Standard Chartered PLC (STAN) Earnings Call Transcript & Summary

Good morning all and welcome again to Deutsche Bank's financials conference. I'm Rob Noble. I recently joined Deutsche Bank to cover U.K. and Irish banks. Joining me today is Bill Winters, the CEO of Standard Chartered. Good afternoon, Bill.

Good afternoon, Rob. Thanks for having me.

Okay. We take just jump straight into it. The last few days, it feels like there's been a bit of a shift in lockdown policy here in the U.K. Standard Chartered, obviously, has a unique and widespread presence across the globe. Can you give us an idea of how the economic recovery looks in countries, which are a bit further ahead, such as China and maybe contrast that to countries which are a bit sort of the high end in the so-called virus cycle?

Yes. Yes, I guess we're still trying to figure out a little bit who's ahead and behind, but clearly, China and Hong Kong, in particular, are off to a very good start, having been, obviously, early on the disease front. Our China business -- or let's say, the Chinese economy, I think 99% of industrial companies are -- have resumed operations and something like 85% of SMEs have resumed operations. 80% of the service sector has resumed operations. We're -- well over 90% of our colleagues are back in the office. All of our branches are open. And business actually remained pretty strong as we discussed in our Q1 earnings during the lockdown period. And the -- there's a clear uptick in economic activity on the back of the loosening up. None of which is to say that things are back to normal because they're not. There's still an extraordinary burden that comes from the -- all the social distancing requirements. Obviously, very limited face-to-face meetings. Probably a little bit more actually now in Hong Kong than in China, very little intra-China travel, not so easy to have a dialogue with government regulators, which oftentimes happen in a face-to-face sort of setting. So not back to normal. But certainly, everybody has found a way to cope and the return to -- the return of capacity to -- industrial manufacturing capacity and service capacity to pre-COVID levels is very reassuring. So I'd say we all have the fear that there's going to be some sort of disruption of the capital stock that makes it difficult to climb back up to those sorts of capacity levels. But in China at least, I think we're encouraged by what we see. Hong Kong has the added complexity now of an element to resumed protests, although those seem to be at the relatively less disruptive end of the spectrum for now, and we're certainly hopeful that, that continues. Singapore was a poster child for containment, having done an excellent job early on of containing the virus, arguably let down the guard a bit and had the surge in cases from foreign workers living in very packed conditions in Singapore, which has sent the country back into quite a severe lockdown. And so economic activity has taken another hit. Though it will start to loosen out up next week, but it's a reminder that -- I think to everybody that letting the guard down can have some -- beyond the health consequences, can have some real economic consequences, which Singapore is experiencing right now. When we look at other markets where we operate, so let's just take some of the poorer countries in Africa and South Asia or some Asian countries, clearly, the level of medical preparedness is not the same. The living conditions and associated hygiene is more conducive to spread of the virus. And the infection rate, I think will -- the testing is quite low. So it's hard to get the information. But we assume that the infection rate is going to be similar to or greater than a number of the more developed countries where we have more real-time data. But the level of severe infection and mortality is much lower. And so we can imagine a slightly more favorable scenario where there's quite a severe shock, and there is quite a severe shock in those markets. But where they come out of it relatively quickly because they effectively abandoned lockdown and just let the disease run its course with possibly this favorable like herd immunity coming in at some point. And all sorts of theories on why there's a little mortality rate across Africa or in India. The age demographic certainly seems to be an important part of it. It's just -- it's a younger population. But possibly, [ there isn’t -- ] and I'm no expert in any of this, but ideas around acquired immunity from antimalarials or previous infections of some viral nature. In any case, so far, and touching wood, it looks like the worst of the ravages in the emerging markets is, at least in the -- our emerging markets. I'm not sure the same is true in Latin America. In fact, I suspect it's not true in Latin America, but leave that aside. We're feeling like we might have missed the worst of the medical impact. But the foot side of all of this is the economic impact. And we obviously have meaningful operations in the U.S. and Europe, where the demand destruction has been enormous. You're perfectly familiar with that. It looks like it's -- while things are beginning to bottom out and improve, it looks like it's going to be with us for some time. And it looks like the level of infection from the first wave was quite low. And therefore, the risk of the second wave is commensurately higher, which to our thinking is an ongoing period of suppressed demand beyond the confidence impact. So the bottom line here, everybody is an epidemiologist these days and everybody is an economist as well. I am, as a matter of fact, neither. But the view that we have at Standard Chartered is that the economic pressures that we feel across our markets are likely to be reasonably severe and reasonably long from here. So a number of this V stuff has made its way into our [ slate of ] filing.

