Triple threat weighs on Middle East earnings for Standard Chartered

Standard Chartered said its Middle East earnings last year were dragged down by increased competition, a low interest rate environment and its exit from lending to small businesses in the UAE.

The overall group posted a 30 per cent drop in full year proft.

Despite the decline, its stock gained more than 7 per cent in early trading after it said it did not plan to tap investors for capital and left its dividend unchanged.

The emerging market specialist lender said its operating profit for its businesses in the Middle East, North Africa and Pakistan was down 10 per cent to US$769 million in 2014 from $858m in 2013.

The bank did not give a breakdown of individual country performance in its earnings release yesterday.

“Strong performances in our markets across the region have largely offset a softer performance in the UAE,” the bank said.

“Continued spread compression as a result of the low volatility, low interest rate environment offset good levels of customer activity in FX and rates.”

More than 90 per cent of the bank’s business comes from emerging markets and growth in these commodity-rich parts of the world has slowed in the past couple of years as the price of everything from oil, steel and palm oil collapses amid low inflation, currencies weaken against the strengthening US dollar, and widening deficits. Loans to businesses that are sensitive to the fluctuation of commodity prices have also not helped.

Not only is StanChart's core business of giving out loans suffering, the bank has also been battling regulatory woes.

In August, it was fined $300m by the New York department of financial services for suspicious transactions involving clients in Hong Kong and the Middle East. As a result, StanChart announced in August it would close the majority of its SME accounts in this country, prompted by higher compliance burdens and a squeeze on profitability owing to intensifying competition with local banks.

The drop in the price of oil, which has shed 50 per cent of its value since last June, has not helped prospects for banks even though chief executives including Ala’a Eriaqat of Abu Dhabi Commercial Bank are so far unfazed and are counting on the non-oil economy to propel growth.

Similarly, Mohsin Nathani, the chief executive of StanChart UAE, is still counting on growth in its consumer banking business to help buoy earnings.

He said recently that a softening of real estate prices was positive as it had made them affordable again and would increase demand for mortgages.

The real estate slowdown has also brought down the cost of living and made the country a more attractive place to do business. The UAE had risked losing some of its lustre amid the spiralling costs and rising inflation, he said.

Last year, as home prices rose, demand for mortgages began to cool off as end users found it difficult to come up with the deposit needed to secure a mortgage.

That caused concern among many officials that the UAE would no longer be a competitive place to do businesses in.

“Mortgages increased as market conditions improved, offsetting margin compression from competitive pricing and surplus liquidity,” the bank said of its Middle East operation in its 2014 earnings statement.

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