Peter Sands, Group Chief Executive
Q: Another record year of income and profits. Is it getting tougher to deliver double-digit top-line and pre-tax profit growth?
A: Well, this was our ninth year of record income and profits. And over the last nine years we’ve averaged income growth of 16% and profit growth of 21%.
But the sheer consistency of our performance shouldn’t mask the achievements. 2011 was in many ways quite a tough year, delivering double-digit income again, double-digit profit again in a world of turbulence, de-leveraging, a huge amount of regulatory change. It wasn’t an easy achievement.
But I think it demonstrates the strengths of Standard Chartered. We’ve stuck to our strategy. We have an incredibly resilient business model, a very conservative approach to our balance sheet. The balance sheet is as strong as it’s ever been.
And we are extraordinarily diverse. We have multiple engines of growth. Two of our largest markets, Korea and India, had actually quite a challenging year in 2011, but we still delivered a double-digit performance in income and profits. And I think that, again, demonstrates the strength of our strategy and business model.
Q: You’ve talked about some of the challenges, and there are many who believe that the global economic outlook is deteriorating. Do you need to think again around strategy to adapt to a changing world?
A: I think the global economic outlook is quite challenging. We’re seeing major challenges in the Eurozone. We’re seeing a lot of concern about the oil price, frictions in the Middle East and Asia is slowing down somewhat.
But I don’t think that should mask some of the positive aspects of what’s going on in the world. While the West is undoubtedly facing some very significant challenges, the emerging world is still growing strongly, perhaps not as fast as it was before, but still you’re seeing massive growth in the consuming populations of Asia. You’re seeing very rapid growth in inter-regional trade and investment.
So the outlook is challenging, but certainly in our parts of the world there are many positive aspects to the story.
Q: If you think about your strategy, is it right for the conditions that you’re facing?
A: We constantly review our strategy against the changes in the external environment, be they the global economy, regulation, technology or what competitors are doing but the fundamentals of our strategy remain right. They remain robust. We want to be the world’s best international bank. We want to lead the way in Asia, Africa and the Middle East.
And the fundamentals of our business model, a conservative balance sheet strategy, a focus on our clients and customers, an emphasis on organic growth, investing in our businesses, an obsession with the basics of banking, how we control costs, risks, capital and liquidity and so on. These remain the touchstones of our strategy and business model, and I think they are still as right, as powerful as they have been.
Q: Hong Kong and Singapore are the growth engines in the business. What are the drivers of performance in these markets? And is that performance really sustainable?
A: Both Hong Kong and Singapore had superb years. In Hong Kong, we saw income up 22%, with profits up 41%. Hong Kong had $3bn of revenue, $1.5bn of profit. That’s a record for any of our markets.
Singapore too had an excellent year, with income up 26% and profits up 40%.
What you’re seeing across both these markets is actually very broad-based growth and performance. In both markets, our Consumer Banking businesses performance very strongly but also our Wholesale Banking businesses. And in both places, you’re seeing the strengths of our ability to leverage our network, through trade finance, through supporting the increasing growth of inter-regional trade in Asia and inter-regional flows of investment.
Q: China is clearly an important market. As you roll out the franchise in China, what for you is the focus?
A: We are growing very rapidly in China and have invested heavily through 2011. We opened 19 new branches and sub-branches. And we’re also growing our staff numbers quite considerably. It’s the place in the world where we grew staff numbers the fastest.
But we’ve also increased profitability. Profitability effectively doubled during 2011. China is going to be a very big part of our future. And it’s not just the opportunities within China that matter to us. It’s the opportunities within Greater China as a whole: Taiwan, Hong Kong and so on, and also, as Chinese companies increasingly trade and invest with other parts of the world, such as the West or in Africa.
Q: You’ve taken decisive action in Korea. Is Korea now ready to really deliver?
A: 2011 was undoubtedly a tough year in Korea. We have not been satisfied with our performance in Korea for some time. The fundamental cause of our underperformance has been labour productivity not being high enough, so our cost/income ratio has been too high. And we weren’t able to reward people for strong performance. And we weren’t really able to deal with poor performance.
So we took action this year. We had to deal with a strike. We stayed open throughout that strike, which is a testament to the commitment and professionalism of our staff.
At the end of the year we launched an early retirement programme. That was very successful. Some 800 people have actually left our Korean business as a result of that. And that will deliver substantial cost savings, about $95m a year from the beginning of this year 2012 onwards.
So we’ve made a step change in the efficiency and productivity of our Korea business. We’ve also rebranded Korea, losing the SC First Bank name, making it Standard Chartered Korea, signalling both our commitment to Korea and the milestone, in terms of making it very much a seamless part of Standard Chartered as a whole.
We’ve still got work to do in Korea. We’re still not finished, but we have made huge progress in improving the performance of our Korea business.
Q: Last year India overtook Hong Kong as the biggest business by operating profit. What’s happened to India since then?
A: You’re right. In 2010 India was our largest business by profit, and in 2011 we saw an 11% reduction in income and a 33% reduction in profits in India.
