UK-based Standard Chartered Bank, which does most of its business in Asia, Africa and the Middle East where 88% of the group’s revenue is generated, turned a corner in 2016 after declining profits led to a $2.2 billion loss in 2015. The recovery was quick, but shareholders may have to wait longer than expected for ROE to improve to pre-crisis levels.
The bank enjoyed a golden decade, outpacing many competitors bogged down by the global financial crisis. Standard Chartered’s operating profit (before bad loan provisioning and taxation) peaked at $8.5 billion in 2013, growing 13% annually over 10 years. Since then, operating profits declined 18% annually to $3.8 billion in 2016. Declining after-tax profits, since peaking at $4.9 billion in 2012, culminated in the banking group, reporting a loss for the first time since the 1990s.
Standard Chartered’s Group CFO Andy Halford explains that some of the lending decisions during the growth years came back to haunt the group. “We found ourselves overexposed to certain industries and firms,” he says. From 2012 to 2014, the bank provided $9 billion for bad loans. Over the next four years, provisioning amounted to $15 billion. The group had other challenges as well: A lending scam in China, a $340 million regulatory fine for breaking US money laundering rules and losses in its private investment business exposed the bank’s weaknesses.
The bank has since shed staff and its unprofitable businesses across the globe. “At the same time, we are investing in IT and new staff in markets with strong growth potential,” Halford says. Mixing aggression with caution, the banking group is also looking for its 90 biggest borrowers. “The strategy is to identify growth sectors we haven’t necessarily looked hard enough at in the past,” he says.
When the bank released its recovery strategy in 2015, it had been optimistic about growth. After shareholders made a negative 4% return in 2015, the bank’s management forecast ROE increasing to more than 10% by 2020. However, the bank is now cautious about this goal, given new uncertainties that have since emerged, such as Trump’s presidency and Brexit.
“We don’t have a time scale for ROE, because while some factors are within our control, there are those that are not,” Halford says. “We will deliver shareholder returns as fast as we possibly can.”
Here are excerpts from the interview…
How did Standard Chartered find itself where it is today?
● Halford: Standard Chartered had a good run for more than a decade, growing its topline and profit even during the global financial crisis, while other banks stumbled. However, the trend reversed in 2012.
Some of the lending decisions during the growth phase proved problematic, leading to higher provisioning for bad loans. Around this time, growing the business was becoming a challenge because markets had enough liquidity due to low interest rates and regulatory costs were rising. For all these reasons, Standard Chartered’s profits declined. By 2015, Standard Chartered made a $1.5 billion loss.
That resulted in a rethink and refresh of its strategy. A number of management changes ensued, with Bill Winters joining the bank as chief executive in 2015. At the end of that year, we announced a strategy revision.
We told shareholders the recovery would be hard, but the bank had a lot going for it: a fantastic client base and a presence in fast-growing markets around the world.
The recovery had four aspects: One was provisioning and exiting problematic loans; and the second was strengthening the capital base, which was done through a rights issue. The bank’s capital structure is now significantly stronger than it was two years ago. Third, the organizational structure was simplified. We operate across four geographic areas, serving four different client groups. We found that two of our client groups – corporate and private banking customers – wanted the same experience wherever they were in the world, and were therefore managed globally. Retail and commercial banking clients and small businesses expected day-to-day services and responsiveness, so they had to be managed locally on country basis. The fourth aspect of the recovery was improving processes and cutting costs. This meant increasing investments in IT and people.
Which sectors was the bank most exposed to?
● Halford: The bank had high exposure to commodities, which was fine when commodity prices were riding high. When prices fell sharply, it became a problem. A large proportion of the bank’s problem loans were in India. We were also overexposed to some clients; this is why we are now more careful about the scale of lending. We will spread the risk by syndicating bigger loans.
We made good progress since the strategy revision was announced 15 months ago. This can be seen in the bank’s 2016 financial results announced earlier this year (2017). The decline in earnings has stopped, riskier loans offloaded and lending risk parameters tightened. We cut costs by $1.2 billion in 2016. This is the largest amount of costs we’ve taken out in a given year while significantly increasing investment to improve processes.
The recovery phase is now over, and the goal for 2017 is to grow the topline. Over the next several quarters, our ability to increase revenue will be self-evident. The global financial services sector and the markets we specialise in are poised for fast growth.
The year 2016 was more about stabilising a difficult prior year, getting things under control and setting up the platform for growth. We did get underlying profit up by about 30% to over a billion dollars from a loss in the previous year.
We’re now much more thoughtful about which clients we’re lending to, making sure we’re not overexposing the bank to particular sectors or clients. This does not mean we’re easing off lending. On the contrary, the bank’s priority going forward is finding our next 90 big clients. The strategy is to identify growth sectors we haven’t necessarily looked hard enough at in the past.
Standard Chartered shareholders got a 0.3% return in 2016. What are their expectations for ROE going forward?
● Halford: We’re looking at an ROE of 8%, hopefully 10%, in a range where the cost of capital is covered. However, we don’t have a time scale, because while some factors are within our control, there are those that are not. For example, interest rate increases are generally helpful, but banks have no control over it. What the bank has control over are client services and delivery, so we will deliver shareholder returns as fast as we possibly can.
