Standard Chartered License Threat Stokes Investor Concern

Standard Chartered’s Fitness Is Key Shutdown Grounds in N.Y. Law
New York’s financial-services regulator has grounds to shut Standard Chartered in the state even if he accepts the firm’s argument that it illegally laundered only a fraction of the $250 billion. Photographer: Simon Dawson/Bloomberg

The threat by a New York regulator to suspend Standard Chartered Plc’s banking license is stoking investor and analyst concern the business model that produced eight straight years of record profit is in jeopardy.

New York State’s Department of Financial Services this week said the London-based lender conducted $250 billion of deals with Iranian banks over seven years and processed transactions for institutions subject to U.S. economic sanctions, and may lose its state license. The shares had slumped 22 percent in London since the Aug. 6 order, erasing 8 billion pounds ($12.5 billion) of market value.

“If a global bank loses its U.S. presence, that’s quite hobbling in terms of conducting international dollar transactions,” said Serena Moe, a former U.S. Treasury Department deputy chief counsel and Citigroup Inc. lawyer who’s now at law firm Wiley Rein LLP in Washington.

Standard Chartered focuses on arranging funding and providing guarantees for clients importing and exporting to Asia, a strategy described by Chief Executive Officer Peter Sands last week as “boring.” While it doesn’t have a U.S. consumer bank, the unit that processes dollar payments for clients with businesses in the U.S. and emerging markets is the seventh largest in the world.

Pretax profit at its U.S., U.K. and European division almost doubled in the first half to about $464 million, about 12 percent of the total.

‘Under Scrutiny’

The stock was downgraded by analysts at Nomura Holdings Inc. and Bank of America Corp. this week on concern the allegations regarding the Iranian transactions may weigh on the shares and lead to more probes.

“The whole business model comes under scrutiny given that Standard Chartered is basically a trading bank in Asia where the bulk of the trade is in U.S. dollars,” said Chirantan Barua, an analyst at Sanford Bernstein Research in London. Barua has had an underperform rating on the stock since at least March, according to data compiled by Bloomberg.

Standard Chartered yesterday denied the allegations, saying it “strongly rejects the position and portrayal of facts” made by the New York regulator. The lender said 99.9 percent of its transactions with Iran complied with U.S. Treasury regulations, and that the total value of trades that weren’t in compliance was less than $14 million. Tim Baxter, a company spokesman, declined to comment further.

Short Sales

The shares, which plunged 16 percent yesterday, the most in almost 24 years, gained 8 percent to 1308 pence at 9:00 a.m. in London today.

The bank might be asked to pay as much as $700 million to resolve the allegations filed by New York’s banking superintendent after his department grew impatient with inaction by federal regulators, a person familiar with the case said, asking not to be identified because the matter is confidential.

The lender is unlikely to lose its banking license because the regulator’s order focuses on monetary penalties, Cormac Leech, an analyst at London-based Liberum Capital Ltd. who rates the stock a buy, wrote in a note to clients yesterday.

‘Uncertainty’ Effect

“It’s incredibly difficult to know what kind of impact this is going to have on Standard Chartered’s business,” said James Chappell, an analyst at Germany’s Berenberg Bank. “That uncertainty is why the shares have been hit as much as they have.”

The Hong Kong Monetary Authority is reviewing the New York order to see if there are issues that have implications for the city, according to an e-mailed statement in response to queries today. Hong Kong has imposed a “robust” regime to curb money laundering and financing of terrorists according to international standards, the de facto central bank said.

Any limits on Standard Chartered’s U.S. dollar clearing operations would be “negative” for the company’s bond ratings, Moody’s Investors Service said yesterday in a statement.

“This business directly supports its global commercial and trade-finance franchise, and the group places a heavy strategic emphasis on transaction banking and cash-management services,” Moody’s said. The potential for closing of Standard Chartered’s New York branch also may have “broader implications” for the company’s reputation, Moody’s said.