Okay. If you consider the various monetary and fiscal responses that we've seen globally, what policies do you think have been the most effective among them?

The central bank reaction to the liquidity squeeze, which at a time when borrowers were thinking they needed to hoard cash and at the same time, shorten their deposit tenders was highly impactful. So I think a combination of programs from all the major central banks, ECB, Fed, Bank of England, Bank of Japan, et cetera, et cetera. We're very, very effective in restoring liquidity to the financial markets broadly. It flowed through to the banking system quite seamlessly. I think there was also a sort of an interesting dynamic amongst our clients. Some, even because they really needed the cash right away, obviously borrowed, drew down the line. Others who were clearly hoarding kind of got a message, I think, from us, and I'm sure by some of the other banks, which is that it really isn't very welcome to be hoarding cash at a time when at least for a moment that it felt like a liquidity crisis. And it became a bit uncool. And I think corporate treasurers would seem reading a little bit the TV that's coming out of the Central Bank said, it's not helpful right now for us to hoard cash, so we're going to hold off a little bit. And see if the central bank actions are effective. It turns out that we're effective, and that liquidity squeeze receded. So I gave overwhelming credit to quick and decisive central bank action, properly targeted, transmitted through the banking system, together through the narrative, very good. I think the -- in terms of forbearance or fiscal type arrangements, it's very varied across our markets. Hong Kong had a formal full branch program. There's relatively little take up on that. But I think it was reassuring both for the borrowers and the lenders that they could work on a more voluntary basis where need be with customers to avoid defaulter repositions. So we have had an increase in delinquencies and an increase in defaults, but some in a very low level in Hong Kong. China is a bit different. There's is a little bit more voluntary, but with strong urging from central authorities and the regulator. Similar results, which is a very modest increase in financial stress and now improving as the economy is opening up again. Singapore a little bit more orchestrated in terms of the programs, also quite effective. When we get to some of our other emerging markets, they don't have the same fiscal capacity. There's a larger component of the economy is -- was in the darkness to begin with. So inadequate tax records or ability to direct funding or informal banking relationships with the demand bank sector. So it's been much harder to provide that kind of fiscal support or fiscal protection. And I think those are the markets where we're also seeing tremendous pressure to open up possibly sooner than the medical establishment would say that it is wise, but where there's just no choice because the ability to get the limited amount of fiscal support to those people that most need is simply not there. The most obvious example of that is India, where there's been a really substantial fiscal program. We got very substantial and probably moderately effective lockdown. But where the economic damage was catastrophic. And by most people's accounts, the death due to starvation had been many times the expected deaths due to the COVID virus. So then I say, we've got -- I'd say that the -- we don't have a huge business in the U.K., but obviously, it's our headquarters, and we have a meaningful corporate business and the government programs on the consumer side have been highly effective, but you'll hear much more about that from people that have big cash operations in the U.K. I won't drill on that. But I've been impressed by both the speed and the magnitude of what the U.K. has done. And I think as other countries look to role models, for response to protecting jobs and small businesses, the U.K. is seen as one of the people that got it right. And from what I've seen and compare and contrast, I would agree with that. The -- we had a handful of countries that have taken a somewhat more either ad hoc or different approach like in -- there'll be more -- bit moratoria imposed in places like Bangladesh, Malaysia, Nigeria, which have probably been a little bit less well thought out. So a big question on the debt moratorium side is that is the borrower eventually going to have to pay it all back, interest, principal, interest on interest. Or is this the precursor to a [ rate ] forbearance. And sometimes, it hasn't been clear, which has the effect of forget about the uncertainty for us, but the real effect is that it means the bank earning to the real economy just dries up because people -- banks don't know the rules. And as a result, exactly when we need banks to be playing the role as promoters of resumption of economic activity, we had some markets where the bank funding has just shut off. And that's been the case in some countries in Africa as well. So that's -- there are some good examples that are very central, controlled and dictated. There are some good examples, which are more collaborative and then subsequently negotiated. There are some examples where just very little is being done, and people are just getting on with their life as best they can. And there are some examples that I think lessons that history will tell us were probably not effective. But all and all, for us, I think it's going pretty well.

