As a major lender in emerging markets, Standard Chartered Bank is well acquainted with the ups and downs that go with the territory. The London-based bank, which traces its roots back to the 19th century as a financier of British imperial trade, expanded aggressively in Latin America in the 1970s, only to suffer big losses during the Latin debt crisis in the 80s and narrowly escape a hostile takeover attempt by Lloyds Bank in 1986. Just over a decade later, the banks core Asian banking businesses were hit hard by the regions financial turmoil, causing profits to plummet. Even when Asian markets recovered several years ago, Standard Chartered was seen by many analysts and investors as too small to compete effectively, making it a potential takeover target for larger rivals such as HSBC Holdings and Citigroup.
Today, however, Standard Chartered is thriving in the midst of the biggest financial crisis since the Great Depression. Scores of major banks have suffered billions of dollars of losses on subprime mortgages and other toxic assets and have had to turn to their governments for bailouts. By contrast, Standard Chartereds negligible exposure to U.S. and European markets enabled it to avoid big write-downs and to post record profits last year. The bank is rapidly expanding its presence in India and China, two still-growing markets where it is one of the largest foreign lenders. And it is more hunter than hunted. Standard Chartered has acquired banks in South Korea and Taiwan in the past four years, and last year it picked up the Asian equities business of JPMorgan Cazenove to bolster its advisory and capital markets capabilities in the region. Peter Sands, a former McKinsey & Co. consultant who has spearheaded the banks growth as CFO since 2002 and as CEO since 2006, is looking to take advantage of the firms relative strength to make more opportunistic deals.
"I dont think any banker can claim not to have had some uneasy moments during the period of September to November 2008," the 47-year-old executive told Institutional Investor in a recent interview on the 32nd floor of the banks Hong Kong headquarters, which towers over the citys picturesque Victoria Harbour. "The thing that stood us in good stead is our focus on Asia, Africa and the Middle East. We have been disciplined in sticking to our strategy. Banks often get in trouble when they get off-key."
Sands targeted approach is serving Standard Chartered well. The bank, which gets 71 percent of its revenue and 78 percent of pretax profits from Asia, has taken advantage of the regions economic boom to triple its revenue from 2003 to 2008. Although profits have collapsed in much of the global banking industry banks insured by the U.S. Federal Deposit Insurance Corp. saw their collective profits plunge by 83.9 percent last year, to $16.1 billion Standard Chartered boosted net income by 17.5 percent, to $3.51 billion, in 2008. Revenue, driven by robust growth in corporate lending, was up 26 percent, to $14.97 billion. Although it did not disclose any figures, the bank announced last month that it had achieved record levels for revenue and profits in the first quarter of this year.
Can Sands can keep that growth on track? The plunge in global trade following the collapse of Lehman Brothers Holdings last September has hit Asias export-dependent economies hard. Singapore and South Korea, two of Standard Chartereds top four markets, have fallen into deep recessions, and China and India have seen their red-hot growth rates cool off. The banks net provisions for bad debt rose 71 percent last year, to $1.3 billion, and executives acknowledge that they are almost sure to rise further in 2009.
"An environment of slower economic growth will undoubtedly lead to more company failures, more unemployment, and naturally put pressure on loan impairment, and thats true for us as well as every financial institution," notes Sands.
Still, many rivals would surely love to be in Standard Chartereds predicament. Unlike several of its British rivals, Standard Chartered hasnt had to turn to the U.K. government for a bailout. The bank raised $2.7 billion with a rights issue in November, which bolstered its core tier-1 capital ratio by 1 percentage point, to 7.6 percent, compared with an average of 7.1 percent for major European banks, according to analysts at Citigroup. "Apart from providing us with a cushion during a downturn, the additional capital will allow us to support clients better and take away market share from distracted peers," Sands tells II . "In these times capital is a competitive advantage."
The bank is also highly liquid. Customer deposits surged by 31 percent in 2008, reflecting its "reputation as a flight-to-quality institution," says finance director Richard Meddings. In addition, it is relatively immune to turmoil in the interbank market. Assets amount to just 75 percent of deposits, which means the bank is a net lender to wholesale banking markets rather than a borrower. "The bank generates sufficient liquidity to support our growth," explains Meddings. "Most of the banks that got into trouble got into trouble because of inadequate liquidity."
As for economic risk, Sands notes that many of the banks key markets are growing this year, even as most developed markets in the U.S. and Europe are contracting. "You are talking of Europe and the U.S. being in the negative zone for some time," he says. "In that context, 6 to 7 percent growth in China or India is excellent. We are confident we are in the right markets at the right time."
