Standard Chartered CEO Peter Sands talks strategy

Peter Sands, Standard Chartered's chief executive officer

For the cover story in this month’s FinanceAsia magazine, we take a long look at Standard Chartered, which is that rarest of things: a global bank that has grown during the crisis. Its strategy has been to focus on clients, avoid fancy products and ride the wave of emerging market growth. But are cracks starting to appear?

We put our questions to Peter Sands, Standard Chartered’s chief executive, and are publishing the full transcript of this exclusive interview over the next two days. Today, he discusses the bank's recent performance and, tomorrow, the wider market and the prospects for banks in the future.

During the past five years you have increased profits, capital, assets and staff size during the worst time for banks in 70 years. How?
Good question. There is no magic to the answer. We have stuck to our strategy; we have been very disciplined in making sure we execute against our strategy. We have remained open for business throughout the most turbulent times. We have almost doubled our lending to clients between the end of 2006 and 2011 — it is up 91%. So we stayed open during the period, we stuck to our strategy and culturally we are obsessed with the basics of banking. It is a business that is driven by clients and long-term, deep relationships.

Do you understand why some people are sceptical that you can have had all this growth without encountering any of the problems that all other international banks have faced?
Absolutely people are going to be sceptical, but the first thing I would say is that it isn’t as if we haven’t encountered problems. We have, and we have dealt with them. It is not as if we were unscathed by the crisis. But I think we had the resilience and mindset of trying to work out what the next problem is. We try to shape the business and the book in a way that allows us to respond. But this is a risk business and in turbulent times you are going to have risks that play your way.

I am very keen to make sure we never get into a position where we assume that just because we have been successful in the past we will be successful in the future. That is a dangerous complacency in banking.

So there are no nasty surprises that may appear on the books in a year or two?
I am very confident that our balance sheet is stronger than it has ever been. If you look at the capital position, the liquidity position, the sheer heterogeneity of liquidity sources, of assets, it is a very strong balance sheet.

Your traditional commercial banking businesses — cash, trade, custody — are humming along very nicely at 17% annual growth; private banking is up 21% year on year. But global markets — a business that is far more risky — is only growing 7%. Do you have your priorities right from a management perspective?
I don’t think that is right. You have to be careful looking at the progression of the businesses with just a one-year perspective. One of the things that distinguishes us is that we take a long-term perspective. So the growth rates of individual businesses will bounce around year to year but we are looking at where the franchise is going over three, five or 10 years. And we see enormous complementarity between the various elements of our business. A huge amount of our FX business is driven by our cash and trade business. There’s a huge complementarity between our private banking business and the things we do on SME banking around family owned businesses. So we are deliberately trying to nurture a combination of businesses that support each other. There is a lot of talk within the bank about ‘one bank’, leveraging the synergies between the businesses and running the bank seamlessly across geographies and different elements of the business.

That is what every bank says. Why is your ability to focus on ‘one bank’ and talk about servicing clients, a luxury that your competitors don’t have? Is it to do with the timing of the last few years, different management style or different incentive structures?
We decided to run our business around clients not products. What gets people excited in this place is working with clients over a long period of time and helping them grow, flourish and succeed. We have designed the organisation, the incentive structures and the reporting systems to support that way of doing business. So you will see that a global account manager in our wholesale banking unit is rewarded by the business they generate across the whole range of product capabilities and across the whole world, and by the development of the relationship over the long term. We don’t want to incentivise people to hustle for near-term business.

We have very long-term relationships around the group. I just attended a dinner in Hong Kong for a group of people who had all become customers in the 1950s and 1960s, and in 1972 had formed a club. They had mostly emigrated from Shanghai and have created very successful businesses, and this was the anniversary of the club they created 40 years ago. Now you have the successors of the original entrepreneurs. It requires a philosophy for how you deal with the difficult times. Over the decades you will get ups and downs in business fortunes and one of the things we believe is that what matters in banking for clients is not what you do when things are all humming along, but what you do when things get difficult.

Do clients really appreciate that? One of your colleagues has said that you are happy not being a top-three provider in terms of product as long as you are top-three in terms of the wallet share of the client. That is almost heresy in this climate where every other bank is trying to work out what they are good at and where they are good at it, and then getting out of everything else.
Our fundamental approach revolves around being very close to our clients. We have to stay focused on doing what it is we do well. If the client wants to do things in parts of the world where we have little expertise, we say go and talk to X.

How do you quantify the stickiness of your relationships over the cycle? Is it by wallet share, by range of products, by range of geographies?
We have made public in various investor presentations the various metrics we can use. We certainly think about the length and the depth of a relationship. One of the things we have shown is that the expansion of the wholesale bank has not been driven by having lots of new clients but by having much deeper relationships with our existing clients.

