Second-biggest investor in emerging markets bank backs chief despite big share price fall from £20 in 2010 to £9.50 last week
PETER SANDS, the beleaguered chief executive of banking giant Standard Chartered, received public backing this weekend from the lender’s second-largest shareholder.
Sands and chairman Sir John Peace are under intense pressure following a profit warning last week and a slump in the share price.
However, Martin Gilbert, chief executive of Aberdeen Asset Management, which controls 8.4% of Standard Chartered, yesterday leapt to Sands’ defence.
Gilbert said: “We believe that the management, led by Sir John Peace and Peter Sands, should be given the opportunity to address the bank’s current issues and deal with them now.
“We don’t believe there is anything fundamentally wrong with the bank and we are looking forward to hearing details of the turnaround plans.” Standard Chartered is due to spell out proposals later this month.
The bank’s largest shareholder, the Singaporean state fund Temasek with an 18% stake, is thought to be broadly supportive of current management and is not agitating for change.
Shares in Standard Chartered suffered a double blow last week. The bank issued a profit warning on Tuesday — the third in a year. Then, on Thursday, it emerged that a US investigation into alleged sanctions-busting had been reopened. The shares lost more than 15% over the week.
Gilbert’s support came as it emerged that the bank faces the threat of having to swallow further bad debts after fresh signs emerged of financial distress at one of its big corporate clients.
The risk of further losses stems from a loan granted in 2012 to Indonesian coal tycoon Samin Tan. He borrowed $1bn from Standard Chartered to buy a share stake in mining group Bumi
At the end of March, the bank was still owed just under $700m.
The bank has a claim over 54m Asia Resource Minerals shares, but that provides little comfort: at Friday’s closing price, the stake in the London company was worth just £21.4m, which is equivalent to $34.2m.
Time runs out for Sands
Standard Chartered’s chief is struggling as his bank grapples with soaring bad debts and a falling share price – from £20 in 2010 to £9.50 last week
As the global financial system threatened to go into meltdown six years ago, Peter Sands could afford to stand comfortably aloof from the panic. Sands — bespectacled and with the look of a particularly intense university professor — knew that his bank, Standard Chartered, need seek no government bailout.
While rivals were sucked down by the sub-prime implosion in America and Europe, his bank had profited from backing entrepreneurs in emerging markets. Its profits were still rising. Indeed, the former McKinsey consultant felt able to offer the Treasury advice on how the bailout of more troubled financial institutions might be orchestrated. As a new framework of banking regulation began to take shape, he was given space in the Financial Times to tell the world what was wrong with the proposals. That all seems a long time ago.
Now the bank — and Sands, who received more than £4m last year — are under intense pressure. Last week came a profit warning. It is beset by challenges from regulators in America. Some of the loans it was prepared to make when times were good are looking suspect. And the bank has contrived to assemble a client list whose cast of characters might reasonably be described as colourful.
That list includes Samin Tan, the Indonesian coal magnate who was intimately involved in the corporate disaster that was Nat Rothschild’s Bumi mining venture. There is also Beny Steinmetz, the Israeli diamonds tycoon who is under investigation by the FBI for deals in Africa.
Add to the list Essar, the Indian conglomerate which is struggling to bring down its debts — reckoned to amount to about $14bn at the end of last year. And don’t forget Frank Timis, the London-based Romanian-Australian who is in charge of the financially stretched African Minerals and has a series of controversial business ventures behind him — as well as a couple of convictions for possessing heroin.
Crucially, all make — or lose — most or all of their money from mining and commodities. And now Standard Chartered’s willingness to commit itself to commodities and mining ventures is coming back to haunt it.
That willingness was a key factor behind a profit warning last week that helped send the bank’s share price tumbling. Add in the news that Standard Chartered faces further — and potentially costly — investigation by US authorities for alleged sanctions-busting, and it has been a terrible few days for the bank.
In the past, the bank has quite openly boasted that it aims to provide a large proportion of each corporate client’s financing: it places big bets. The loan to Samin Tan alone was for $1bn.
Unfortunately, until a couple of years ago, many of those big bets were with clients whose financial strength depended on continuing strong commodity markets — just as commodity process were starting to fall.
In the first half of 2012, for example, it increased its exposure to mining and quarrying 75% year-on-year to more than $11bn, making that sector by far the largest in its wholesale bank.
FOR years, Standard Chartered was a darling of investors. For a full decade, it notched up record results year after year. Its heavy exposure to developing markets seemed to have served it well. No longer. In late 2010, Standard Chartered’s share price nudged towards £20. Last week, it fell below 950p.
Understandably, investors are restless. Some analysts complain that Sands, chief executive since 2006, too rarely appears to have a grasp of detail; explanations of how exactly the bank plans to address its problems have so far been vague. Investors are being promised $400m of cost-cuts next year, but details are not yet available.
Andy Halford, recruited from Vodafone to replace the bank’s long-standing finance chief Richard Meddings who quit abruptly in January, started his new job only four months ago. “He hasn’t yet engaged with the market,” said one close observer of the company. “So far, all he has done is read out a couple of prepared scripts. It’s not that he has said anything wrong; he just hasn’t said anything.”
That leaves Sir John Peace, the chairman. He has contrived to make 2014 his year for riling shareholders — at three FTSE 100 companies. He is chairman of luxury goods group Burberry. And until recently, he chaired the credit checking company Experian, a company he built up. Shareholders have registered their upset about the governance of all three businesses.
