By Steve Slater
LONDON (Reuters) - Standard Chartered may take a more than $1 billion hit on its Korean business, analysts said, and will use a valuation made on Sunday to decide exactly how much to write down.
The bank said this week it plans to more aggressively restructure its business in Korea - its biggest ever purchase - where its problems have included weaker-than-expected returns, a dispute with staff, tough regulations and a rise in bad debts.
The Asia-focused bank has had troubles with its First Bank business since it bought it in 2005 for $3.3 billion and it said this week it will assess whether to write off some of the $1.85 billion goodwill value it has assigned to the business.
"It has been a troubled business there," said Mike Trippitt, analyst at Numis Securities, who estimated the bank's annual return on its investment has averaged just 6.5 percent in the eight years since the First Bank deal, compared with 10 percent returns across the rest of the bank.
Analysts said the writedown was unlikely to be the full goodwill amount but could be near $1 billion. It is an accounting issue that would not hit cash or capital, but will dent reported profits.
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"It is obvious that a charge could significantly depress stated profits in the half," Deutsche Bank analyst Jason Napier said in a note.
Standard Chartered, which makes more than 90 percent of its profits in Asia, Africa and the Middle East, said it will target clients more suited to its international strengths.
"Korea remains a core part of the franchise and we remain very committed to it ... We were going to shrink it as a proportion of the group largely by holding flat (while other areas grow). I think we will be more assertive now," Richard Meddings, finance director, told analysts on a call.
"It's not just a shrinking, it's also a shifting in how we apply our resources to enhance the return."
Meddings said that will see the bank "significantly shift" resources away from domestic corporate firms to companies with international businesses.
The bank rebranded its 391 Korean branches to Standard Chartered Bank Korea from SC First Bank last year, when it also restructured as part of a costly dispute over a staff retirement programme. All banks have also seen bad debts rise after Korea overhauled its personal debt restructuring processes, allowing more forgiveness on long-term loans.
Standard Chartered made an operating profit of $514 million in Korea last year, on income of $1.85 billion. But it has said bad debts have risen there this year, with Korea accounting for 40 percent of consumer banking impairment in the first-half.
The bank said it will assess goodwill - a value placed on intangible assets - on June 30, and announce any impairments it takes in half-year results, due in early August. The calculation includes long-term economic growth and cash flow forecasts.
(Editing by Louise Ireland)