Dubai: Standard Chartered, which prides itself to be referred as an Emerging Market bank, has been a huge beneficiary of economic boom in China and other key Asian emerging markets in the last decade. The bank’s focus on emerging markets has helped it steer through the financial crisis relatively unscathed while it reported nearly a decade long uninterrupted growth in profits and revenue.
Talk of a slowdown in emerging markets as a result of the Federal Reserve scaling back asset purchases has raised questions on the bank’s revenue and profit growth. To combat a potential slowdown in growth the bank in January announced a major reorganisation leading to the merger of the wholesale and consumer banking divisions.
On a recent visit to Dubai, Peter Sands, Standard Charterd’s CEO dismissed the talk of a sharp slowdown in emerging markets as “really overblown.” He believes the West’s obsession with China means it is overlooking the opportunities in Asean, a massive trading bloc that is forging closer economic ties with each other.
In an interview with Gulf News Sands speaks about the emerging market challenges and new opportunities in Middle East and Africa.
Gulf News: Standard Chartered has been a subject of envy in the banking world for the past several years for its unbroken record of rising revenues and profits. With the kind of economic vulnerabilities faced by some of the key emerging markets where the bank operates how do you look at the future?
Peter Sands: Well, some of this negativity about the emerging markets is overblown. It is inevitable to have some kind of financial correction in these markets, given the impact of tapering by the Federal Reserve, its impact on liquidity conditions and the flow of money into the emerging markets. But that does not take away the reality that most of the real economic growth in the world is going to be in the emerging markets. People talk about emerging markets slowing down — China is slowing down, but it is still growing at 7 per cent, which is faster than any of the Western economies. Even India, for all sort of challenges the country faces. It is growing close to 5 per cent and it should grow faster. I am not complacent about some the challenges our markets face. But I still think there are enormous opportunities for growth not just for us but all types of businesses.
Q. Isn’t this change going to impact performance? What is your outlook on the bank’s performance given the looming inevitable correction in the emerging markets?
A. We have to be careful talking about our performance because we are in a closed period. So I can’t talk very much about our financial performance. But still, broadly speaking we are very optimistic on our key markets. Obviously there are ups and downs in these markets. Some countries are facing political and or economic challenges. But when I look at Asia and the Middle East I am very positive at the opportunities. Much of Africa is looking very strong. Here in the UAE the mood is very positive. The flow of data is very encouraging and this is by far our largest market in the Middle East. When I look at Asia, yes, some of our markets are facing slow down, but Asia is still going to account for a major share of global growth.
With growth momentum picking up in developed markets and the opposite happening in the emerging markets, is there going to be a change in your market focus?
The West is getting excited about because the US is going to grow at 2 — 3 per cent and may be Europe is going to stop going backwards. Even if the emerging markets are going to grow slower than before, say China at 7 per cent, the relative rate of growth in many of the emerging economies are much higher than in Europe or US. In addition, the pick up in economic growth in the US is going be positive for most emerging markets because that is going to create more demand for their exports for finished products and resources.
How do you see the growth prospects of the UAE economy?
I see it as very positive and vibrant. There are lots of challenges for the region but the UAE has consistently proved as a very strong hub for lots of different types of businesses. I think the real challenge for the economy is that people don’t get overexuberant and focus should be on sustainable growth. With a number of large scale projects planned and the projects in the pipeline associated with the Expo 2020 and so on, the future looks exciting.
The bank has made significant investments in Dubai focusing on the Middle East and Africa markets. In the context of the slowing economies in Asia what is your Middle East and Africa strategy?
We see opportunities for significant growth in the Middle East and Africa. In the Middle East our biggest market is in the UAE. We see opportunities for growth particularly in Iraq and Saudi Arabia.
In Africa we are present in 15 countries in Sub-Saharan Africa. We have consistently grown and invested in our African franchise and we see very significant opportunities in Africa. We have just opened up in Angola recently.
How do you see the banking sector regulations impacting the business and economy, especially the mortgage regulations?