At Burberry, holders of more than half the company’s shares voted against a scheme to give incoming chief executive Christopher Bailey a huge share award.
When Peace anointed Experian chief executive Don Robert as his successor as chairman, almost one third of shareholders opposed him or abstained in the vote: it was in clear violation of the City code on corporate governance and even provoked criticism from the Institute of Directors. And at Standard Chartered, some 41% of investors voted against pay deals for the management team.
Added together, the repeated rebuffs from shareholders suggest that Peace — a former army officer, Lord Lieutenant of Nottinghamshire and now aged 65 — has shown a striking lack of sensitivity to the City’s zeitgeist that is crucial for anyone chairing one top-100 company, let alone three of them.
Furthermore, when it comes to causing upset, Peace has previous form.
Most notably, he got himself — and Standard Chartered — into a fearful pickle after American regulators forced the company to shell out $670m in 2012 for breaking US sanctions against Iran and other states blacklisted by Washington.
Early last year Peace swatted away questions about the sanctions busting, breezily dismissing the bank’s misdeeds as mere “clerical errors”. He said there had been “no wilful act to avoid sanctions . . . mistakes are made.”
The Americans were furious. Peace, Sands and the then finance director Meddings, were summoned to Washington. The bank had been guilty of far more than mere clerical errors, they were told. Peace was forced to issue a humiliating apology. His off-the-cuff remarks had been “legally and factually incorrect” he told investors and staff; the bank had been responsible for “knowing and wilful criminal conduct.”
Standard Chartered was fined $670m in 2012 for breaking US sanctions against Iran and other states blacklisted by WashingtonStandard Chartered was fined $670m in 2012 for breaking US sanctions against Iran and other states blacklisted by Washington (AFP/Getty) THE sanctions-busting affair continues to dog the bank. In August this year, it paid out a further $300m after it was accused of alleged failures in a system to flag up additional “inappropriate” transactions. And last week, just as investors were trying to assess the latest profit warning and the gravity of Standard Chartered problems, there came a further blow.
It emerged that the US justice department and the Manhattan district attorney’s office are investigating whether they should take yet more action against the bank: the suspicion — no more than that at the moment — is that at the time of the 2012 settlement, Standard Chartered did not reveal the full extent of its dealings with Iran.
The bank itself merely says it is “co-operating” . Whatever the outcome, it seems that it will be a while yet before the bank can draw a line under the affair.
As recently as June, Standard Chartered was trying to sound upbeat about its ability to restore its fortunes. In an inelegant piece of management consultant-speak, it told investors: “We are making good progress against our refreshed strategy . . . managing costs very tightly, disposing of non-core businesses and optimising the deployment of capital.”
Last week, the thrust — and, indeed, the language — initially seemed little changed. Sands said: “We are executing our refreshed strategy, including reprioritising investments, exiting non-core businesses, de-risking certain portfolios and reallocating capital . . . We are taking further action on costs.”
So steady as she goes? Not a bit of it. In June, Standard Chartered said: “Profits in the second half are likely to be higher than in the same period last year.” But now? “We now expect profits in the second half will be lower,” it said last week.
Does the lowly share price fairly reflect Standard Chartered’s prospects? By some measures — shareholders’ funds on its balance sheet, for example — the bank seems strikingly undervalued. But there are two great unknowns.
The first is the extent of any further punishment that Standard Chartered is likely to receive from American regulators. Benjamin Lawsky, superintendent of New York’s Department of Financial Services has taken an aggressive line with the bank. In 2012, he branded Standard Chartered a “rogue institution . . . engaged in deceptive and fraudulent behaviour”. His attack prompted chancellor George Osborne to phone Tim Geithner, the US Treasury secretary, to complain. On this side of the Atlantic, there were suspicions that Standard Chartered had been the victim of an undeclared campaign to give non-US banks a hard time.
The second unknown is whether the latest provisions for corporate debts that turn sour are merely the tip of a very menacing iceberg. Is the $250m set aside in the most recent quarter a foretaste of things to come?
Ian Gordon, a banking industry analyst with Investec and a bull of the stock, points out that over the past five years or so, Standard Chartered has clocked up operating profits, excluding provisions, that are roughly seven times “impairment” charges — the amount it has set aside for loans unlikely to be repaid. That compares with a typical ratio or three or four times for other banks.
In other words, Standard Chartered has, in the recent past, done better than most. Certainly, the latest quarter’s $250m provision is unwelcome — and compares with virtually nil for the equivalent three months of last year. But it is still only roughly four times underlying pre-provision profits — unwelcome, but not catastrophic. Nevertheless, investors are clearly worried — hence Standard Chartered’s sharp share price fall in the wake of last week’s statement. The company said its increased provisions “related to a small number of accounts, primarily in the corporate and institutional clients segment, some of which have been affected by weak commodity markets.”
Which companies are behind these “small number of accounts”? We don’t know – although the problems faced by clients such as Samin Tan, Essar and Timis are likely to be in the mix. It is thought that Tan still owes Standard Chartered about $600m, and his businesses have been hit by a tumbling coal price over the past two years. Also under scrutiny is a $2bn-plus loan to India’s Essar. Loans such as these amount to more than small change — even for a bank the size of Standard Chartered.
Will Peace and Sands survive? I wouldn’t fall off my chair if one or other of them were gone in the next few months,” said one bank watcher, “And frankly, it wouldn’t do much harm to the share price if they were to go.” Sunday Times