Some investors share that enthusiasm. "While we have some concerns on the emerging-markets slowdown, Standard Chartered has the best growth profile of any major financial company in the world," says Martin Schulz, managing director for international equities at Cleveland-based Allegiant Asset Management Co., which recently added the banks shares to its $750 million international portfolio.
Others observers are more skeptical. Thomas Rayner, a banking analyst with Citigroup in London, believes that Standard Chartered is more vulnerable to the economic downturn in Asia. He forecasts a 37 percent rise in provisions for nonperforming loans this year. "Management does a good job of emphasizing the relative benefits of Standard Chartereds geographic exposure," he says. "However, I believe that they may be too optimistic on the outlook for the region and their own business." Rayner has a sell rating on the banks stock.
"Standard Chartered is not an everything-to-all-people bank," says Sunil Garg, an analyst at JPMorgan Chase & Co. in Hong Kong. "Its overall market share is small in most markets, but it competes in niches where it is strong in each of the markets. The acquisitions have been opportunistic, and making deals in Asia hasnt been that easy" because of a shortage of targets.
The banks share price has declined by 32 percent over the past 12 months, to £12.48 ($20.56) in late May. By contrast, HSBCs stock has fallen by 35 percent over the same period, and the MSCI index of world banks has dropped by 46.9 percent.
Standard Chartered employs 75,000 people and has 1,750 branches in more than 70 countries, but the groups heart clearly lies in Asia. In Hong Kong, where the bank generates 16 percent of its revenues, it is one of three institutions alongside HSBC and Bank of China to issue Hong Kongdollar notes on behalf of the Hong Kong Monetary Authority. Standard Chartered is the biggest foreign bank in India and one of the largest in China; in South Korea it owns Standard Chartered First Bank Korea, the countrys sixth-largest lender.
Although the bank generated strong growth across much of Asia last year, it currently faces stiff head winds in several markets. In Singapore, the groups fourth-largest market, pretax profits jumped 67 percent in 2008, to $744 million, but a repeat performance is unlikely this year. The city-states economic output shrank at a record 19.7 percent annual rate in the first quarter. Bad-loan losses and provisions nearly tripled in South Korea, to $263 million last year from $94 million a year earlier.
Sands acknowledges the pressure and says the bank has been moving to lower its risk profile by reducing unsecured consumer loans, obtaining better collateral from clients on other loans and keeping roughly 70 percent of its wholesale loans at short maturities of less than one year. Some 80 percent of Standard Chartereds consumer loan book is secured, he says. The banks loss-given-default ratio declined to 30 percent in 2008 from 37 percent a year earlier, reflecting the efforts.
"This is a very proactive way of managing risk," asserts Sands. "What has worked to our advantage is that we have sailed through some very turbulent times over the past decade in Asia, and our Western counterparts are not used to seeing such bottoms."
The bank gets just under 10 percent of its revenues from Europe and the U.S. and has little exposure to the toxic assets that have plagued many Western banks. Standard Chartered took modest write-downs of $164 million on asset-backed securities last year. "We dont have any material exposure to the so-called risky asset classes," says Meddings. "If we had bigger scale, we might have had some more of this toxic exposure."
Sands makes a virtue of the banks conservative lending practices. "Perhaps were a bit old-fashioned, but we want to be in markets that we know very well, where we have a long history and deep knowledge," he says. "We want to work with customers with whom we have a deep relationship, and we want to sell products that we fully understand the risk, the benefits and the operational details of how we deliver them."
Most of the banks growth last year came from wholesale banking, predominantly corporate lending. Wholesale revenues rose 33 percent in 2008, to $7.5 billion, or 56 percent of the groups total; pretax profits rose 28 percent, to $3 billion. Revenue from consumer banking, by contrast, edged up just 3 percent, to $5.95 billion, or 43 percent of overall revenue; pretax profit declined 33 percent, to $1.1 billion.
Sands strategic focus on Asia is in keeping with the banks roots. Founded in 1853 under royal charter by a Scottish businessman and politician, James Wilson, who also started The Economist magazine, Chartered Bank of India, Australia and China began by financing trade between companies in the U.K. and Asia, in particular loaning to tea, silk and rubber merchants. It opened its first branches in 1858 in Bombay (now known as Mumbai), Calcutta and Shanghai, followed by Hong Kong and Singapore. Wilson was serving as a member of Parliament and as the U.K.s financial secretary to the Treasury when he launched the bank. A three-meter-tall statue of Wilson stands in the lobby of Standard Chartereds 42-story tower in Hong Kong, which sits adjacent to HSBCs 47-story Asia headquarters.
The modern bank was formed by the 1969 merger of Chartered Bank with Standard Bank of South Africa. The new entity expanded in the 1970s into South America, only to be hit by a rash of nonperforming loans when the regions debt crisis erupted in the 1980s.
