Two big U.K. banks’ shares tanked over the past couple of days, and unlike the British pound, they’re not weakening because of the so-called “Brexit” referendum — although that certainly doesn’t help.
Instead, their fall may have a lot to do with the market and economic turmoil that has been taking place in China.
The London-listed shares of emerging markets-focused bank Standard Chartered (SCBFF) fell by 10% at one point on Tuesday morning after it reported its first annual loss in more than 25 years.
The bank reported a loss before tax of $1.5 billion last year, in sharp contrast to 2014’s profit of $4.2 billion.
On Monday, HSBC’s (HSBC) shares fell in an otherwise rising market after the bank, which is the biggest in Europe and one of the biggest in the world by assets, reported a loss of $858 million before tax in the fourth quarter of last year, vs. a profit of $1.7 billion in the fourth quarter of 2014.
HSBC, which is doing a lot of business in Asia and was even thinking of moving its headquarters there before deciding earlier this year to remain in London, eked out a 1% increase in pretax profit for full 2015 to $18.87 billion, but its adjusted loan impairment charges were up 17% at $3.7 billion over the period.
The weak results of the two banks chime with rising investor worries about the exposure of U.K. banks to Asia, and particularly China, at a time when European banks have been making investors nervous again.
Richard Barnes, senior director at Standard and Poor’s credit rating agency, received many questions about the risk of European banks’ exposure to Asia last week during an analyst call, and said the region was important particularly for HSBC and Standard Chartered.
However, “we’ve seen European banks generally retrenching from a number of regions in the world including Asia … banks are trying to reduce exposure,” Barnes said, adding that, in China, “banks look again at their exposure to state-owned enterprises and are focusing on the ones that are likely to be supported by the government in a downturn.”
HSBC has been deeply involved in the liberalization and deepening of China’s capital markets, having successfully negotiated a majority stake in a new, nationally licensed securities joint-venture in the mainland. HSBC Group Chairman Douglas Flint acknowledged in a statement on Monday that “China’s slower economic growth will undoubtedly contribute to a bumpier financial environment,” but he added that the country “is still expected to be the largest contributor to global growth as its economy transitions to higher added value manufacturing and services and becomes more consumer-driven.”
He said this transition is driving the bank’s focus on the Pearl River Delta as a priority growth opportunity, as the area is a concentration of high-tech, research-focused and digital businesses.
HSBC’s exposure to mainland China is around $143 billion, according to its annual report; of these, $135 billion are loans to other banks or non-bank financial institutions, sovereign and corporate loans, while $8 billion are loans to retail clients.
China is perhaps even more important for Standard Chartered and has helped reduce the bank’s loss over the past year. Its Greater China business showed a pre-tax profit of $1.37 billion last year, compared to a loss of $1.33 billion in its European operations. In terms of exposure to China, Standard Chartered listed $77.67 billion in loans to customers in the country.
The two banks would normally be sheltered from fears over their exposure to China by their presence in one of the strongest financial centers in the world, London. But with uncertainty in the U.K. rising because of the referendum on EU membership, expect a few particularly volatile months ahead for HSBC and Standard Chartered.
ANZ Bank’s wealth chief, Joyce Phillips