Very interesting. And the volatility in the market since the economic impact has been quite negative for a lot of the business. The volatility has been very positive for market space businesses and particularly your financial markets and wealth management businesses. Do you believe the performance of these businesses can offset the impact of lower activity and lower rates on the other areas of your business?

In the short term, for sure, and it has. In the longer term, the impact of rates on -- we talked about $600 million of annualized impact on our earnings from the structured lower interest rates relative to what we had indicated a year ago. But obviously, the expectation also at the time was that interest rates would rise over time, not fall. And now the expectation is they are going to stay lower for longer. So you have a substantial headwind to overcome. Can we make all of that up with financial markets? Yes, from time to time. But I think to suggest somehow that we can consistently earn that magnitude of money plus the other foregone opportunities, we'd probably be hopeful. We're going to try very hard and be hopeful. The wealth businesses is notoriously cyclical. And when I think about the last sort of major market dislocation in our markets, it was shortly after I arrived and the RMB devalued in late 2015, early 2016. And that caused the market -- the wealth management product market to seize up, I think mostly because investors across the Asian region had a structural long RMB carrier position on. And when the RMB devalued, they didn't just leave that trade, they left the market. And then they came back in over the course of 2016, '17, '18. This one has been different. When the shock hit and obviously equity and debt values contracted significantly, investors seemed to just keep on going at full speed. And it's -- obviously it has begun to taper off more recently as we get some -- back to something a little bit closer to normal. But despite the fact that investors were dealing from home for the most part, thankfully, we've invested extremely heavily in online capabilities and digital capabilities across our retail business, but in particular, wealth. Thankfully, we've got a reasonably personalized delivery model. So our ends really are trained to give advice and reassurance. And our clients stayed very, very active through Q1 and into Q2. That's encouraging. But I also think we've been through a period of extraordinary dislocation where investors felt that it happened to them rather than they made a mistake earlier. So they're still involved in markets. I don't know that we would expect the kind of secular growth in that business above -- call it, above trend, above the underlying wealth trend that would be enough to offset the headwinds, but we're going to -- again, we're going to try very hard. But yes. There are other parts of the business that continue to perform well. I think we -- having taken some credit losses in the first quarter that were reasonably idiosyncratic, and at least in 2 cases, pretty fraud related. The rest of our credit portfolio feels pretty robust. And -- which is not to say that there aren't more challenges, there will be plenty of challenges, but it feels like we're going into this in about as good shape as we can. And in many markets assets are repricing. So we've got a relatively clean portfolio, very clean compared to what we had back in 2014 and '15. Relatively clean portfolio and assets that are repricing, that obviously helps offset some of the NII impact from lower rates.

And okay, just touching on that. You joined Standard Chartered in 2015. The bank had some asset quality issues back then, and it's been restructured quite a lot since then. So how is the risk in the business and the attitude to risk changed? And has it changed fundamentally from years back?

