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StanChart's new Iran fine may pave way for takeover, loan growth, analysts say

A potential U.S.-issued fine as high as $1.5 billion against Standard Chartered PLC for its Iran dealings would give the bank an opportunity to move on from legacy problems that have hindered growth and make it more attractive to buyers.

The fine would represent the conclusion of a multiyear investigation into StanChart's sanction-busting Dubai clients transacting with the Iranian regime. With StanChart also being buffeted by the U.S.-China trade dispute, an emerging market crisis and uncertainty over Brexit driving down U.K. stocks, resolving the Iran issue will allow it to increase lending while reducing regulatory and compliance staff costs, analysts said.

The U.S. launched its investigation into the bank after one of its top executives was recorded in 2012 delivering an expletive-loaded rant, defying Washington over its tough stance on clearing dollar transactions for the Middle Eastern country.

StanChart signed a deferred prosecution agreement with the U.S. in 2012 over its Iran dealings, while also paying a $667 million fine, but the Justice Department is looking into whether the bank has continued facilitating trade with Iran after that date, the Financial Times and Bloomberg News reported Oct. 1. If StanChart is found in breach, its executives could be jailed. In a follow-up report Oct. 8, the FT said U.S. authorities had informed the bank about plans to bring criminal charges against two of its former employees for allegedly breaching sanctions involving companies linked to Iran.

The deferred prosecution agreement was extended in July as the independent monitoring team assigned to the bank by the regulators discovered that it had not fully fixed its anti-money laundering and terrorism finance controls. Its agreement was extended two other times since 2012, including in 2014, when it had to pay an additional $300 million for lapses in its automatic tracking of suspicious transactions.

The London-based lender, which was fined around $4 million in Singapore for breaches of money laundering rules in March, is keen to point out that this fine may be discounted following negotiations.

Julie Gibson, a spokeswoman for StanChart, said the newly reported $1.5 billion fine is "based on a leak from unnamed sources, there is no confirmed figure or timeline for a settlement at this point."

'We continue to cooperate'

She said: "We continue to cooperate fully with the investigation regarding our historical sanctions compliance, and are engaged in ongoing discussions with the U.S. authorities. While we do not comment on the substance of those discussions, we look forward to resolving these legacy issues ... we won't be commenting further given the investigation and discussions with the authorities are ongoing."

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Analysts believe the fine would allow the bank to switch its focus to some of the complex risks it is facing.

"The fine might be bigger than expected but it should ultimately prove cathartic," one London-based analyst, who requested anonymity due to the sensitivity of the matter, told S&P Global Market Intelligence. The $1.5 billion exceeded the expectations of players in the market, which had typically priced in a fine of between $750 million and $1 billion. "Many analysts have zero in their estimates," he said.

That said, the bank might be a collateral victim not only in the U.S.-China dispute, but also in the intensifying U.S.-Iran conflict, which flared up after Washington pulled out of the anti-nuclear agreement with Tehran in May. "Some believe that the current renewed tensions between the U.S. and Iran might have caused the U.S. authorities to take a more punitive approach to the issue," said the analyst.

The New York Department of Financial Services declined to comment.

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StanChart's share price year-to-date has tracked banks listed on the STOXX Europe 600, albeit at a lower level. Ian Gordon, a banks analyst at Investec, said in a note written in September that he expected a turnaround.

Takeover approach

The FT reported earlier in the year that StanChart was approached for a takeover by U.K. rival Barclays PLC, but the talks proved fruitless. The bank also denied that it was to be acquired by a Chinese bank.

Despite the double whammy of weakening emerging currencies and the trade conflict between the U.S. and China, StanChart's biggest market, the note said the bank is likely to grow its profitability and even be taken over, "most likely at the instigation of a regional player."

Gordon upgraded the firm to a buy rating in September, saying the shares had been undervalued.

Berenberg analysts said in their own report in August, their most recent, that they "struggle to understand" the roughly 30% discount to the bank's total book value. "The bank's revenue trajectory remains very healthy," they wrote.

The anonymous analyst said the presence of the monitor and the deferred prosecution agreement have constrained the bank's lending, driving a decline in revenues, as management sought to be "proving to the authorities that when they grow they will grow only based on a satisfactory compliance culture."

The bank would likely step up lending as soon as the Iran affair is concluded, while regulatory and compliance staff costs will drop, he said. "The group badly needs to move on from legacy items. It weighs on the rating of the shares. It consumes management time. It injects a degree of risk aversion into the corporate culture which might not be optimal."

Standard Chartered can afford to take a $1.5 billion hit to its reserve capital, said the analysts, as it would only reduce CET1 by 55 basis points, from 14.2% as of June-end.

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See a section dedicated to financial highlights for your bank: Search for the company in the top search box and go to the "Financial Highlights" section, housed under the Templated Financials on the left-hand panel. Here is an example for Standard Chartered Plc.

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