Standard Chartered's franchise value in domestic Korean market 'permanently impaired'

The write-down on Korea operation is credit negative.

Moody's notes that last Tuesday, Standard Chartered PLC, parent of Standard Chartered Bank, announced it would record a $1 billion goodwill impairment for its Korean operation for the six-month period ended 30 June.

Here's more from Moody's:

SCPLC’s write-down is credit negative for both SCPLC and Standard Chartered Bank Korea Limited because it is a recognition that the group’s franchise value in the domestic Korean market is permanently impaired and that the operating environment there remains challenging.

SCB Korea has long been a challenge for SCPLC, and the write-down caused SCPLC’s first-half 2013 pretax profit to fall 23% to $3.3 billion from a year ago. Standard Chartered Bank acquired Korea First Bank in 2005 for $3.3 billion, creating goodwill of $1.7 billion.

After the write-down, remaining goodwill equals $734 million. The bank has launched various initiatives, including an early retirement plan and branch network rationalization in 2011 to improve the bank’s performance.

However, progress has been slow and the bank is considering options such as exiting unprofitable customer relationships and business sales, and its management has stated that there “won’t be a quick turnaround.”

The write-down is also credit negative for other Korean banks because it confirms that low profitability, which has been a feature of the banking system for the past couple of years, will not improve anytime soon and that margins willcontinue to contract.

SCPLC’s write-down, together with the 5 July announcement by HSBC Bank plc that it would close its retail banking and wealth management operations in Korea, illustrate the difficult operating environment banks face in that market.

Recent data from Korea’s Financial Supervisory Service show that domestic banks suffered a 48% drop in first-half 2013 net profits from a year ago because of net interest margin contraction to 1.88% in the second quarter and trading losses. 

On a more positive note, the income SCPLC earned in other markets on Korea-related business grew 12%, underlining the health of the group’s core franchise in cross-border trade finance and corporate banking, and the continuing rationale to maintain a presence in Korea.

As of 30 June, Korea accounted for 11% of SCB’s total loans and 9% of first-half 2013 income.