told FinanceAsia.

StanChart is ranked 17th in Asia in terms of equity research advisory or 1.2% of commissions, according to consultancy Greenwich. “StanChart leaving the business will not materially impact the over-capacity in Asia,” added the equities trading head.

Increasing numbers of investors are directing flow through the largest players, whose greater economies of scale allow investment into the fastest trading systems. As a result only a handful of cash equities businesses are profitable in Asia, according to industry sources.

Samsung Securities shuttered its Asian equities business in February 2012; and Japanese brokers Nomura, Daiwa and Mitsubishi UFJ Securities drastically scaled back from the region around 2011 to 2012.

“Closure of [StanChart's] cash equities business was, we believe, overdue," said Ian Gordon, an analyst at Investec. 

Pressure on the equities business was unrelenting at a time when the wider group's profits were under pressure from a downturn in Asian emerging markets, rising bad debts, an inability to compete on lucrative Chinese listings in the US caused by lack of scale, compounded by fines from regulators for lack of compliance.

Even its core lending business was faltering. StanChart’s relatively small deposit base meant its cost of funding was higher than the likes of its biggest rivals HSBC and Citi. StanChart often had to resort to raising funds in the interbank market then added on a liquidity premium.

Under pressure headquarters introduced a new policy that all new loans had to have a rate of  return above 7%, said the investment banker who was recently let go.

“It was so embarrassing ... Our quotes were often double competitors and clients just shook their heads at us,” said the banker who was let go.

Fee killer

StanChart has fallen globally from 36th in 2010 to 54th in 2014 in terms of ECM revenue, according to Dealogic data. In Asia, it has performed marginally better, rising from 25th in 2010 to 24th in 2014. But the bank was clearly making little headway compared to its competitors.

The bank was regarded as something of a fee-killer with a tendency to make lowball bids, which dragged down revenues for banks generally, according to a senior ECM banker in the region. This will clearly no longer be the case, which should see fees increase, he added.

StanChart had been “muscling in aggressively” in the Asean bloc, particularly Singapore Reits, he added.  

Headhunting firm Correlate noted that StanChart's exit should create space for rivals.

"There will now be another $50m-$60m of equities revenues up for grabs – and a bit less pressure on ECM fees, where [StanChart] had aggressively used its balance sheet relationships and discounted fees to muscle into deals," the firm said in a note to clients. “It’s a zero-sum game and there’s one less mouth to feed,” a head of Asia ECM at a global investment bank told FinanceAsia.

Bad blood

Whereas the industry became an increasingly tough climate in which to operate for the bank headed by Sands (pictured left), frustration also mounted within StanChart’s investment banking department in the past few years over the bank's own policies, which have stymied their ability to win new business, a separate source told FinanceAsia.

For example, according to the person who was let go from the bank, investment bankers were not allowed to pitch clients without first asking relationship managers.

“There is such bad blood between departments – it was like we were in different banks,” the person said. “Every step you wanted to move there seemed to be more hurdles than support.”

StanChart’s latest cuts come as the bank steps up its broad re-organisation, involving dumping non-core businesses, cutting jobs and closing branches globally amid falling profits.

In December, the bank said it would sell its consumer finance business in Hong Kong to a consortium led by the China Travel Financial Holdings Company. Meanwhile, in June 2014 StanChart sold two Korean units to Japan’s J-Trust.

Exiting cash equities is a small but symbolic move for the group whose shares have materially underperformed peers over the past two years.

"Knocking it off for a struggling bank is a good move," said Chirantan Barua at Bernstein Research who estimated equities revenues were sub $100 million. "However, taking out equities and especially ECM will be a bottleneck towards developing a profitable private bank – the area that seems to be one of [the bank’s] biggest growth drivers."

"With the equities move, it will now be no different from the wealth management offering of any regional or local bank. And that will be bad for margins/growth." 

FinanceAsia reported in November that veteran banker Tom Welch left the bank, with one banker saying he took the blame for the losses.

Cost savings

StanChart said in its statement on Thursday that it was on track to achieve at least $400 million of cost savings this year as part of its restructuring. The move away from equities should deliver a further $100 million in savings in 2016, the bank said in its statement.

“We are continuing to take significant action on costs by exiting or reconfiguring non-core and under-performing businesses. We are now focusing on achieving further cost savings for 2016 and beyond,”  Sands said in the statement.

StanChart closed 22 branches in the second half of 2014 as part of a plan to shut 80-100 outlets.

While the bank has been relatively weak in ECM, its debt capital market presence is stronger.

StanChart said it would continue to develop its capabilities in convertible bonds, equity derivatives and macro-economic and fixed-income research. It would also continue to provide strategic advice to clients on equity financing, it said in the statement.

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