Interview with Peter Sands

Like it is for many other global CEOs, India is an important destination for Peter Sands, Group Chief Executive of London-based Standard Chartered Bank. But Sands, 46, a former McKinsey consultant, has a special connection with the country: His mother, Susan, was born and educated in India. Over the years, those personal ties have persisted-so much so that Sands, a Harvard University alumnus, applied for a "person of Indian origin" (PIO) status last year. That apart, India is among the top three markets for Standard Chartered, contributing nearly a third of the bank's global profits. In 2006, Standard Chartered in India reported profits of more than $400 million, and expects to have done better in the year gone by. Last year, too, Standard Chartered struck a deal to acquire stake in UTI Securities even as it got American Express' banking business in India as part of a global deal. Not surprisingly, then, Sands has been paying a lot of attention to the country. He's been to India four times in as many months since October 2007. During his trip in December, Sands spoke to BT's R. Sridharan and Shalini S. Dagar on the (then impending) global financial markets turmoil and the fallout on emerging markets. Sands updated some of his responses on e-mail subsequently. Excerpts:

Is the sub prime turmoil over? How do you see it evolving into the future and how does it affect Standard Chartered, which is largely an emerging markets' bank?
You will continue to see turmoil in the global credit markets and global financial markets. There is a lot of pressure in the inter-bank markets. Certainly, it is an advantage not to be affected by the sub-prime market. So, we are well placed relative to what is going on. But we are not complacent at all, because nobody should be complacent about the powers of the forces that are sweeping the global financial markets. No market or player can be completely immune to such forces. We are extremely vigilant about potential effects. Most financial problems are hard to predict. We don't pretend to know. Our direct exposure to the sub prime issue is extremely limited. If anything, the turbulence creates for us as many opportunities as it does challenges.

What are the opportunities that you are seeing in the market?
If you are very well capitalised and very liquid, and we are both, then you are in a position to support clients. On the other hand, some of our competitors are constrained in their abilities to support clients. So, we are stepping in to help clients and complete transactions, finance themselves. Hence, there are opportunities.

So, any opportunities for acquisitions…
Oh! We have been busy on the acquisitions' front. I don't think there are too many banks which would have done the number of acquisitions that we have done in the past six months. I admit most of them have been quite small, but there is no doubt that the playing field for acquisitions is a little less crowded than it was before, mainly because many players in the world financial services sector aren't exactly in a position to be writing cheques for acquisitions.

There is a new kind of acquirer on the global financial services scene with not just Chinese banks, but even sovereign wealth funds and private equity players acquiring a lot of muscle. How does all this affect the playing field?
There is a fairly fundamental shift in economic power from the West to the East and that is reflected in the strength of the Chinese banks and the buying power of the sovereign wealth funds. It's something that the West will have to adjust to and get used to. Sovereign wealth funds are really a significant development in the way world capital markets work because they really have so much capital to invest. We actually see them as clients. They are institutions that we can advise on financial strategies and we are actively supporting the sovereign wealth funds.

Standard Chartered itself has evoked a lot of interest about the acquisition of the Temasek stake (since the interview Temasek has increased its stake in the bank by 1 per cent to 19 per cent). Does StanChart remain a perennial acquisition target, especially in the context of the global shifts in capital?
As chief executive of Standard Chartered, you get used to these stories. It is hard for us to get terribly excited about it. But what it reflects is that we are quite a unique player. There is no one quite like us. We view Temasek's investment as a vote of confidence in our management and our strategy. We welcome Temasek as a long-term investor. It's not for me to say whether we're a takeover target. Our focus is on delivering superior financial performance and return to our shareholders.

[Shalini Dagar] BT: For ambitious Chinese banks who want heft in banking StanChart would be a nice trophy to begin with..
Sands: I would agree with you the Chinese would want to and should develop more international capabilities, but the reality is that building an international banking business and collecting trophies are not quite the same thing.

The cost of capital for the emerging market banks is extremely low. How does this affect a bank such as yours?
It is an interesting reversion of the old trend when the western institutions had lower cost of capital. It depends on how sustainable or long-lasting it will be. The effective cost of capital for an Indian bank or a Chinese bank, given the P/E ratings, is quite low compared to that of a bank listed in London or New York. Then the question is will that last or will you find the sources of capital going to West, which they are doing. You've seen the deal with China Development Bank investing in Barclays. The other way around is for institutions such as ourselves to start raising capital in places like India and China, which is certainly a possibility.

