This article first appeared in The Edge Malaysia Weekly on December 2, 2019 - December 8, 2019
THESE are certainly disquieting times for Asia, not least because of protracted US-China trade tensions, slowing growth in the world’s second largest economy and prolonged unrest in Hong Kong.
Nevertheless, Standard Chartered PLC chief executive Bill Winters, who says the banking group derives over 70% of its profit from Asia, remains upbeat. He is buoyed by the fact that the bank is not only more resilient to ride out the gloom, having strengthened its foundations since 2015, but also uniquely positioned to tap identified opportunities.
“Yes, there are plenty of challenges and we can expect that to continue for some time,” Winters tells The Edge in an exclusive interview in Kuala Lumpur. “But the bulk of the world’s growth is still coming from Asia, and that is driven by demographics. Obviously, there are some subsets of our markets that are heading to that ageing-population point but broadly, the demographics are very supportive of long-term strong growth. China has slowed but it’s still the world’s second largest economy, growing at 6% — it’s a material contributor to global growth.
“So, we feel very good about where we’re positioned. We couldn’t have hoped to be in a better place right now in terms of the underlying growth trends, the demographics and the franchise — just the businesses that we have today and the opportunities that they give us to continue to grow.”
StanChart, which Winters describes as a global bank “with its heart in Asia”, also has a keen focus on the Middle East and Africa. It is present in 65 markets worldwide.
The group has come a long way since it slipped into the red with a pre-tax loss of US$1.5 billion in 2015 — its first full-year loss since 1989 — amid volatility in global markets, restructuring costs and bad loans.
It was a major blow to the group, considering that it had even managed to grow annual profits through the 2008/09 global financial crisis.
Winters got into the London-headquartered bank’s driving seat in June 2015 and set a series of actions in motion, including axing 15,000 jobs worldwide in a bid to cut costs and restructure the business, boosting capital through a US$5.1 billion cash call and focusing on its strengths.
The moves paid off. StanChart returned to annual profitability in 2017 and this year, it is seen to be on course for its fourth straight year of underlying profit growth.
“We’ve been growing very nicely for the past two years. The economies in which we operate haven’t been the strongest they’ve ever been, and the global economy has been slowing down. Nevertheless, we’ve been growing our income,” says Winters.
Operating income grew 5% last year to US$15 billion, within the growth target that the group indicated to shareholders.
Singapore’s state investor Temasek Holdings Pte Ltd is the largest shareholder in StanChart with a 15.97% stake. Temasek also owns 29.98% of top regional bank DBS Group Holdings Ltd.
Whither Hong Kong?
Winters expects pro-democracy protests and the resulting unrest in Hong Kong — where the bank derives its biggest revenue — to be a long-drawn-out affair. However, he is confident that Hong Kong, which slipped into a technical recession in the third quarter of the year, will bounce back from the turmoil.
“I know there’s overall concern about what’s going on in Hong Kong but in our latest financial results — that of the third quarter [ended Sept 30, 2019] — we showed growth in Hong Kong on a year-on-year basis. It remains our biggest market,” he says.
Whether Hong Kong continues to grow for the bank in the final quarter remains to be seen. The protests, sometimes violent, have lasted some six months now. In late October, StanChart joined two other banks in cutting their best lending rates by 12.5 basis points following a quarter-point cut in the base lending rate by the local monetary authority.
In August, StanChart and rival HSBC separately took out advertisements in Hong Kong newspapers condemning the violence and calling for a peaceful resolution.
The city is “still very resilient”, Winters notes.
“Hong Kong has been buffeted by pretty fundamental shocks regularly throughout its history, whether it was the global financial crisis, the Asian financial crisis or the SARS (severe acute respiratory syndrome) crisis. These were body blows to Hong Kong and it bounced back. So, Hong Kong will bounce back from this one as well but it’s going to take some real reconciliation between the objectives of the protestors and of the government to bring that peace,” he opines.
He hopes that the parties can find a way to reconcile but in the meantime, he says, “business is carrying on”.
StanChart will go ahead with plans to launch a virtual bank there early next year with its non-bank partners, he says.
Commenting on the strained US-China relationship, Winters says, “Trade tensions are unambiguously bad. That said, if the US and China can stabilise things — that is not allow things to get worse — then global growth will, over a period of time, return to something that’s a little bit closer to potential but having reconfigured to some extent.”
How will slower global growth impact StanChart?
“Well, clearly, global economic growth is good and slower growth is less good, so we’re feeling some impact from that, to the extent that it’s pushing down interest rates because we’ve got stubbornly low inflation — that’s an incremental challenge for us,” Winters says.
“But as we look at the opportunities, we don’t have much exposure to trade between the US and China — that’s not a big part of our business. We have much more exposure to trade between China and the rest of Asia, China and South Asia, China and the Middle East, China and Africa. We have a big market share of those trade flows.”
He points out that China is “an extremely active” trader and investor in the markets in which StanChart operates, allowing the bank to play a strong role. It operates in 45 of the 65 Belt and Road Initiative countries, he says.
“We’re a big infrastructure financier, we’re a big power — particularly renewable power — investor. China is a big contractor in those countries and, of course, the trading flows in these core areas are very large. It’s only going to get bigger. And the greater the tensions between the US and China, the more important the Chinese trading ecosystems across our markets become.”
