This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017
IT has been a rough few years for Standard Chartered Bank Malaysia Bhd (StanChart), but the country’s oldest bank believes it may have finally turned the corner and is now on a mission to regain lost ground.
In a rare interview, managing director and CEO Mahendra Gursahani says 2015 — the year the bank turned in its worst net profit in at least a decade and slashed staff headcount — was a defining period for StanChart. It gave the bank pause for thought on creating a more sustainable future for itself in the country.
“I think there comes a point in every company’s history — we’ve been 142 years in this country — when there is a need to refresh and redesign to face off against the evolving future,” Mahendra, who took the bank’s helm in February 2015, tells The Edge.
“And what we’re very sure about is that our future is going to be far more digitised,” he says, explaining that the bank, like most other banks, has been investing heavily since last year on a plan to increasingly deliver products and services to customers through digital channels rather than branches.
StanChart, whose earnings and assets had been on a steady decline since 2013, saw net profit plunge 93.4% year on year to RM25.85 million in 2015, due to a surge in impairment provisions in a few large corporate accounts. Provisions that year jumped 77.9% to RM683.6 million.
Its asset quality has been weaker than the average Malaysian bank’s mainly because of a few large problem loans in the steel and commodity sectors since 2013, analysts say.
While its recently-released 2016 financial results were an improvement over 2015, it continued to be dogged by other issues. Industry sources say StanChart was the bank that was fined RM1.4 million by Bank Negara Malaysia earlier this year.
The central bank, in a statement on Jan 24, announced that it had slapped an administrative monetary penalty of RM1.4 million on a financial institution — without naming it — for failing to notify it of a significant audit finding in relation to dealers’ misconduct involving the fixing of the US/RM exchange rate.
While the size of the fine is by no means substantial, it is rare for the central bank to fine a bank and announce it publicly.
“We are aware of the public statement issued by Bank Negara, and as a financial institution, we are not at liberty to comment,” is all Mahendra would say on the matter, without actually denying that StanChart was the bank in question.
Worst is over
He is nevertheless more optimistic about StanChart’s prospects now.
“I’d like to think that the worst is over, and that we are now in the phase where we’re trying to build back from that weakness that we saw in 2015. We’ve had a much better 2016. And we’re already seeing that some of the investments that we’ve made in the last 18 months are starting to bear fruit.
“But, you have to bear in mind that investments, particularly in retail banking, which is where much of our investment is happening and is transforming this bank into a more digitised business, means that there will always be a bit of a gestation period ... the rewards in the form of revenue streams will take some time to mature and come through,” he says.
However, he is confident the bank is taking the right steps. “We’re seeing the green shoots come through and I think we have quite a lot of confidence that we will create the right outcomes in the future, so that 2015 will be a bit of an aberration,” he adds.
StanChart reported a net profit of RM301.85 million in FY2016 — almost 12 times what it made in the previous year — due to lower impairment provisions. Provisions, while still substantial at RM350.9 million, were nevertheless 48.6% lower than that in the previous year.
Against a backdrop of moderate growth sentiment in Malaysia, its net interest income fell 12.3% to RM790.5 million. Islamic banking income, however, grew 13.2% to RM369.6 million.
Operating expenses fell 2.72% to RM1 billion as it continued to keep a tight rein on costs.
StanChart’s total assets, however, continued to decline — by 4.1% to RM47.1 billion. Loans contracted by 1.99% to RM29 billion in 2016, but it was nevertheless a significant improvement over the 12.38% contraction in 2015.
Its gross impaired loan (GIL) ratio worsened to 4.5% from 4.1% a year ago, and was a strong deviation from the banking system’s average of 1.6% in 2016.
Mahendra says he expects the GIL ratio to improve this year even as impairment provisions come down further.
“I think both will come down, because much of what we had to respond to [in terms of provision] has been done in 2015 and 2016. There will always be a certain amount of impairment coming through the book because the economy does remain slightly vulnerable and stressed. But now, I think that the worst in terms of our provisioning impairment is behind us and we’re hoping to get to a more normalised impairment outlook in the future,” he says.
He is hopeful that writebacks will start coming through in the next two years or so.
Its loans in the steel and commodity sectors are no longer as problematic for the bank, he says. “And the good news is that these are cyclical assets and we’re already seeing that the pressure on commodity prices is easing a little bit ... so we just have to have patience and make sure that we come through in better shape.”
