StanChart's Problems Far From Over Despite Settlement
Standard Chartered’s $340 million settlement with the U.S. regulator which accused it of illegal transactions with Iran has bolstered its share price, but questions over its management and how much more it will have to pay in fines remain.
The bank’s Hong Kong-listed shares (click here for a quote) rose by around 7 percent on Wednesday, after news of the settlement with New York’s Department of Financial Services (DFS) emerged. Last week, a blistering critique by the DFS of Standard Chartered’s conduct with relation to $250 billion worth of alleged transactions with Iran sent the share price into freefall.
Standard Chartered shareholders will have been particularly relieved by the retention of its U.S. banking license, which is viewed as key to its success as a conduit between emerging and developed markets.
The settlement was less than had been feared by the market – some analysts had predicted a total of $1.5 billion in fines.
“This is quite a pragmatic decision for Standard Chartered. Making the settlement doesn’t represent them admitting they did something particularly wrong in the context of the behavior of other banks,” Cormac Leech, banks analyst at Liberium Capital, told CNBC Europe’s “Squawk Box” Wednesday.
“There are two separate issues: one is the operational issue of U-turn transactions and on some of those it does seem that Standard Chartered did do some wire-stripping – and it’s that that the DFS is zeroing in on.”
The bank is still facing fines fromU.S. regulatorsincluding the U.S. Treasury and U.S. Justice Department over its role in allegedly helping nations, including Iran, funnel money through the U.S., contravening U.S. sanctions. Leech forecasts a further $350 million worth of fines for the bank.
The most important concession which Standard Chartered has made to the DFS in its settlement is that it admitted that $250 billion worth of transactions were involved, rather than the $14 million the bank claimed in response to the allegations.
“Both Standard Chartered and the regulator won the point to some extent,” David Marshall, senior analyst of Asia-Pacific banks at CreditSights, told CNBC’s “Capital Connection.”
“The regulator got Standard Chartered to admit to a great number of transactions affected, and Standard Chartered has a comparatively painless result compared to what might have happened and the fear of losing its licence.”
The bank's senior management has so far survived the crisis, but that may change. Barclays lost its chairman, chief executive and chief operating officer within a week after admitting manipulating the London inter-bank offered rate (Libor – click here for an explanation).
A senior departure from StanChart is “a little less likely” following Tuesday’s announcement, but still not off the table, according to Marshall.
“Bear in mind we don’t know the outcome from other investigations,” he warned. “What the DFS has done may have raised the bar in terms of fines.”
Standard Chartered had been one of the sector’s best-regarded banks, because of its exposure to emerging markets, particularly in Asia, before this scandal emerged. Its share price will recover slightly in the short term, according to Leech.
“We’ve already rallied about 30 percent from the lows, so the easy money has already been made from the rebound trade, but I think there is 4-6 percent further upside,” he said.
“We will see higher cost of equity for Standard Chartered. People now realize that they’re operating in emerging markets and there are therefore more operational risks.”
Written by Catherine Boyle, CNBC. Twitter: @catboyle01.