We are very comfortable with these sorts of regulatory changes. We see them in most jurisdictions we operate. We understand that why regulators are seeking to bring about changes and we always work within regulations. I don’t see them as a massive problem. We understand that what the regulators are attempting to is to support balanced growth in financial services sector. The mood here is very positive. Thus it is very important to regulate the market so that people don’t get overenthusiastic. What the UAE and Dubai is attempting to achieve is sustainable growth. What we do not want to see is that businesses getting over exuberant and then having a bit of a correction.
Is Dubai going to be the anchor for your Africa operations or are you going to have a separate Africa division?
The way we run our Africa operations is that some of our specialist product expertise that we use to serve our clients in Africa, a significant portion of that, is based in the Dubai International Financial Centre (DIFC). We have also some personnel and expertise based in Johannesburg and some based in London. But we clearly have a concentration of expertise here in Dubai.
What do you expect to drive a growth for you in the Middle East?
It is the same fundamental sources that drive our business in other regions that will drive our growth in the Middle East. One of the critical areas we focus on as a bank is the cross border trade. Everything that is happening in the world of trade such as exports and imports of manufactured goods, services or commodities and so on has an impact on our business. Dubai being a such a trading hub we see huge potential here. The second thing is that the whole deepening of the capital markets in the region is going throw up new opportunities. The deepening of equity and bond markets, and particularly the Islamic finance and the growing sukuk market is an area of tremendous growth for us. Wealth management is an area with enormous potential. I think the opportunities we have here are not fundamentally different from other markets we operate.
Of course the opportunities look enormous, but it is not so in the distant past the banking sector in the region, particularly banks in the UAE and Kuwait faced massive restructurings. Standard Chartered also is among the banks exposed to some of these restructurings. What have been the lesson learnt and has this resulted in any reservations on taking new exposures in the UAE?
From the way we operate here, you can see that we are very committed to the region and the UAE. We will continue to develop our business and invest in these through the ups and downs. I do think, though, that people have learnt some lessons from those experiences and as we get into a new positive cycle, we all should by cautious against getting over-exuberant.
You have countered the rumours that the bank is planning a rights issue to shore up its balance sheet. But clearly there is growing pressure from the regulators to push for higher capital requirements. What is your reaction to such calls?
We are very comfortable about our capital levels. We are very strongly capitalised at the moment by any comparison. Our regulators too are comfortable with our capital levels and we have no plans to raise our capitals. We are prepared to implement the Basel III recommendations. We are very strongly positioned in terms of liquidity ratio.
Costs and regulatory arbitrage has come in for lots of discussion in recent months with the talks of some of the British banks possibly moving their domicile to Asia or elsewhere where both these factors are favourable. Has Standard Chartered considered such an option, especially a big chunk of your operations are in Asia?
I am asked this question so often by media and sometimes by our investors. We do understand what our options are, but we don’t have any plans to move.
What are the major challenges the global economic recovery faces?
We have got a situation where economic conditions are improving but the overall environment is turbulent. There is still a huge amount of regulatory change happening. Undoubtedly much of that is positive, but some of them have unintended consequences. Technological change happening around is both a challenge and an opportunity. Banking has become a digitised industry; so much more can be automated, made it available over the Internet or mobile devices. We have done a lot, but I think there a lot more to do as in industry in using technology. I think as an industry we need to work on to improve the credibility of the industry. Understandably having played a big part in the financial crisis, there is repair job to do on the reputation of the industry and I understand that will take time.
The question of restoring the reputation and credibility of the industry leads us to the question of the banking sector bonus. It has been a very controversial issue during the past few years when governments, shareholders and the public at large have come down heavily on the executive compensation and bonus policies of banks. What are your views?
I wouldn’t disagree with the view that there were in some institutions there were excessive and grievous practices in hiring people at exorbitant costs. The approach, however, we take is the one that is focused on regulatory arbitrages and competitiveness, so that we are able to attract and retain talented people. But we are very thoughtful about how we compensate people making sure that the compensation is for risk adjusted performance. Making sure that it is not just what people achieve, but how they achieve and how they live the values. I think some of the changes that have happened in the way the industry compensates are very positive. More of the compensation is now deferred. I agree that it is a difficult topic but what I believe is that we must ensure that we are paying people that create the right incentive.
