Standard Chartered PLC would be a juicy acquisition target – and one that a couple Canadian banks would have to at least consider – if it loses its New York banking license over accusations it helped clients in Iran do business in contravention of U.S. sanctions.
Standard Chartered has what its own chief executive has described as a “boring” business model of financing trade in and out of Asia, which means doing a lot of transactions involving foreign currency on one side and U.S. dollars on the other. The business doesn’t work if Standard Chartered is limited in its ability to work in U.S. dollars by a lack of a New York license, hence the market’s decision to cut the bank’s market capitalization by about 20 per cent Tuesday.
However, a buyer with a license could put Standard Chartered right back in business, and gain the bank’s coveted connections in Asia. The bank has a huge presence in places like India, where it’s almost impossible to build out a presence organically because of limits on branch openings, say some senior banking executives.
So who would be interested? In a perfect world, banks like Citigroup Inc. and Royal Bank of Scotland PLC would be aching to buy StanChart to increase their international presence. However, it’s nowhere near that perfect world for firms like Citi and RBS, which have far bigger problems.
In that vacuum, why not a Canadian bank such as Royal Bank of Canada or Bank of Nova Scotia? They would have little chance of winning the bidding war in that perfect world but might have a shot with the competition on the sidelines.
To be sure, even a reduced StanChart would be a huge bite, especially for Scotia, but the strategic rationale looks interesting.
Standard Chartered has a market capitalization of £31-billion, or about $48-billion (Canadian), after Tuesday’s rout. Chop another 20 per cent off StanChart if the license really is pulled, and it would still be $40-billion. That’s almost half the market cap of RBC and two-thirds of Scotia.
But let's think big for a minute. Scotia has staked its business on becoming bigger internationally, and it has the acquisition integration chops overseas. StanChart would take what Scotia has already been doing very successfully and vault it to another level.
For Royal, which has been focusing on wealth management as a “boring” way to counterbalance its focus on capital markets, StanChart’s trade finance business would do something similar, with the added advantage of giving Royal a bigger window on Asia.
The Canadian government and regulators might be nervous about a Canadian bank getting so big internationally, given that their domestic weight helped shield them from the last crisis. But there’s an argument to be made (and one that Bank of Canada Governor Mark Carney has been making) that Canadian companies need to diversify away from the U.S. to international markets. Having a big bank lead the way might set an example and help to ease the way for other companies by providing crucial services in those international markets.