After preparing for 18 months, Standard Chartered Bank – the country’s second-largest foreign lender by assets – will open the first Indian depository receipt (IDR) issue in the history of the Indian capital markets on May 25. Group Chief Executive PETER SANDS talks to Sudeep Jain and Akash Joshi about the bank's growth prospects and the challenges it faced in bringing the issue to the market. Edited excerpts:
You are the first off the block in the IDR market. What challenges did you face while bringing out this issue?
You always face challenges when you are the first to do something. There were a number of issues that had to be worked through in terms of establishing the regulatory framework around this. But we had a very constructive and supportive working relationship with the Securities and Exchange Board of India and the Reserve Bank of India. The other challenge is to explain to investors how this works and how to think about it as an investment proposition. So, there is a communication challenge when you do something new. Another thing is market participants are familiar with the 20 per cent of Standard Chartered that is in India but much less familiar with the other 80 per cent. The key to the investment proposition is the opportunity to get a share of the 80 per cent.
RBI has said it wants foreign banks to operate as subsidiaries. Since you are coming out with an IDR, how appealing is a subsidiary structure to you?
We always review the structure of all our businesses. A little over half of our businesses is under the subsidiary structure, while the remaining follow the branch structure. A lot of countries are searching for an optimal structure for banks to operate in, but there is also a debate going on about cross-border MNCs and what sort of structure is right for them. So, I think it will continue to be a matter of discussion and dialogue.
What is the impact of the current financial turmoil in Europe? Is there any impact on your emerging markets business?
There is no direct impact of the pressures in the Euro zone. But the indirect impact is two-fold. To the extent that sovereign risks affect credit growth, the effect will be worldwide. We are concerned about credit spreads, which could rise. Second, if the demand for exports from Asia is reduced within the Euro zone, that could have an impact. It’s not clear how pronounced that is going to be because, although places like Greece are having problems, other countries like Germany are growing at a high rate.
Your fee income increased in 2009, but net interest income remained flat. What is the reason for this?
In some markets, such as India, consumer lending went through a difficult period. But the biggest impact on interest income on the group as a whole is the impact of lower interest rates. We have more deposits than we have assets, which is a good thing in terms of the strength of the balance sheet. What it does mean is, when interest rates go down, we have a head wind. But that reverses once we enter a period of rising interest rates.
How will you use the proceeds of the issue?
In terms of specific deployment, the proceeds will be repatriated to the UK and become a part of our general resources as a group. We are not doing it for capital purposes because we are very strongly capitalised. We are doing this because we think it’s a great way of visibly reinforcing our commitment to Indians and enhancing our brand and presence here.
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Equity capital markets (ECM) is an area you have been absent from and are now in the process of entering. Why did you wait this long?
We make no apologies for being conservative. When we do things, we want to make sure that we do them very well. We have decided that we want to build a relevant ECM capability across our key markets. We have made some acquisitions and hired people and are putting together that capability. We had a very good start when we bought Cazenove Asia and that exceeded our expectations in 2009. Here, we have UTI Securities (now STCI Capital Markets). We have created a securities company in Korea. This is an area that we are investing in to build the infrastructure and teams and it will be a mix of small acquisitions and recruitment.
There is talk of stricter capital norms for banks in the UK. How will that change life for you?
We are already very strongly capitalised and compare very well with peers in the market. Now, the regulatory debate on both the quantity and quality of capital and liquidity requirements — no one really knows how that is going to end up. It is important that it is an international debate, and that’s why the work of the Financial Stability Board under the aegis of G-20 is important.
SCOPE, your captive outsourcing unit, has grown to a commendable size. Do you plan to offer its services to clients outside the bank?
No. We see SCOPE as very much being a part of StanChart and it’s been hugely successful. We see it as a source of competitive advantage and we are not in a hurry to provide that to others.