We’re constantly talking to share-holders, updating them on the progress, and explaining the complexity of the business and the thinking behindthe strategy, and why it will ta ke time to increase ROE.
The bank says it will reduce costs by a further $1.1 billion over two years to 2018. How will you achieve this?
● Halford: Mainly, by investing in IT. We incurred huge costs in maintaining multiple autonomous systems focusing on specific geographic locations or businesses. For example, several different credit card types sat on their own systems and had their own databases. The ongoing investment in IT is bringing all of these on to one platform, giving the bank huge opportunities to manage costs and improve efficiency. Better analytics are helping us onboard new clients faster, and automation enhances experiences for both client and staff, while reducing errors. We’ve been able to gather important feedback from our global client base.
Some of them told us they didn’t always know who to contact at the bank. We used this information to simplify the organizational structure and refocus. For example, we’ve had to release staff in some markets, but continue investing in people in countries and businesses with strong growth potential.
There’s opportunity to grow the bank’s retail business in India and Singapore. The private banking business – which is strong in Hong Kong – has considerable growth potential across Asia. Both the retail and private banking businesses are underperforming, in part because we’ve been operating outdated systems.
A big component of our IT investment is on a wealth management platform. Wealth management attracts a lot of funds in Asia, and the reputation of our bank will stand us in good stead to make more of an opportunity than we have in the past. Digitalization and mobile applications are transforming retail banking, and we’re investing in these areas as well.
What’s the impact of regulation?
● Halford: Each year, regulatory costs account for about 10% of the bank’s total expenses, and this is not likely to decline any time soon. However, these costs are critical for long-term growth. Capital and compliance are absolutes for growth in the banking business. Constantly improving standards around governance and professional conduct, and investing in financial crimes and anti-money laundering systems don’t just satisfy regulators, banks want these things too.
What are some of the uncertainties the bank has to deal with?
● Halford: It’s too early to conclude with precision the outcomes of the Trump presidency in the US, Britain exiting the European Union and the elections in several countries in Europe where the bank has a small presence.
Consumption is growing in Africa, Asia and the US, which means domestic and cross border trade is increasing. Standard Chartered is well positioned in these markets to make the most of these opportunities. We have a positive outlook, although trading patterns could easily change.
Brexit is moving into uncharted territory, no country has exited the EU before. But there is more to it than the two-year separation process. Some of the changes will have lifelong implications that are not so clear at this point in time. Banks based in the UK will need locations within the mainland to overcome some of the uncertainties around the separation.
It’s still early days into the Trump presidency. Important economic and trade issues are being discussed, but the passage of time will tell us more about what will be done and what needs to be changed. For now, the rest of the world is watching with a degree of interest and intrigue.
On the regulations front, the finalisation of Basel III and the transition to Basel IV appear to be taking a breather for the moment. Perhaps later in the year, we will see more clarity about what shape it’ll take. Most banks like to see some certainty about the end point and what those parameters will look like, so they can focus on running the business.
Standard Chartered has a strong presence in Asia and Africa. What opportunities and challenges does this kind of focus bring?
● Halford: The opportunities are considerable.
Most countries in Asia and Africa are growing fast and consumption is rising. There is a growing need to trade, and this is our specialty. Standard Chartered has been in the region for 150 years, finding solutions for customers who live and trade in Asia. We operate in spaces few other global banks do, and in the highly competitive world that we live in, this should make a big difference.
Many banks are competing for a share in these markets that already have enough liquidity, so there is pressure on margins. I think we need to be aware that we need to earn our place at the table. Our long history of advising and providing trade services in these countries gives us a distinction not many of our competitors enjoy, so we really need to focus on standing out from the competition; if we do that well, the opportunity to gain market share is evident.
[pullquote]Most countries in Asia and Africa are growing fast and consumption is rising. There is a growing need to trade, and this is our specialty[/pullquote]
What is the outlook for interest rates and monetary policy?
● Halford: In the US, there is clearly a forecast expectation for more interest rate increases. Europe has a difficult balancing act, where growth is possibly strong enough for an interest rate increase, particularly in the UK—with Brexit, that is certainly the case.
In Asia, most governments have growth high on the agenda, so we may not see interest rates increasing. However, low interest rates over a period of time can create challenges, so we could see some modest increases, particularly driven by US policy and currencies pegged to the dollar.
What sectors or industries will the bank want to increase exposure to going forward?
● Halford: Consumer goods, technology and other growth sectors depending on the country. We were probably more focused in other sectors in the past, but our skills can easily be transferred. If Standard Chartered is to grow as a trading bank, we need to be able to support all aspects of trade, not just trade in selected sectors.
We have a great customer base and we want to get more involved in their eco-systems, so we’re trying to serve through the value chain by working with their suppliers and clients.
Because the client base is really good, we need to get the belief in the business, we need to get the energy in the business and we need to motivate people. If all of these happen, the bank will be in much better shape.