Eugene Tarzimanov, vice-president and senior credit officer at Moody’s Investors Service, agrees that things will likely start improving for StanChart on the asset quality front. He notes that despite its improvement in financial performance in 2016, the bank’s profitability remains lower than the other major banks in Malaysia.
“This is on account of lower credit provisions for the other banks,” he tells The Edge. “Historically, a large part of StanChart’s GILs was related to the manufacturing sectors, including commodity and steel. The bank does not report its exposure to oil and gas. We don’t expect any further material negative pressure on asset quality for StanChart,” he adds.
According to Mahendra, the bank’s exposure to oil and gas has been pared down over the years.
StanChart’s closest rival, HSBC Bank Malaysia Bhd, reported a net profit of RM998.25 million in FY2016, a slight drop from RM1.1 billion a year earlier. Its loan/financing impairment charges in 2016, at RM168.5 milion, was marginally lower than the previous year’s RM169.73 million.
Five-year roadmap
Mahendra says StanChart is now in the second year of a five-year plan aimed at growing its three business segments — retail banking, commercial banking, and corporate and institutional banking (CIB).
“We certainly have a plan to win back some of the market share that we perhaps have lost in the past. Most importantly, it is about being very clear about what we want to do for our clients and customers. Going digital is simply about us responding to what in the future is going to be a basic customer requirement.
“But if you look at the CIB and our commercial banking space, I think it is about doing what we’ve always done, but doing it well ... supporting clients and customers in the industries that we believe have a future. In commercial banking, we’re certainly looking at the export industry which is benefiting now from the weak ringgit. If you look at healthcare, education, hospitality ... these are what we believe to be the industries of the future,” he says.
Among the goals StanChart has set out for itself under the plan is to drive its return on equity (ROE) up to at least 10% from 6.8% in 2016. It is giving itself “the next two to three years” to get there, he says.
As for net interest margin, which stood at 1.6% last year, Mahendra sees it being flat at best over the next three years, amid stiff competition.
Having taking a cautious stance on lending over the last few years, StanChart is now ready to grow its loan book again.
“Having stabilised what I think is now a balance sheet that is in reasonable health, our ambition is to grow. And we will grow in a sensible manner that will give us returns that are commensurate with the risks we are going to take. In the past, perhaps we weren’t as disciplined, but we are now very focused on making sure that the returns that we get are just as important as driving topline growth,” Mahendra says.
He expects to see marginal loan growth this year, driven by a continued focus on residential mortgages, working capital, credit card and personal loans. Residential mortgages accounted for about 41% of its loan book of RM30.2 billion last year.
Not exiting Islamic banking
Last year, the bank’s Islamic banking subsidiary, Standard Chartered Saadiq Bhd (Saadiq), closed three of its seven branches, sparking talk that it may be exiting the Islamic banking business altogether.
Mahendra stresses that this is not the case, and that the closures are part of the bank’s effort to move more into the digital space. “We are very clear about the fact that that we want to continue to support the growth of Islamic banking in Malaysia, as we do in some of our other markets,” he says.
The branch closures, he says, are not unique to Islamic banking.
“We look at all of our branches, whether they are conventional or Islamic, and we make our own evaluation on those that continue to make sense for us to have and those that don’t.
“There is no reason to believe that just because we’ve closed a few Saadiq branches we are exiting Islamic banking … we [still] offer Islamic products right through our conventional network. So, I would not say that we’re shrinking or withdrawing, but we’re certainly looking at how we deliver those products and services to our clients,” he says.
StanChart currently has four Saadiq branches and 31 conventional branches. There are no plans at present to close more Saadiq branches.
“If, in the end, we find that many of the customers who bank with us Islamically prefer to do that digitally, then we may not need those branches in the future. But, at the moment, we have no intention to close more than we’ve done already,” he says.
Saadiq’s profit in 2016 grew to RM32.1 million compared with RM14.54 million the year before. Mahendra says, going forward, there will be a shift in the way StanChart does its Islamic business.
“We’re looking to shift some of the emphasis away from assets, to liabilities and wealth management (WM). We believe, particularly as an international company, that we can provide solutions for our customers and clients that are slightly differentiated, in the WM and liabilities space. And that’s where we want to try and place most of our focus,” he says.
Over the last two years, StanChart has cut some 100 to 120 jobs, but it continues to hire in its areas of focus like WM and retail banking, he says.
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