Bringing vanilla investment banking products to emerging markets has proved a highly successful formula for Standard Chartered, and the model needs only modest refinement to cope with new regulations, according to its wholesale banking chief.

Mike Rees is refreshingly candid about the situation he found when he took over as head of global markets at Standard Chartered in 2000. After a series of scandals and losses had forced the shutdown of the group’s Asian investment banking operations that year, the division’s speciality, he jokes, was “crisis management”.

More than a decade later, Mr Rees can afford to smile about those days. Standard Chartered is one of the most highly valued banks in Europe, having navigated the financial crisis well. The wholesale banking division that was created under his leadership in 2002 has been a sustained contributor to the bank’s performance, notwithstanding the fines agreed with US regulators in 2012 over alleged breaches of sanctions on Iran prior to 2008. Standard Chartered recorded return on equity of almost 14% in the first half of 2012, with wholesale banking operating profit rising 16% to offset a decline in consumer banking profits.

Even including the fines to US authorities relating to the transaction banking business, the bank is forecasting growth in wholesale banking profits for 2012, in a year when many competitors have struggled. Fees in the global investment banking sector as a whole for 2012 fell by about 3.4% according to Thomson Reuters data.

Close relations

The bank’s formula for success is no secret. While headquartered in the UK, Standard Chartered earns at least 80% of its revenues from Asia, Africa and the Middle East, which look set to be faster growing than Europe and the US for some years. And the wholesale banking division from its creation has focused not on product sales silos, but on a relationship banking model that other global banking groups have only begun to adopt since the financial crisis.

“We have always had great relationships with key clients in our core geographies, many of them going back generations. But those relationships can only be sustained by the high-quality delivery of products that clients need,” says Mr Rees.

He says the bank regards relationships built on a single product as difficult to maintain, and its general policy is to pitch for issuance mandates only where the bank has a minimum two-year commercial relationship with the client. The commercial banking relationship also extends the other way, with the sale of payroll services to cash management clients helping to originate as many as 30% of the bank’s consumer banking customers. Mr Rees emphasises that the wholesale division has always retained a very strong sense that the bank is a protector of people’s savings, which is integral to its strategy and approach to balance sheet management.

“We have never been about doing 20- or 30-year complex derivative trades. Standard Chartered is about geographic complexity, offering vanilla wholesale products such as debt capital markets and project finance in countries that other banks tend to neglect. That could be Iraq, or many countries in sub-Saharan Africa,” he says.

Ready for regulation

Mr Rees warns that any prolonged uncertainty about the shape of post-crisis regulation will make it more challenging for banks to play their part in the real economy. He cites delays finalising Basel III contingent value adjustment (CVA) provisions and US swaps market rules as particular sources of difficulty. But having steered clear of some of the financial market business lines most affected by the tide of new regulation, he says he remains firmly in the glass-half-full camp. Even in trade finance, a traditionally crucial area for Standard Chartered that looks set to be hard hit by Basel III, he is relatively sanguine.

“It is possible that the climate for trade finance may become more difficult for banks, but that just means we must focus on distributing those assets that we originate. The loss rate on our trade finance portfolios has always been small, so it has always been straightforward to repackage and securitise these loans, such is the credit quality,” he says.

Standard Chartered has a long track record of successfully securitising trade finance receivables, most recently with a $3bn transaction under its 'Sea Lane' emerging market securitisation platform.

While commercial banking products such as cash management and foreign exchange account for about 55% of revenues and are 'stickier' in terms of client relations, the changing regulatory environment is actually encouraging Standard Chartered to look more closely at financial markets and corporate finance businesses.

“Our role as an investor intermediary was traditionally weaker, but investors today are flush with liquidity, and it makes sense for us to distribute credit to the market. We are not starting from zero, but we are definitely turning up the volume. Regulation is squeezing the maturity transformation role of banks, and our clients have borrowing needs that are greater than Standard Chartered single name limits. We want to be able to serve those clients without turning down deals,” says Mr Rees.

He is optimistic that the bank’s capital markets business can grow following the appointment of Carsten Stoehr as head of global capital markets in June 2012. Mr Stoehr is a 17-year veteran of Credit Suisse, most recently as head of Asia-Pacific fixed income.

Spotting the risks

While Standard Chartered’s areas of operation have better prospects than the US or western Europe, Mr Rees does not shy away from identifying what he calls potential “bumps in the road”, especially with regard to China. He believes that the Chinese authorities have recognised the need for a lower and more sustainable growth rate.

“For now, the authorities are using higher regulated savings rates to encourage spending. But if banks begin to hit losses, there is always the option of changing regulated rates to create higher margins that will enable the banks to recapitalise,” he says.

Standard Chartered’s focus on emerging markets also leaves it facing a higher degree of political risk – Mr Rees flags up the Middle East as a source of regional political uncertainty at present. And on a broader scale, he notes how the development of shale gas in the US has led to a sizable discount on gas prices relative to oil. This could ultimately raise questions for major emerging market hydrocarbons producers.

However, the overarching theme remains the growing economic significance of the bank’s core markets, and increased trade between developing countries. Standard Chartered has already broadened its wholesale banking presence in the second half of 2012, buying Crédit Agricole’s corporate and investment banking business in Turkey and expanding its office in Brazil.

“There are 2 billion pigs in China that need 5 million tonnes of soya feed every year. China cannot produce all of that, so Brazil and Africa will be major suppliers. To serve those needs, we want to offer correspondent banking and trade finance facilities in Brazil, but we will not need the full suite of domestic banking services,” says Mr Rees.

The bank also remains at the forefront of the process of globalising the Chinese renminbi, which he firmly believes is a huge opportunity for London as a financial centre. He notes that 12% of China’s trade with the rest of the world is settled in renminbi, but so far only 7% of Europe’s trade with China is settled in renminbi.

New competitors

However, one side-effect of stronger emerging markets is the rise of regional banks that can potentially compete with Standard Chartered’s model. The likes of DBS in Singapore and Standard Bank in South Africa have developed pan-regional models, but Mr Rees says they have not yet established the inter-regional presence that Standard Chartered can offer. Similarly, among global banks Barclays has a large African network, but cannot match Standard Chartered in Asia.

The most significant direct competitors remain HSBC and Citi, but even they do not have such a depth of on-the-ground presence in Standard Chartered’s chosen markets of operation. Both have also been scaling back their international presence, whereas Standard Chartered is extending into new markets such as Turkey and Brazil. Mr Rees rules out any attempt to compete directly with the global model operated by HSBC and Citi. While Standard Chartered serves multinationals, its strength lies in being able to reach down to mid-sized companies in the markets where it has a local branch network.

“Wholesale banking has grown from 4500 staff in 2002 to 19,000 today. It is inevitable that we do not have the same level of ambition today in terms of further expansion, and building further local scale is now less of a priority. But we still have to be ambitious in the sense that we cannot take our competitive position for granted in any of our existing markets,” he says.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter