BNP Paribas (NASDAQOTH: BNPQY.US), arguably the most prestigious bank in France, has opted to settle for $9bn with state and federal authorities in the US. Of course, this is big a deal for most banks in the UK.
Barclays (LSE:BARC), HSBC (LSE: HSBA), Royal Bank of Scotland (LSE: RBS) and Standard Chartered (LSE: STAN) are under the spotlight.
US Risk Is Alive And Well
Foreign banks eager to boost their returns by doing business in North America will think twice before making any serious investment there. Incumbents may simply try to find their way out of it, while new players may believe that the risks outweigh any possible benefits.
Economic theory is based upon unintended consequences. The US authorities are simply asking banks to abide by the rules, but the banks themselves may be tempted to streamline their US operations if the regulatory environment becomes even more challenging than it currently is.
Barclays: What Is Next?
Barclays generates £6.7bn of revenues in the US, or about one fourth of its total revenue around the globe. Its total assets in the Americas stand at £330bn for the fiscal year ended on 31 December 2013.
Barclays doesn’t need US exposure, unless it finds a strong partner stateside, in my view. Its shares haven’t recovered since the New York attorney general filed a lawsuit against it, and the reputational damage could have a greater impact on the bank than the potential economic losses stemming from litigation risk.
Without the US, Barclays’ revenues would be in the region of £21bn, i.e. roughly in line with those it reported in 2006 and 2007. It was a different environment back then, but Barclays stock traded around £7 in those years.
A Non-Event For HSBC?
HSBC turns over $7.6bn in North America, or 12.9% of its total revenues. Its total assets stand at $432bn for the fiscal year ended on 31 December 2013. Its underlying profitability has been volatile over the years, but its pre-tax profit in North America represents only a small fraction of group’s pre-tax earnings.
A money-laundering scandal hit HSBC in the US only a couple of years ago – the bill for that was almost $2bn.
HSBC is much more profitable in the US than in Europe, however. So, although tighter scrutiny in the US may hurt earnings, it’s very unlikely that the bank will decide to make a U-turn on strategy in North America. This heightens the risk profile associated to HSBC, but it’s not a great deal for its valuation. Its problems reside elsewhere.
RBS: More Upside Than Downside In The US
At RBS, revenues generated in the US stand at £4.6bn and represent 23% of the group’s total. Sales have gone down from a record high of £6.6bn in 2009, and that is not necessarily a good thing. Operations in the US were unprofitable to the tune of £615m in 2013, yet between 2010 and 2012 their pre-tax contribution to earnings was outstanding.
RBS reported total assets of £197bn in the US for the fiscal year ended on 31 December 2013.
The bank recently agreed to pay $275m to settle a lawsuit in the States. It was accused to have misled investors with regard to mortgage-backed securities. It won’t be the last time it will have to cope with similar accusations. I predict more upside than downside from the US, however.
Standard Chartered: Nothing To Worry About?
Standard Chartered doesn’t break down revenues for the US but reports revenues for Americas, Europe and the UK — which represent, on an aggregate basis, just less than 13% of its total revenue. In the US, Standard Chartered has had its fair share of problems in recent years.
In August 2012, Standard Chartered had agreed to pay “$340 million to New York State’s financial regulator to settle allegations that it concealed Iran-linked transactions worth a total of $250 billion,” as Reuters reported.
It has problems in other parts of its business, so latest news shouldn’t bother its shareholders. Finally, the good news about Lloyds is that its US exposure is meaningless.
