While financial institutions were ill and dying all over the world last year, Standard Chartered reported strong results for the full year 2008. Income rose 26 per cent to $13.97 billion (Dh51bn) and operating profit before tax 13 per cent to $4.57bn, in what the bank called "a difficult operating environment, particularly in the second half". The Middle East and South Asia (Mesa) regional grouping outperformed the rest of the world, but that was not surprising given the bank's focus on these regions.

Emirates Business spoke to Shayne Nelson, Standard Chartered's regional Chief Executive, to get a sense of the bank's strategies and conservative approach to liquidity management. Excerpts:


You spent several years working in Asia during the financial crisis there. How do you compare what's happening today to that period?

Some of the stuff we are experiencing in this region is similar to what I saw in Asia. When I look around the UAE sometimes it reminds me of Shanghai in 1997. When I moved to Shanghai in 1997, there were cranes everywhere. In fact, we used to say that Shanghai had 25 per cent of the world's cranes. It's similar to what you hear about the UAE. But then when I went back in 1998 there were no cranes left. Even a city with 20 million people with obviously massive pent-up demand struggled through the Asian crisis with property prices and demand.

Was that real internal demand?

It was largely driven by internal demand. There was also external demand – from nearby Hong Kong and from expatriates buying as an investment. Property prices came down 50 to 60 per cent through that period. But Shanghai recovered and continued to explode in growth. Even a city like that – with obviously huge pent-up demand, obviously huge population – has its cycles. You shouldn't expect anything different in the UAE where you had a huge boom in property prices. And we are seeing a substantial reduction. Actually, I think it will be very good for the UAE. It will make us a lot more cost competitive. I think this would be very good for the country over time. Yes, I think there is short-term pain. But I think in the long term it will be good to rebase the cost structure.

Again, Asia was a market that relied pretty heavily on international capital flows. So, what happened in that period in Asia and what is happening in the Gulf region are similar. Liquidity revolves around confidence. Lack of confidence causes a massive decline in property prices for every region.

Having worked in Asia during the financial crisis, however, what I have seen so far in the Middle East is not, nowhere near, the same effect of what happened in the Asian crisis to Asia.

What would be your prognosis on this, especially for the UAE?

The outlook is that it is in pretty good shape at the moment. We haven't had many defaulters. I think it will be a gradual recovery process. I don't think we are going to see another boom in property prices. I think we need to find the floor and I think a little more transparency would be good.

Standard Chartered was one of the best performers globally last year amongst financial companies. How did you achieve this?

In general, there has been a substantial reduction in profitability for consumer banks. Consumers have been feeling the pinch throughout the world and the UAE is no exception to that. We are seeing an increase in down payments for SME loans, personal loans... There is no doubt that the credit crunch around the world and especially in the UAE is impacting SMEs.

Unfortunately, SMEs get three effects: First, they are affected because the business is down; because of the economic conditions of the country, profitability is down. Second, they traditionally get squeezed by the banks, which cut down their limits, cut back their credit. Third, suppliers squeeze them because they want cash flows so they ask for a quicker turnaround. So SMEs are a pretty susceptible part of any market, not just the UAE market, to any economic downturn. We as an industry and as a government need to support SMEs in these times.

I'd have to agree. But getting back to the reasons for Standard Chartered's performance last year...

I think there are a few reasons why we performed so well across the globe. First, our revenue mix is quite different from most banks, international banks especially. We have very little revenue coming out of the Americas and Europe, less than 10 per cent, in fact. We don't have large concentrations there. Our offices in the Americas and Europe have outbound business. We are not focussed on building a core franchise in New York or London other than to help clients in our footprint markets where we are strong.

It's geography and strategy. Globally, we are customer-focussed. Business is driven around the customers. Yes we do trade on our account. But we base a lot of that on customer flows. We are the sixth or seventh largest US dollar clearer in the world. So we capture a lot of flows of trade, cash flows from clearing etc. We have a natural capacity to trade off the back of flows. We are not trying to do proprietary trading for its own sake or seeking investments such as sub-prime. That is not our strategy. Our strategy is around the clients.

