Investors applaud the aggressive emerging-markets growth strategy of Standard Chartered’s dynamic CEO. Now they,d like to see more consistent results.
By Kevin Hamlin
December 2000
Institutional Investor Magazine
When Standard Chartered Bank first tried to recruit Rana Talwar 30 years ago, the young Indian walked away. He thought the British bank was too stodgy, too outdated and too elitist. Everyone he met there, he recalls, “was over 50, white, and male.” Worse, the bank wouldn,t allow new recruits to marry for at least four years, and even after that, says Talwar, “I would have had to bring the lady in for tea to meet the managers.”
Instead, the graduate of Delhi’s elite St. Stephens College joined an upstart in India called Citibank. It had young Indian recruitment officers (their age and race “sent a clear message,” says Talwar) and no rules against marrying. “We won,t pay you any more if you,re married,” Talwar recalls a Citibank recruiter advising him. “If you want to waste your youth, that’s your problem.”
Talwar, who married soon after joining Citibank and has two sons and a daughter, spent 28 years with that organization. He rose to head consumer banking in the U.S. and Europe and to become a candidate to succeed longtime chief executive officer John Reed. But in April 1997, with Reed still firmly in charge, Talwar made a surprising decision. He not only left Citi but he also joined the British bank, Standard Chartered, that he,d rejected in his youth. He initially became group director in charge of Africa, the Middle East and South Asia but had been earmarked for the top job by Standard Chartered chairman Sir Patrick Gillam. Talwar duly ascended to become group chief executive in October 1998.
His brief isn,t an easy one. Talwar, 51, wants to create a more dynamic and sharply focused emerging-markets bank and cater to Asia’s burgeoning consumer marketplace. To do so he believes he has to transform a staid, risk-averse management group centered in London into an aggressive, decentralized global operation with strong local managers competing in their own markets. Anxious investors are waiting to see if Talwar can jump-start the business and revolutionize the culture at the 147-year-old vestige of the British Empire while delivering consistent earnings growth from some of the world’s most volatile economies. Avoiding earnings surprises is a feat the accident-prone Standard Chartered, once known as the “banana skin bank” for its propensity for nasty spills, has never completely accomplished.
Much of Talwar’s initial strategy was based on the belief that Asia would rebound from its 1997,,98 financial contagion. The newly designated CEO wanted to ensure that Standard Chartered would emerge from the crisis with a stronger franchise. A brainstorming session at Talwar’s London home one Saturday afternoon in December 1998 produced most of the key elements of the bank’s four-part plan, recalls executive director Christopher Castleman.
In short, the bank planned to expand in its core markets of Hong Kong, Malaysia and Singapore; develop two or three noncore markets , India and Thailand, with Taiwan expected to come later when regulations permit it to buy a local bank, and then perhaps Indonesia , to diversify its income stream; strengthen its non-Asian businesses; and solidify its relationships with multinational customers by offering new products and services. To achieve those four strategic objectives, Standard Chartered also wanted to create what it called a “fit for growth” infrastructure improvement program that would reduce costs and enhance efficiency.
Implementation got under way almost immediately. Four months after Talwar took over, Standard Chartered sealed a deal to buy a 20 percent stake in Indonesia,s Bank Bali. Unfortunately, the transaction unraveled after due diligence uncovered irregularities that ultimately contributed to the downfall of then , Indonesian president B.J. Habibie. However, the Asian financial crisis had spawned many other buying opportunities, and Standard Chartered quickly moved on to other targets.
Talwar went on to spend $2.96 billion on acquisitions in Thailand (75 percent of Nakornthon Bank from the Thai government for $330 million in September 1999), India (ANZ Grindlays Bank, then owned by Australian and New Zealand Banking Corp., for $1.31 billion in April 2000), and Hong Kong (Chase Manhattan Corp.'s consumer banking operation for $1.32 billion in November), three of the bank’s key target markets. In February Talwar also snapped up Metropolitan Bank in Lebanon for $18 million, as well as, for $1 billion, the emerging-markets and capital equipment structured finance business of Canadian Imperial Bank of Commerce , which included $1 billion of export finance and structured credits, 70 percent of them guaranteed by export credit agencies. And in April 1999 it picked up UBS’s non-Swiss global trade finance business for $205 million.
