Monday, April 27, 2009

BTO: Up to the challenge

Business Times - 25 Apr 2009

Up to the challenge

What will the banking industry look like after the current crisis? Peter Sands, Standard Chartered's group chief executive, shares his views. By Conrad Tan


PETER Sands is focused, with a quiet energy that is unmistakeable in his voice, even though he must be tired from a gruelling travel schedule.


Sitting in a meeting room at Standard Chartered Bank's Singapore head office at Six Battery Road, the chief executive of Standard Chartered PLC, the group's parent company, speaks in measured yet forceful tones.


He flies to Singapore 'very often, because we have not just the business here, but also the operational headquarters for our global businesses', he says.


In all he spends 'probably 60 per cent' of his time away from London where Standard Chartered is headquartered - mostly in the bank's key markets in Asia, Africa and the Middle East.


'But I also make sure I get to our biggest and most important markets for the future quite often. Last year I was in China six or seven times, and about the same for India.'


That means a lot of time in planes. At the end of last year, Standard Chartered's network spanned 75 countries and territories and employed 73,800 people, according to its latest annual report.


The bank, which celebrated its 150th year in Singapore in February, also has the enviable distinction of having weathered the financial crisis better than most of its international peers. Last month it reported full-year 2008 net profit of US$3.4 billion - up 20 per cent from 2007.


Its geographic footprint has proved a great advantage. Asia alone provided more than 70 per cent of income and over 80 per cent of operating profit last year. The Singapore business contributed US$744 million or 15 per cent of group pre-tax profit in 2008 - a 67 per cent jump from 2007.


Mr Sands, 47, insists that the financial crisis will not derail the bank's plans.


'We're going to continue doing what we have been doing,' he says. 'We're going to stick to our strategy of focusing on Asia, Africa and the Middle East. And we're going to continue to be very focused on the basics of banking, managing liquidity, capital, focusing on our customers, being very disciplined in what we do.


'This doesn't mean we're complacent about what's going on around us - obviously not. And we're not unscathed or immune to what's going on. But we actually think the focus of our strategy and the discipline with which we've stuck to the basics of banking are the reasons we have performed well amid all this turmoil, and that's why we should stick to them.'


The bank also has no intention of pulling back from its existing markets. 'We're certainly not retreating from any markets,' says Mr Sands. 'Unlike most international banks, we don't have another home to go to. Places like Singapore, Asia, are where we grew up. These are our homes. We're very much open for business.'


That isn't just rhetoric - the man actually did grow up here, so his own roots in Asia go deep. His father was born in Malaysia and his mother was born in India. 'Until the age of about 11, I spent most of my childhood in a combination of Singapore and Johor Bahru,' he says. 'We started living in Singapore and then we ended up in Johor Bahru, but I was in school in Singapore for the whole time.


'I don't know that it makes much difference to the bank's strategy, but certainly for me personally, the fact that I spent my childhood here gives a comfort and familiarity.


'Singapore, to me, is not somewhere that feels like I'm travelling to. It's somewhere that feels like home - it's very familiar. It's somewhere I'm very comfortable and at ease in. I do think that makes a difference - it makes it very easy.'


At age 11 he moved to London, but stayed there only a few years before he was again uprooted. 'At 16 I went to Canada and finished my high school on the west coast of Canada.' And the moving didn't stop there. He returned to the UK for university, studying philosophy, politics and economics at Oxford. Then, after a brief working stint at the UK Foreign and Commonwealth Office, he left again - this time to the US, where he studied economics at Harvard University, graduating with a master's degree in public administration.


Of his undergraduate days, Mr Sands says: 'Clearly, some of the economics I learned is still relevant. But the most practical thing was philosophy, because philosophy teaches you a rigour in thinking and use of language that is a great skill to have, almost whatever you do.'


What does he think the banking industry will look like after the current crisis?


'I don't pretend to entirely know the answer, because the dust certainly hasn't settled yet,' he says. 'But I think the industry has changed irretrievably and fundamentally. I think we are going to have to see a banking industry that is more focused on delivering on its role for the broader economy.


'In hindsight, with some aspects of what banks did, it's quite difficult to discern what the ultimate economic value-added was. What is the ultimate economic value-add of the CDO-squared?'