This wasn’t really a surprise. India, as an economy, has slowed down, partly as a result of quite aggressive actions of the Reserve Bank of India raising interest rates in order to try and control inflation, and partly by a range of governance and political issues that undermined business confidence.
In fact, we have not slowed down our investment in India at all. Our enthusiasm for India as a market, in terms of its medium and long-term prospects remains undiminished. And indeed, if you look at our client franchise, our Indian client franchise, and take account of our offshore income, i.e. the business we’re doing with Indian companies as they expand overseas, it’s actually proved very resilient.
Q: And your thoughts for India in 2012?
A: As we enter 2012, there are some encouraging signs, in terms of both policy and business confidence in the external environment. And as a result, we think that our business in India will resume its growth path in 2012.
Q: We often hear people speaking of the strength of Standard Chartered in Asia. But Africa is emerging as an interesting set of markets. What’s your view of Africa as an opportunity?
A: Africa remains one of our key regions, and we are continuing to invest and grow our business across Africa. Income in Africa grew 8% in 2011, and 13% on a constant currency basis. And it’s not just the opportunities within Africa that are attractive. It’s the increasing trade and investment flows between African countries and Asia - India, China - and we’re seeing enormous opportunities there to work with our clients.
Q: What’s the cost of regulation in the UK? Why do you remain domiciled in the UK?
A: Like all banks, we have faced an avalanche of regulation. Our capital ratios are somewhat double what they were before the crisis. We’re holding much greater liquidity buffers. And we’re very supportive of much of this regulation. We’re very supportive of the core thrust of Basel III.
But we’re also very concerned about the sheer complexity of having many different national variations and add-ons, which leads to significant costs, but also just the burden of extra complexity.
There is a fair amount of UK-specific add-ons and variation which do cost us quite considerable amounts. And if you take all the aspects of UK super equivalence, where the UK has gone beyond what the international standards are, it isn’t difficult to get to a number north of $500m.
Q: And on the question of domicile in the UK, why do you stay?
A: We would prefer to stay where we are, mainly because we want to focus on our clients and customers, on delivering value for shareholders and moving the headquarters of a major international financial institution is not a small thing to do. And London has many advantages as a home for a major international institution.
But we do worry about the degree to which UK super equivalence, extra regulation, things like the bank levy, undermine our competitiveness. We have got to be competitive against our international competitors. And so we do keep under review our options. We understand what our options are, and the Board keeps them under review.
Q: You’ve got this target of mid-teens return on equity. Can you give us a steer as to when you think you can hit that target?
A: We’ve made clear to the market that we seek to achieve four performance objectives, and that’s: double-digit income growth ; double-digit growth in EPS; flat jaws, so costs growing broadly in line with income and a mid-teens ROE. We set out those objectives as objectives we want to achieve over the medium term and through the cycle.
In 2011, we clearly achieved our double-digit income target and flat jaws. Indeed, we outperformed on jaws. But we fell short on EPS, which was up marginally, and on ROE at 12.2. And that was a result of the dilutive impact of the rights issue we did at the end of 2010.
In 2012, well, it’s early days. We’ve had a very good start to the year, and that good start puts us on track for the double-digit income, the flat jaws , the double-digit EPS. But it is early days. There’s lots going on in the world. I don’t need to remind you of how many risks and uncertainties there are in the global economy.
In terms of ROE, I think it’s likely that we will still fall short in 2012 of our mid-teens aspiration. And that’s because we are carrying over twice as much capital as we were before the crisis, and there will be some time before that extra level of capital across the industry flows through into margins.
The other consideration affecting ROE is that we are at the low point in the cycle, in terms of interest rates. And for a very deposit-rich bank, such as Standard Chartered, that has a depressing effect on margins.
But we still retain our aspiration to deliver a mid-teens ROE in the medium term and through the cycle.
Q: Standard Chartered Bank’s brand promise is ‘Here for Good’. How does that fit into the post-financial crisis world, where you’ve got investors, communities and regulators increasingly challenging the way that the banking industry is run?
A: I think ‘Here for Good’ powerfully captures what makes Standard Chartered different. We have a very distinctive culture and set of values. And ‘Here for Good’ is a very simple phrase that, in its two meanings, captures two aspects of what distinguishes us.
One meaning, of course, is the sense of being here over time – committed, permanent, not going anywhere, sticking by our clients and customers through good times and bad. The other meaning of ‘Here for Good’ is, of course, doing the right thing, a commitment to deliver value for our shareholders and contribute to the broader economy and to society.
And both those themes, both those concerns, run very, very deep across Standard Chartered. They’re not just things we put on the outside. We want them woven into the way we actually run the business. And I do think that is very important in a time when much of banking is seen as part of the problem. We’ve got to change that mind set and demonstrate that we can be part of the solution and I am convinced that we do play, a very powerful role in helping reinvigorate economic growth and job creation.
It’s worth recalling that between the end of 2006 and the end of 2011, so the last five years, through all this crisis, de-leveraging, turmoil, we have increased our lending to our clients and customers by 91%. So, we’ve almost doubled our lending, and we’ve more than doubled profitability. So we have been supporting our clients and customers throughout the crisis.