The buying spree established Talwar as the most aggressive acquirer of banking assets in postcrisis Asia. With the Grindlays and Chase purchases, Talwar has made the two biggest banking acquisitions in Asia, outside of Japan, this year. Buying Grindlays from Australia and New Zealand Banking Group made Standard Chartered the biggest foreign bank in terms of local assets in Bangladesh, India and Pakistan and second in Sri Lanka and the United Arab Emirates. Its tentacles reach into 11 African countries and six in the Middle East.
Standard Chartered has also sharpened its emerging-markets focus by shedding businesses operating in developed countries. In August Talwar sold Chartered Trust, a U.K. consumer finance subsidiary, to Lloyds UDT, a subsidiary of Lloyds TSB Group, for £627 million ($876 million).
What has resulted from the flurry of acquisitions and the disposal of Chartered Trust is a financial institution more keenly focused on consumer banking in emerging markets. Consumer banking’s contribution to profits before provisions increased from 40 percent when Talwar took over in late 1998 to 50 percent at the end of 1999. By the end of 2001, with all of its acquisitions fully factored in, Schroder Salomon Smith Barney forecasts that 95.4 percent of Standard Chartered’s profits before provisions will come from emerging markets, against 86 percent when Talwar took charge.
The bank is now considered one of Asia’s top three consumer banking institutions, along with Citibank and HSBC Holdings. HSBC still dwarfs its two competitors in the region with operating profits before provisions of $4.45 billion in 1999. By the same measure, Standard Chartered earned $996 million and Citibank $1.06 billion in 1999. HSBC’s Asian operations, however, are dominated by corporate banking, while Standard Chartered and Citibank are considered by analysts to have stronger consumer franchises with better positions at the top end of the marketplace.
Standard Chartered is particularly strong in credit cards in Asia, with 4 million customers. With the purchase of Chase’s consumer business, it’s now the leading issuer of credit cards in Hong Kong, holding a 25 percent market share. The bank also has a healthy mortgage lending franchise, particularly in Hong Kong. Its market share there has risen to more than 12 percent, from about 11 percent in 1998. In addition, Standard Chartered has become the leading third-party distributor of mutual funds in both Hong Kong and Singapore. Last year it sold about $578 million in mutual funds in Singapore.
Much of Standard Chartered’s success in consumer markets stems from its long history in Asia and other emerging markets. It has a strong brand name with an enviable reputation among customers. “Because it’s a London-based and domiciled bank with good disclosure and Western-style management, it’s seen in many markets as being on a par with Citibank and HSBC when in size they really are worlds apart,” says one U.S. banking analyst. “It punches above its weight because it’s a bank that customers in emerging markets often perceive to be a major OECD bank.”
In fact, Standard Chartered has only nominal representation in the U.S. and Europe. Its market capitalization stands at just $13.6 billion, compared with HSBC’s $127 billion and Citibank’s $222 billion.
The sharp focus on less developed economies has made the bank’s shares a proxy for emerging-markets equities. “It’s a unique beast,” says Christopher Ellerton, a banking analyst with Warburg Dillon Read in London. “For investors, Standard Chartered is virtually the only route into many of these markets.”
To date, investors have supported Talwar’s growth strategy, funding his acquisitions to the tune of $4 billion through nine capital-raisings over the past two years. The bank’s stock price has nearly tripled in that time, rising from a low of £3.75 in the fall of 1998 when Talwar assumed the helm to £9.98 late last month.
Mindful of previous missteps, even appreciative investors insist that Talwar still has to reverse the downward trend in income. Standard Chartered’s 1999 pretax profit of £507 million was less than the £661 million it earned back in 1995. Pretax profits increased in only two years of the past five, 1995 and 1996. And there is always the threat of another emerging-markets meltdown. With operations spread across Asia, the Middle East and Africa, the bank is vulnerable to regional crises in any of those traditionally volatile areas.
Investors have been burned before by Standard Chartered stock. In 1992 the bank suffered a disastrous securities scandal in Bombay that wiped out a third of its equity capitalization and caused the Indian stock market to crash. Local stockbrokers and speculators had delayed delivery of stock via dummy transactions and misleading paper trails in a complicated arrangement. Standard Chartered discovered it was £272 million short on securities and receipts for securities that it was supposed to be holding. An Indian parliamentary committee later recommended suspending the licenses of Standard Chartered and three other international banks. The committee report saved its harshest criticism for Standard Chartered, charging “complete abdication of responsibilities by the back office.” The Bombay incident prompted the “banana skin” label that Standard Chartered has labored hard to erase.
