Standard & Chartered overview and trade update

Standard Chartered is the third British bank to be the target of the US regulator this summer.

After coming through the Great Financial Crisis much better than most other global banking peers, Standard Chartered was well & truly hammered today as investors in the Asia focused bank ran for the exit following a threatening warning  issued by the New York banking regulator last Friday and that was announced just as the market closed last night. The New York State Department of Financial Services (DFS) threatened to revoke Standard Chartered banking license stating that the bank hid £160 billion in transactions tied to Iran. The DFS used unusually strong words, calling second largest UK bank a “rogue bank” that had schemed with the Iranian government and hidden 60,000 transactions, generating hundreds of millions in fees over ten years whilst exposing the US banking system to terrorists, drug traffickers and corrupt states. The regulator also claims it found evidence that the bank had been involved in similar schemes for other countries under sanctions including Libya, Burma, and Sudan.

Standard & Chartered rebuked those comments, going further in fact in stating that the charges came as a surprise since they were at the time engaged in ongoing conversations on the matter with the DFS. The bank claims that 99.9% of the transactions relating to Iran complied with appropriate regulations and that there was just under £9 million in transactions that may not comply and that these are under review.

The investigations being undertaken by the US regulator are creating massive losses for non-US banks, in particular the British ones. Standard Chartered has now had its name added to the ignominious list which comprises Lloyds, Barclays and HSBC. Just last month, HSBC had to set aside £700 million to address money laundering penalties. In total, six European banks were implicated in dealings with sanctioned countries through the investigations being led by the US authorities.

The current crackdown on foreign banks has not only legal but also political implications. As the game of political interference persists, Standard Chartered is now firmly in the cross-fire and the stock was hit hard today, losing more than 20% of its value at mid morning. According to some analysts, the loss of the clearing license for US Dollars may result in a drop of 30% to 40% in earnings, however they tempered this with the remark that such a revocation would be very unlikely.

Nevertheless, the bank will most certainly end paying some fines – probably running to £100m or more – not useful but hardly likely to make even a scratch on the Banks book value or future earnings. As we have seen with Barclays, reputational damage seems to have no real effect on profit generation and customer retention

Standard Chartered was, until this week, one of the best bank performers over the last few years in the UK. The bank was able to survive the financial crisis much better than any other since it was not exposed to the problematic subprime arena that many others were and their banking franchise is much more tailored to the fast growing emerging markets.

As we can see in the table below, the bank was the only one within FTSE 100 that has shown a gain since 2008 at last Fridays closing price in contrast to RBS which has lost almost all its value. Even HSBC, the second best performer, wasn’t able to avoid a 23% loss.

Conclusion

Earlier today we relayed that we had entered a reactive long trade in 2 tranches – at 1220p and 1152p to give us an average of 1186p. The stock displayed good strength into the close and barring any further damaging revelations overnight, we wouldn’t be surprised to see a rebound during the Hong Kong session and consequent follow through strength tomorrow that takes us towards the 1300p level.

A bit like BP a few years ago where they were hit hard as a consequence of the Macondo disaster, calling the bottom in these situations is never easy – you can only go on short term technicals, ensure you have adequate margin to run the position and fall back on the fundamentals. At 1200p Standard Chartered trade at an attractive price:book level and if this is a short term blip, the current woes provide an attractive entry point for both a short and medium term trade in our opinion given the superior ROE and growth profile of the bank.

Standard & Chartered (red), FTSE 100 (green), FTSE 350 Banking sector (Blue)

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