August 21, 2014 / 4:37 AM / 3 years ago

Fitch: StanChart Fine Shows Rising Risks of Complex Bank Model

(The following statement was released by the rating agency) HONG KONG/LONDON/SINGAPORE, August 21 (Fitch) The USD300m settlement between Standard Chartered (SC) and the New York Department of Financial Services (DFS), announced on 19 August, again highlights operational and regulatory risks for the bank, says Fitch Ratings. SC's agreement with the regulator concerns deficiencies in anti-money laundering surveillance systems at its New York branch, and suggests a lack of sufficient internal controls and compliance mechanisms. The settlement also places explicit business restrictions on the bank related to its US dollar accounts and clearing services. The immediate financial cost to SC from the settlement is limited - the USD300m fine accounts for just over 7% of 2013 net income, and we do not expect the curtailment of specific businesses to be significant to earnings. However, the agreement to restrict US dollar clearing services for some Hong Kong and UAE retail business clients, and to require the approval of the DFS before opening any new US dollar demand deposit accounts at SC's New York branch, may necessitate some change to its medium-term business plans. Furthermore, profitability will also be dented by increased compliance obligations. The SC and recent BNP Paribas settlements suggest that the regulators are increasingly turning to restrictions on specific activities as a way of penalising conduct failures. These restrictions may have longer-lasting implications for banks' business profiles than one-off fines. This is still damaging, while the business restrictions imposed on SC and BNP Paribas have been tailored to reflect the specifics of each case. Therefore, we believe this may be a useful way for the enforcement authorities to remedy identified weaknesses for banks more broadly, instead of withdrawing business authorisation completely. For SC, the business restrictions and additional compliance burden are occurring at a critical juncture in the midst of its strategic repositioning. Hong Kong originates the majority of SC's US clearing activities, but we do not expect major strategic changes to the group's businesses in Hong Kong and greater China. This is the second major settlement between SC and US regulators in as many years, following a USD667m fine in 2012 for violating sanctions against Iran. Compliance costs have already added to an increase in overall operational expenses, by 1%-2%. The DFS is also extending the term of its independent monitoring of SC by two years; so the importance of compliance, regulatory and operational issues is heightened for the medium term. Fitch's ratings for SC are at a high level (AA-/Stable/aa-), reflecting (among other things) the bank's far-reaching network which enables it to compete with global banks of a significantly larger size. However, the heightened cost and required management focus of compliance and regulatory issues are making it more challenging to operate a business model with multiple strands. Large global banks are facing similar challenges from enhanced scrutiny, but most have a greater critical mass to deal with them. We will assess the potential broader impact of the settlement on SC's ratings during the coming weeks. Contacts: Sabine Bauer Senior Director Financial Institutions +852 2263 9966 Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway Hong Kong Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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