Collateralised debt obligations or CDOs are structured debt securities backed by pools of mortgages or other types of loans. At the height of their popularity, demand for the securities spawned a type of CDO built from tranches of other CDOs, known as the CDO-squared. Such instruments have since been widely criticised for being needlessly complex - earning generous fees for the investment banks that created them, but obscuring the quality of the underlying collateral and the risk of it turning bad.


In future, banking will be an industry that 'cuts out some of the over-complexity and is perhaps a bit more conservative', Mr Sands says. 'But some aspects are still unclear', such as how the regulatory environment changes and the extent of government involvement in banking. 'We are already seeing significant changes in the competitive environment.'


Still, 'there are certainly opportunities' that have resulted from the crisis, he says. 'At Standard Chartered, we see as many opportunities as we see challenges.'


The re-pricing of risk - which has allowed banks to charge higher interest margins to lend to businesses and people, making lending more profitable - 'is certainly happening', he says.


'We're seeing significant re-pricing across most of our markets in Asia, Africa and the Middle East.


'We're also seeing opportunities to deepen relationships with our customers, partly because other banks have pulled back because they're short of liquidity or capital. So we are seeing lots of opportunities both in terms of margin and in terms of growth.'


Meanwhile, 'we are and we will be' looking at distressed assets and portfolios for possible bargains. 'We've continued to make at least small acquisitions.' That included brokerage firm Cazenove Asia, which the bank's Hong Kong subsidiary bought for an undisclosed sum last November. 'We are seeing opportunities to buy. However, our fundamental focus in terms of growth has always been organic growth - and that will continue to be the focus.'


Another opportunity the crisis has opened up, 'which is vital to organic growth, is the opportunity to acquire talent', Mr Sands believes. 'We're finding this to be an environment where we can attract really exceptional people.'


Does he worry that the crisis will result in much stricter national regulation of financial institutions, making it more difficult for cross-border banks such as Standard Chartered to do business across many countries? 'I think there is a danger that we may see a kind of creeping financial protectionism,' he says. 'It's less visible than conventional protectionism - tariffs on traded goods - but it's equally damaging to the world economy. It's something policy-makers around the world need to be very careful about.'


But he admits this is 'very understandable' because 'when taxpayers have put their money into intervening to rescue banks or in the form of guarantees, the political imperative to ensure that that money is spent within the boundaries of the country is very, very clear'.


Still, 'what I think is important is that companies and banks involved in international trade and investment articulate the case for supporting trading and investing between countries, because I certainly think that for the world to come out of this crisis, we need that flow of trade and investment around the world', he says.


'In the short run, I think there will be a bit of a dampener on innovation, and I think the danger is that we throw the baby out with the bath water. We want to ensure that the innovative spirit of the industry isn't completely destroyed, and that's a delicate balance that bankers and regulators are going to have to strike. Modern economies need an innovative, flexible financial system.'


Still, some recent trends are unmistakeable. 'I think you are going to see new international rules on capital emerging that will affect both the quantum and the quality of capital' that banks will need to hold as a buffer against losses in future, Mr Sands says.


'The current regulations were inadvertently pro-cyclical. You needed less capital when things were good and you need even more capital when things get more difficult, whereas actually, what you want is a regulatory framework that encourages banks to put money away for a rainy day and then to use that buffer so they can continue to lend when a downturn happens. I think that's going to be one of the biggest changes that is likely to emerge from all the discussions through the Financial Stability Forum and the G20 process.


'But it's important that we don't just focus on capital,' he adds. 'There are two other areas of regulatory change that I would think are very important.'


One is liquidity regulation. 'A lot of the problems that have emerged are fundamentally due to liquidity, rather than capital,' he says. Northern Rock, the UK mortgage lender that was nationalised after its funding in wholesale markets dried up and triggered a run on the bank in September 2007, 'was very well capitalised, it just ran out of liquidity'.


'The second is that regulation is going to have to shift more to regulating by the economic substance of activities, rather than the name of the legal entity,' Mr Sands adds. 'There has been a lot of shadow banking or near-banking, and one of the things that has made this crisis so difficult to deal with is the interaction between things that look like banks but aren't actually regulated as banks, and the banks themselves.'


