Standard Chartered’s 3.3 Billion-Pound Sale Starts Capital Race

October 13, 2010, 7:01 AM EDT

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By Jon Menon

Oct. 13 (Bloomberg) -- Standard Chartered Plc’s 3.3 billion-pound ($5.2 billion) rights offer may mark the start of a race among European banks to raise more capital than the minimum required by international regulators under Basel III.

The share sale will increase the British lender’s Core Tier 1 capital ratio, a measure of financial strength, by two percentage points to more than 10 percent, Chief Executive Officer Peter Sands said on a conference call today. Banks must have a ratio of at least 7 percent under the new capital rules.

Lenders are raising surplus capital as their regulators weigh whether to force the largest banks to hold more capital than the minimum level agreed by international regulators in Basel last month. Deutsche Bank AG, Germany’s largest lender, raised 10.2 billion euros ($14.2 billion) this month. Spain’s Banco Bilbao Vizcaya Argentaria SA, Banco Santander SA and Italy’s UniCredit SpA are among firms most likely to follow, said Andrew Lim, an analyst at Matrix Corporate Capital LLP.

Standard Chartered “is the first bank to raise money for regulatory purposes where we did not previously think there was a pressing requirement to do so,” said London-based Lim, who has a “buy” rating on the bank. “Standard Chartered therefore marks the beginning of the race to improve ratios.”

Shareholders will be offered one new share at 1,280 pence for every eight they already own, the London-based bank said. That’s a third less than yesterday’s closing price. Temasek Holdings Pte, Standard Chartered’s largest shareholder with a 17.7 percent stake, will subscribe to its portion of the sale, the bank said.

Shares Drop

Standard Chartered dropped as much as 4.6 percent and was down 2.2 percent at 1,867 pence at 11:52 a.m. in London trading. The stock has gained 19 percent this year, beating the FTSE 100 Index’s 6 percent gain.

Some countries and policy makers are urging standards above the Basel III minimum for the world’s largest lenders. A Swiss government-appointed panel last week proposed the first capital surcharge on too-big-to-fail banks, saying UBS AG and Credit Suisse Group AG need to hold almost double the capital required under Basel III rules.

The offering is a “pre-emptive strike,” said Richard Hunter, head of equities at Hargreaves Lansdown Plc, a Bristol, England-based stockbroker. “Barclays is potentially being seen as the next one who might need to make a similar announcement to improve their capital buffer.”

Barclays CEO-designate Robert Diamond said on Sept. 29 that while Basel III rules will affect the bank’s ability to generate earnings, it won’t need additional funding from shareholders.

Barclays Drops

“We have enough equity capital and it is not our objective to turn to shareholders for more,” Diamond said at a conference.

Barclays dropped as much as 5 percent, and was down 1.8 percent at 289.6 pence at 11:52 a.m. Royal Bank of Scotland Group Plc was up 0.2 percent at 47.71 pence, while Lloyds Banking Group Plc climbed 0.4 percent to 72.93 pence.

“We would be nervous of anyone claiming that RBS and Lloyds will have excess capital in two years time,” Bruce Packard, a London-based bank analyst at Seymour Pierce, wrote in a note to clients today.

RBS had a Core Tier 1 ratio of 8.5 percent at the end of June compared with 9 percent for Lloyds. Barclays had a Core Tier 1 ratio of 10 percent.

“This is not a war chest for acquisitions,” Chief Executive Officer Peter Sands, 48, said on a conference call today. “This is a strategy primarily for organic growth.” He didn’t rule out “smaller, bolt-on acquisitions.”

Record Profit

Standard Chartered said in a separate statement that it had “record levels of income and profits to the end of September.” Revenue in the third quarter was above the first half run-rate, the lender said. The bank posted a record first-half profit of $2.15 billion in 2010 as provisions for bad loans fell.

Temasek, Singapore’s state-owned investment company, invested in Standard Chartered’s 1.8 billion-pound rights offer in December 2008, three months after the collapse of Lehman Brothers Holdings Inc. sparked a global financial panic. Unlike U.K. rivals like RBS, Standard Chartered didn’t require a government bailout.

The cost of insuring against losses on Standard Chartered bonds dropped to the lowest in more than two months in the credit-default swaps market. Contracts linked to the lender fell 2.5 basis points to 78.5, according to data provider CMA.

JPMorgan Cazenove, Goldman Sachs Group Inc. and UBS AG are managing the share sale.

--With assistance from Ben Livesey in San Francisco and Joyce Koh in Singapore. Editors: Francis Harris, Edward Evans.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.