By Babajide Komolafe and Michael Eboh
In a time of great turmoil for the global financial system, when banks-big and small, declared huge losses and laid off staff en-mass, Standard Charted Bank Group reported a seventh consecutive record annual profit of $3.38 billion for the year ended December 31st 2009.
The previous year, the Nigerian subsidiary grew by more than 40 per cent. In this interview, Chief Executive Officer of Standard Chartered Nigeria, Mr. Christopher Knight explains the factors behind the success of the bank even in time of global crisis. He also explains factors that occasioned the crisis in Nigerian banks, and what can be done to solve the nagging problem of credit freeze. Excerpts
For seven consecutive years, Standard Chartered has consistently grown its performance indices; even in the midst of global economic crisis. What are the lessons from these seven years of growth that the bank would be taking to the future?
I think you are right. We have done very well and we are very proud of that. When you look back, I think a lot of it goes back to how we have decided to mange the bank. And there are two areas that I want to mention. One is generally from a strategic point of view. Our vision is to be the best international bank leading the way in Asia, Africa and Middle East.
Now those three geographic regions, I mentioned on purpose, because those three regions we have historically been working in, back in the 1860s. We know those regions, we know the risks, and we know how to manage through the whole economic circle that those regions typically go through over a period of time. That is one thing; we know the geography that we are working in.
The second issue is that we focus on products and services that we understand the risk of. We like to believe that we do something if we offer our customers something; it is because we have done the analysis and we understand what the risks are in those businesses.
Finally, if you look at what happened in many of the banksâ€™ cases in which there were problems, many of those problems were from ventures outside of their core expertise. Quite often, they may have been subsidiaries created to do a new kind of business. Those non-core businesses were not in the focus of management, they were outside.
Management was focusing on the core businesses. As a result, these kinds of what we call â€˜non-pieceâ€™ or â€˜off-pieceâ€™ businesses didnâ€™t have the attention of management and sometimes problems created there wonâ€™t receive attention until they blow up. I think from a strategic point of view that is one area.
The other area is that we have a kind of different approach in doing business. First of all, if you look at our balance sheet, we have strategies, we always want to be adequately capitalised and we manage that level of capital.
Just to give you an idea, our core tier one capital, our target ratio is between 7 and 9 per cent. During 2008 and the difficulties of 2009, because of all the turmoil happening in the world, we on purpose increased that, so last year, we ended up with about 11.5 per cent core tier one capital just because we thought it was safer to have that extra buffer.
We also managed aggressively our liquidity in our balance sheet.Â We believe that you do not want to lend more in loans to customers than what you have in deposits from customers, because deposits are inherently stable. Essentially, your target might be somewhere around 80 per cent but have a 100 in deposits; we would want to lend about 80, so that if ever deposits should reduce, we have a buffer.
Furthermore, we also want to make sure that we have a certain level of assets that are highly liquid so that if in fact there is any need for liquidity, we then have those assets -typically Treasury Bills and otherÂ things thatÂ we can liquidate. So, we have a very conservative balance sheet.
The other is that we manage our costs very conservatively, very tightly, because costs are entirely within our control. Revenues depend on customers wanting to work with us (competition), so it is hard to control the level of revenues; the cost is within our control.
Finally, we just paid a lot of attention to risks. Risks in our credit portfolio, where we did our due diligence, we price the risks, those customers that are a little more risky, we charge those more and if they do not want to do the business at that price, we will walk away from it. We wonâ€™t do it just to have the business; it has to be the right business.
And finally, we also pay very close attention to everything that has to do with operational risks. This is to make sure that we follow our internal procedures, controls, regulations, because there, if it is not top of the actual operations of the bank, it disrupts operations and significant losses can arise.
All of these things put together, I feel helped us weather the last few years, as well as, if not better than our other international competitors.
Was the bank in any way at all affected by the global financial crisis?
Yes, we work in a global environment so we are not working in isolation of what is happening to our customers and to other banks. The United States and Europe were the two geographic areas that were the most affected by a downturn in their economies. And remember that these two areas are responsible for 60 per cent of the global economy; therefore, if these two areas go into a recession, it will have an impact on Africa, Asia and the Middle East.
