Standard Chartered Faces More U.S. Fines as Profit Falls 20%

Aug 06, 2014 9:59 pm ET

(Updates with share move in fifth paragraph, comments from CEO of Asian operations in 18th paragraph.)

Aug. 7 (Bloomberg) -- Standard Chartered Plc said it faces further U.S. fines over efforts to block money laundering and posted a 20 percent earnings decline on losses in Asia.

Pretax profit, excluding adjustments to the value of the company’s own debt, fell to $3.3 billion in the first half from $4.1 billion in the year-earlier period, the London-based bank said in a statement yesterday. That matched the average of 11 analysts’ estimates in a Bloomberg survey.

Standard Chartered said it’s likely to face more penalties after New York’s banking regulator found “certain issues” with its anti-money laundering systems. That’s adding to pressure from disgruntled investors on Chief Executive Officer Peter Sands, 52, as he navigates faltering economies in Asia, where the bank generates about three-quarters of its earnings. The lender posted a $127 million loss in Korea for the period, and said it made provisions for a fraud in China.

“There are ongoing risks and scrutiny regarding anti-money laundering issues,” which combined with bad loans in China create “an ongoing overhang” for Standard Chartered, JPMorgan Chase & Co. analysts including Josh Klaczek said in a note. They have an overweight rating on the shares.

‘Silver Bullet’

Shares of the company fell 0.9 percent to HK$158.90 as of 9:32 a.m. in Hong Kong today.

In London, the company’s stock closed at 1,208 pence yesterday, down 0.7 percent on the day and about 11 percent this year, the second-worst performer among Britain’s five largest lenders. Barclays Plc has slipped about 20 percent.

“First-half performance was impacted primarily by a downturn in financial markets and the challenges we face in Korea,” Chairman John Peace said in the statement. “We have taken assertive action to manage short-term performance issues.”

The bank said there is no “silver bullet” to turn the Korean division around. In East Asia, operating profit slid 59 percent in the year, while declining to $728 million from $745 million in greater China. In Europe, profit fell 50 percent to $153 million, while the Americas and Africa also saw declines.

The bank left its dividend unchanged at 28.8 cents a share. First-half net income rose to $2.4 billion from $2.2 billion a year earlier, according to the statement.

Net interest margin, the difference between its income from lending and its cost of funding, fell to 2.1 percent in the first half from 2.2 percent a year earlier, while loan impairments rose by $116 million to $846 million.

U.S. Fine

Standard Chartered said “a monetary penalty and remedial actions” may result from the latest probe into its compliance systems. Benjamin Lawsky, superintendent of New York’s Department of Financial Services, is seeking more than $100 million from the bank, said a person familiar with the matter.

The alleged lapse in anti-money laundering controls, caused by a problem with a software program, was detected by Ellen Zimiles, the independent monitor installed at the bank as part of a 2012 settlement for violating U.S. sanctions against Iran, said the person. The monitor’s term may be extended beyond its original two years, Standard Chartered said.

Standard Chartered was fined $340 million by the New York watchdog two years ago as part of a wider $667 million settlement over breaches of U.S. sanctions with Iran. Lawsky accused the bank at the time of helping Iran launder about $250 billion in violation of federal laws, keeping false records and handling lucrative wire transfers for Iranian clients.

Penalty Estimate

“We don’t believe the impact to be of the same scale as the very different issues the group faced two years ago,” Sands said on a call with reporters. “While I can’t be precise at this stage, we believe the monetary penalty will be less than what we paid” in 2012.

Standard Chartered “recognizes that its compliance with historical, current and future sanctions, as well as anti-money laundering” requirements around the world will remain a focus of authorities, according to the statement.

The lender doubled its headcount in financial-crime compliance, according to the CEO. Operating expenses rose $46 million to $2.5 billion, following regulatory-related charges.

The bank said other impairments rose by $174 million to $185 million amid provisions against commodity-financing assets in greater China “as a result of a fraud.” The company also had “the impairment of certain strategic and associate investments” in Europe.

‘Isolated Issue’

The alleged Qingdao, China, fraud took all banks by surprise and “looks like an isolated issue,” Jaspal Bindra, chief executive officer of Standard Chartered’s Asian operations, told Bloomberg Television in Hong Kong today. The lender has strengthened due diligence in China, he said, without being more specific.

Faltering earnings and rising legal costs have put further pressure on Sands, and The Financial Times reported on July 23 that Peace has been urged to replace him.

Asked on a call with reporters about speculation around his future, Sands said he had no plans to leave the bank, referring to the bank’s “strong team” of senior executives.

Temasek Holdings Pte, the Singaporean state-owned investment company that owns about 18 percent of the bank, pressed for a clearer succession plan, the FT said, citing people it didn’t identify. Temasek declined to comment, as did Aberdeen Asset Management Plc, which holds 7.7 percent and was said by the newspaper to seek Sands’s ouster.

HSBC Holdings Plc, which also generates the largest share of earnings in Asia, said on Aug. 5 that pretax profit dropped 12 percent to $12.3 billion from a year earlier. That was the first decline in the period since 2009. Revenue fell 9.3 percent in the first six months.

--With assistance from Stephen Morris and Suzi Ring in London and Darren Boey and Angie Lau in Hong Kong.