Standard Chartered Hong Kong's core operating profit plunges 20% YoY in 1H14

Partly due to Financial Markets income decline.

Standard Chartered Hong Kong recorded a decline of 20 percent in its 1H14 core operating profit, to USD$3.3b.

According to a research note from Maybank Kim Eng on Hong Kong banks, this was due to: a 20% YoY decline in Financial Markets income; a mid- to single-digit YoY decline in Retail Products income; and high-teens YoY increase in loan impairments.

The report noted, meanwhile, that management maintained: a positive outlook for the
private banking, wealth management and lending businesses from new medium-sized enterprises; a positive cost-efficiency outlook; and a positive outlook for quality of Korea’s consumer finance in 2H14.

The report also forecast an uncertain and challenging outlook for Financial Markets income, and said that this income contributed 25% of SCB's total income in 1H13. Within this, SCB saw declines in both volumes and spreads for rates and spreads compression in Foreign Exchange in 1H14.

Here's more from Maybank Kim Eng:

Some declines were related to regulatory changes, such as the Dodd Frank Act, and the move towards central counterparty clearing.

Besides, some spreads pressure was driven by the reduction in complex structured products. Overall, we cut our non-interest income (excluding net fees) forecast by 11.3% for FY14.

Concerns over quality of commodity finance. SCB had USD250m in commodity-related exposure in Qingdao in Jun 2014.

It is unclear whether SCB suffered from the recent alleged commodity-finance fraud of Decheng
group in Qingdao. We raise our credit cost forecast from 0.53% to 0.64% for 2014.