Yuan slide seen adding to StanChart's Asian challenges

By Steve Slater

LONDON, Aug 13 (Reuters) - Already faced with a battle torevive the fortunes of banking group Standard Chartered, new Chief Executive Bill Winters is now confrontedwith another challenge in the shape of China's yuan devaluation.

Just over a week after Winters outlined his plans to revivethe bank after a slump in profits, analysts say his turnaroundefforts could be hampered by the yuan devaluation whichthreatens to increase bad debts in Asia and weaken othercurrencies in the region.

London-based Standard Chartered is the European bank mostexposed to Asia's economic weakness and currency volatility,which come just as Winters launches his attempts to lift thebank's fortunes and improve profitability.

"We think that asset quality will continue to deteriorateand the worst is yet to come," said Barry Norris, chiefinvestment officer at Argonaut, a fund that has a short positionon the stock.

The bank, for many years a favourite among investors becauseof its exposure to fast-growing Asian economies, had alreadycome under pressure from rising losses on loans to commoditiesclients and to customers in China, India and elsewhere.

Southeast Asia (ASEAN), where Standard Chartered generates19 percent of revenue and has 26 percent of loans, could beparticularly impacted by currency turmoil, analysts said.

Shares in Standard Chartered, which have more than halved invalue since hitting a record 1,975 pence in late 2010, are down3.4 percent since China's devaluation and HSBC is down 2.7percent. By comparison European banks as a whole aredown 2.3 percent.

The relatively muted reaction is because a rise in bad debtshad already been forecast at StanChart and there were concernsabout China's slowdown, analysts said. The impact of weakerAsian currencies on revenue is also partly offset by a reductionin local expenses, such as wages, in dollar terms.

CREDIT QUALITY

But some say worse is to come.

"We believe ASEAN credit quality is set to deterioratefurther, as existing trends are exacerbated by yuandevaluation," said Joseph Dickerson, analyst at brokerageJefferies. He rates Standard Chartered "underperform" and hascut his price target on the stock to 602 pence from 656p.

Other analysts have also downgraded this week, with Nomurafor instance cutting its target to 1055p from 1170p with a"neutral" rating.

China's yuan depreciation has sparked jitters its economy isslowing and it could start a "currency war", which dragged otherAsian currencies to multi-year lows.

Standard Chartered reports in U.S. dollars so earnings arehit when local currencies weaken against the dollar. Weak localcurrencies reduced its income by $277 million in the first sixmonths of this year, representing more than one-third of its 8percent income drop.

Rival HSBC is also heavily exposed to Asia, but ismore diversified in Europe and the United States. Its core HongKong market also appears less affected by the recent turmoil,analysts said.

Standard Chartered acknowledged moves in the yuan-dollarrate would have a direct impact as it reports in dollars. "Thesecond-order impact on the Chinese economy and therefore ourChina-related business is obviously more of a macro (economic)conversation," said a spokeswoman in an email, declining furthercomment. (Additional reporting by Sinead Cruise; Editing by DavidHolmes)