With a UK£25.36B market capitalisation, Standard Chartered PLC (LSE:STAN) falls in the large, commercial bank category. A common risk large financial institutions face is credit risk, measured by the level of bad debt it writes off. Large commercial banks like Bank of America, Wells Fargo Bank and JP Morgan Chase had lending portfolios that were exposed to the turbulent credit market during the 2008 recession which led to billion dollar losses in shareholder equity. The faith of investors in what were once considered blue-chip stocks were undermined. Now we will analyse financial metrics focused on bad debt and liabilities in order to gain insights into Standard Chartered’s lending practices and better understand its operational risks. View our latest analysis for Standard Chartered
How Much Risk Is Too Much?If Standard Chartered’s total loans are made up of more than 3% of bad debt, it may be engaging in risky lending practices above the judicious level. Loans that are “bad” cannot be recovered by the bank and are written off as expenses which comes out directly from its profit. Since bad loans make up 3.03% of its total assets, which is above the prudent level of 3%, it faces a high chance of default. Given that most banks tend to be well-below this threshold, Standard Chartered faces a much higher risk level and shows below-averagebad debt management.
How Good Is Standard Chartered At Forecasting Its Risks?
Standard Chartered’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Standard Chartered understand its own risk?. Standard Chartered’s low bad loan to bad debt ratio of 65.85% means the bank has under-provisioned by -34.15%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
Is There Enough Safe Form Of Borrowing?Standard Chartered makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Standard Chartered’s total deposit to total liabilities is within the sensible margin at 66.61% compared to other banks' level of 50%, it shows a prudent level of the bank's safer form of borrowing and an appropriate level of risk.
While Standard Chartered has maintained a safe level of deposits against its liabilities, it has taken on excess levels of bad debt and poorly provisioned for these bad debt payments. This could lead to lower profits than may have been expected by the company. This potential negative impact on cash flows lowers our conviction of Standard Chartered as an investment. Today, we've only explored one aspect of Standard Chartered. However, as a potential stock investment, there are many more fundamentals you need to consider. I've put together three essential factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for STAN’s future growth? Take a look at our free research report of analyst consensus for STAN’s outlook.
- Valuation: What is STAN worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether STAN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.