No. We did a bunch of things back in -- it actually began before I arrived -- been carried on throughout 2015 into 2016. We set up effectively at that bank. So we took the big concentrated exposures that we just wanted to get out of and put them into a separate pool, have -- completely worked that out over 18 months or so or largely worked that out over 18 months. We've reduced our single name concentration appetite significantly. So we -- where we were, in many cases, the largest lender by some factor, we -- where we said involved, we were a lender along with others. So the single name concentrations were way down. The average life of the book has -- it shortly began with and it's gotten a bit shorter over that time. So really focusing more on working capital and trade in terms of the lending portfolio. Much more active credit portfolio management. So we've much more active in securitizations in individual loan sales and other hedging. The result of all that is an increase in the proportion of the book that's investment grade, a decrease in the proportion of the book that's represented by the top 20 or the top 50 or the top 100 borrowers. Better diversification by industry and sector. So we were overweight oil and gas and a few other old economy sectors. We still have a substantial oil and gas and commodity trader business, but it's both lower as a percentage and much higher in terms of quality. And we reduced our concentrations by country. So we had a particular concentration in India. To a lesser extent, Indonesia, and we've managed to get those portfolios sort of in line with our overall capital. So a long way of saying -- I'm sorry for all the detail, but it's -- this is really what we've been doing. It's a substantially higher credit quality portfolio. That said, we had loan impairments -- sort of stage 3 loan impairments in Q1, which were much higher than what we've had in the previous 2 years. And that came from a relatively small number of quite visible defaults in the market, 2 of them quite visibly fraud. That's been going on for some time, but as we often see in times of financial stress, frauds are uncovered. And that at least to some extent was the case in these, too. What lessons we learned from that is it's a field Standard Chartered that they can't get out of its own way. I don't think so. At the end of the day, we were one of a group of lenders we weren't outsized. We were duped and we will dig in very deep to understand what lessons we should have known or we should have learned that could have helped us avoid that. But it looks like we were in pretty good company with some auditors and many other banks in the same boat. But we're also reminded that in the banking business, things go on from time to time. And when they go wrong, you just want to make sure that they're sized in such a way that it doesn't call you out of your otherwise strategy. Thankfully these losses don't call us out of our strategy at all. They just -- there's lessons to be learned and we will. And we'll deploy those as best we can. We'll take actions -- or we have taken actions on the back of that. But it doesn't fundamentally change our view of the efficacy of our risk management processes.

Great. At Q1, you highlighted a number of sectors that were most vulnerable, I mean, particularly, obviously, given lower oil prices, airlines and things like that. What markets are you looking at more closely at the moment? And obviously, you put overlay over your expected credit loss. So assuming a certain amount of government interventions, has that had more or less support than you expected? Or is it still too early to tell on that front?

Well, it's a bit early to tell. I think we pretty much put our entire aviation exposure into what we call early alert, which is -- it's well before nonperforming, but it's getting extraordinary attention. And the aviation sector is under tremendous pressure, and we'll have very large problems if there's isn't government support. We expected there to be government support from the big state or quasi state-owned airlines. And the fact that there is that support, whether it's from the German government, Lufthansa or Singapore Airlines or Qatar, Emirates, Etihad, there's -- and even U.S., American Delta. United had all had either outright support or equity injections or the promise of support. So that was our base case. By putting them into early alert and effectively downgrading the credits, there's an ECL dimension to that, and there's a capital dimension to that in terms of the RW rates. But it's obviously short of nonperforming. And right now, it looks like that picture is unfolding more or less as we would have hoped that it would. We also know that there's a bunch of airlines that are either entirely private or that are owned by governments or affiliated with governments that don't have the same fiscal capacity where there could be some losses, and we'll be looking to the collateral, and there's no market for that we've observed in any meaningful way for secondary airplanes. Is there the possibility of some losses in the aviation portfolio? Yes, there is. Is it manageable? Yes. Yes, I think we're well provided for that. Other hotspots, obviously, every view related to the commodity economy, we're watching carefully. Encouraging that the price of oil has increased substantially from desperately low levels at the time of our earnings call, but they're still quite low. And we know that, that puts pressure on some companies, although, as we indicated in our report, the -- our portfolio is very skewed to higher-quality companies, many of them either global majors or state backed with strong state backing. But we have some exposure to the weaker end of the sector as well. And we have some exposure to some sovereigns, who are going to -- either are or we can expect will experience some real stresses. The most will be those probably in Africa or in Asia. But again, we think this is manageable. We have an equally substantial exposure to commodity traders, which against the backdrop of the loan impairment that we had with a particular borrower in Singapore one might think is a real cause for concern. Broadly, that portfolio is a very short-dated portfolio to very incredible reputable companies that generate good returns for us overall and where we don't have material credit concerns. But obviously, we did fall victim to fraud and other smaller losses in that portfolio. So it's on the alert list as an industry sector, but not for any specific reason in terms of observed distress. Those are really the big ones. I mean we're obviously -- we're watching the Indian market very carefully, the SME and consumer market, in particular, just because the economic damage is so big and because the -- it's a big market and we have a meaningful presence in that market. And so the flip side is the recovery in other parts of Asia, it's underway, and it seems like as some of the worst fears of what might have gone wrong. It can be avoided at least for now on. I'd say at least for now not because I think it's going to get worse but because in this world things change.