On this, he is adamant: 'My view is that if it walks like a bank and it quacks like a bank, it ought to be regulated like a bank. That's an easier thing to say than to do, but if you don't do that, you have huge opportunities for regulatory arbitrage, or simply gaps in the regulatory system.'


His own career in financial services began when he joined US consulting firm McKinsey & Co in 1988. 'Fairly early on at McKinsey, I started doing consulting projects in the banking sector,' he says. 'I found it a fascinating industry and I decided to focus on financial services - in particular banking, and particularly in emerging markets. So I spent most of my career in McKinsey concentrating on banking.'


He stayed at McKinsey for 13 years, rising to the level of director, before he was hired by Standard Chartered as its group finance director in May 2002.


'Banking, by its nature, involves risk, which means it's intellectually challenging,' he says. 'It's a very technological industry, but it's also a people industry. Ultimately, what customers care about is the quality of interaction they have in a branch or with a relationship manager.'


This 'interesting blend of intellectual challenge, people, the fact that it's a technology-driven industry' is what drew him to banking.


And despite the massive damage the financial crisis has done to the financial services industry worldwide, he believes the upheaval gives newcomers to banking a chance to distinguish themselves.


'I think the fascinating thing about banking now - for anybody who is looking at joining it and to build a career in it - is that this is an industry that's going to go through quite fundamental change,' he says.


'The downside of the good times of banking in the past few years has been that almost everybody looked good. Whereas when things get more testing, you really see who can stand out and out-perform.'


To his mind, 'there is no doubt that the banking system has effectively failed - and so it needs redesign and reshaping', he says. 'But some of the most interesting personal challenges anybody can have are in that sort of situation.'


Home life On the rare occasion Mr Sands is home in London and not working, he does his best to spend his time with his wife and four children - a son, 16, and daughters aged 15, 12 and 10.


'One of my personal challenges is trying to reconcile family life with a job that is pretty intense and involves a lot of travel,' he says. 'But I'm quite disciplined in making sure that I make enough time to spend with my family. As a company, we encourage people to actively manage their work-life balance, and I can really only do that if I set the right example myself - but it's not easy to get right.'


On working days, 'if I'm in London, typically I'm in the office by 7.15 in the morning', he says. 'The mornings are always very busy, because most of our businesses are to the east of London, so all the video and telephone conferences happen in the morning. And then most of the physical meetings I have will typically happen in the afternoon.


'I would normally try to leave the office by about 7pm. There are often dinner engagements I have to go to. I try to keep those under control, because when I'm in London I try to make sure I spend some time at home and see my wife and my kids.'


Perhaps unsurprisingly, he makes it a point to avoid the subject of business when he's off work. 'I spend so much of my working day involved in business that when I'm not in business I don't really want to read about business,' he says, when asked what he reads for leisure.


'My wife is a novelist (author Betsy Tobin), so perhaps because of her, I tend to read novels.

One book I've read recently is Wolf Totem (by Jiang Rong). It's a really good Chinese novel about people living in Inner Mongolia. We went as a family to Mongolia proper last summer, so I was intrigued to read a novel set in that kind of culture and landscape.'


Just before Christmas last year, he brought his children to Singapore - 'the first time for them' - stopping over on the way back to London from a holiday in Bali, he says. 'I thought they should see where I spend so much time.'


Are any of them interested in following in his footsteps to become a banker? 'Oh, I don't know. It's early days yet,' he laughs.



Group chief executive of Standard Chartered PLC
Born Jan 8, 1962, UK citizen

Spends childhood in Singapore and Malaysia till age 11

1981-84 Attends Oxford University in the UK, graduating with a degree in philosophy, politics and economics
1984-86 Starts first job, as a trainee at the UK Foreign and Commonwealth Office
1986-88 Attends Harvard University in the US, graduating with a master's degree in public administration
1988-2002 Joins consulting firm McKinsey & Co. Becomes partner in 1996 and director in 2000
May 2002 Joins Standard Chartered PLC as group finance director
Nov 2006 Becomes group chief executive of Standard Chartered PLC

Mr Sands is married, with one son (age 16) and three daughters (ages 10, 12, 15)

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