Standard Bank Group Ltd. (SBK), Africa’s biggest lender by assets, may make further writedowns of about $80 million on the value of aluminum stockpiles entangled in a Chinese fraud investigation, two fund managers said.
Standard Bank, which isn’t accused of any wrongdoing, started legal proceedings in July after $167 million of aluminum it claimed ownership of was placed under lockdown by authorities probing irregularities at warehouses in Shandong Province. The aluminum stockpiles held in bonded facilities, mostly at the Qingdao port, were allegedly pledged to banks as collateral for loans multiple times. The Johannesburg-based lender has already written down the value of the metal by about half and said last month that any recovery was highly uncertain.
Standard Bank in December revised the value of its global markets business, which includes the aluminum assets, being sold to biggest shareholder Industrial & Commercial Bank of China Ltd. (601398) Standard Chartered Plc, ABN Amro Group NV and Citigroup Inc also made loans affected by the alleged fraud. Standard Bank said in a statement any financial impact from the stockpiles will be accounted for in its year-end results due in March.
“I expect Standard Bank will have to write off the other 50 percent of its exposure to aluminum stockpiles in China in its full year results,” Jean Pierre Verster, an analyst at Johannesburg-based 36ONE Asset Management, which holds the stock, said in an interview on Jan. 8.
On Standard Bank’s balance sheet, the Shandong metal stocks’ net value was $167 million as of June 30, with $80 million of that provided for, or written down, a Jan. 13 statement from the lender shows. In addition to legal action to protect its position, the bank has also made an insurance claim, it said.
Aluminum, used to make everything from window frames to cars, has dropped almost 9 percent in the last six months to $1,845 a ton on the London Metal Exchange.
The investigation at Qingdao, China’s third-largest port, is examining companies owned by metals trader Chen Jihong, who is alleged to have pledged the same metal inventories multiple times for collateral on loans. Chinese authorities have uncovered almost $10 billion in fraudulent trade.
Standard Bank “will probably have to write off the next 50 percent,” Sean Ashton, chief investment officer at Anchor Capital, which holds some of the stock for clients, said in an interview in Johannesburg on Jan. 9. “They do have insurance with Lloyds, but it’s unlikely that they will be able to accrue an asset for this at year end” under international accounting rules, he said.
The looming losses in China and Standard Bank’s spending on technology have weighed on the bank’s stock price in the past 12 months, according to Ashton, who manages the Anchor BCI equity fund, South Africa’s best-performing general equity fund in 2014. Standard Bank has climbed 11 percent in the past 12 months in Johannesburg trading, compared with the average 27 percent gain of the six-member FTSE/JSE Africa Banks Index.
“The total IT spend will peak at 31 billion rand ($2.7 billion) and Standard has spent about 20 billion up until now,” Ashton said. “The numbers are eye-watering. Over the next 2 to 3 years they will be amortizing 11 billion rand.” That is “a big drag to the income statement, given the group makes about 18 billion of profit,” he said.
Standard Bank had funded 18.5 billion rand of computer software as of the end of 2013, with a net book value of 13.9 billion rand, the lender said in its statement. The difference of 4.6 billion rand has been amortized, with the value of the assets reduced to reflect their decreasing worth over time, it said.
“It is not our policy to disclose financial estimates related to the enhancement of the group’s information technology capability,” the bank said.
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