Great. In the short term, you've highlighted areas of spend, which could be reduced to help offset the revenue impact from lower rates this year. What can you do in the medium term if revenue headwinds persist? And also how do you think about longer-term strategic investment? Is that spend flexible? Are there any projects being rethought in their entirety given the lower rate environment? Or is that a decision for later after recovery plays out?

No. The decision is now. The background on our investment portfolio, back in 2015 when I arrived, we were investing something like $650 million in investments as we define them. In a similar definition, we invested $1.6 billion last year. So it went from $650 million to $1.2 billion, $1.3 billion, $1.4 billion, $1.5 billion, $1.6 billion and along the way, maybe even more importantly than the magnitude of investment is that we shifted from almost 100% of the investments being defensive. So investing in regulatory requirements. We're undertaking a massive financial crime compliance upgrade at that point for all the obvious reasons, dealing with a big technology deficits and dealing with obsolescence. So most of the investment was defensive. We now got to the point where probably only 1/3 is purely defensive. And fully 1/3 or more is entirely focused on -- go as far as to say, disruption. So really proactive forward-looking investments. We're very keen to protect as much of that investment capacity as possible. And of course, we'll reprioritize unless there's some things that are just less relevant in this macroeconomic environment or this competitive environment. But for the most part, what we've been investing in proactively has been digital capabilities. And I'm really, really happy that we set our investment so much in that area. Because we've gone from being a laggard in digital competence to being a leader in digital competence. And we've done it off our own bat. So digitizing everything that we do, automating our processes end-to-end, we are not complete in that, we'll get to that in just a second. But also developing new customer propositions, which are in various stages of rollout or testing right now, and on which we're getting pretty good reviews. Have we not made those investments, we would not have been able to sustain the growth in our wealth business. In the early part of this year and through the crisis, we would not have been able to generate the very strong results that we did in financial markets. And we would not have been able to gain market share in our cash business the way that we have during a time of crisis. You'll quickly note that we gained market share, but earnings are down as because of interest rates. So in an environment where pressure -- margins are under pressure, which they are in the cash business at 0 rates or thereabouts, it's just critical that we have seamless connectivity to our clients. So that -- the good news is, we've invested a lot, and it's paying off. The flip side of the good news is we have a lot further to go. We're not seamless end-to-end automated in digital. Our headcount is still roughly the same as well as when I arrived. We've rotated about 10,000 people out of clerical jobs into data analytics programming and relationship managers and the like. But we're not -- we are not fully automated end-to-end. And that's a big remaining investment opportunity for us, but also productivity opportunities. So we ask -- fine, we can -- we talked about, and we can imagine, but the short-term steps are that we can take. Of course, if earnings are down, bonuses will be down. Obviously, we're traveling less, the travel and entertainment business. Many other tactical things that we can do in the short term, which may or may not be extendable to 2021 or 2022 and beyond. Most of them are not. So we have to be able to lock in our lower run rate expenses for future years on the assumption that it's going to take the global economy a while to recover from this. And that's -- those are the productivity efforts that we've got underway to complete the end-to-end digitization, to really, really absorb the culture of a customer journey and agile organization. So I'd say we're well on the way to developing, but is not yet fully delivered. And this is just fundamentally changing the ways that we work, we think, provide material incremental productivity in 2021, 2022, so that we can keep our game going, right? And that's clear. In 2015, when I arrived, our expenses were $10.2 billion or something like that. Last year, our expenses were $10.2 billion or something like that. So -- and we've not increased expenses despite 5 years of inflation, one penny. We've not exited anything materially during that time. So we didn't just get there by hiving off 10% of our expenses into some sale. We sold some goods and pieces, shut down some things. But for the most part, we managed to find efficiency and productivity year after year after year that offset the natural inflation in our business and substantial expansion in a few of them. We have to -- in this economic environment, we will seek to carry on with that trend. And we will do a reset to a somewhat lower expense number this year. I think we've indicated that we would hope that our expenses this year would begin with a 9 rather than a 10. We're not going to stop at 9.99. We'll take as much as we can, as appropriate, but we want to lock it in with structural productivity steps that we're taking now that will allow us to continue to grow without growing our expenses materially in the subsequent years.

