LONDON Standard Chartered is failing to convince some shareholders of its defense against allegations it broke U.S. sanctions on Iran, leaving them worried about possible lawsuits, fines and the loss of top executives.
StanChart, which has cherished its image as one of the cleanest names in global finance, lost more than a quarter of its market value in 24 hours after New York's banking regulator accused it on Monday of assisting $250 billion of money-laundering transactions over nearly 10 years.
Despite StanChart's protests that just $14 million of deals flouted the U.S. rules, its shares are still around 15 percent below levels before the New York State Department of Financial Services (DFS) branded it a "rogue institution".
"Even if it is only $14 million, they have still committed a crime, and they are still guilty," one of the 10 biggest institutional investors in the bank told Reuters, explaining why the shares remained depressed.
"And if this is hot air and they are just bluffing, then they are playing a very dangerous game," the investor said, putting the risk of either chief executive Peter Sands or Chief Financial Officer Richard Meddings quitting the bank at "5-8 percent and rising".
The bank could face a huge fine and even its state banking license is under threat, a punishment that would paralyze its U.S. operations and relegate the London-listed institution to the second tier of global banks.
The accusations could end up harming StanChart's 'AA-' credit rating, Fitch Ratings said.
Speculation that StanChart could sue the New York regulator for injury to its reputation and stock price were adding to worries about the potential loss of U.S. business, one of the 25 biggest investors in the bank said.
"I think the phrase 'Don't fight the Fed' applies in more ways than just one. Who knows what else the regulator could unearth if they really wanted a fight?" he said.
"(StanChart) tend to have a chippy approach which doesn't always win friends, and they need to be careful ... I would rather see them settle and leave this whole sorry saga behind them."
London lawyers echoed the warning.
"It's very difficult to say whether Standard Chartered believe they have a case without knowing all the details ... but I think history tells us that it is extremely tough to take on the U.S. regulators and win," Tom Hibbert, head of the banking litigation group at City of London law firm RPC.
Standard Chartered's stock was already ripe for a sell-off even before its high-profile tussle with U.S. regulators came to light, analysts at Canaccord Genuity said.
Low exposure to the euro zone's troubles, healthy capital reserves and a halo burnished by steering clear of the interest rate manipulation scandal tainting other banks have given it a trading premium so wide that returns could only be reached through "near flawless execution of ambitious consensus estimates".
"To our mind the stock is priced for everything to go right, and nothing to go wrong," the analysts said, maintaining their advice to sell the stock.
The bank's woes offer a timely reminder of the risks investors face by supporting lenders with deep roots in emerging markets, said Jeff Yeh, Chief Investment Officer at Capital Investment Trust in Taipei, with about $5 billion in assets.
"I think the events of the past few days really drove home that point, and I think a growing number of funds may not be as comfortable with these large banks as they used to be."
While quick to deny the money laundering allegations in the press, some say StanChart's lack of direct communication with shareholders is limiting its share price recovery.
"They haven't been in touch with us, which surprises me, because when they had rights issue one, two and three, they were in touch well in advance, but this time, not a tweet," the top 10 investor said.
"We have been proactive in reaching out to all our investors, both shareholders and debtholders, and the process is ongoing," a spokesman for Standard Chartered said.
It will not want to lose the goodwill of those such as Hugh Young, managing director of top-five StanChart shareholder Aberdeen Asset Management Asia, who is giving it the benefit of the doubt for now.
"It's something to worry about, although I noticed a lot of emotive and sensational language which slightly diminishes the allegation ... The StanChart we recognize is not the rogue bank portrayed in the allegation," he said.
(Reporting by Sinead Cruise, additional reporting by Sarah White, Sudip Kargupta, Kelvin Soh and Denny Thomas; Editing by Will Waterman and Matthew Tostevin)