Standard Chartered’s (LSE: STAN) poor performance during the past few months can be traced back to one region: South Korea.
StanChart Korea, Standard’s third largest business by assets, reported an operating loss of $162m for 2013, a $326m round trip from the profit of $164m reported during 2012.
Additionally, during 2013 Standard was forced to write down the value of its South Korean business by $1bn. This writedown was a result of government regulations, which forced the bank to forgive some customer debts.
The writedown and operating losses both dragged on Standard’s group income so, as a result, management began a restructuring plan. The plan entails the closure of 20% of Standard’s branches within Korea and the instillation of a new management team.
Management are excited
StanChart Korea’s new management team is headed by Ajay Kanwal. Mr Kanwal was installed as StanChart Korea’s new head last month and he has immediately got to work.
However, unlike head office’s view on the region, Mr Kanwal believes that South Korea is a region of opportunity for the bank. Standard’s head office views Korea as the bank’s most troublesome business.
In particular, Mr Kanwal has stated that Standard’s troubles within the region are not just confined to the bank; the whole South Korean banking sector is under pressure.
And while Standard is trying to close down StanChart Korea branches to save costs, Mr Kanwal wants to expand. This could be a very astute move.
Hostile environment
South Korea has become a hostile place for banks during the past decade. According City figures, the South Korean banking sector’s return on equity, a commonly used metric to evaluate how profitable banks are, has slumped from a high of 17.6%, reported during 2005, to a low of 3.6% at present. During the last quarter of 2013, the sector’s average return on equity was negative.
As a result of South Korea’s hostile banking environment, it’s not just Standard that has been suffering. Some of the company’s larger peers have also been forced out of the region, leaving a gap in the market.
For example, HSBC announced back in July of last year that it would shut down its South Korean retail banking operations. Meanwhile, Goldman Sachs Asset Management’s decision to pull out of South Korea during 2012 and Citigroup has plans to close up to 196 retail banking branches within the country.
With competitors leaving, StanChart Korea’s plans to expand make sense. The bank intends to extend its offering, planning an expansion into mortgage lending, savings accounts and wealth management, as well as helping to make South Korea a hub for trading in the renminbi.
