Asia-facing bank Standard Chartered (STAN) lost a quarter of its market value in just two hours of market trade following allegations of illegal money transactions. During the London Stock Exchange’s final hour of trade on Monday, news broke that the New York State Department of Financial Services has accused the UK lender’s US subsidiary of collaborating with the Iranian government and hiding $250 billion in financial transactions.
Shares Plunge 25%
Shares in Standard Chartered, which has its headquarters in the UK but operates almost exclusively in Asia, Africa and the Middle East, dropped 6% in closing deals in London on Monday, extended the fall on the Hong Kong Hang Seng overnight, and had dropped as much as 20% within half an hour of the FTSE 100 opening on Tuesday.
Shares fell below 1,200p on Tuesday for the first time in more than three years; the last time the stock traded this low was in July 2009 as it recovered from its 664p slump at the market trough of the financial crisis.
Not So Squeaky Clean?
Over the past few years, while allegations of rogue banking have swept through the industry, Standard Chartered has managed to keep its reputation relatively intact and was regarded by many as an exemplary banking institution. These allegations, however, particularly the strong wording used by the US regulator, bring that view into question.
“We've historically seen Standard Chartered as among the best-managed, most risk-averse global banks,” Morningstar senior banking analysts Erin Davis said immediately following the allegations. “The New York report seems to indicate that Standard Chartered didn't stand apart from the rest of the industry as much as it just didn't get caught,” she added.
The report from the New York State Department of Financial Services (DFS) claims that the firm’s wholly-owned US subsidiary, Standard Chartered Bank, “schemed” with the Government of Iran to hide “at least” $250 billion of secret transactions from regulators over a ten-year period, resulting in the firm “reaping” hundreds of millions of dollars in fees.
Davis says she’s especially worried about the allegations that senior management knew about these risks and tolerated actions to cover them up, rather than swiftly eliminating them. “We note that the allegations cover activities through 2007, when the bank was under different senior leadership, and when the banking industry generally had much more of a cowboy culture. We'll closely watch current management's response to the allegations as we recalibrate our opinion of the firm.”
Firm “Strongly Rejects” Allegations
Standard Chartered issued a statement early Tuesday saying it “strongly rejects the position and portrayal of facts made by the New York State Department of Financial Services.” The statement added that the firm “ceased all new business with Iranian customers in any currency over five years ago.”
Standard Chartered said it has been conducting a review of its historical compliance, first announced in its 2010 annual results statement and most recently in its 2012 interim statement, and has been discussing this review with the relevant US agencies including the regulator that has made these allegations. The firm was “therefore surprised to receive the order from the DFS, given that discussions with the agencies were ongoing.”
A Buying Opportunity?
These developments underline that even the banking industry’s ‘squeaky clean’ members are subject to accusations of murky dealings and shareholders will have to wait and see how this story plays out. Should Standard Chartered succeed in contesting the DFS allegations and healing the damage done to its reputation, the loss of a quarter of its market value in just a few hours of trade could present an interesting opportunity for investors willing to take a punt. Standard Chartered provides exposure to the financial sector and emerging markets, without the eurozone risk that is inherent in many of its UK peers.
Last week the firm posted net income of $2.9 billion for the first half of 2012, amounting to a robust 14% return on equity. Earnings increased 28% from the trailing half and 14% from the year-ago half and the bank announced a 10% increase in its interim dividend.