Memories of the bank’s penchant for surprises were stirred this past summer when it announced that it would spend £480 million over the next three to four years on a major restructuring of its operations. This includes an exceptional £200 million charge to be taken at the end of this year. Though previously announced integration costs stemming from the Grindlays acquisition accounted for £100 million of the total, the larger figure stunned investors, and Standard Chartered’s stock briefly plunged, by nearly 10 percent, before recovering.
Talwar further riled analysts when he declined to explain how the money would be spent, saying details would be forthcoming at year-end. For now, the bank says only that the lion’s share of the expenses comes from severance for 6,000 departing employees, or 19 percent of the staff, from costs incurred in closing down premises and from writing off redundant information systems.
“Just when we thought we were getting into payback time, Talwar starts talking about an enormous reengineering of the [information technology] and processing side of the business with a very large restructuring/investment charge,” says a London-based banking analyst. “It doesn,t matter how you look at it; it’s half a billion pounds charged to P&L over the next two to three years with a quite long-dated payback.”
And the payback doesn,t seem that enticing to some. In a note to clients, Schroder Salomon Smith Barney banking analyst Simon Samuels asserted that though savings from the program should flow through by 2003, “its size, low payback and enormous uncertainty over the trade-off between extra costs and savings have injected a new degree of uncertainty into forecasts.”
The episode also raised questions about Standard Chartered’s ability to execute its own plan. “It’s come out of the [Asian] crisis, it’s seen the growth prospects, but it’s saying it doesn,t have the systems and infrastructure in place to accommodate this growth,” says a U.S. analyst. “That’s where there’s an operational risk in this business at the moment. The investment community is shutting its eyes and trying to ignore it.”
Talwar acknowledges that the £480 million restructuring charge spooked investors and that the bank “could have done a better job” of communicating. “The number we flashed at them was £480 million, which was a shock,” he says. “The reality was that the actual restructuring charge was £200 million out of that, and that was well within what we had led them to expect. The £280 million is our ongoing investment that will be managed in our businesses, usual expense.”
For now, investors seem willing to give the Standard Chartered CEO the benefit of the doubt, particularly since the bank, with its recent acquisitions, is well positioned to profit from an improving Asian economy. The bank has gained nearly 1 million new customers in India and the Middle East through Grindlays, 740,000 credit card holders in Hong Kong through Chase and 100,000 accounts in Thailand through Nakornthon. Says finance director Nigel Kenny, “The opportunity now is to cross-sell.”
Schroder Salomon Smith Barney’s Samuels forecasts a 24 percent increase in pretax profit, to £628 million, for this year and an additional 58 percent rise in 2001, to £994 million. Donald Tosh, head of research at Morley Fund Management in London, fully supports the expenditures: “Talwar hasn,t been afraid to announce that he’s going to invest in the business. Were they right to do it? Absolutely. Just because it causes you a bit of share price volatility doesn,t mean you make wrong decisions.”
The recent dustup with investors is just a small reminder of the turbulence Standard Chartered has encountered in the past decade. In the wake of the Bombay securities scandal, Malcolm Williamson, a Standard Chartered board member since 1989 and group chief executive reporting to Gillam from 1993 until Talwar’s ascension in 1998, tightened reporting requirements and risk management methods and upgraded back-office systems. To start the process of refocusing its efforts, the bank got out of 15 unprofitable or low-margin businesses and sold 130 companies and properties between 1993 and 1998, making a £325 million profit from those sales and reducing its cost base by £100 million.
Among the businesses exited were stockbroking, private banking and asset management. A raft of property was off-loaded, including the bank’s Hong Kong headquarters, part of which was leased back. “We had a stockbroking business in Hong Kong which had 300 Cantonese speakers and two [foreign] managers who didn,t speak Cantonese,” says Gillam. “It was a splendid way of losing money.”
But just as Williamson and Gillam guided Standard Chartered back to solid, if unspectacular, performance, the Asian crisis hit and consolidation in global banking looked likely to accelerate. The bank’s 1998 pretax profit slumped 19 percent, to £703 million, as provision for bad debts in the midst of the sharp economic downturn roughly tripled, to £436 million. Standard Chartered had two options: Hunker down and wait for the storm to pass, or go on the offensive.
Gillam concluded that the bank should act rather than be acted on. “We are a medium-size institution with a very attractive franchise, and if we were to stay independent, we had to offer particular attractions to our investors,” he says. “We could only do that by offering them returns on equity north of 20 percent , and growth.” (ROE was only 13.1 percent in this year’s first half, up from 11.7 percent in the year-earlier period.) And that would require more concentration in higher-growth emerging markets.
