LONDON – Standard Chartered shares fell and the cost of insuring its debt against default jumped on Monday after U.S. activist investor Muddy Waters said it had bet against the bank because of its "deteriorating" loan quality.
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Muddy Waters' founder Carson Block told a conference in Las Vegas last week he had bet against Standard Chartered debt because the market is underestimating the risk that is in the bank's loan book, a spokesman for the short seller said.
Block, whose company says it analyses the true worth of Chinese companies, argued that while Standard Chartered is diversified across emerging markets, a slowdown in China will lead to "considerable stress" at the lender.
Block was buying 5-year credit default swaps (CDS) for the bank, which is insurance against a default and yields a profit for buyers on any rise, the spokesman added.
Standard Chartered's 5-year CDS jumped almost 13 percent to 103.75 basis points on Monday, according to Markit. That means it costs $103,750 to insure $10 million of debt, less than for most other banks. But the price has widened from 84.5 points a week ago and was the biggest riser of the iTraxx Main and Senior Financials indices constituents on Monday.
Standard Chartered shares fell 3.9 percent to 15.22 pounds by 1139 GMT, the second biggest FTSE 100 faller.
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"The comments have added to the momentum that has built up post the trading update," said Gary Greenwood, analyst at Shore Capital. The shares have lost 10 percent since the bank warned on Wednesday it could miss this year's revenue target after a drop in first quarter operating profit.
It said losses from bad loans were up on the year, driven by an increase in its consumer bank, notably in Korea. But it said bad debts in the wholesale bank remained low and it still expected to meet analysts' profit forecasts for 2013.
"Concerns are building around China and the impact on Asia. Ultimately your view on a bank comes down to the economic backdrop, and over the long-term, China and Asia are going to be reasonably strong growth markets, maybe with some bumps along the way," Shore Capital's Greenwood said.
Standard Chartered declined to comment on Block's comments.
Muddy Waters last year bet against Asia commodities company Olam after slamming its high debt and business practices, forcing it to be propped up by Singapore investor Temasek and shrink its business. Temasek is also Standard Chartered's biggest investor with a stake of about 18 percent.
(Reporting by Steve Slater, Simon Jessop and Natalie Harrison; Editing by Louise Heavens)