For us, Asia is a big area of geographic concentration; their export did go down – Africa, Nigeria, weathered the consequences of a drop in demand of oil and as a result, the prices of oil dropped from about $145 to $35 before it started going back up.
So we are not operating in isolation. As a result, it has affected us. But, due to the areas that we work in – Asia, Africa and the Middle East – these areas have done better than Europe and the United States. Asia, in large part, because they went through a financial crisis in the late 1990s, they wound up having a more conservative mindset _ companies were not as highly leveraged, banks were more conservatively run, government, having had to put out a large amount of money to shore up the economy, and that is, I think in large part what has benefited Standard Chartered then, and it continues now.
There are challenges though still for 2010. Right now, I think that the main challenges that banks are facing in the world, are what is going to happen when the government subsidies and support given in Europe and the United States actually are eased or withdrawn. Will the economy pick up and will it be sustainable? That really is more of a question than anything and potentially could impact whether or not we have a double-dip recession.
How would you compare the competition in the banking industry in Nigeria to that in other countries where youâ€™ve worked?
You know it is difficult, let me give you an idea, here in Nigeria, we have 24 banks for a country that has about150 million people. Where I have worked before in Jordan, we also have, ironically, 24 banks in a country that has only 17 million people, so there was a lot of competition there, perhaps, more intense.
Here, historically, the competition has always been quite robust. It has been a challenge for us, particularly, after 2005, when there was the consolidation. You know you have some very big Nigerian banks that have the financial wherewithal to invest in branches, in new products, services and so on. More recently, we have seen that sometimes chasing being number one and being the biggest is not necessarily the best. For us, we want to be, ideally, the most profitable, we do not care if we are the biggest or not, we just want to make sure that we are giving our shareholders the best returns.
Right now, there is probably less competition. We are very well placed in the Nigerian market, with a very sound balance sheet, I would almost say over-capitalised and extremely liquid. But I have no illusions, I think the other Nigerian banks, though having some difficulties now, would be back.
I think what the Central Bank is doing regarding the Asset Management Company which will help relieve banks of their non-performing loans is sound, because then the management of those banks would be able to focus and actually do good business, what I would call, business as usual.
Right now, I believe they are very internally focused on trying to collect some of their bad debt and control their costs. We see a lot of opportunity, and a lot of growth in Nigeria. There is demand out there, and so ourselves and the competition would be back to be able to provide services to the customers.
You said the competition seems to be less right now, in what areas?
I mean less in number. I mean since last year, August 14, when the CBN stepped in and actually relieved some of the banks of their management and gave them liquidity support, those banks became more internally focused in particular. Basically, you have gone from 24 banks to 15 banks that are really open for business if I should say.Â Those 15 banks, in essence, need to supply the business requirements of both businesses and retail customers of 24 banks that existed before.
For us, where they are fewer in number, it gives us an advantage, we have to compete against fewer banks, and we have got a very strong reputation, both internationally and locally and which is good for us. And I am not partial to admit that.
In your view what would say was responsible for the recent banking crisis in Nigeria vis-a-vis the revelations of the CBN special audit and the quantum loses declared by banks. Was it that Nigerian banks became less conscious of risk or had too much money to play around?
I think the main problem for Nigerian banks, the main problem for many of them was the chase after growth and size just for the sake of becoming the largest. And the risk that has, when you just go after volume, if you donâ€™t pay attention to the risk in doing the business, orÂ whether the pricing you are offering on that businessÂ is adequate to cover the risk you are taking, you just want to book an asset you just want to grow. So that is one thing.
And I think that philosophy may have beenÂ created in part by, all of a sudden, the banks have emerged havingÂ this huge equity base, and they actually went and increase the equity because of the believe that if you have $1 billion capital you will get part of the external reserves to mange. So there was this race for more equity and then shareholders want a return. So that then led to a race for size and that goes back to my earlier comment that if you grow too fast you lose control.Â You become less risk averse, you just want to get those assets and youâ€™ve got to face the problems in the future.
Given the intense competitive nature in the banking industry donâ€™t you think that tendency to want to be the biggest or largest would always be there and hence banks making similar mistake and another crisis in the future?