Winters does not expect growing global headwinds to spark a financial crisis anytime soon. “I don’t see a global financial crisis but that doesn’t mean we can’t have local crises. Argentina is having a tough time right now and Zimbabwe has had a very challenging time for some time. I think we’re going to have local crises where local mismanagement or imbalances have evolved. But I think it’s unlikely to be the thing that sets off a global growth slowdown that we saw 10 years ago,” he says.
Seizing opportunities
StanChart’s focus going forward includes improving risk-adjusted returns in underperforming markets like South Korea, India and Indonesia, maintaining cost control and delivering returns on digital investments.
A key part of its growth strategy is to focus on companies with cross-border businesses that can leverage the bank’s unique international network. It is what Winters calls the bank’s network business.
“Network business refers to the subset of our corporate business that is helping our clients to effectively manage their finances across borders — so, things like managing their currency risk or interest rate risks, the way they finance their trade and cross-border investments and so on,” he explains.
The bank’s network is unique because of the many countries in which it operates and the fact that it is “deeply local” in about half of them, he says. Among the global banks, StanChart has arguably the strongest presence in Africa and is the only one with a presence in all 10 Asean markets.
Four years ago, the network business was “a little bit less than half” of StanChart’s corporate client business. The group decided to grow it faster.
“It’s been growing at, or close to, double digits for the past three years. It’s a very high returning subset of our business as it requires a little bit less capital than the straight-lending business. It’s where growth is coming from in our corporate business. So, that leaves us feeling very optimistic that we can continue this growth profile even in a slowing growth environment,” he says.
The other key thing it is focusing on is growing its retail affluent segment.
“That business was a bit less than 50% of our income three years ago and now, it’s close to two-thirds our income. It’s a higher-returning client segment and has been growing very nicely — at between 9% and 10% compound (annual growth rate). It’s a little more volatile because affluent people’s interaction with the markets depends on sentiment. But we’ve had really consistent growth in the number of clients and that, in a way, is the most encouraging measure,” Winters says.
Meanwhile, a major part of the group’s strategy has been digitisation with a particular focus on the retail segment.
“We have been pioneering in Malaysia [in terms of digital solutions]. We clearly have more work but we’ve introduced a set of products and services, starting with payment cards, but moving to current accounts and savings accounts by the end of the year that are 100% straight-through with no human touch. We’re continuing to evolve and are working with the regulators to get the optimal set-up that matches regulatory compliance with convenience,” Winters says.
Over the last couple of years, StanChart has launched eight digital banks across Africa.
Malaysia
Malaysia is a central pillar for the group’s Asean business, says Winters. In fact, it was the country’s first-ever bank with a branch set up in Penang’s Beach Street back in 1875. The bank was locally incorporated as Standard Chartered Bank Malaysia Bhd on Feb 29, 1984. It marks its 145th anniversary in Malaysia next year.
Its 8,300-odd employees recently moved to a spanking new headquarters in Equatorial Plaza in Jalan Sultan Ismail, Kuala Lumpur. They were previously based in Menara Standard Chartered for 15 years.
The official launch of the office last month was the reason Winters was in Kuala Lumpur.
“We have grown with this country,” says StanChart Malaysia managing director and CEO Abrar A Anwar. He adds that the bank’s fastest-growing business here is its small and medium enterprise segment, in line with the government’s strategy of the SMEs supporting the economy going forward.
The bank pays particular attention to female entrepreneurs through its WOWnita programme, seeing how 25% of SMEs are owned by women.
Last year, StanChart Malaysia reported its third straight year of profit growth with net profit coming in at RM549.54 million, up 51% from a year ago on a significant improvement in its provision for credit losses. In the half-year ended June 30, 2019, net profit rose 10% to RM230.9 million. Its asset base stood at RM47.84 billion.
StanChart has a global shared services centre in Bukit Jalil, KL.
Geographically, Asean is important to the group, says Judy Hsu, StanChart’s CEO for Asean and South Asia.
“Out of Singapore, two-thirds of our clients, mid-corporate, have operations in Asean, most of them in Malaysia. Similarly, we have a lot of local champions in Malaysia. A big part of our network business is in mid-corporate ... this is where we’re really focused. I do think that is our biggest differentiator versus many other regional or global players,” says Hsu.
Meanwhile, Winters dismisses rumours that the bank is exploring a potential sale of its Islamic arm, Standard Chartered Saadiq Bhd. “It remains an important piece to us,” he says.
StanChart Malaysia has 32 branches nationwide, four of which are under Saadiq. KL is the bank’s global hub for Islamic banking.
Last year, StanChart reported a 6% rise in profit before tax to US$2.5 billion after provisions for regulatory fines and restructuring.
Analysts expect StanChart to steadily improve its profitability but say the pace will depend on its ability to deliver its business plan in the next few years.
“Headwinds in trade tensions and geopolitical risks, and earnings volatility in emerging economies where the bank has high exposure, could limit [its] ability to sharply improve earnings,” says S&P Global Ratings in a July report.
The bank is targeting a return on tangible equity of at least 10% by 2021. In 3QFY2019, it reported an underlying ROTE of 8.9% compared with 7.3% a year ago.
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