Sands, 50, said he saw “virtue in being boring” as the lender posted an 11 percent increase in net income to $2.86 billion for the first half of 2012. The bank, which generates about 70 percent of its revenue from Asia, has had a U.S. presence since 1902. In 2008, it agreed to acquire an American Express Co. bank unit for about $860 million, in part to double its business clearing dollar payments for clients.

‘Reputational Risk’

The unit provided about 1,700 banks in 120 countries with clearing services in U.S. dollars, euros and yen at the time of the purchase. The bank clears about $195 billion a day through its Americas division, according to its website.

“It does business with American banks and used to describe itself as a bankers’ bank, organizing trade finance for Asia, so it will not be good for its global reputation to be seen to be falling out with New York regulators,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London, who rates the bank a buy. “It’s the reputational risk.”

Standard Chartered’s New York operation had $40.8 billion of assets at the end of March, according to the New York regulator. By comparison, the parent had $624 billion in total assets at the end of June.

Central Role

The New York branch plays a central role in the bank’s interactions with the Federal Reserve, which guards the stability of the U.S. financial system.

As of March 31, the New York branch had $17.7 billion in deposits held at Federal Reserve banks, according to a data filed with the National Information Center, a U.S. data repository. In November 2008, during the credit crisis, Standard Chartered used the New York branch to borrow $2.9 billion through a Fed emergency-lending program, according to a Bloomberg News examination of data obtained from the central bank under a Freedom of Information Act request.

Finance Director Richard Meddings told analysts Aug. 1 that Standard Chartered took pride in being one of the few able to provide non-U.S. clients access to dollar funding throughout the crisis.

Dollar liquidity “has become one of the more sort-of unpredictable and sort-of in-flux variables,” Meddings said. “But we are in a position to take advantage of that, because we are highly liquid in dollars. We have the trade-finance infrastructure, we have the relationships.”

Dollar Funding

Wire transfers involving Iranian banks are at the heart of Standard Chartered’s alleged misconduct. From 2001 to 2007, the bank executed 60,000 wire transfers involving $250 billion through its New York branch, according to the Department of Financial Services.

At the time, the U.S. Office of Foreign Assets Control required U.S. banks to identify and filter all dollar-clearing transactions involving financial institutions operating in nations facing U.S. sanctions, including Iran -- even if the transactions were handled by third-party banks. Standard Chartered flouted the rules by removing any reference to the involvement of Iranian banks from wire-transfer orders involving its New York branch, the regulator said.

‘Rather Tricky’

Standard Chartered “had previously reported that it is conducting a review of its historical compliance and is discussing that review with U.S. enforcement agencies,” the bank said in the statement, referring to the Department of Financial Services, U.S. Department of Justice, U.S. Treasury, Federal Reserve Bank of New York and New York District Attorney.

The DFS was created in 2011 when Governor Andrew Cuomo merged the state’s banking and insurance departments into a new regulator under Benjamin Lawsky, his former chief of staff. The agency has the power to issue regulations, investigate and fine financial-services firms. It may also probe alleged criminal activity and refer its findings to the state’s attorney general for prosecution.

The lender’s top executives may now come under pressure to resign, according to Christopher Wheeler, a Mediobanca SpA analyst in London.

“This is going to prove rather tricky for the management team at Standard Chartered as they have been at the bank” for years, he said. “This has been happening while Peter Sands, Richard Meddings and Mike Rees have been in place.”

Settlement Seen

Sands was promoted to CEO in November 2006 after four years as finance director. Meddings, who replaced Sands as finance director, was previously director for governance for Africa, Middle East, Pakistan, Europe and the Americas. Since 2003, Rees has been CEO of global banking and markets, the unit that generates about three-quarters of the lender’s profit.

The bank may be fined $1.5 billion by regulators in the U.S., lose about $1 billion of revenue from its Iranian operation and a further $3 billion in market value if top executives quit, Liberum’s Leech said.

That may prompt Standard Chartered to reach an early settlement and avoid losing its license.

The problem is “what makes the stock go up from here?” Wheeler said in a Bloomberg Television interview after the plunge. “What good news can push the stock up? To get back to where it was last night they need to resolve this issue.”

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