It is no accident that you will not find the language of an investment bank here. There is no hierarchy of products where one is sexy and another is basic. Cash and trade is absolutely core to our relationship with clients.

That is a difficult management challenge when you have been hiring a lot of investment bankers.
It is a management challenge and that is why we have a priority on strategy and a relentless focus on how we go about doing business. ‘Here for good’ is out mantra. It captures our sense of commitment and continuity over time. We are not transactional and stand by our clients and markets when times get tough. We also have a very strong sense of wanting to do the right thing.

Click here to read the second part of this interview

Peter Sands: FSB and G20 'are not about creating the kind of regulatory architecture that the emerging world needs'

For the cover story in this month’s FinanceAsia magazine, we take a long look at Standard Chartered, which is that rarest of things: a global bank that has grown during the crisis. Its strategy has been to focus on clients, avoid fancy products and ride the wave of emerging market growth. But are cracks starting to appear?

We put our questions to Peter Sands, Standard Chartered’s chief executive, and are publishing the full transcript of this exclusive interview over two days. Yesterday, he discussed the bank’s recent performance and, today, the wider market, Standard Chartered’s domicile and the prospects for banks in the future.

On the consumer side, some analysts are starting to raise concerns that because of the cyclical nature of the business, and the fact that you have had to go down the risk curve, then impairments will rise, especially in your core markets in Asia. Is there a cyclical element to your book that will now start to affect your share price?
There is obviously a cyclical element to the book but 84% of the consumer book is secured. If anything too much of our book is secured. If you look at our LTVs (loan-to-value ratios) in mortgages its incredibly low compared to Western standards.

So you could happily survive a Hong Kong or Singapore housing slump?
Yes. If you look at our history, we went through a 40% reduction in Hong Kong housing prices post-1997 and our loan impairments then never became very significant. Our LTV on the Hong Kong mortgage book is in the high 40s. We are not complacent, but we know that the consumer banking and SME banking opportunity is going to carry on growing rapidly across our markets. It will be cyclical, but we can manage our way through the cycles. We also have a natural diversity in that we are not a single-country bank. Very few banks have our degree of diversity in their asset book.

That diversity leads to a very challenging competitive position: you compete with local banks — such as DBS, CIMB or Bank of China — that are expanding and going regional, and then you are competing as always against HSBC and Citi and new global banks that are eyeing up the Asian consumer business. And you are now competing against the bulge-bracket investment banks. How do you manage all that?
It keeps us on edge. We have some very good competitors. But it was ever thus, and we have proved that we can compete against them. One of the things we have observed is that more and more people are talking about strategies that look remarkably like the things we have been doing. We have to reinforce the distinctiveness in what we do.

Does your risk appetite differentiate you from your competitors, especially on the wholesale side and especially on the big client relationships? You are one of the few banks that has regularly written billion dollar tickets over the last few years.
I’m not sure that is the case. In terms of risk appetite, we are a very conservative bank. The proof is in our performance. The structure of our balance sheet is very conservative in terms of use of leverage, LTV ratios. By most standards, as well, we have a very short tenor book. On the wholesale side, a large proportion is less than a year and on the consumer side, it is much shorter than that and much of it is secured.

How do you ensure that as the world economy starts to pull out of this slump all the business does not leave you?
You are right that it is harder to differentiate when everything is easy. In some ways, for us, the period from 2005 to 2007 was a more difficult period competitively because the differences between banks was less obvious both to investors and customers. There is still enough turbulence and uncertainty in the world for that to be a problem I am not too fussed about at the moment. There are plenty of storms around.

Any way you look at it, you are an Asian and specifically a Hong Kong bank — it is easily your biggest profit generator, you print the money. Why not re-domicile there?
Yes, in many ways we are an Asian bank, although we do have very good businesses in the Middle East and Africa. I would push back on us being a Hong Kong bank; it is only about 20% of our book. In terms of re-domiciling, our approach is very straightforward. We would prefer to stay where we are for the simple fact that moving the domicile of a big international bank is complicated and costly, and frankly a distraction. We do face some incremental costs as a result of being domiciled in the UK due to things like the UK bank levy or FSA regulation. We understand what our options are and we keep these things under review. We have options. But our preference is to stay where we are.

Do the regulatory authorities in Hong Kong — or even Singapore — not want you?
We absolutely have options. If we wanted to move, we would have options as to where we wanted to move to.

