The back-to-front world view of Standard Chartered

The wholesale banking division at the Asian-focused bank has been growing at a startling rate. Ben Wright and William Wright look at how the bank has thrived while others have struggled

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Standard Chartered does not see the world in quite the same way as other banks. In March this year, the bank appointed V Shankar as chief executive of the Middle East, Africa, the Americas and Europe and moved him to Dubai.

Read the job title again, and it almost looks like a deliberate snub to the traditional Atlanticism of the financial markets.
At a time when most of the banking world is rushing east to take advantage of fast-growing markets in Asia and Africa, Standard Chartered, which generates just seven percent from the region it calls “Europe/US”, is already there. Instead, it is asking itself whether it should be going the other way.

Mike Rees, chief executive of wholesale banking, which encompasses the corporate and investment banking divisions at Standard Chartered, said: “Yes, we want to expand westwards, but westwards from Shanghai into mainland China, not westwards into large but highly developed and slower growth markets such as Europe or the US.”

Standard Chartered is sticking to its roots in Asia, the Middle East and Africa, which date back to the 19th century, and pursuing a two-pronged growth strategy to build scale in local markets and expand the range of products – particularly in investment banking and financial markets – that it can offer to its traditional clients.

Rees said Standard Chartered’s rule of thumb was that wholesale banking revenues would grow at two to two-and-a-half times the rate of GDP growth over the cycle. In high growth markets, this should translate into annual growth in the mid to high teens.

The wholesale banking division, of which Rees has been in charge since 2002, has been running ahead of this target, with revenues and pretax profits growing at a compound annual rate of more than 25 percent since 2005, to $5.01bn and $2.47bn respectively in the first half of this year. As foreign competition increases in the many markets it calls home, the big question for Standard Chartered is whether it can manage and maintain this rate of growth.

This growth has been accompanied by rapid hiring in global markets – with staff rising from 4,500 in wholesale banking in 2002 to 16,500 today. Most of these have been in the “arc of growth” – through South East Asia, across India, into the Middle East and Africa. Standard Chartered’s global products heads are based almost exclusively in Asia: recent hires in Hong Kong include a global head of equities, fixed-income research and equity sales.

Lenny Feder, head of financial markets, is based in Singapore, along with the recently hired global head of commodities research and of client coverage. The global head of debt capital markets sits in Dubai. Rees is the exception in that he is based in London, where the bank is headquartered despite employing only 2,000 of its 77,000 staff in the UK.

The world’s local bank?
Rees said: “Our clients – individuals, companies and governments – view us as a local bank and, in many cases, one that has been working with them for decades, not as a foreign bank that operates by parachuting product bankers in to see the client.” He views competition from overseas banks as “episodic”, and instead of merely gaining a foothold in new markets, the wholesale division aims for local scale, with a target of being at least the fourth or fifth largest participant in each market with a market share of 10 percent and above.

Feder, who joined in 2007 after a career at Lehman Brothers and Bear Stearns, said this record of getting into markets early and staying – “we have never voluntarily left any market in which we are active” – had resulted in strong client relationships.

The challenge the bank faces is keeping up with those clients and expanding its product range to meet their needs. Feder said: “Our clients are in the world’s fastest growing markets and their business has grown in tandem. Our focus is to continue to build product capability to meet their changing and growing needs. We don’t want to lose that relationship with the CEO when they get to the next big stage in their development.”

Not having these additional products and being forced to walk away from clients is not just about losing money, said Feder: “It’s about losing touch points with the client and not being able to further our relationship with them.” This geographic and product roll-out appears to have resulted in greater penetration and “wallet share” with Standard Chartered’s existing client base. One metric the bank uses is tracking how many clients pay more than $1m, $5m and $10m in fees and commissions. Between 2007 and this year, the number of clients paying more than $5m nearly tripled to 240, and the number paying more than $10m quadrupled to 96.

The wholesale division’s rapid growth is reflected in its contribution to the group. In 2005, 45 percent of Standard Chartered’s group revenues came from wholesale banking. In the first half of this year, that contribution rose to 63 percent, with two thirds coming from financial markets and corporate finance compared to just under half in 2005.

Going for growth
In the past five years, revenues and profits in wholesale banking have more than tripled – a higher growth rate than at any of its international rivals. HSBC, whose banking and markets revenues in the first half of this year were $10.8bn, managed 99 percent growth over five years. Global markets revenues have risen more than fourfold and, at a time when many banks are cutting their risk-weighted assets, Standard Chartered’s have more than doubled to $175bn and are still growing.

Such rapid growth might usually be associated with margin compression, higher costs, lower profitability and a big increase in risk. But pretax margins in the wholesale division have remained stubbornly high in the mid to high 40 percent range, touching 49 percent in the first half of this year. Value at risk, a measure of trading risk, is around $25m, or around a quarter of its US and European rivals’. As risk-weighted assets have increased, so the return on them has grown from 1.9 percent in 2005 to an annualised 2.8 percent this year.

Rees said: “This is business that is doubling in size every three years. Of course, we need to focus on the discipline and consistency of that growth, but we believe it is a rate of growth that is sustainable.”

Maintaining and managing annual growth in the high teens will be a formidable challenge for Rees and his team.

Analysts covering the bank, appear to be onside, at least for the time being. A recent report by Credit Suisse subscribed to the bank’s growth targets for wholesale division over the cycle and, of the 21 analysts covering the stock who have published research in the past two months, 10 rate the bank as outperform, eight as neutral and just three as underperform.

Integral to the bank’s ability to manage this rate of growth is for it to be able to attract and retain talent. Rees said he worried that this was being undermined by FSA’s new rules on remuneration, which apply not only in the bank’s home market but in every country in which the bank operates, and by other regulatory reforms.

He said: “When a regulator comes into the room and asks me what my biggest risk is, I say: ‘You’. We understand that the bonus tax was political expedient, but when they look to introduce regulations that create structural long-term competitive disadvantages, then there is a problem. No one wants to move out of the UK. But we need to show that there are two sides to this argument.” Standard Chartered’s wholesale banking growth has not been a one-way street.

It came under fire for a $7bn structured investment vehicle called Whistlejacket that collapsed in February 2008, got tied up in some controversial currency derivatives called Kikos in Korea, and lost money lending in some countries such as Saudi Arabia where it does not have a local base.

Without commenting on specific cases, Rees openly admitted the bank had made mistakes. Most prominently, it was one of the biggest lenders to Dubai World, the Emirati conglomerate that was forced to restructure its debt. Did the bank get carried away by the Dubai story? “No. That was one strategy.

There will always be ups and downs in the business, but standing by a client is never a mistake,” he said, pointing out that the week before the bank had been one of the three banks, along with Deutsche Bank and HSBC, to be picked to lead the Dubai government’s first bond offering since the crisis in one of the most plum deals in the region this year.
For the past eight years, it has been mostly up for Rees and the wholesale banking business at Standard Chartered. Their real test will come if – or when – the spectacular growth it has enjoyed begins to stall.