Standard Chartered PLC Is Drinking In The Last Chance Saloon

Central bankers, politicians and regulators were scorned for failing to lynch the big banks in the wake of the financial crisis, but the authorities are slowly exacting revenge, especially in the US.

New York’s Department of Financial Services (DFS) has just slapped a $300m fine on Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) and banned it from from processing transactions for some high-risk clients, after accusing it of backsliding on its promise to improve procedures for identifying suspicious activity.

This is on top of $667m worth of fines imposed in 2012, for busting US sanctions imposed on Iran. 

British Isn’t Best

I couldn’t help but feel a frisson of shame at the New York Times headline: “British bank faces action, again, by New York State”, but London-listed Standard Chartered is a British bank, even if it does 90% of its business overseas, primarily in Asia.

It is now been forced to suspend clearing activities for high-risk Hong Kong business clients and exit certain client relationships at its branches in the United Arab Emirates.

And it will remain on the naughty step, because it can’t accept new customers for dollar-clearing without approval from the DFS. It faces compliance monitoring for the next two years. 

The long arm of the US law has a global reach.

Sands Running Out

Which is the last thing chief executive Peter Sands, needed right now. Standard Chartered emerged from the financial crisis with a relatively clean reputation, but that has been steadily muddied by regulatory penalties and fears that is is sitting on a growing stockpile of toxic loans to wealthy Asian clients.

Sands, one of the longest-running banking bosses, has already been warned he is drinking in the last chance saloon, following a series of profit warnings.

Standard Chartered hit a rich seam in the emerging markets goldrush, but now its chief executive’s personal line of credit is running out.

Wanted Man

The bank’s disappointing first-half results included a 20% drop in pre-tax profits, from $4.08bn to $3.3bn, while its operating income, cost/income ratio, earnings per share and impairments line all look shaky.

City talk suggests that Sands has to turn things round in the second half. If he doesn’t, the saloon bars will swing open, and a posse of armed institutional investors will strong arm him into the streets.

Toxic Troubles

Of course, Standard Chartered isn’t the only British bank to incur regulatory wrath, it goes with the territory these days. What makes this particularly worrying is that the bad bank is only just starting to emerge from the shell of a supposedly good bank. 

The toxic swamp was exposed years ago at Barclays, Lloyds Banking Group and Royal Bank of Scotland Group, and the clean-up operation is well underway. 

Standard Chartered is at an earlier stage in the cycle, suggesting that further shocks could emerge.

Last Chance Charlie

Banking investors have got so used to swingeing regulatory fines, they shrug them off these days. Standard Chartered’s latest fine will only hit earnings by 2% at most. Management has said that its US licenses, and the vast majority of its clients, including in Hong Kong and the UAE, will be unaffected by the ruling.

With the share price down 17% in the last year, leaving Standard Chartered trading at 12 times earnings and yielding 4.3%, this stock could be worth another roll of the dice.

But for Peter Sands, the glass looks increasingly empty.