By Lawrence White
HONG KONG (Reuters) - Incoming Standard Chartered (LONDON:STAN) Chief Executive Bill Winters will need to take tough decisions that predecessor Peter Sands deemed unnecessary, in order to reverse a two-year slump in the bank's fortunes, according to some insiders and bankers.
In a major boardroom reshuffle that signalled the end of an era at the Asia-focused bank, Standard Chartered said Thursday that Winters would take over in June, initially prompting a giddy reaction among investors, analysts and some staff.
The lender's shares (L:STAN) have risen nearly 10 percent in the last two days.
Winters faces challenges including cleaning up the bank's books following a spike in bad loans, raising at least $4 billion (2.6 billion pounds) in capital, trimming costs further in an underperforming retail division and improving investment banking performance.
"There's a mood of borderline euphoria and excitement today...after six grim months where the sense of passion and urgency fell away a bit," said a senior Asia-based insider.
That mood reflects the expectation that Winters, 53, a seasoned American investment banker, will tackle some of the bank's problems head-on rather than argue, as Sands had done, that only smaller revisions to its strategy were necessary.
The biggest of those problems is the need to raise capital to cover the costs of a clean-up of the bank's books, which have been hit by rising bad loans in countries including China and India and by exposure to commodities.
"(Winters) has to do some very deep plumbing to understand the depth of the problems in asset quality, credit exposure, litigation risks, mismarked positions," said Michael Dee, former Southeast Asia CEO of Morgan Stanley (NYSE:MS) and senior managing director at Temasek, Standard Chartered's biggest investor, from 2008-10.
Once Winters has assessed those problems, he will then have to raise a lot of capital in one go, Dee added.
Analysts differ in their assessment of how much the bank needs, but the consensus is at least $4 billion, with some saying as much as $7 billion in order to get the bank's core capital ratio to 11 percent by the year-end.
Outgoing CEO Sands said the bank had no immediate plans to raise capital.
EXPECTING CHANGES
Sands has had a grim time since the summer of 2012, facing problems with the U.S. regulator and a rise in losses on loans to commodities firms. But before then the bank had 10 successive years of record growth and delivered good returns to investors, and Sands was praised for steering the bank through the financial crisis better than almost all rivals.
He was prepared to make changes more recently, including the January announcement that the bank would shut its equities division and cut around 4,000 jobs in its underperforming retail unit, a move which won praise from the market.
Insiders are bracing for further major changes once Winters assesses the bank he is taking over.
"We've got a tonne of challenges. Bill Winters has one mandate: to change things. I fully expect a review of everything," said the senior Asia-based Standard Chartered insider.
Deputy CEO Mike Rees held an internal call on Thursday during which he said there would be no major change in strategy, according to someone on the call, but some people inside the bank expect further job cuts.
"FIEFDOMS"
While Winters is a well-regarded banker, he lacks much experience in Asia where the bulk of Standard Chartered's business, and its problems, lie.
In recent results announcements, the bank has focused attention on credit problems in China and India, but it also saw bad loans spike 31 percent in Southeast Asia in the first half of last year. The bank is due to report on Wednesday.
The lender's business model involves funding companies that trade across its core markets of Asia, the Middle East and Africa, providing them with loans, cash management, forex and other products.
That can be capital-intensive, a strategy that has become harder amid rising funding costs and regulatory changes that put more pressure on banks' use of capital.
"The model is quite old-school, lending to resource companies over tech, very balance sheet-intensive, and that's more challenging now," said a former senior Standard Chartered banker who worked in Asia.
Winters will also need to fix Standard Chartered in Korea, where the bank recorded a $1 billion writedown in 2013, and has seen its return on equity decline annually since 2008 from 12.4 percent to 0.1 percent in the first 9 months of 2014.
Insiders and market observers are betting problems like these could prompt Winters to make bold decisions.
"Standard Chartered was a collection of fiefdoms, run by warlords and overseen by princes," said former Temasek director Dee. "Sustainable change will take five to seven years if it happens at all," he said.