So, how soon will you raise capital in this region? Growth in these markets, too, is quite rapid…
There is no timetable. We are not capital-constrained in any way. In the long run, as capital markets of Asia develop, I think we may well be looking at listings in other places. We have done it before. We opened a second primary listing in Hong Kong in 2002. We were the first among western companies to do so. And I wouldn't rule out other places, potentially Mumbai or Shanghai. Who knows? It is premature. We are looking at it.

[Shalini Dagar] BT: What do you think are the strengths which will lead to Standard Chartered becoming the bank of choice for these economies?
We have a couple of advantages. One is we are more local than our international competition. We are celebrating 150 years of our branch in Kolkata. We are more international than our local competition. A critical advantage we have is our ability to support clients as they trade and invest throughout the region and say between China and Africa, the US and Asia. All these trade and investment corridors-our ability to get different parts of the business to work together and support our clients is a critical advantage. It is the deep intimate knowledge and yet global capabilities that we have, that is the key to our success.

BT: What are the challenges of this sort of a business model-more international than local banks, and more local than international banks?
There are a lot of challenges because you have to be local as well as simultaneously global. The culture within the organization must support both. It is culture that very much becomes part of local business communities and understands the dynamics of a particular a particular markets but is also a culture where people will across borders in a very seamless and collaborative fashion. The other big challenge is simply that of growth. Three years ago we had 30,000 people and now we have 65,000 people. Just training, making these people absorb the StanChart values-that is a very big challenge.

BT: If the economic power moves east and the region continues to rise in the manner in it is do you see StanChart becoming the number one bank in the world?
Sands: (laughs) Well it is a nice thought…. But I am certainly not counting on it.

Two India-related transactions-the acquisition of IFCI (in a consortium) and the sale of the AMC business-did not materialise in the last few weeks. How difficult does this make doing business in India, especially since both organic as well as inorganic growth for foreign banks is heavily regulated?
No doubt we want more branches in India, but I think the government and the regulators have done a commendable job opening up the financial sector in the way they have over the last few years. India presents huge opportunities, and I think because of our Indian heritage, product capabilities and relationships, we are well placed to take advantage of the opportunities. Our focus has been on organic growth and the numbers speak for themselves-our 2007 first-half India profits were more than the 2005 full-year profits. We (the consortium) decided to pull out of the IFCI bid after completing the due diligence-so we are not disappointed in any way. We had intended to sell the AMC last year, but the obligation was not on us to secure regulatory approvals. In hindsight, now is not a bad time to sell the business-the asset management company has performed very well over the last year and has substantially grown its aum (assets under management) and equity portfolio.

How do you now chase similar opportunities (like IFCI) in India?
India is a priority market for us and we will look at every opportunity to grow here, organically as well as inorganically. Our options to grow through acquisitions are currently limited because of regulation, but we will be open to pursuing strategic opportunities such as UTI Securities.

What has been the cost of the deal with UBS falling through for StanChart? How soon do you expect to close the sale now with a new buyer, and how does this affect valuation of the business?
We expect to close the deal soon. I don't think what happened with the earlier arrangement will have any negative fallout on the valuation. Now is not a bad time to divest the business-the AMC's assets under management have risen almost 50 per cent since our decision to sell in 2006, several of its equity funds are now among the best-performing in the industry, and the size of the equity portfolio has jumped to 35 per cent of the overall assets under management (AUM).

What is the value that the AmEx acquisition brings to StanChart in this region as well as in India?
American Express Bank has more employees in India than anywhere else in the world. It has two businesses-a transaction business for financial institutions, dollar, euro and yen clearing. This is already very big business for us. They have great product capabilities. We did not have the euro and the yen clearing. We were eighth- and they were ninth-largest dollar clearers, together we are sixth. These are very scale-intensive businesses, so there are considerable synergies in bringing these businesses together. Reinforcing what is already a core business for us. The other business that AmEx has is private banking business. And we launched our business early 2007. Effectively, by acquiring their private banking business, which has over $22 billion assets under management and 10,000 clients, we have accelerated what we have been planning to do by 2-3 years. There is a logical fit as a lot of that business is across Asia.

How do the regulatory issues affect the AmEx transaction in India?
You will appreciate that we're in the midst of closing the deal and hence can't comment. We are very excited about the opportunities that this transaction holds for us, particularly in India. American Express Bank provides Standard Chartered a unique opportunity to add capability and scale in two strategically important businesses-it significantly accelerates our financial institutions business and fast-tracks development of our nascent private bank. At the same time, it enhances our footprint in a number of key markets, like in India.

