Standard Chartered's credit quality triggers worries for its wholesale business

Blame it on a sharp pick-up in NPLs and impairments in 1H12.

According to Barclays, a sharp pick-up in NPLs and impairments in 1H12, along with concerns about the economic outlook for Asia have sparked concerns about credit quality in Standard Chartered's Wholesale division. These have been further fuelled by press commentary on a specific Indonesian loan.

Here's more from Barclays:

While the pace of NPL formation and falling provision coverage are worrying, it is not clear that this is a trend, with credit quality remaining benign across much of Asia. While a sharp correction in credit quality would drive a near term de-rating we do not see it altering the medium term investment case as damage to tangible book value would be relatively limited, even if provisioning levels rise to historical peaks. We retain an Overweight rating.

Lending does not appear particularly aggressive: Although Standard Chartered has grown its Wholesale Bank at a faster pace than the banking systems in its footprint, the degree of outperformance has reduced in the past 3 years. Additionally, the faster growth has been in arguably lower-risk regions such as Singapore and Hong Kong while higher risk India and the Middle East have grown in line with the market.

The beginning of a trend? Credit quality deterioration in MESA and India led to a significant pick up in both NPLs and the impairment charge in 1H12, with NPL formation the fastest since 2002. Although these two regions remain challenging, credit quality across much of the rest of Asia is robust. 2H12 performance will be key.

Coverage has been falling: Coverage has been on a downward trajectory since 2007, which management attributes to increasing collateralisation. However, the trend is similar even when we take collateral into consideration, which we see as a potential cause for concern.