Great. We've got one question online, and then I'll ask a few more here. Can you give your view on the potential impact of banking operations as the proposed Hong Kong security law has passed? Does this weaken non-Hong Kong clients' confidence with Hong Kong banks? And do you see Standard Chartered moving operations out of Hong Kong to Singapore?

So no to the last question. We're very happy with our business in Hong Kong. It's their home for 165 years or something. And they're doing extremely well. We see no direct impact from -- obviously, we don't know the details of the security law, but from everything that we've seen, we see no undermining of the rule of commercial law. Arguably, there's no undermining of the rule of security law either. It's just filling a gap in Hong Kong that has been filled in other markets like the United Kingdom or the United States or China from the beginning of time. But obviously, the question is how -- to the extent that the Chinese traditional system becomes involved in the resolution of a particular issue in Hong Kong, does that undermine confidence about the kind of model we've all come to understand in Hong Kong, having derived from the U.K. Our expectation is that, that will not be the case. Every indication that we've gotten from Chinese authorities has been that they do not intend to disrupt the commercial life in Hong Kong at all. In fact, they don't intend to disrupt life in Hong Kong at all, except for that the C cases, where there would be aspects of sedition or treason or secession. And that hasn't changed. I mean China has clearly asserted itself into Hong Kong on those matters that it considers ones of national security. I don't see are -- my Standard Chartered colleagues and from the clients I've spoken to and I've spoken to many over the past couple of days, none of them are particularly concerned that the security law itself is going to engender any material change the way business is done. There is concern, obviously, that it provokes reescalation and protest to become disruptive in their own way. And so we're watching carefully as days go by how that's unfolding. So far, it seems quite manageable. The response from the authorities in Hong Kong has been and will continue to be quite severe, we think. So the cost of violating the rules as they exist in Hong Kong today will be quite high to the protestors. And I think we'd be hopeful that there could be a resolution to these matters that would be peaceful and less disruptive. But obviously, that's still another question.

And on the full year results, you mentioned that the 10% ROT target will take longer to reach, given everything that's happened in the world now, is 10% still a long-term realistic target?

Absolutely. Absolutely. I mean this franchise should absolutely be able to deliver its cost of capital plus. The singular explanation for why we thought it would take a year longer is that yet again, we and the market got the assessment of forward interest rates completely wrong. We had a -- okay, I mean, for the second time now, I've got been burned by this particular forecast, but we had a flat to slightly upward trajectory interest rates and then we almost immediately had a downward ratchet, and that would cover a second major downward ratchet. And we can't escape that as a bank. But we can accommodate for that. So clearly, some businesses become less attractive in that environment, asset-heavy businesses that are dependent on having access achieved liquidity become less attractive. And many capital markets businesses or other typically higher-margin advice-driven wealth type businesses become more attractive in that environment. And we've been pivoting away from the asset-heavy part of our business. Our nonfinancing income is already more than half of our overall income, having been closer to 70%. Sorry, the financing income was closer to 70%, 6 or 7 years ago. So we've already had a major pivot towards nonfinancing income. And we'll continue with that pivot. And we'll do that by cementing our relationship with customers in the broader entirety of their financial life than is the case today. And providing a range of products and services that they go beyond straight financing. So that's -- it's really the secret, there's no secret, the recipe for us to hit our targets is to do what we were doing anyway, to do it a bit more deliberately, a bit faster and perhaps take advantage of dislocations in the market amongst our competitors or whatever along the way.

Great. Thanks for that, Bill. I think we've filled our time for today, and it's been a pleasure having you and found it very enlightening. Thanks a lot.

Thank you, Rob. Thanks for having me.

Thank you. Good bye.

Bye-bye.