StanChart, though, has managed to wrap up the UTI Securities deal. How do you expect the benefits to accrue to the bank in the coming years?
UTI Securities is a strategic investment, and we have the option to increase our holding. The acquisition is in line with our strategy of seeking 'capability' targets: that is, businesses which expand our specialist or product offering as opposed to geographic reach. UTI Securities' equity broking business gives us a significant transactional capability for our wealth management and private banking clients; and an initial public offer (IPO) management capability for our wholesale banking clients.

If the Indian market opens up in 2009, what sort of banks would StanChart be interested in?
It is quite difficult to know quite how 2009 would unfold at this point. We see India as absolutely critical, strategically central for Standard Chartered. So, we are very committed to building our business. And we will take advantage of whatever opportunity we can see. Our primary focus in India, as in the rest of the world, is actually organic growth. We think the most effective way and the most sure way for delivering shareholder value is to drive new products, capabilities, new services for customers. When we make acquisitions, we look at them as platforms for growth rather than just buying growth.

[Shalini Dagar] BT: Despite that StanChart has been one of the most prolific acquirers. What is the DNA of a successful acquirer in the banking space?
Sands: It sounds like a truism, but you have to be very clear what it is you are buying. And you also have to be very clear on how you are going to deliver value through the acquisition. We have learnt a lot on how to make integration successful. We think of acquisitions as two different categories-one is where we are buying scale and distribution in a particular geographic market such as the recent acquisitions we made in Pakistan and Taiwan. The second kind of acquisition is capability-based acquisition where we are trying to acquire a specialized capability which we can then leverage across our customer base and franchise. Good example of this would be Pembroke, an aviation advisory and leasing firm. If you look across Asia and the strategic importance to our clients of aviation, then we can really make use of these specialist capabilities. If you actually look at Standard Chartered's history, every year at least two-thirds of our revenue growth is from organic growth.

BT: Is there also an increasing appetite for emerging market debt and other asset classes? And do you see the boom sustaining?
Sands: Debt products, yes (there is an increasing appetite) though in many Asian markets the depth of the debt markets is relatively limited. Equities, currencies and the strength of all these (asset classes) is a reflection of the shift of the economic dynamics in the world. Every time this happens it won't all be smooth. There will be mispricing and there will be asset bubbles classes of various sorts. In general, Asian asset classes will be strong, it does not mean all of them will be.

BT: In the current context where does most of the weakness lie?
Sands: Obviously those sectors which are most exposed to the US economy, so Asian exporters exporting to the US are likely to be more vulnerable to any slowdown in the US. Also those companies and sectors which are most vulnerable to any currency adjustment, because there will continue to be upward pressure on the Asian currencies, and the Indian rupee too.

Do you see China letting go of its currency? And how do you see movements in the region? Do you see most currencies in this region strengthening relative to the dollar?
China will not let go of its currency, but over time, you will see the Renminbi strengthening. Middle-Eastern currencies will also strengthen over time. The dollar has predominantly weakened against the euro. For macro-economic adjustments to go further, the dollar will have to weaken further against the Asian currencies.

[Shalini Dagar] BT: How much a risk are energy prices for emerging markets?
Sands: Energy as a whole will be an important issue. The whole dynamic around the demand, supply and pricing of energy is going to be a very, very big issue. Spikes in energy prices have the risk of the slowing down the growth in Asia or leading to greater inflation. This set of issues around energy is not going to go away. It is the combination of blunt economics and environmental issues that will have to lead to companies and governments to think about significant leaps in energy efficiency. Economic growth in Asia is not nearly as efficient in energy as it could be. The whole area of renewable energy too will come up. We at Standard Chartered have made a commitment to provide $8-10 billion financing to renewable energy over the next few years.

Strengthening rupee, high oil prices… How much stress can the Indian economy take, strong as it may be?
The Indian economy has huge momentum. Every economy is subject to risks and challenges from macro-variables such as energy prices and currency. However, if India continues to work away at some of the internal constraints to growth… addressing issues such as skills shortages, infrastructure, accelerating agricultural growth and others. I would actually argue it probably makes more sense to get focus on those things and getting real traction on those things rather than spending too much time on things that you can't control anyway.

BT: Is there an ideal way of controlling capital flows?
Sands: (pauses)… That is a very tricky question because it is India's interest to progressively become more and more integrated with the rest of the global financial markets, because India does not have a lot of internal capital. It is important to growing in external capital. However, the mechanism to do that and to protect against volatility is a very tricky equation.

BT: Do you see Indian companies acquiring enough?
Sands: A lot of Indian corporates are expanding both by acquisitions and organically on the international scene. That is one of the reasons why India has t become more internationalized-because you don't want to be sort of bifurcated between those aspects that are internationalising and those that are not. What we are seeing is an accelerated internationalization of the Indian economy, which is a great thing for India.