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Why bank stocks are immune to scandal

August 24, 2012: 7:04 AM ET

Banks have had their share of bad publicity recently, but investors continue to give them the benefit of the doubt.

Standard Chartered (SCBFF) is a prime example.

The British bank's stock has recouped nearly all of the losses sustained earlier this month, when the bank was accused of laundering money for Iran.

U.S.-listed shares plunged to a low of $18.65 on Aug. 7, one day after banking regulators in New York threatened to revoke Standard Chartered's license. In the span of a week, the stock (both in the U.S. and in London) gained 14% after the bank settled the case, and is nearly back to where it was before the scandal.

Standard Chartered has plenty of company.

Barclays (BCS), another leading British bank, paid $453 million in fines to U.S. and U.K. regulators in June to settle allegations it manipulated key lending rates, including the closely watched Libor, going back to 2008.

The episode cost Bob Diamond his job as Barclays chief executive, but the bank's stock is now trading just below where it was before the settlement was announced.

Related: Bank stocks to go long on

Part of the reason why investors are so forgiving is that the fines pale in comparison to the size of the banks' assets.

"No matter how large a fine is, it's never meaningful in the long run," said Erin Davis, an analyst at Morningstar who covers Standard Chartered.

As part of its settlement with New York, Standard Chartered agreed to pay a $340 million fine, although the bank could still face federal penalties. The Treasury Department, Justice Department and the Federal Reserve are among those still investigating Standard Chartered.

Davis estimates the bank will pay an overall fine of $800 million, compared with its $600 billion of assets.

Another reason bank stocks tend to recover briskly is that the initial sell-off is often overdone.

"We've seen again and again that the market overreacts to litigation and regulatory issues," said Brad Hintz, a banking analyst at Sanford Bernstein. "That's because it is very difficult to judge whether you have permanent damage to the franchise, or just a headline issue."

Hintz said Standard Chartered "dodged a bullet" by settling with New York. But it's too soon to say the bank's reputation will not suffer long-term damage, he added.

Just take a look at UBS (UBS), said Davis.

After a rogue trader cost the bank $2 billion of losses last year, UBS has had to boost capital levels and scale back its activities in certain markets. The Swiss bank paid U.S regulators a $780 million fine in 2009 to settle criminal charges it helped wealthy Americans avoid taxes. UBS is also among the banks caught up in the Libor scandal.

U.S.-listed shares of UBS have declined 8% so far this year.

For banks that do not commit multiple transgressions, however, investors are willing to forgive and forget.  "Investors often have short memories," said Davis.

Related: Standard Chartered should should deliver the truth

What's more, investors have become desensitized after being bombarded with bad headlines about the banking industry for the past four years, said Richard Bove, an analyst at Rochdale Securities.

Goldman Sachs (GS), Citibank (C), JPMorgan (JPM) have all settled charges they misled investors in complex mortgage-backed securities before the market crashed in 2008.

In April 2010, a federal judge approved a $26 billion settlement between states attorneys general and the nations top banks, including Bank of America (BAC) and Wells Fargo (WFC), over improper foreclosure procedures.

More recently, JPMorgan said that trading losses stemming from its London investment office totaled $5.8 billion, up from an initial estimate of just $2 billion.

Related: Libor and the folly of deregulation

Despite these high-profile scandals, bank stocks have recently helped lead the broader market higher.

The simple explanation for the resiliency is, in a word, profits. "Banks are making staggering amounts of money," said Bove.

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Ben Rooney
Ben Rooney
Staff writer, CNNMoney

Ben Rooney is a staff writer for CNNMoney. He covers the European debt crisis and other international finance stories, in addition to writing about stocks, bonds, investing and other Wall Street-related news. Follow Ben on Twitter: @ben_rooney

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