STAN Standard Chartered Plc

By Max Colchester And Juliet Samuel 

LONDON--U.K. banks and insurers that rode a wave of growth in emerging markets in recent years now find themselves facing a sharp downturn in those key markets.

Financial firms including Standard Chartered PLC, Prudential PLC, Aviva PLC and HSBC Holdings PLC have long touted their exposure to fast growing Asian markets. But the region's fortunes are quickly turning sour, driven by concerns about weakness in China.

Investors are selling off emerging market assets and pulling money out of China on worries about the country's slowing growth and the sudden devaluation of its currency. "The narrative around weaker growth in China and emerging markets more broadly has spilled over into commodity and currency markets," said David Stubbs, a market strategist at J.P. Morgan Asset Management. The fears about the impact of lower demand for raw materials from China have pushed oil prices to six-year lows.

For banks with big emerging markets exposures, investors fret a stuttering Asian economy will dial up the loan losses. Shares in Standard Chartered and HSBC are down 40% and 24% over the last year, respectively. A "real slowdown" in Asian markets would "crystallize" loan losses at banks with big operations in the region, said Nick Anderson, a banking analyst at Berenberg. "In terms of provisioning, the pain is still to come."

Some analysts said the turmoil in Asia could add to pressure on Standard Chartered to issue new capital. The bank, which makes about a third of its operating profits in Greater China, is considering raising additional equity. New Chief Executive Bill Winters said during a recent conference for analysts that no decision had been made yet on whether to do so.

"It seems logical that the group nonperforming loans will continue to increase this year," said Joe Dickerson, an analyst at Jefferies. But the bank could avoid issuing equity by cutting its dividend and selling off assets, he added. In the first half of the year, impairments jumped 15% to $1.7 billion on the back of weakness in commodities markets. The bank has cut its commodities exposure by 11% since the start of the year in an effort to stem losses.

Both Standard Chartered and HSBC are also facing an imminent Bank of England "stress test" that focuses in part on whether lenders can ride out an emerging markets crash. The results of the test, which is already under way and based on last year's financials, will be presented on Dec 1.

Standard Chartered and HSBC declined to comment.

Executives at banks and insurers are putting on a brave face, pointing to the fast growing nature of emerging market economies, fueled by increased urbanization and a fast growing middle-class. "Whilst we probably haven't seen fully the impact in terms of bad debts and so on that come about from the sell off in the stock market...We're still very much looking for 7%, 7.1% GDP growth for this year for China," said HSBC Chief Executive Stuart Gulliver during a call with analysts earlier this month. In June HSBC executives unveiled a plan to divert extra resources into bolstering its Asian franchise, which in the first half of the year generated more than two thirds of its profit before tax.

Shares in London-based insurer Prudential PLC have also suffered. The stock is down 12% since the start of July. Analysts are predicting an inevitable slowdown in sales from its Hong Kong and Chinese customers. Prudential has warned it faces difficulties in its biggest Asian market, Indonesia, an economy sensitive to falling commodity prices and a weakening currency. Six analysts have downgraded 2015 growth forecasts for the company in the last two months, according to FactSet.

A spokesman for the company said that its growth isn't correlated with Asian equity markets and that there are still increasing numbers of affluent people in China who need insurance.

Write to Max Colchester at max.colchester@wsj.com and Juliet Samuel at juliet.samuel@wsj.com

(END) Dow Jones Newswires

August 24, 2015 13:26 ET (17:26 GMT)

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