I will like to believe that after the programmes, after the actions taken by the central bank, the increased focus on governance that the central bank would be demanding of the management of any bank, that there would be more of a shift towards profitability rather than size. I donâ€™t think it there would quit the same emphasis on growing for growth sake. As I said competition would be coming back. There is the asset issue and there would be need for the banks to reinforce their equity.
How best do you think the authorities can address this problem of credit freeze and get credit flowing into the system again?
I think there are three things to do in order for Nigerian banks to start lending again, one, the issue of capitalisation – banks need to especially the ones that are more stressed, increase or find new capital. Itâ€™s not going to be easy because globally, investors have been burnt and are probably investors are a bit shy to invest again. But it has to happen. One way this can happen is creation of the asset management company. Yes, because actually it would be giving money back to the banks, so this will give them the wherewithal to start lending again. There are some areas that I believe the government should help.
And that would be, if you take care of letâ€™s say the risky areas traditionally such as the SME sector, it is so risky because quite often, they are smaller businesses, they donâ€™t have the same kind of management skill, and they donâ€™t have the same kind of financial reporting. Those two elements make it rather difficult for banks to lend.
So if the government or the Central Bank will have a policy where they would stand behind to some degree, or guarantee either in whole or part, this sector, it would get credit flowing to this sector. Actually I was at a meeting this morning with the Central Bank and my understanding is that they are actually thinking of something like this and I think it would be good. Finally, the third point which I can think of is that, we now have some credit reference bureaus in Nigeria; I believe they are three that are operating.
I would encourage all the banks to give their data on loans to those credit bureaus. This will help in banks looking at new transactions. The reason for this is that there is something called asymmetrical information. If I, a borrower, come to a bank, I know what my intention is whether or not I am going to pay back the loan. The bank doesnâ€™t know, but if the bank can go to a credit bureau and see how this customer repaid past loans, that might be a good indication of how I might treat the next loan. So this would help banks to start lending also.
And why has Standard Chartered not listed in the Nigerian Stock Exchange?
I can think of two answers. One, we believe in controlling our business and the best way to control that business is to have 100 per cent ownership. Secondly, Standard Chartered Bank, as a new venture, has taken the risk to invest in Nigeria. And Standard Chartered Bank, as a consequence, wants to be the entity that reaps the benefits from having taken that risk. But this is not to say at one point in time we would not consider it. For example, very recently, weâ€™ve been in India for 150 years.
India last year, for the first time generated $1 billion in profit, we have a huge profile there, and the bank has decided that we would sell some equities into the local market this year. So there is a programme, an IDR programme, we would be the first foreign entity that would sell IDR to the local market. At some point in time, it may be possible (in Nigeria) but now we want to enjoy the benefit of taking the risk. Itâ€™s a dynamic business, it is growing rapidly and the bank essentially would want to maximise its control.
What is the rationale behind your new brand promise â€œHere for Goodâ€? Why did you take the decision to adopt a new brand promise at a time when the global financial services industry is in a state of flux?
The first part of my answer to the question is that it is not really new for us. We at Standard Chartered have always believed in a commitment to doing what is right, to living up our values, to developing deep customer relationship, toÂ Â our heritage, and continued profitability.
But now we are at a period of great turmoil. The bank has done very well and we think this is the opportunity for Standard Chartered to actually proudly acknowledge to the public, what it is we are, what it is that we stand for, and what we think differentiates us from many other banks. So I just want to ask, â€˜can a bank stand for something?â€™ We like to think we can, and for us, we can stand for good. Let me give you an idea of what this means.
For us, it is right for a bank or a business to be ambitious but we think that ambition should come with a conscience. We want to not only do what we can but what we should or what we know is right to be done. We want to be profitable, we want to maximise our profit to shareholders but how you generate the profit is also important.
And we want to stand with the community that we do business with as opposed to standing on top of them. Those are just some of the things that define, â€œHere for Goodâ€, brand promise. Before it was, â€œWe are the right partnersâ€, and we still want to be the right partners but we think now is the time to elevate what the bank stands for better.
And the bank feels that â€œHere for Goodâ€ which has multiple meanings, I mean the more you look at it, here for people, here for progress, here for the long-term, all of these things spill out of the â€œHere for Goodâ€ brand promise that we now have.