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Threat to suspend licence of StanChart worries investors.

WASHINGTON: The threat by a New York regulator to suspend Standard Chartered's banking licence is stoking investor and analyst concern the business model that produced eight straight years of record profit is in jeopardy.

New York State's Department of Financial Services this week said the London-based lender conducted $250 billion of deals with Iranian banks over seven years and processed transactions for institutions subject to United States economic sanctions, and may lose its state licence.

The shares had slumped 22 per cent in London since the August 6 order, erasing EeAu8 billion ($12.5 billion) of market value.

"If a global bank loses its US presence, that's quite hobbling in terms of conducting international dollar transactions," said Serena Moe, a former United States Treasury Department deputy chief counsel and Citigroup lawyer who's now at law firm Wiley Rein in Washington.

Standard Chartered focuses on arranging funding and providing guarantees for clients importing and exporting to Asia, a strategy described by chief executive Peter Sands last week as 'boring'. While it doesn't have a US consumer bank, the unit that processes dollar payments for clients with businesses in the US and emerging markets is the seventh largest in the world.

Pretax profit at its United States, UK and European division almost doubled in the first half to about $464 million, about 12 per cent of the total.

Under scrutiny

The stock was downgraded by analysts at Nomura Holdings and Bank of America this week on concern the allegations regarding the Iranian transactions may weigh on the shares and lead to more probes.

"The whole business model comes under scrutiny given that Standard Chartered is basically a trading bank in Asia where the bulk of the trade is in US dollars," said Chirantan Barua, an analyst at Sanford Bernstein Research in London. Barua has had an underperform rating on the stock since at least March, according to data.

Standard Chartered on Tuesday denied the allegations, saying it 'strongly rejects the position and portrayal of facts' made by the New York regulator.

The lender said 99.9 per cent of its transactions with Iran complied with US Treasury regulations, and that the total value of trades that weren't in compliance was less than $14 million. Tim Baxter, a spokesman, declined to comment.

Short sales

The shares, which plunged 16 per cent, the most in almost 24 years, gained 8 per cent to 1308 pence in London yesterday.

The bank might be asked to pay as much as $700 million to resolve the allegations filed by New York's banking superintendent after his department grew impatient with inaction by federal regulators, a person familiar with the case said, asking not to be identified because the matter is confidential.

The lender is unlikely to lose its banking licence because the regulator's order focuses on monetary penalties. - Bloomberg News

, Cormac Leech, an analyst at London-based Liberum Capital Ltd. who rates the stock a buy, wrote in a note to clients on Tuesday.

Uncertainty effect

"It's incredibly difficult to know what kind of impact this is going to have on Standard Chartered's business," said James Chappell, an analyst at Germany's Berenberg Bank. "That uncertainty is why the shares have been hit as much as they have."

The Hong Kong Monetary Authority is reviewing the New York order to see if there are issues that have implications for the city, according to an e-mailed statement in response to queries yesterday. Hong Kong has imposed a 'robust' regime to curb money laundering and financing of terrorists according to international standards, the de facto central bank said.

Any limits on Standard Chartered's US dollar clearing operations would be "negative" for the company's bond ratings, Moody's Investors Service said on Tuesday in a statement.

"This business directly supports its global commercial and trade-finance franchise, and the group places a heavy strategic emphasis on transaction banking and cash-management services," Moody's said. The potential for closing of Standard Chartered's New York branch also may have 'broader implications' for the company's reputation, Moody's said.

Sands, 50, said he saw 'virtue in being boring' as the lender posted an 11 percent increase in net income to $2.86 billion for the first half of 2012. The bank, which generates about 70 per cent of its revenue from Asia, has had a US presence since 1902. In 2008, it agreed to acquire an American Express bank unit for about $860 million, in part to double its business clearing dollar payments for clients.

Reputational risk

The unit provided about 1,700 banks in 120 countries with clearing services in US dollars, euros and yen at the time of the purchase. The bank clears about $195 billion a day through its Americas division, according to its website.

"It does business with American banks and used to describe itself as a bankers' bank, organizing trade finance for Asia, so it will not be good for its global reputation to be seen to be falling out with New York regulators," said Simon Willis, an analyst at Daniel Stewart Securities Plc in London, who rates the bank a buy. "It's the reputational risk."

Standard Chartered's New York operation had $40.8 billion of assets at the end of March, according to the New York regulator. By comparison, the parent had $624 billion in total assets at the end of June.

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Publication:Times of Oman (Muscat, Oman)
Geographic Code:1U2NY
Date:Aug 9, 2012
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