After fending off the unwanted takeover offer from Lloyds Bank, Standard Chartered got its house back in order by selling subsidiaries in Europe, the U.S., Africa and Latin America and refocusing on its core business in Asia. Among the assets sold was the banks 39 percent stake in Standard Bank Group, in 1987. The bank kept "Standard" as part of its name, however, because Standard Chartered had become a major brand in Asia.
The banks troubles led executives to look outside the group for help in crafting a new strategy and installing state-of-the-art technology. Among the professionals they turned to was Sands, who came to know the bank in the 1990s as a McKinsey consultant.
Sands has a somewhat untraditional background for a banker, but one that is well suited to Standard Chartered. He spent his childhood in Singapore and Malaysia before moving to London with his family at the age of 11. He earned a bachelors degree in philosophy, politics and economics at Oxford University, then did a two-year stint as a trainee in the U.K. Foreign and Commonwealth Office before going to Harvard University for a masters degree in public administration. McKinsey hired him out of Harvard, and Sands went on to specialize in banking and technology and to take Standard Chartered on as one of his major clients. Impressed by his work, then-CEO Mervyn Davies tapped him to become the banks CFO in 2002.
In that position and as CEO, Sands has played a major role in some $7 billion worth of acquisitions. Standard Chartered spent $3.3 billion for Korea First Bank in 2005. The following year it became the first foreign bank to acquire a Taiwanese lender when it paid $1.2 billion for Hsinchu International Bank. Then in February 2008, Sands snapped up American Express Bank for $860 million, a deal that strengthened Standard Chartereds private banking and foreign exchange businesses.
Some critics say the deals have produced a mishmash of businesses that lack scale and synergy. "The recent acquisition track record has not been particularly encouraging, notably in South Korea, and often appears opportunistic rather than part of a clear strategic plan," contends Citigroups Rayner.
Sands defends the moves, though, and insists he isnt a deal junkie. "The primary driver of our growth strategy is organic rather than acquisitions," he says. "If we make acquisitions, they have to be financially attractive and strategically well fitting. We are taking advantage of the opportunities we see in the market."
Last September, Standard Chartered lost out to Nomura Securities in bidding for the Asian assets of the failed Lehman Brothers; the Japanese firm paid $225 million for the business. Executives declined to discuss the deal.
Much of the responsibility for growth falls on the shoulders of Jaspal Bindra, Standard Chartereds Asia chief executive. Bindra says his strategy is to increase revenues from existing and new corporate clients by providing a wider array of services, including investment banking, while keeping costs down.
"We are still being cautious and circumspect on cost," notes Bindra, 48, who worked at Union Bank of Switzerland and Bank of America Corp. before joining Standard Chartered in 1998. Roughly 50 percent of the banks wholesale banking staff compensation is tied to performance, he says. "Cost growth actually slowed in the second half [of 2008], in line with the slowdown we were seeing in the environment, particularly in consumer banking. We were not behaving like a bank that had just posted a record first half with a 31 percent profit growth," he adds.
A key market for the bank is China, where it plans to expand its branch network from 54 to 60 outlets in 20 cities this year. Only HSBC, with 83 outlets in 19 Chinese cities, has a bigger network. Citigroup, by contrast, has 30 branches in nine cities.
In China the bank also has a 19.9 percent stake in China Bohai Bank, which it purchased for $123 million in 2005. Bohai Bank is headquartered in Tianjin, the countrys largest northern port and entrepôt with close links with South Korea and Japan. "Were very happy with that investment," Bindra says. "Its growing very well and has met all of its projections. Its a longer-perspective play." Standard Chartered has representation on Bohais board but leaves the daily running of the bank to local management.
Besides China, Bindras other major focus is his home country, India, which delivered $943 million in profit before tax in 2008, up 37 percent year-on-year, and has become the second-largest profit center for the bank after Hong Kong. In 2006, Standard Chartered became the No. 1 foreign bank in India. It now has 90 outlets in 33 cities, with more than 2.1 million consumer clients far more than HSBCs 47 outlets in 26 cities and Citibanks 31 outlets in 13 cities.
Unlike in China, where the bank concentrates on wholesale banking and servicing commercial clients, a lot of Standard Chartereds energy in India is focused on issuing consumer products, especially credit cards, mortgages, personal loans and wealth management. "India, like China, is showing huge growth," Bindra notes.
The banks largest acquisition to date is Korea First Bank. Standard Chartered beat out HSBC in a bidding battle, but some analysts question the wisdom of the deal. Standard Chartered has been working to transform the bank from a mortgage specialist into a full-service consumer and commercial bank but has had difficulty in expanding its range of services. "The price paid was high, and the rewards were not delivered," says Citigroups Rayner. "Thats an acquisition thats been a disappointment."
