The e-mail landed in my inbox last week: “There’s something about Standard Chartered that is worth looking into.”
You don’t say?
The message was from FINS, a service that highlights job opportunities in the financial sector, saying that the British bank “has money to play with” and planned to hire more than 1,000 workers globally this year.
It was not, alas, a warning to investors that U.S regulators were about to accuse the high-performing bank of evading laws restricting the processing of transactions from rogue states, such as Iran. That charge, from the State of New York, initially wiped out 20 per cent of the company’s value Monday.
The shares are on the rebound, with analysts urging investors to buy on the weakness. But this episode illustrates that even the best and most well-regarded institutions seem to be susceptible to blowups. And, importantly, that investors should think seriously about whether one big problem suggests there are other, unknown ones lurking.
I’m no stranger to the appeal of a battered stock, but it seems to me essential to distinguish between two types of downtrodden securities – those that are suffering from temporary glitches and those that languish because of longer-lasting issues.
Earlier this year, I recommended shares of JPMorgan Chase & Co. after it was revealed the company had a significant trading loss on a big derivatives bet. To me, the key reasons to forgive the company were that its loss was an issue of competence, rather than dishonesty, and that the problem was uncharacteristic of the company’s leader, CEO Jamie Dimon, who quickly acknowledged the bank had been “stupid.”
More problematic, I find, are allegations of long-term, systemic wrongdoing, and what they suggest about other potential problems. That is what is at issue here.
The New York regulators say Standard Chartered removed identifying material from more than 60,000 transactions that would have flagged them as involving Iranian clients.
The bank responded by saying the New York regulators’ order does not “present a full and accurate picture of the facts” and suggested the matter has devolved into a technical dispute over the meaning of the Iranian-transactions law (in which, for all I know, Standard Chartered could prevail).
Yet, the true problem has been revealed with the juicy legal document the regulators released Monday, in which a U.S. executive for Standard Chartered was said to have warned the head office that the Iranian transactions offered the risk of “very serious or even catastrophic reputational damage.” The response of the bank’s group executive director, according to New York regulators? “You … Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”
Allow me to suggest I find this response underwhelming, when the issue at hand is possible “catastrophic reputational damage.” It suggests to me a large cultural problem — one heretofore unidentified at Standard Chartered.
“Standard Chartered is not an ordinary bank. It has a proud reputation, a management team of high integrity, and is known for its magnificent work with the charity, Seeing is Believing,” smooched analyst Ian Gordon of Investec Bank PLC.
Indeed, thanks to both its reputation and its large exposure to high-growth emerging markets, the bank had been trading at a significant premium to British banking peers – 1.5 times its tangible book value, versus an average of 0.6 for others, says Standard & Poor’s equity analyst Frank Braden.
Most equity analysts reiterated their “buy” ratings this week and maintained price targets of as much as £18 to £19 ($29.75 U.S.) — upside of 20 to 30 per cent from the prescandal prices, and 35 to 45 per cent from Wednesday’s level of £13.15.
Cormac Leech of Liberum Capital, who has a more modest price target of £16, believes the combination of fines, “lost future illegal revenues,” reputational impacts and “kitchen-sink risk” adds up to a potential impact of $5.5 billion (U.S.), or £1.50 a share — and since the shares are now down about that much, there’s “limited further downside.”
He may be right and investors who buy on the dip may prosper. But consider this: To get a good sense of the impacts, the analysts have been able to draw on British banks’ past settlements and legal reserves for violating U.S. Iranian money-transfer laws, like the agreement entered into in 2010 by Barclays.
You know, Barclays — the bank that hasn’t had any reputational damage since then.