Asia set to buoy Standard Chartered

The UK's banks face an uncertain year. A key concern for the sector is that, given tough government austerity measures, the UK’s economic prospects remain so uncertain. Those cuts will, for instance, see roughly half a million public sector jobs lost in the next four years. And, while the risk appears to be diminishing, a return to recession still can't be ruled out - that reflects the negative impact on economic demand as the stimulus effect from public spending falls away. This could mean grim news for banks’ bad debts, as unemployment rises, as well as for loan demand.

Investors may be wise, therefore, to avoid those lenders in 2011 that are exposed to the UK's shaky economy - a condition that's easily met with Standard Chartered. Indeed, Standard has virtually no UK exposure and generates most of its earnings in Asia, where those developing economies are growing fast. Last year, for instance, China's economy become the world's second largest and the World Bank estimates that East Asia and the Pacific region will see economic growth reach a heady 8 per cent in 2011. Compare that with the World Bank's forecast for the G7 countries, where economic growth is expected to reach just 1.1 per cent in 2011.

Reflecting this impressive growth story, Standard Chartered - unlike other UK banks - is delivering an impressive performance. Indeed, broker Charles Stanley estimates that the lender's pre-tax profit grew by an impressive 22 per cent during 2010, and that's during a year when many UK banks managed little more than a return to profitability; largely driven by significant bad debt write-backs. Reflecting those superior prospects, Standard's trading update last month reported plenty of good news. Management anticipates double-digit pre-tax profit growth in both the consumer and wholesale units and credit quality has continued to improve, with loan impairments having fallen across the business. "We continue to be very well placed in markets that have strong growth prospects," remarked chief executive Peter Sands.

Admittedly, Standard's net interest profit margin (the difference between its lending and borrowing rates) is experiencing pressure. At the half-year stage that was reported to have fallen to 2.3 per cent from 2.4 per cent, reflecting such factors as low interest rates and uncertainty over sustained economic recovery. That pressure has continued, with last month's trading update noting that net interest margins had fallen "fractionally" from 2009's levels.

Still, following October's £3.3bn rights issue, Standard boasts a healthy capital cushion. That has been partly driven by regulatory developments. Last year saw international bank regulators agree the Basel III bank capital rules, which will eventually require lenders to hold core tier one capital that's equivalent to 4.5 per cent of their risk weighted assets. Reflecting the possibility that some national regulators will implement an even tougher regime - Switzerland chose a 10 per cent level - Standard has raised more funds. Management estimates that the move has yielded a core tier-one ratio that stands at about 10 per cent - leaving Standard as one of the best capitalised lenders in the sector and well able to support growth while also meeting tough capital rules.

However, other regulatory developments present potentially greater hurdles. Not only has the government imposed a banking levy, and without international coordination - bad news for banks' earnings generally - but it has also established a commission to consider whether banks should separate their retail and investment banking operations. That's potentially bad news for Standard should the commission find in favour of separation. Indeed, management vented its frustration over the growing regulatory burden with the half-year figures in August. "It is a matter of great concern to us, as a truly international bank, that regulations and taxes are not being introduced equivalently on an international basis," remarked chairman John Peace. Management also flagged that regulatory change is "fraught with unintended consequences" - potentially hinting that Standard may even consider basing itself overseas should the burden become too great.