The dilemma for Gillam was that Williamson had brought Standard Chartered back from the brink of disaster by cutting costs, dumping marginal businesses and avoiding risk. As Gillam mulled over a more aggressive stance, Williamson left to become CEO of Visa International, effective in October 1998 , four months ahead of his expected retirement. That opened the door to Talwar’s early succession.
Williamson’s departure followed reports in U.K. newspapers of a split with Gillam over whether Standard Chartered should sell out. Williamson and former Barclays Bank CEO Martin Taylor had discussed the possibility of a merger over dinner. Press accounts suggested that Gillam strongly opposed the idea, but both Gillam and Williamson have categorically denied there was a conflict.
Whatever the cause of Williamson’s departure, Talwar was already waiting in the wings. In fact, Gillam and Williamson had begun pursuing him as far back as 1994. Talwar’s long Asian experience and knowledge of consumer banking made him an atractive candidate. He had moved to Hong Kong with Citibank in 1981 and spent the next 14 years in Asia, heading the New York bank,s highly regarded consumer operation in the region between 1991 and 1995, a period of rapid growth. Between 1988 and 1996, revenues from Citibank’s Asian consumer banking business increased from $130 million to $2.45 billion and profits rose from $40 million to $500 million. Talwar seemed a perfect fit for Standard Chartered, which regarded consumer banking as its engine of growth.
However, it wasn,t until Citibank chief Reed installed William Campbell, former chairman of Philip Morris USA, as Talwar’s boss in early 1996 that Standard Chartered finally got a chance to pry him loose. By then Talwar was in charge of Citi’s consumer businesses in the U.S. and Europe but found himself increasingly at odds with the mass-market strategy championed by Reed and Campbell. Talwar believed that Citi should be more selective, soliciting those customers who would be most profitable to the bank. Gillam and Williamson’s three-year campaign to win over Talwar finally paid off, and he accepted the post at Standard Chartered.
Aside from his consumer banking experience in Asia and elsewhere, Talwar was an inspired choice for the job of transforming an institution that grew up on the coattails of Britain’s colonial expansion, financing booming trade in Europe, Asia and Africa and serving the interests of British military personnel spread across the Empire in the latter part of the 19th century. Talwar had begun rebelling against colonial institutions as a boy.
Because his father was a wing commander in the Royal Indian Air Force, Talwar attended the St. Lawrence Military Academy, a boarding school for the children of British officers. He never liked the school’s strict discipline (including a 5:15 a.m. wake-up call). An old school friend says Talwar sometimes wore civilian clothes when he was supposed to be in uniform and deliberately “slouched around” when talking to teachers rather than standing at attention. “Even within the bank I don,t like rigid, bureaucratic or arbitrary things,” Talwar says. “People should be given more flexibility to be creative and innovative and be able to spread their wings a little bit.”
“Localization” and “meritocracy” are key buzzwords at Standard Chartered. Although the head office retains the final say on strategy, Talwar is pushing authority out into the field through a CEO leadership team consisting of his top 90 executives. Like the board, the team membership, which meets twice a year, increasingly reflects the nationalities and ethnicity of the markets they serve rather than that of the London headquarters.
Talwar estimates that half of Standard Chartered,s employees are women and that 80 to 90 percent are natives of the countries where they work. “But when you get to the top of the bank, you suddenly hit this great big bunch of middle-aged, male Anglo-Saxons,” he says. “We talk about building a meritocracy. We,re working toward giving everybody the opportunity , regardless of color, nationality, gender, age , to get to the top and to recruit people who reflect the countries we do business in.”
The management structure of Standard Chartered, once dominated by Brits both in London and abroad, is already changing. New recruits to the Standard Chartered board include Ho Kwon-ping, chairman of Singapore Power Co.; Ronnie Chan, chairman of Hong Kong property company Hang Lung Development Co.; and Sir C.K. Chow, the Hong Kong,born CEO of Britain’s GKN.
Below the board level, other personnel shifts highlight the changes under way at the bank. Talwar promoted Peter Wong in July from head of consumer banking in Hong Kong to CEO and general manager of the bank’s entire operation there. Wong thus became the first local to head the group’s pivotal Hong Kong business in 140 years. Similarly, Talwar has elevated Jaspal Bindra, formerly head of corporate and institutional banking for Standard Chartered in India, to CEO of Standard Chartered Grindlays Bank and Washington Matsaira from CEO of Uganda to CEO of Zimbabwe, the bank’s biggest African market. As finance director Kenny notes, "[The team] really opened things up to a broader group of people who are the managers on the ground, the change agents.”
