OREANDA-NEWS. (This announcement replaces the one published earlier on 23 February to correct the figure for the un-provisioned portion in Standard Chartered's legacy book to USD4.4bn.)

The Outlook on Standard Chartered's rating is Negative and risks are weighted to the downside following the USD2.2bn loss for 2015 that the group reported yesterday, says Fitch Ratings. If it can successfully implement its new strategy, the Outlook could be revised but this looks increasingly challenging given the strong external headwinds and the scale of the transformation.

The restructuring, affecting one-third of the group's USD303bn total risk-weighted assets, cost USD1.8bn in 2015. This was split between USD968m of impairments taken against a USD20bn portfolio of risk-weighted assets held in the newly created liquidation portfolio, USD695m of redundancy costs, USD126m goodwill impairments against Thai operations and USD56m of fixed-asset impairments.

Management warns that the liquidation portfolio, which includes higher risk assets, may require further impairments in 2016 but they are confident that they can keep it to around USD1.2bn. This is in line with the total USD3bn restructuring charge outlined in November's strategic plan. The liquidation portfolio contains USD8bn of loans, of which USD7.5bn were non-performing. Fitch believes that accelerated wind-down could exceed this budget considering that the un-provisioned portion in the legacy book was a high USD4.4bn.

Impairment charges, booked outside restructuring costs, nearly doubled to USD4bn and weighed heavily on 2015 results. These were split 60/40 between ongoing businesses and the liquidation portfolio. The bulk of impairments taken in the ongoing business units were across corporate, institutional and commercial client portfolios to reflect weak commodity prices and deterioration in India. Impairments at the retail business units were far lower, equivalent to 70bp of loss, which appears reasonable considering the group's broad geographical scope.

The reduction in concentration risk is positive because interconnected exposures can result in sizeable simultaneous credit downgrades, as when USD3bn of liquidation portfolio exposures were reclassified in 2015. The group's top 20 corporate risks now represent 61% of common equity Tier 1 capital, down from 83% at end-2014. Geographical concentration is still high, however. In 2015, only 'Greater China' reported a pre-tax profit of any significance.

Operating income fell 15% to USD15.4bn in 2015. Wealth management was the only business line that increased its contribution at this level. At an un-adjusted pre-tax level, only retail and private banking units were profitable, highlighting the challenge faced by management.

We expect dim group results in 2016, impacted by lower client activity, depressed trade flows, emerging-market currency and commodity-price weakness, lower capital markets activity, and weaker global economic growth.

NPLs jumped to 4.5% of gross loans at end-2015 from 3.8% at end-September 2015 and the bank's total net impaired loans are sizeable at USD6.6bn or 17% of common equity Tier 1 capital. Standard Chartered's capital ratios, which strengthened following a rights issue in 4Q15, compare well with peers'. The common equity Tier 1 ratio reached 12.6% at end-2015 (2014: 10.7%) and the leverage ratio 5.5%. We think it is important that the group maintains high buffers especially because internal capital generation prospects are poor.

Medium-term profitability targets are not over ambitious: management aims for an 8% return on equity by 2018 and 10% in 2020. Returns earned from corporate and institutional banking, representing 56% of operating income in 2015, are well below these thresholds. Retail business generates returns well in excess of the targets in all areas except China and Korea.