Success stories among the large banks headquartered in the UK are rare. Peter Sands, the group chief executive of Standard Chartered, could therefore be forgiven for a bit of crowing. The 156-year old bank’s operating profits before tax were up by 13% to $4.57bn in 2008, while many of its rivals foundered amid losses and writedowns, and were forced to take government funding.
But cock-a-doodle-do boasting is not the style of Mr Sands, who grew up in Asia. He was not born in a Year of the Rooster, which in any case is often said to bring bad luck. The former McKinsey consultant is, however, a deep thinker, an attribute of those born in the Year of the Rooster.
Mervyn Davies, a former chairman of Standard Chartered and now trade minister in the UK, says he recruited Mr Sands because the bank was missing a “thinker” among its top management.
The Oxford and Harvard graduate was born in the Year of the Ox. And oxen are said to have great presence of mind in troubled times, with good problem-solving capabilities. This character trait has come to the fore as the bank faces a marked slowdown in global trade and Asian growth, both of which are crucial to its business. Although it declares that its profits come from Asia, Africa and the Middle East, it is Asia that is responsible for the lion’s share.
In terms of trade, Mr Sands says during an interview in his office in the bank’s City of London headquarters, that he is worried trade finance is under threat, while protectionism is on the rise. He believes that we are drifting towards a more balkanised world trade system that will impede the global flow of investment and trading.
Global trade volumes are falling this year for the first time in 27 years. Many countries are seeing double-digit declines in exports. Chinese exports plummeted by more than 25% in February compared to a year earlier – one of the reasons for the World Bank to lower its 2009 economic growth forecast for China to 6.5%. Standard Chartered forecasts 6.8% GDP growth.
China’s minister for commerce, Chen Deming, recently promised a host of measures to help boost exports, including reducing export taxes and more financing.
Meanwhile, the World Bank has been in discussion with banks and others heavily involved in trade to put together an initiative, announced at the G-20 summit in London in April, that will increase the supply of trade finance by about $50bn. The main part of it would be a liquidity pool of about $10bn, put up by the International Finance Corporation, governments and regional development banks, such as the Asian Development Bank.
This will fund co-lending with private sector banks, such as Standard Chartered, and will be leveraged up to $50bn in extra finance because of the low-risk, short-term nature of trade finance.
The gap between supply and demand for trade credit may have reached $100bn, up from $25bn last November, announced a conference hosted by the World Trade Organisation. About 90% of world trade is financed on credit.
The upside of the current situation for private sector banks is that they can charge more for a commoditised product as competitors fall away. That has certainly been the case for Standard Chartered and not only in trade. The bank’s revenues from its top 50 company clients rose by 45% in 2008 as the bank deepened its share, while in overall wholesale banking, income increased by 43% to $7.49bn.
Standard Chartered has also been anticipating a worsening scenario by pricing loans for increased risk and ensuring covenants and the securities on loans are strengthened. Mr Sands proudly notes that 72% of the bank’s wholesale loan book is less than one year in maturity. But, already in 2008, loan impairments rose by 74% to $1.3bn.
Mr Sands says that unlike other Western banks that have been doing business in emerging markets and are now withdrawing to their home markets, Standard Chartered’s commitment to the economies it operates in is credible because it has been in many of them for a long time and the bank has “nowhere to go”.
Its perceived safety at a time of turmoil last year resulted in a 31% increase in Standard Chartered’s 2008 deposits. Its balance sheet strength and liquidity means that investment bankers are perpetually knocking at its doors with deal offers, especially because Western banks that expanded into Asia are having to sell operations.
Mr Sands admits that there is no shortage of acquisition opportunities but the bank approaches them from the point of view that it has no need to make any, because in the past few years it has grown at double-digit rates, mostly through organic growth.
He adds that “there is an added layer of caution in this environment”. So far, Standard Chartered has only acquired the Asian operations of JPMorgan Cazenove but there are rumours it is in talks about some of AIG’s businesses in Asia.
Deals worth doing
Although those born in the Year of the Ox are not gamblers, it is unlikely that Mr Sands could not find a deal worth doing in the current crisis.
The bank, which employs 75,000 people, nearly half of whom are women, is proud to note that its employees are of 115 nationalities, with 60 represented among senior management. It is searching for a new chairman, as former chairman Mr Davies (now Lord Davies) joined the government in January. Deputy-chairman John Peace has taken over the role in the interim while the bank looks for a permanent successor. It would be surprising if the bank did not choose a senior Asian figure, say analysts.
Whatever Mr Sand’s main strengths are – and oxen are said to be resolute and fearless – all of them will be needed in the unchartered waters which the world economy and his bank is facing.
1750 branches, in more than 70 countriesEmployees worldwide
14 million2008 profits before tax