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3. STANDARD CHARTERED BANK: VALUATION AND CAPITAL STRUCTURE1 Ruth S. K. Tan, Zsuzsa R. Huszár and Weina Zhang wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, National University of Singapore and Richard Ivey School of Business Foundation Version: 2015-12-07 In November 2014, Standard & Poor’s (S&P) — a major U.S. credit rating agency — downgraded Standard Chartered Bank’s long-term debt from AA– to A+, and its short-term debt from A-1+ to A-1.2 The new rating meant that Standard Chartered Bank (SCB) had a “strong capacity to meet its financial commitments, but was somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.”3 The downgrade came after a string of profit warnings issued by the bank, and was the first downgrade for SCB in 20 years since S&P started rating the bank in 1994.4 According to the rating agency, SCB remained one of the most creditworthy in its class, but “the group [was] no longer materially less exposed to unexpected losses than [its] peers.”5 There were reasons to be bearish about SCB’s outlook. Its shares had been amongst the worst performing stocks of the 30 global, systemically important banks (G-SIBs).6 G-SIBs were banks that, should they fail, might trigger a financial crisis. The list of such banks was published by the Financial Stability Board in 2014.7 SCB’s large exposure to emerging markets in Asia, Africa and the Middle East weighed heavily on the minds of investors as interest rates started to creep upwards along with the recovery of the U.S. economy.8 The threat of large-scale defaults in these emerging markets, coupled with slowdowns in China and India, had increased the vulnerability of the bank’s balance sheet. In October 2014, U.S. authorities had reopened investigations into whether SCB had withheld prohibited transactions from investigators in 2012, when it paid a total of US$667 million.9 Portions of this total were paid to the New York State Department of Financial Services ($340 million), the New York City District Attorney and Department of Justice ($95 million), the Treasury Office of Foreign Assets Control ($132 million) and the Federal Reserve ($100 million).10 The authorities also signed a deferred prosecution agreement to resolve a criminal case of sanction breaches in Iran, the Sudan and Myanmar.11 Some of the bank’s largest investors pushed for radical changes, such as the departure of its chairman, Sir John Peace, as well as its chief executive, Peter Sands.12 They also pushed for the relocation of its London, England, base of operations to either Hong Kong or Singapore, for tax purposes.13 29 For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 06, 2020 to April 30, 2020. Use outside these parameters is a copyright violation. 9B15N030 I I Page 2 9B15N030 The Singapore investment fund Temasek Holdings became the single largest shareholder of SCB in March 2006, after its purchase of an 11.5 per cent stake in the company (worth about $4 billion) from the estate of the hotelier Khoo Teck Puat. Khoo was a reclusive Singaporean billionaire who had died in 2004. By December 2007, Temasek had increased its investment to 18 per cent, and its stake hovered between 18 and 19 per cent thereafter.14 Investment in a bank which specialized in emerging markets with a strong Asian focus placed Temasek in a position to benefit from Asia’s economic growth. From 2008 to 2013, SCB benefited from its Asian focus because these emerging markets grew faster than the U.S. and European economies did.15 As a result, SCB weathered the financial crisis relatively unscathed.16 When Asia started experiencing slower economic growth in 2013, SCB’s fortunes took a turn for the worse. The slower growth and the U.S.