But such a strategy means that at a time when economies are booming, you may not perform as well as other banks that invest aggressively on their own accounts.

You could be right. You could be wrong. The reason I say you could be wrong is that most of our markets even now have quite reasonable GDP growth. Last year was our 150th year in Shanghai and Kolkata. This year is our 150th year in Hong Kong and Singapore. The point I am making is that we are big in markets that are outpacing the rest of the world. So instead of getting growth from other activities we have got natural GDP growth coming through these economies that are outstripping the rest of the world on average. Yes, China's growth is going down but it's pretty good growth. So is India. And in the UAE, we are still forecasting 0.5 per cent growth. We are probably at the lower end of a lot of the economists' forecasts. But a lot of the West would chew their arm off for 0.5 per cent growth.

It's a strategic choice that we want to be in high-growth markets. Standard Chartered has been in emerging markets for a very long time – 150 years. That is how we were founded as a bank. We are one of the three banks Queen Victoria put in place during her reign. The three main cores were the Standard Bank, the Chartered Bank and Grindlays Bank. We go back to Queen Victoria's time.

Back to last year's performance… How much of it can be attributed to losses taken to balance sheet or amortised over a longer period within accounting guidelines? Was there any of that? You say it was mainly from operations. What role did the Middle East play in this?

There may have been a bit of that, but not much. In our Mesa regional grouping we were up 25 per cent. In revenues, wholesale banking in the UAE was up by 80 per cent. So we had a pretty good year in the UAE.

In Mesa, UAE was the strongest performer in terms of revenue growth?

Correct.

Standard Chartered said it had a good start to 2009. How do you define "good start"?

We don't give projections. We can't. But we did say a good start and it was a good start.

Does this mean credit flows are thawing? Does that mean recapitalisation of banks is almost complete? What's your sense on the global situation?

Because we operate in many difficult markets, and because we have been doing this for a long time, we don't take liquidity for granted. We manage our liquidity and our capital conservatively, country by country.

The thing about liquidity is that there is liquidity and there is liquidity. The point I am trying to make is that the other thing we look at very closely is type of liquidity, the structure of liquidity that you have got. "Just" liquidity does not help you at the end of the day. It can flow out as fast as it can flow in. We seek what we call sticky liquidity. What is your core of sticky liquidity – the base on which you can lend?

How do you identify sticky liquidity?

We monitor very closely our customers' behaviour. Where is the liquidity sitting – in current accounts, savings accounts, term deposits – and how much can we lend long. What can we lend short? Managing that to us is pretty important. It is not just about cash. Simply having cash, frankly, is not going to help you. That's like providing money to someone on a 30-day line. That's not very helpful for any business.

Nor very profitable...

For either of us, actually. So to me it's also about how you manage liquidity and what type of liquidity you've got.

How can the UAE create sticky liquidity in the system?

I think there are a few measures and one of them could be to develop injectable liquidity. I agree with the UAE Central Bank governor that we are about Dh116 billion short. We've been saying that for quite a while.

It is basically international capital flows that funded loan growth last year. A lot of it came from the dirham peg speculation. A lot of that money came from hedge funds etc. The reason now all those capital flows are going the other way is the peg speculation is no longer happening – leading to the system left significantly short.

There is no way four and a half million people's savings will fund the ambitions of the UAE. It does need foreign inflows. We are lucky in the UAE that we have massive foreign currency reserves. We have massive investment reserves that can flow back into the country when these liquidity situations happen. We are lenders to the world.

Some of the funds can go into Tier 2 capital, which is structurally very good because it enables the banks to leverage on that capital. So, as a start, we saw $10 billion coming from the Central Bank through the Dubai bonds, which will bring a lot of liquidity into the system. And we have been hearing about some more stimulus packages coming up.

How do you think such a huge gap – Dh116 billion – can be bridged?

The UAE has generated significant surpluses over the years. Therefore the government has the capacity to inject large amounts from these foreign reserves directly into the banking system – we are in a privileged position as few countries have this flexibility. Additionally the recent Abu Dhabi offshore bond plus the Dubai bond will inject significant liquidity into the system.

