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Standard Chartered has had its credit rating downgraded by Moody’s Investors Services to reflect expectations for lower profitability following the bank’s efforts to de-risk its balance sheet alongside a materially tougher revenue outlook.

Moody’s lowered its long-term deposits and senior unsecured debt ratings by one notch to A1 from Aa3.

The agency said its downgrade reflects expectations that profitability “will be structurally lower following management efforts to de-risk SCB’s balance sheet.” StanChart’s management has targeted a return on equity of 8-10 per cent over the medium-term, which is below the average for rival banks operating in the lender’s key markets of China, India, Hong Kong, Singapore and the United Arab Emirates. Korea is an exception, though.

“In earning a return on capital below that of its peers, SCB’s long-run returns may be insufficient to cover the risks inherent in its key operating markets,” Moody’s said.

The agency also said StanChart faced challenges in materially boosting revenues in its wholesale banking business, while operating at a lower level of risk tolerance. “As a result, while profitability will recover from its current very low levels, signs of which were visible in the latest quarter, it will remain materially below the levels seen during 2009-13,” Moody’s said.

On the plus side, the bank has been proactive in recognising non-performing loans. As such, NPL ratios and credit costs at the bank will be better in the next two years than they had been in the past three.

Rival agency Standard & Poor’s has a long-term issuer rating of BBB+ on StanChart, while Fitch is at A+.

StanChart’s Hong Kong-listed shares were down 1.3 per cent in late trade. Its UK stock was down 0.5 per cent shortly after the London open on Tuesday.

Copyright The Financial Times Limited 2017. All rights reserved.
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