In its results for the six months ended June 30, banking group Standard Bank reports that its exposure to fraudulent activities relating to physical aluminium held in bonded warehouses at China’s Qingdao port has been estimated at R854-million.

The aluminium represents the bank’s collateral for a series of commodity financing arrange-ments, also referred to as reverse repurchase agreements (repos).

The gross exposure in Standard Bank’s state-ment of financial position as at June 30, in respect of the repos, is $167-million, against which $210-million of aluminium collateral is held and is subject to legal processes.

As at June 30, the group recognised a valuation adjustment of $80-million, or R854-million, against the repos, representing management’s best estimate of the risk adjustment required in determining the fair value of its net exposure, Standard Bank says in its interim results report.

The adjustment was recognised within the discontinued operation line in the income statement. The discontinued operation, which was the disposal of the Standard Bank Group’s controlling interest in its global markets business outside Africa to the Industrial and Commercial Bank of China, including the fair value adjustment on repo positions relating to the aluminium financing in China, recorded a headline loss of R1.032-million.

In determining the valuation adjustment, the Standard Bank Group considered the collateral, the client’s ability to perform and the obligation of the custodians to account for the collateral.

The group says it maintains insurance for such loss events and will recognise the value of its rights to compensation once the applicable International Financial Reporting Standards recognition criteria have been met.

Chinese authorities in May launched an investigation into whether private metals trading firm Decheng Mining and its related companies used fake warehouse receipts at Qingdao port to obtain multiple loans secured against a single cargo of metal.

Since the discovery was made and indicated to Standard Bank shareholders in June and July, the group started investigations and legal proceedings in Shandong province against several parties. The legal proceedings are part of a process undertaken by the group to take all available steps to protect its position in respect of these stocks.

The group reports that it has also undertaken a review of all its base metal holdings in China and other countries and advises that it has further exposure to aluminium at other bonded warehouse facilities in Shandong province.