An absolute return fund has increased its short position on the UK-listed bank while another firm recently upgraded its recommendation on the bank.

Co-managers of the UK-based Argonaut Absolute Return Fund have increased their bearish bet on shares of Standard Chartered, arguing that the bank – which earns the bulk of its revenues in regions such as Asia – faces a number of headwinds. However, it appears other investors differ on the bank's outlook.

The UK-listed bank, led by new chief executive Bill Winters since June (he took over from Peter Sands), has been through a difficult period, due to a run of indifferent results and pressure on its share price. Since January, its share price has fallen around 3.92 per cent. In results issued earlier in August, the bank said operating income in the first half of the year was $8.495 billion, down 8 per cent from a year ago, which the firm said was mainly caused by the effect of currency translation, business divestments and mark-to-market valuations. The pre-tax profit of $1.824 billion, down 44 per cent, was affected by “adverse loan impairment trends”.

In an emailed commentary, Barry Norris and Greg Bennett, co-portfolio managers of the Argonaut Absolute Return Fund, explained why they had increased their short position in Standard Chartered.

They said that asset quality in underlying markets is “deteriorating much more rapidly than the company’s recognition of non-performing loans would suggest”; loan loss provision has fallen from 3 per cent to 1.5 per cent of its loan book, significantly below the current 3-5 per cent eurozone peer group; the bank’s increase in non-performing loan coverage ratio from 47 per cent to 52 per cent is “inadequate”, the managers said, and other banks in Asia have adopted counter-cyclical provisioning policies with coverage ratios above 100 per cent. Meanwhile, Hong Kong and Singapore assets are particularly exposed to a Fed hiking cycle, they added.

This publication is in contact with the bank about the comments.

By contrast, the stockbroker and wealth management house Charles Stanley raised its Standard Chartered stock recommendation to “hold”, from its previous (March 2015) move down to “reduce”. The firm said it was encouraged by the new CEO’s declaration that returns will take primacy over growth and that a 10 per cent return on equity was the minimum acceptable level that Standard Chartered should deliver as soon as possible. Charles Stanley also said the bank appears to be on track to achieve a three-year savings plan and two-year risk-weighted assets reduction programme that had been launched before Winters took over his role.

In its comments, Argonaut said: “It is easy to lose perspective. Standard Chartered has been a fantastic success story, with shareholders' equity increasing from $6 billion to $46 billion since 2000. Over the same time period its balance sheet has also expanded from $53 billion of customer loans to $282 billion. This corresponded (or rather was directly linked to) an abnormally long period of robust Asian and emerging market economic growth, broken briefly by the global financial crisis of 2008.

“However, just as many financial commentators have made the mistake of extrapolating EM economic growth since 2000 irrespective of any analysis of its sustainability, so we would argue STAN [Standard Chartered] has fallen into the trap of believing that the EM credit cycle was dead: that they did not need to take insurance for bad loans on the balance sheet in the form of loan loss provisions (LLP) because they had not been experiencing any problems with asset quality,” Argonaut added.