It seems like banks just can't keep themselves out of trouble. While the markets have largely moved on from the self-inflicted wounds of irresponsible mortgage lending and securitizations, and most European banks have stabilized their sovereign debt risk, new scandals are filling in to replace the old. Regulators are wrestling with the possibility of a sizable conspiracy to manipulate LIBOR rates, and if that wasn't enough, large Asia-focused Standard Chartered (OTC:SCBFF) finds itself in the eye of a hurricane over alleged dealings with Iran.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

If True, a Sizable Violation
The New York State Department of Financial Services (SDFS) has alleged that Standard Chartered has engaged in years of illegal transactions with the government of Iran, transactions designed to circumvent United States-led sanctions on banking and financial transactions with the country. Among other allegations, Standard Chartered reportedly stripped information from wire transfers, engaged in so-called "U-turn" transactions and actually cleared Iranian financial transactions through its New York-based U.S. operations.

All in all, SDFS has alleged over 60,000 illegal transactions worth more than $250 billion occurred. Investors should note two details right off the bat. First, the bank strongly contests these allegations and asserts that only $14 million or so in illegal transactions occurred. Second, the dollar amount would reflect the notional amount of the transactions, not Standard Chartered's profits from the alleged activities.

SEE: Tax Avoidance Or Illegal Evasion?

Kicking a Hornet's Nest
However investors may feel about sanctions and corporations helping companies evade them, Standard Chartered would not be alone if it did in fact engage in these deals. A host of European banks, including Barclays (NYSE:BCS), Credit Suisse (NYSE:CS), ING (NYSE:ING) and HSBC (NYSE:HBC) have been fined by U.S. authorities for activities in dealing with sanctioned regimes (including Cuba and Iran).

What makes this investigation more interesting, though, is the storm it seems to be stirring up among regulators. Several reports have indicated that officials at the Treasury and Fed are furious that the state of New York has gone public with these accusations ahead of them, and likewise the Bank of England (BOE). Insofar as the BOE is concerned, this seems to be touching a nationalist nerve, with some British regulators speculating that it's part of a concerted effort to undermine London as a financial center and London-based banks like Standard Chartered.

The actions of the NY SDFS have also stirred charges of electioneering and accusations that the timing of the charges is politically-motivated. What's more, while New York authorities are threatening to strip Standard Chartered's banking license, which would be an unprecedented move for what is in some respects a routine violation.

SEE: Is Your Bank On Its Way Down?

What's the Risk?
Standard Chartered has a small loan book in the U.S., but relies on its ability to operate in the U.S. for functions like U.S. dollar clearing and wholesale banking. Losing its license in New York would not be catastrophic in and of itself, but it would be a definite hit to the company's operations, to say nothing of the damage to its reputation (Standard Chartered has heretofore enjoyed a reputation as a conservative, risk-averse bank).

Based on past experience with similar violators, Standard Chartered is likely going to find itself on the hook for several hundred millions of dollars in fines if it is found guilty (or agrees to a settlement). At the high end, it is not inconceivable that the fines could approach $1 billion and that is not a trivial sum. Keep in mind, though, that some of the transactions in which Standard Chartered allegedly participated were not illegal for all of the time involved (the U-turn transactions only became illegal in 2008, for instance), so the total liability is very much up in the air today.

SEE: Assessing Bank Assets: Are Your Savings Safe?

The Bottom Line
The panicked reaction to these allegations has pushed the shares into bargain territory. It's hard to see how the actual fines and lost reputation could be worth as much as the roughly one-quarter drop in market cap that accompanied the initial reactions. Instead, assuming that the bank can continue to post a low-teens return on equity, the shares could finally be in bargain territory.

Investors can't hope to know exactly what is going on with Standard Chartered, so investing in the shares today is essentially a vote of confidence for management - a vote that management would not endanger the entire operations with recklessly excessive dealings with a government under sanctions. Stranger things have happened, though, so while Standard Chartered looks like a potential bargain today, there is still sizable downside if the worst of the charges prove true.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  6. Stock Analysis

    The Top 5 Financial Penny Stocks for 2016 (CPSS, ASRV)

    Learn about some of the most promising penny stocks in the financial services sector that investors can consider adding to their portfolio for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
Trading Center