Another mechanism to generate liquidity is to make the Central Bank's repo window more flexible and without penalty. This can be done by allowing a wider range of asset classes to be discounted – with appropriate haircuts – thereby generating dirham or foreign currency liquidity.

Is there anything the Central Bank should watch out for while it does this? Are there downsides that need to be worked around?

The risk about pumping substantial liquidity into the system is recreating inflation, but I don't think that is going to be an issue for a while. That problem has gone away. Actually, inflation can solve a lot of ills. It becomes an asset. You have made, for example, a bad lending decision. If the property value keeps going up, you may in the end have made the best decision. But I think an over-inflated economy is always a risk. The UAE has the capacity to mop up liquidity. And certainly we don't want to see another property boom. I would rather see sustainable growth versus gold dust. I think one has to watch the process pretty carefully and be careful about putting too much liquidity back into the system.

What measures is Standard Chartered implementing this year in terms of cash conservation and prudence?

I think there is no doubt when you look at economic causes globally that you need to be prudent and enhance your risk management. I think every bank has done that. If you didn't you would be called imprudent. Of course we have. Of course we have looked at some the evaluations on our properties. Of course we have looked at long-term assets.

Are you also letting many people go?

We are still actually hiring people. We welcomed new employees last week. We are still employing people as we speak.

A lot of the problems that led to the credit crunch were the result of created financial products out of thin air, so to speak, or based on very shaky assets. Do you think the financial world will lean more on Shariah-compliant products in future? Will conventional banking take lessons from Islamic banking?

Islamic banking is traditionally conservative in how it is structured and the covenants around it. I think one is taking lessons from Islamic banking as much as one is taking lessons from what has happened. One will have to be more conservative, have better risk management etc. It is going to come through better liquidity management, definitely.

In Mesa and UAE in particular, are you going to use your cash position for acquisitions, expansion? Or is it all going to be organic?

Our strategy at Standard Chartered is organic across the world.

There have been some rumblings about acquiring RBS assets.

If something comes up which is strategic we'll certainly consider it. The majority of our growth is organic. Organic is generally much cheaper as a strategy than acquisition. And certainly one of the things we are looking at is getting deeper into supporting our existing clients through this period. We are not a Wall Street bank. Our franchise is in Asia and the Middle East. That is why we are so committed to these markets.

Do you see any rebound in investment risk appetite globally?

I think there is low-risk appetite in this market at the moment. We are not seeing many transactions through capital markets. From all indications, most of the markets are pretty frozen. There is no doubt that the market in this year is quite constrained compared to what it was. Frankly, I don't see that changing in 2009. This is going to be a difficult year to do loan syndications, to do bond issuance in any of the markets in the region. There is just not a lot of overseas appetite at the moment.

The other thing is, of course, the situation where some of the banks that have been nationalised in the West getting pressure to lend at home rather than lend overseas, in order to regenerate the economies where they are. It's a natural process.


PROFILE: Shayne Nelson Standard Chartered Bank's Regional CEO for the Middle East and Africa

Nelson is Standard Chartered Bank's Regional Chief Executive Officer for the Middle East and North Africa. In 2007, he was appointed Chairman of the bank's Islamic Banking Board and Chairman for Standard Chartered Bank Pakistan.

Prior to this assignment, Nelson was Chief Executive Officer and Managing Director for Standard Chartered Bank Malaysia Berhad. He was on the board of directors of Cagamas Berhad, the National Mortgage Corporation; the Malaysian Institute of Banks (IBBM), the British Malaysian Chamber of Commerce and was a council member of the Association of Banks in Malaysia (ABM).

Nelson joined Standard Chartered in 1997 as Regional Head of Audit, Corporate and Institutional Banking covering Asia Pacific and India. He was then appointed the Regional Head of Credit for Hong Kong, China and North East Asia before being appointed Chief Risk Officer for Wholesale Bank, which is a global position covering over 50 countries within the StanChart network.

He has held numerous positions in Australia's Westpac Banking Corporation and the National Australia Bank including periods in corporate finance, debt restructuring and senior positions in retail and wholesale banking.

 

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