http://www.livemint.com/Companies/MkeVMI0wSehgYYbkM3W8aP/Bulk-of-StanCharts-India-business-unaffected-by-bad-loans.html
How has the first six months of your term been so far?
Winters: I had a view coming in that Standard Chartered is fundamentally a very good bank that had a lot of problems. And six months in, I reached a conclusion that Standard Chartered Bank is a very good bank, but it has a lot of problems that have to be taken out one by one.
Fundamentally, we’ve a very good business. But we underinvested in some key parts. We underinvested in India and we overinvested in wholesale lending. So our capital was skewed dramatically over 10 years way from all the basic businesses that make up a very good bank into highly concentrated wholesale lending lines. Obviously, much of the wholesale lending business is okay, but some of it isn’t. And the part of it that isn’t okay is really impacting the results.
Some of the wholesale lending mistakes that we made are in India. They are quite well-documented and we are dealing with it. The teething realization is that we have to deal with the problems that are dragging the earnings down, even though it is a very small subset. We said that of the $320 billion of risk-weighted assets, we will sell $20 billion.
This 6% is that part that we would not have given if we had used the prudent principles that we are following today. They were too big for our bank and the terms and conditions were just wrong at the outset. In that $20 billion, there is a chunk of concentrated Indian exposures. But that’s the exit part.
Rest of the strategy is investment. We have said we will invest $3 billion in the company in the next three years. Some of it is catch-up. These are things that we wish we had probably done five to 10 years ago. One billion dollars will be invested on controls, one billion on continuous upgrades to protect the franchise that we have and one billion on new investments.
The biggest chunk of the new investments capital will go into upgrading everything around our retail business—making everything digital; and the biggest recipients will be in India.
We have a retail presence in India but certainly small compared to local banks. But in the niches where we operate like big urban centres, we have very good differentiated proposition.
We want to increase our share in that client segment substantially. We want to increase the share of our banking wallet that comes from our corporate clients and the new account opening opportunities as we bank their employees.
That’s our story in the nutshell. We are cutting out the excesses. We are significantly simplifying organization which is reducing our expense. In just two months, we exited around 20% of our senior managers as there was duplication of jobs. All these expense savings and exiting the risk-weighted business, we are investing it right back into our business. We had the option of not raising capital. We were well-capitalized with a CET-1 (Common Equity Tier-1) of 11.5%. We decided to do the opposite and raise $5.1 billion in order to make those investments today.
How do you view India? You spoke about the opportunities and challenges.
Winters: The demographics are great. Indian economy will grow at 7%-7.5% at a time when the global economy is very slow. It is supported by demographics and opportunity. It is obvious to me that the Indian economy is just beginning to take off. It has years and years to go. Now, can this government and future governments address the underlying infrastructure challenges, the political tensions, the social tensions? These are big questions and not without risk.
I believe the opportunities for us in India are as great as anywhere in the world. The other region we’ve identified is Africa. It’s much further behind and it is much more commodity-dependent. But the underlying pace of reforms and demographics are very supportive.
Contrast to our more mature businesses in Hong Kong and Singapore. They are very profitable businesses, and we have great market share. But they can’t grow like India and Africa. So, if we are going to have a balance in our portfolio, we need to have a couple of highly concentrated bets on markets that we think will grow secularly. India is on top of the chart.
How is India positioned vis-à-vis other markets for the bank?
Winters: There are two markets that get headlines at Standard Chartered for problems: one is India and the other is (South) Korea. In India, it is because of the highly concentrated loan exposures we have. It is a real shame. But it is a small exposure, which we absolutely have to reduce. We had a bunch of credits to work out and we will do it as quickly as we can. They have been identified. We know who they are and what they are.
There are no new ones that we are getting surprised by.
But that’s not the business. The business is the great retail bank. It is our 6,000 commercial banking clients. We are dealing with the concentration problem and protecting the core business. The greatest opportunity to generate incremental profits will come from India.
Kanwal: India’s challenge is that over-concentration is defining what we do in India. Yes; that happened, and we have to deal with it.
What happens to the wholesale banking business now in India? Once you clean up your books, what next?
Winters: Bulk of our banking business in India is completely unaffected by these small concentrations of lending that has gone bad. Our retail focus is much more on upgrading the technology, increasing the value of the brand.
We are the biggest trade bank in India. The trade between India and China is our sweetest spot. There is also trade between India and the Middle East and between India and Africa.
We have the best trade platform in the world. We are investing more on that. The part of our differentiation is financing the ecosystems of some of our big clients. Take a big group like a Tata or Mahindra. They have thousands of suppliers. We will finance their suppliers for them. They also have thousands of distributors. We will finance their distributors.
But aren’t you again taking big exposures to one particular group?
Winters: It is completely different. The underlying credit exposures we are taking is at the heart of their operation.
Kanwal: It is a short-term cycle. One will get paid in 30-45 days. To that extent, it is a much healthier business.
Winters: Our loan impairments in the first nine months of this year were 1.7%. The loss rates on the short-term trade financing or financial ecosystem financing is in single-digit basis points. We don’t have losses in these operational businesses.
Where we have losses is we have lent large amounts of money for long periods of time. So, our wholesale business is going to be doing what we have done always minus the heavy concentrated lending.
So, in the next few years, will we see much more focus on retail in India that we have seen so far?
Winters: Yes. You will see no less focus on wholesale. You will see less focus on concentrated lending. We will have a balance with the retail business.
Over the last 5-6 years, one gets the sense that you have gone slow on the retail business in India.
Kanwal: The mandate that Bill (Winters) has given the Indian team is to drive the retail business. We probably went more corporate, and the balance shook. But I think we can bring back that balance.
What kind of investments will you be making in India to expand the retail operations?
Kanwal: India will be one of the top investments. But it will be very difficult to allocate a percentage because most of our systems are global systems. Also, the investment in compliance will help all our businesses, be it retail or commercial.
Winters: We have highly manual account opening checks today. We hope to be able to change that so that a customer can open an account with the bank in a minute. The customers should get instant satisfaction that he is not getting today.
All Indian banks are focusing on their retail businesses. Won’t you find it difficult to expand the retail business with so much competition?
Winters: We’re the only player that has a nationwide network with nationwide brand but we are extremely focused. We have got 100 branches in 43 cities. We have to be very focused. And because of that, we are differentiated. We only need a few million to make a very big difference to our business.
But it will be expensive to grow the retail business.
Kanwal: We have got the branches and the infrastructure. The technology costs are on the global platform.
So, growing retail means that the cost will be divided among countries. With the combination of brick and click, we think we are best-placed to leverage this opportunity.
What are your views on subsidiarization? The Reserve Bank of India is stepping up pressure on foreign banks to move to a subsidiarization model.
Winters: We look at it all the time.
With subsidiarization comes obligations like priority sector lending and things like that.
There is also an increased element of trapped capital as it will become relatively hard to take out the capital. And the other side is it will give us opportunities to grow. We’ll focus entirely on improving the operations we have today and then we will be in a much better position to assess how much we can grow further if we subsidiarize. And do we want to take on the incremental obligations and liabilities. We are not under pressure today. Obviously, we could come under pressure at some point in the future. We are ready if we need to subsidiarize today. But we don’t need to today. But the opportunities that subsidiarization opens up for us are not our priority today. But they could become the priority at some point.
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