Finance director Meddings admits its taking longer than envisioned to merge the Korean acquisition with Standard Chartered. "I dont disagree it is a hard integration to manage through," he says of the bank. "We are broadening the product range, reconfiguring the branch network. These take time."
Meddings, however, insists that the deal is starting to pay off. The South Korean bank posted a 10 percent rise in pretax profit last year, to $358 million notwithstanding a near-tripling of impairment losses on loans and provisions for bad debts, to $263 million thanks to a strong performance in wholesale banking.
Elsewhere, Sands is eager to bolster Standard Chartereds capital markets capabilities in spite of the failure to win Lehmans Asian operations. In February the bank agreed to buy the Asian business of JPMorgan Cazenove. It also acquired a securities license in South Korea last year. In 2007 it bought a 49 percent stake in Indias UTI Securities from Securities Trading Corporation of India, with an option to increase it to 100 percent by 2010.
Turning those pieces into a substantial capital markets player wont be easy. Standard Chartered barely registers on Asian league tables. The bank ranked No. 27 as an equity book runner last year, with $455 million worth of transactions, well behind No. 1 UBS, which handled $13 billion, according to data provider Dealogic. In corporate debt it ranked No. 24 in the region, with $6 billion of deals, well behind No. 1 Mizuho Bank, which sold $61 billion worth of bonds. In mergers and acquisitions the bank ranked No. 42, with a total of $4.2 billion worth of deals closed, trailing No. 1 Bank of AmericaMerrill Lynch, which advised on $97 billion worth of transactions.
With the Cazenove deal, Standard Chartered managed to rise two places, to 22nd, as a corporate debt book runner so far this year.
Bank executives did look at some of the Asian operations of Royal Bank of Scotland, the British bank that is retrenching after massive losses forced the U.K. government to take a controlling stake, but decided not to bid because most of the assets were unsecured.
Even before it acquired the Asian brokerage arm of Cazenove, Standard Chartered was openly competing for project deals in investment banking alongside Citibank, HSBC, JPMorgan Chase and Merrill Lynch, says Sean Wallace, the banks Singapore-based group head of corporate finance. Dozens of deals completed in the past two years include participation in syndicated loans helping South Africas leading mobile services provider, MTN Group, to finance $3.85 billion of its $5.5 billion acquisition of Dubai-listed wireless provider Investcom in 2006; and aiding India steel conglomerate Tata Group in financing $2.5 billion of its $12 billion acquisition of Anglo-Dutch steel producer Corus in 2007 and its $2.3 billion acquisition of Jaguar Land Rover in 2008.
Regardless of how short-term trade flows may be affected by the U.S. credit crisis, there is no question that intraregional trade between entrepreneurs in Asia and counterparts in the Middle East and Africa will drive Standard Chartereds growth in the longer term, says Wallace.
"Asian entrepreneurs and corporate clients have a huge need for project finance, especially in infrastructure," notes Wallace, who joined Standard Chartered in March 2008 after leaving his position as Asia head at Franklin Templeton Investments private equity arm, Darby Overseas Investments. "They also need commodities."
Other growth targets include private banking, where Standard Chartered hopes to grab a bigger share of the wealth being created in its core Asian markets. The acquisition of American Express Bank should strengthen Standard Chartereds business, which now has about $40 billion in assets under management. Last month the bank said it would hire as many as 100 new relationship managers in the next 12 months, which will boost its private banking team to 450.
Other acquisitions have focused on niche businesses. In 2007, Standard Chartered acquired Dublin-based aircraft leasing company Pembroke Group to help service many of its Asian airlines clients. The bank also bought London-based oil and gas advisory firm Harrison Lovegrove & Co., the largest boutique advisory in its segment, to help clients source and acquire oil and gas fields in Africa and the Middle East. Terms of the deals have not been disclosed.
Although Sands and his team are working to knit their various Asian businesses together, the banks prospects depend in large part on the health of the underlying economies. "The global slowdown will inevitably impact its core markets of Asia, the Middle East and Africa, but Standard Chartered is likely to be among the first major financial institutions to recover," says Patrick Winsbury, a senior vice president with Moodys Investors Service based in Sydney. Moodys gives the bank an A2 rating, with a stable outlook.
"Weve always said we dont expect Asia to be decoupled, and Asia will be impacted by a very severe dislocation," says finance chief Meddings.
The challenges are real, but Sands is confident that the bank faces a bright future among the worlds emerging economic powerhouses. "Everywhere you look at Standard Chartered, you see our focus on Asia, Africa and the Middle East. There are no plans to change that strategy."