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Banks’ legal problems could stress credit

admin | September 7, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Among a small but growing list of domestic and European banks, we are seeing legal issues that could imperil ratings and put pressure on credit spreads. The following are the primary stories of concern:

ING Group (INTNED: Baa2/ A-/A+) – Shares of ING were down ~3% in Europe when ING entered into an agreement with the Dutch Public Prosecution Service and agreed to pay €775 million in fines for money laundering violations, which occurred from 2010 through 2016. ING admitted wrong-doing and the fine is expected to hurt T1C by 24 bp. That is manageable for the bank and will result in executives getting no bonuses for the year. S&P affirmed ING ratings despite the fact that ING did not take provisions and will book the loss entirely in 3Q18. This seems odd given the fact that ING first disclosed the investigation in the 2016 annual report. ING is no stranger to AML fines, as it had to pay US authorities $619 million in 2012 for allegedly allowing illegal money transfers by Cuban and Iranian clients.
Danske Bank (DANBNK: Aa2/A pos/A+) – Danske has been conducting a review of its operations in Estonia where it is thought upwards of $13 billion was laundered between 2011 through 2016. This is shaping up to be a very large case of laundering in the scope of what has been found in the last 10 years. There will likely be material charges and fines for Danske Bank, and S&P could revise their outlook to stable from positive. It is still a bit early for estimating what the up-front costs will be for Danske, but the $900 million ING fine is likely a low-water mark. Danske’s high ratings are partially predicated on its high capital levels with CET1 of 15.7%. This fine will hurt as each €1 billion is expected to reduce CET1 by 100 bp. Danske was down 7% in the equity markets one day this week, and has been volatile the last couple days.
Standard Chartered (STANLN: A2/BBB+/A+ neg) – It appears Standard Chartered is still at risk for its money laundering activities of years passed. The $667 million fine paid in 2012 could be increased, depending on Department of Justice (DoJ) findings from a lengthy review of STANLN’s operations with Iranian accounts. Given the settlement was made years ago, it is said that STANLN has not taken additional reserves during the on-going investigation.

What is at risk: Criminal charges for the bank or individuals, as it is possible that sanctions were violated and business practices hidden to disguise their nature. The deferred prosecution that was originally set to expire in 2012 has been extended a few times and is still in force. New fines or charges would potentially harm its business with select customers. It also seems more likely that Fitch would act on the negative outlook, or the other two agencies could move to negative.

Relative value: STANLN does not issue many US dollar bonds, but the 6-year non-call 5-year (6NC5) notes sold in March are trading +150 bp (A2/BBB+/A+), which is +22 bp wide of the Lloyd’s 5-year, the LLOYDS 4.05% ’23 (A3/BBB+/A+). This discount incorporates some spread for the 1-year extension, but may also reflect the more risky business at STANLN. Among the UK banks, only RBS and Barclays trade wider than STANLN in the 5-year part of the senior curve. In mid-June RBS sold a 6NC5 that now trades in the +167 bp area, and the May 6NC5 issue from BARC is +171 bp. Clearly there is more downside room for STANLN spreads, which seem likely given the news.

Wells Fargo (WFC: A2 neg/ A- / A+) – Wells Fargo continues to be plagued by legal problems with news this week that the DoJ is probing their wholesale banking activities. The Justice Department is looking into whether Wells Fargo employees altered customers’ information to fit within regulatory standards, or other matters that didn’t impact the customers, but improved the “look and feel” so to speak, of the documents if examined by regulators. This was reported previously by Wells Fargo, but is seems to be getting closer to a resolution with authorities. At present, Wells has a considerable list of legal issues, including:

Ban by the Fed from growing assets (legacy retail banking matter);
Potential over-charging by the asset management business;
Foreign exchange business being investigated for inconsistent pricing to customers; and
May have improperly foreclosed on hundreds of low-income housing customers.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

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