China syndrome may hit Standard
Bank faces commodities fraud risk to tune of R1.8bn
STANDARD Bank, Africa’s largest bank, has been caught off guard by commodities fraud in China that could cost the lender R1.8-billion.
While the scandal points to vulnerabilities in China and may still prove embarrassing for Standard Bank, it is unlikely to have much effect on its share price.
Investors and analysts appeared to shrug off the Chinese news.
Wayne McCurrie, who heads Momentum Wealth, said this was “not a disastrous situation” for the bank by any means.
“I don’t think Standard Bank will incur a major loss.”
The problem started a few months ago, when Standard Bank revealed that there might be a problem with the commodities stocks held in warehouses in China, supposedly as collateral for loans that the bank’s UK-based unit had granted.
It emerged that in some cases, these commodities — initially, it was just copper and iron ore — may have been sold two or three times.
This left question marks over whether the value of the collateral held by the bank covered the loans.
Last month, Standard Bank found out that it had similar problems with aluminium stock held in Shandong province.
In a statement this week, Standard Bank said it had “commenced inquiries into potential irregularities at the port”.
But its potential exposure to the China fraud swelled to $170million (about R1.8-billion).
The bank is now knuckling down to audit metals actually held in China at these bonded warehouses to make certain that it matches the amounts in the lending documents.
Standard Bank, which operates an office in Beijing, has long-established ties with China that were entrenched in 2008 when that country’s largest bank, the Industrial and Commercial Bank of China (ICBC), bought 20% of the South African-based business.
The scandal is not Standard Bank’s problem alone.
The South African bank is the third company to say it has taken legal action to recoup its losses since Chinese authorities launched an investigation into whether a private metals-trad-
SA investors will not be pleased if there are significant losses
ing company called Decheng Mining used fake warehouse receipts at Qingdao Port to obtain multiple loans.
However, this incident underscores one of the problems of operating in China. Graeme Korner, who runs the multiasset fund manager Korner Perspective, said this case highlighted the fact the data flow from China may not be as good as the market may want.
For example, economic data figures from China, such as the purchasing managers index, are always being scrutinised for its apparent disconnect with economists’ predictions.
Imara SP Reid said: “We have been reading for some time about eyebrow-raising financial shenanigans where Chinese importers of metals use the latter for raising prodigious loans.”
Imara said it was tricky to say what losses Standard Bank may ultimately take from this.
But in the unlikely event that everything has been lost, the hit would be equal to about 13.5% of its normalised headline earnings of R10.65 a share for its past full financial year.
“Frankly, however, South African investors will not be pleased if there are significant losses from such activities in China, when in all likelihood they invested in the bank because of its African footprint,” Imara said.
Although Standard Bank’s share price fell 1.7% on the day, this seemed more a reaction to a rather dismal trading update from Barclays Africa, which owns Absa.
Barclays Africa said its profit for the half-year to June would increase by a mere 11%. Barclays Africa’s stock shed 1.8%, as did Nedbank.
FirstRand’s shares were the least affected, falling only 1.3%, reflecting the fact that the bank which owns First National Bank and Wesbank is still the darling of the banking market.
Over the past year, FirstRand’s share price has risen 43% — more than Standard Bank’s and Nedbank’s gain of 34% each and Barclays Africa’s more muted 15% rise.