As powerfully symbolic as some of these changes are, they also have a very practical aim. If Standard Chartered remained a “colonial, expatriate-led bank, we would not survive,” says Gillam. To attract the talent needed to go forward, Standard Chartered had to offer “young people careers where we operated. Talwar was a key part of that.”
Not all the vestiges of empire have disappeared, though most of the remaining ones are quaint. At Standard Chartered’s headquarters dining room in London’s picturesque Aldermanbury Square, ginger always accompanies a meal , a custom that began more than 100 years ago, when the bank received a large and unwanted shipment of ginger in lieu of cash payment for a debt.
Insiders say the bank is a more fun place to work under Talwar. At a meeting of the newly formed CEO leadership team in January, Talwar presented a paper on his vision for the bank and received what Castleman calls an “extraordinary reception that went beyond the line of what you,d expect in such circumstances.” Then Talwar had a momentary lapse of concentration, beginning a sentence, “We at Citibank . . .” Amid the ensuing laughter, Castleman strode up to Talwar and squirted him with a water pistol he had won at an earlier game-playing session.
However fun-loving and egalitarian, Talwar isn,t someone to let details slip through the cracks. He instituted monthly management meetings earlier this year. Before each session Talwar gets a sizable report that dissects the bank’s performance against forecast and budget to a depth that far exceeds that of previous tallies. The report allows Talwar to pepper managers two layers below him with questions and assess whether they are on top of their businesses. Castleman says it is safe to assume that “by this process people are taking the trouble to get to know their businesses better than they would have without it.”
They will have to remain well prepared because Standard Chartered must deliver on its promises. Aside from its controversial outlay to rebuild its technology infrastructure, there are ongoing investor worries about earnings and costs. “The lack of earnings growth over the last few years means that management has a lot to prove over the next few years,” says London-based Richard O,Connor, head of global research at Clerical Medical Investment Management, which owns about 1.4 percent of the bank’s shares. A misstep could quickly make the bank an acquisition target, according to another London-based shareholder: “You only have to go out to Asia to see what an awesome franchise they have. If they don,t deliver, somebody else will take it off their hands.”
Whether and how quickly Standard Chartered reaches Gillam’s goal of 20 percent return on equity will be closely watched. Schroder Salomon Smith Barney,s Samuels doesn,t expect the bank to hit that magic number until 2004. In emerging-markets years that’s a long time, as investors who have suffered through the recent peso, ruble and Asian crises will attest. Many things can happen to undermine even the best-laid plans.
Some of these longer-term worries were at least momentarily forgotten when the bank posted its first-half results. Pretax profit rose 31.4 percent, to £356 million. That increase was driven by a 25 percent rise in fee and commission income, to £262 million (most of that from the trade finance, credit card, cash management and custody businesses), and a 32 percent decline in provisions for bad debts, to £164 million, as Asia’s economic recovery continued. Hong Kong, one of the bank’s core markets, recorded a particularly strong performance, with pretax profit doubling to £162 million.
Standard Chartered even got a break when the Netherlands, ABN Amro Bank recently announced it would exit emerging-markets consumer banking. With that disclosure, Talwar happily notes that “a third of my competition went away. What’s happened in Asia and in emerging markets generally is that there are really only three players left , Citi, HSBC and ourselves. That means there’s a lot of space for a trusted, reputable brand like ours.”
And that’s where he’s putting much of his attention these days: a revamping of the Standard Chartered brand. He,d like to “jazz up and modernize” the bank,s image. Internal research shows that customers view it as a trusted and dependable institution that stays with its customers in “good times and bad.” Says Talwar: “We can make up for some of our lack of sex appeal with the trust factor. We,re doing some pretty serious work on building a Standard Chartered brand that is distinctive and gives us competitive positioning.” Right now the revised branding is still in the discussion stage, with a more detailed approach likely by the middle of next year. The objective of the rebranding is to position Standard Chartered to win more of the business that falls between behemoths Citibank and HSBC and smaller local institutions.
The repositioning, like much of what Talwar focuses on, is designed to keep the recent surge of momentum going. “We,ve got the strategy in place and the pieces of that growth strategy in place,” he says. “The main thing now is just to deliver results over the next six to eight quarters , not spectacular, but just solid, results.” Shareholders would agree.
