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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.

  • Standard Chartered pays $340 million to settle Iran charges

    British bank Standard Chartered agreed Tuesday to pay a $340 million civil penalty to settle money-laundering charges brought by state authorities in New York.

    The New York Department of Financial Services had accused the London-based banking group of conspiring with Iran to avoid U.S. economic sanctions by concealing transactions totaling $250 billion over nearly 10 years.

    In a statement, the New York regulators said Standard Chartered (SCBFF) agreed that the transactions in MORE

    - Aug 14, 2012 3:35 PM ET
  • U.S. Treasury continues to probe Standard Chartered

    The U.S. Treasury Department is continuing its investigation into potential violations of U.S. sanctions against Iran by Standard Chartered, according to a letter obtained Wednesday by CNNMoney.

    The letter to a top U.K. Treasury official comes days after banking regulators in New York state accused London-based Standard Chartered of helping Iran avoid U.S. economic sanctions by concealing $250 billion worth of transactions over nearly 10 years.

    Shares of Standard Chartered (SCBFF) rebounded MORE

    - Aug 8, 2012 5:38 PM ET
  • Banks behaving badly

    It sure seems like big banks are acting like villains from old silent movies – and investors are tied to the train tracks.

    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

    Happy days are here again for the stock market. If you love MORE

    - Aug 7, 2012 12:55 PM ET
  • Standard Chartered's stock drops on Iran allegations

    Shares of British banking giant Standard Chartered fell more than 23% on the London Stock Exchange Tuesday, one day after New York regulators accused the banking group of helping Iran avoid sanctions by concealing $250 billion in transactions over nearly 10 years.

    On Monday, the New York State Department of Financial Services accused the London-based bank of conspiring to hide 60,000 transactions with Iranian clients, including the Central Bank of Iran, MORE

    - Aug 7, 2012 7:19 AM ET
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