Jeffries has lowered its price target for Standard Chartered from 730p to 722p (currently trading at 931p), arguing that the idiosyncratic risk behind the original Underperform rating will be exacerbated by macroeconomic headwinds in the emerging markets where Standard Charteredis most active. This could force STAN to de-risk since it only has 10.5% tier 1 common equity, while TSB Banking, Lloyds Banking, and the Royal Bank of Scotland all have more than 15%.

“In our view, it is untenable that the UK-listed and regulated bank with the greatest prospective intermediate-term tail risk emerges with the lowest estimated CET1 ratio in 2016,” writes Jefferies analyst Joseph Dickerson.

Jefferies was already bearish on Standard Chartered

Dickerson’s bearishness on Standard Chartered stems first from idiosyncratic risk: revenues in the corporate finance division have leveled off and could start to fall; underwriting has moved to lower rated companies causing impairments to rise 86% year-on-year in 3Q14; and according to Jefferies survey of more than 10,000 companies in STAN’s footprint, credit quality is deteriorating even without macroeconomic conditions getting worse.

“The tailwinds that benefited Standard Chartered from 2008-2013 became headwinds in 2014,” writes Dickerson. “While these headwinds are expected to continue over 2015-16, we now believe they will be exacerbated by a deteriorating macro environment.”

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Unwinding EM credit cycle could increase Standard Chartered’s impairments

The macro environment that Dickerson is talking about is the unwinding of the emerging market credit cycle. Since 2008 advanced economy bond allocations to emerging markets have increased from 4% to more than 9%, but that changed at the end of 2013 and bond fund outflows have been steady throughout 2014. With a stronger dollar and the first Fed rate hike on the horizon, those outflows are more likely to increase than switch back to inflows this year.

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At the same time, private sector leverage has grown dramatically in some of Standard Chartered’s key markets like Hong Kong and Singapore. Dickerson argues that credit can’t keep growing at this pace, especially as EM corporate credit quality is deteriorating, which limits Standard Chartered’s prospects for revenue growth and puts it at risk of larger impairments this year. Household leverage has also grown rapidly in these markets, and if consumer credit starts to deteriorate alongside corporate credit, the impact could be even more severe.

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Finally, Dickerson says that falling commodity prices will have a big impact on Standard Chartered’s impairments, and since the decline started last year the damage will show up in Q4 earnings when Standard Chartered reports in March.

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