There are huge long-term changes to the global economy that are happening at the same time as a massive banking crisis. You have benefited from these big changes — such as the rise of Africa, or Asia becoming a capital exporter — and you have to an extent benefited from the banking crisis. What concerns you about these trends and what could upset your position taking advantage of those trends?
The starting point is that we are very well placed. In a crude way the centre of economic dynamism and power in the world is shifting from the West to the East, although Brazil is included in that. That is a good thing. Fundamentally, what is going on is that a huge number of people are being made much wealthier and that is a huge thing for social progress. We are structurally well placed to help make that happen and to deliver shareholder value in doing so. It is not without its tensions; when you have massive shifts in the way the global economy works, there will be all sorts of issues that will arise, especially when you have deleveraging and slow growth in the West against economic dynamism in Asia — you will get all sorts of calls for protectionism. Given that our absolute core business is international trade and investment, to the extent that the world loses confidence in globalisation, that is clearly an issue. I don’t think it will, but around the margins you will get individual issues coming up that will threaten it.

There are strands of the individual regulatory change agenda that are leading to a degree of fragmentation in the global financial system, which is an unintended consequence of authorities in different jurisdictions doing things to try and protect the resilience and stability of their individual financial systems. There is a cost to that and it is a cost that is more significant to emerging countries than to the West.

In what way?
Smaller companies in the emerging world are much more dependent on trade finance as a source of working capital than their equivalents in the West are. So if trade finance becomes more difficult and expensive, it has a bigger impact on them.

I thought that the banks have won the argument over how much capital needs to be set aside for trade finance assets under the new Basel III regime?
They have made some concessions, but those that they made last October address a fraction of the gap between the regulatory cost of doing trade finance under Basel III and the true economic cost of doing it. They only address a small part of it. You still have a situation where the regulatory cost of trade finance is considerably greater than the true underlying economic cost.

If the numbers are so clear, why is this such a difficult issue to resolve?
I think it is partly because the voice and influence of Asia in all these international fora that are reshaping the architecture of the global financial system is still not what it should be. If you look at the priorities for the regulatory change agenda, they are all about avoiding another Lehman or RBS. They are not about creating the kind of regulatory architecture that the emerging world needs. Those things tend to get swept up in retrospect with people looking to make a few amendments afterwards. They are not front and centre of the agenda. The agenda — I am sorry to say — is a very backward looking agenda: not having another repeat of 2008/2009. I would like to see the emerging world and particularly Asian voices having more say as to how all this gets reshaped. That voice is growing but it is catching up with the realities of the world economy.

How can that best be achieved? Is it through existing structures such as the IMF or through new structures like the FSB or G20?
We have seen the emergence of new mechanisms and vehicles like the FSB and G20, and there is still work to be done around the governance of the IMF. But part of it is also Asia stepping up and saying we want to be driving this strand of regulatory change or issues. You are seeing more of it and I am not saying it is not happening, but I think it is really important [to do more]. The whole debate around trade finance is indicative of this. The reality of this is that nobody in the FSB committee in Basel had focused on the consequences of trade finance at all. It was only when it was pointed out to them that they realised this was going to damage one of the most important lubricants of global trade and growth that something should be done about it. Then they are on the defensive as they have already put the changes in place. And you are in the wrong place to start with.

A better way would have been to have had that as something to think about when forming the rules. It is an interesting example of the broader issue. Another example would be that many Asian countries are quite dependent on external sources of funding as they don’t have deep capital markets. So thinking through the impact of Basel III on those flows strikes me as quite important. I don’t think there has been enough focus on that. There is obviously a clear conclusion that you need to accelerate the development of domestic capital markets, but we are deluding ourselves if we think that the dollar is not going to be the primary form of finance of cross-border trade and investment. The renmimbi has grown enormously in a very short space of time, but the dollar is still hugely important. So if you have a more fragmented financial system because of people worrying about contagion and trying to create firewalls, what are the implications of that for the emerging world? These are really important sets of questions that need rather greater focus than they have yet had.

You have clearly thought deeply about this. Is this an indication of what you would like to do with the next stage of your career?
No, no. I am very happy where I am. This is a fantastic job. But also we as an institution have a big role in shaping these issues and being part of the solution. That comes to a broader point that banking as an industry has been in the box of being part of the problem. It needs to get out of that box and to be seen as being part of the solution. We think that proper banking is both an essential and powerful part of how you get economic growth and job creation — all things that the world needs right now. For us, the sweet spot is where we can do things that deliver economic growth and job creation, and deliver for our shareholders. A really good example of that is SME banking, which is a really fast-growing part of our business. We tend to have a particular focus on SMEs that want to do international stuff, and that plays to our strength. Talk to any government around the world and SME finance is absolutely top of the agenda as it is a very important part of growth and jobs. So, no. I am very happy where I am.

Click here to read the first part of this interview