Below is the transcript of a CNBC Exclusive interview with Bill Winters, Group Chief Executive Officer, Standard Chartered Bank. The interview was first broadcast on CNBC's Squawk Box Asia on 17 September 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Nancy Hungerford
Nancy Hungerford (Nancy): Here we are 10 years from collapse if you can believe it. I'm sure it's that time you remember very well as you were with JP Morgan at that time. Can you just walk us through what that was like? Did you get a call from Jamie Dimon saying get in here, this thing is getting serious?
Bill Winters (Bill): Well it felt like we had a bit of a dress rehearsal for the big one which was six months earlier when we got that call about Bear Stearns. And we spent a feverish weekend figuring out what we could do and how we could do it and ultimately ended up buying Bear Stearns. So when saw the snowball rolling as it were leading up to the Lehman collapse, it did feel like a repeat. Of course it didn't end up exactly the same way with nobody actually buying them. But the exercise was very similar.
Nancy: Do you regret the fact that the bank did buy Bear Stearns?
Bill: Well I'm not there anymore so any regrets I might have, had passed. I think it was a strategically important acquisition for JP Morgan and it went well. Of course there were subsequent extraordinary fines that were levied on JP Morgan chase by virtue of the fact that it had acquired Bear Stearns which had some legacy issues related to mortgage backed securities. So the economics may not have worked out anywhere near as well as we thought, but strategically it was a good acquisition.
Nancy: Since you had the front seat on what was taking place, you must have seen some warning signs earlier on, and the reason I'm curious about what you did see, are there any lessons you can extract from what happened then to things you might be looking at now in terms of the environment?
Bill: I think there are all sorts of lessons that we all learned. I would hasten to add I think those lessons aren't going to be the lessons that we really need for whatever the next problem as it comes around, because I think those lessons, at least for now have been pretty well digested. But clearly we allowed some combination of hubris and over reliance on historical methods of assessing risk, to blind us to the fact that there were some structural problems building up in financial markets. And I think subsequent regulation and subsequent training of risk managers and in banking and outside of banking have pretty thoroughly addressed that set of issues. Of course the next time around it'll be different and we'll see whether those lessons are extendable.
Nancy: The regulators took their steps, the banks have changed, many assets overall, the financial system has improved. We've seen what happened in financial markets and the economy globally. But you and some others have made the point that global political system, economy political system if we talk about free market capitalism too, is still somewhat in a recession. Do you think that's true, and is part of what we've seeing, in so much of the populist pressures now?
Bill: Well I think the global system of financial markets is under a fair amount of pressure. The very natural response to the financial crisis was for nations to withdraw into themselves in terms of regulation. So the markets are still very global, corporations are very global trade is still strong and growing. But the way that markets are regulated is more national than was the case before the crisis. As much as central bankers and other regulators are working to coordinate with each other, and the whole Basel process is one indicator of that, it's pretty clear to us that capital has become fragmented. Liquidity has become fragmented. That throws grist into the mill of commerce and prosperity. So I think it will be some time before we recover from that, given the rise in nationalism, the rise in populism things of that nature.
Nancy: And the rise of nationalism and populism right now seems to be manifesting itself in protectionism. Let's start with what's going on in the U.S., in terms of the constant trade battle waged with China. How much of a concern is this for you at the moment, and how serious could the impact be on Standard Chartered financially?
Bill: The trade tensions have to be a concern because to the extent that they escalate and spread beyond just this bilateral US-China relationship, there will certainly be an economic impact. There's been no material impact so far I'd say that there's a little bit of a fear or lack of confidence that's causing people to hold back on investments, in particular investments that would further complicate global supply chains. But that's on the margin, and nothing too materialize has happened. For Standard Chartered, we are a very big trade bank. We're particularly large in Asia, but interestingly in intra-Asian trade or trade between Asia and the Middle East, in Africa and less active in trade between China and the United States. If the only issue were a US-China trade spat that had the effect of producing trade between those two countries, there would be no material impact on Standard Chartered.
Nancy: Even if it escalates? Like the $200 billion threat out that, the $267 billion is another threat that President Trump has made, won't that have an impact?
Bill: It would have little impact in the first order. The second order impact though would depend on how supply chains adjust and to the extent that supply chains start to circumnavigate or circumvent entirely the Chinese market because it's just become too expensive. That would certainly have a knock on consequence for trade between China and the rest of Asia given how interlink the supply chains are between China and its neighbors. But we all know that a trade war is a bad thing for everybody. Everybody loses at the end of the day. And what we're hopeful is that this confrontational process turns into one that's more co-operative with basic agreements on how to establish routes of free and fair trade. That's the US is the express purpose. China as I think has every interest in finding a way to accommodate. So we remain hopeful.
Nancy: We all know it's a bad thing, and that's certainly what we hear from business leaders. But President Trump doesn't think so. He thinks it's easy to win...
Bill: I can't speak for President Trump of course. I wouldn't begin to think how that might come across. I am sure he doesn't think that the trade war is a good thing. He just may think that he may win one and come back to a better place afterwards and maybe he's right. Maybe there's a better deal that can be had through confrontation. I suspect that the best deals come through a more extended period of cooperation and multilateralism. And my biggest concern and indeed the US-China dispute is that it's diminishing the role of the World Trade Organization which as flawed, as the WTO framework is and it is flawed, it needs continual renewal. It was a multilateral and is a multilateral framework to resolve exactly the kind of disputes that are being fought right now.
Nancy: And this multilateral organization, the framework is crucial to an area that is so crucial to Europe and the emerging markets. Sure, the trade tension is just another headwind you might say, but its real concerns in this sector at the moment, also based on what's happening with liquidity, what's happening over at the Federal Reserve. How concerned are you given this an area that's such a selling point for Standard Chartered?
Bill: Well the emerging markets are under some pressure right now, and as we've seen time, after time, after time, markets tend to paint a broad brush over all emerging markets as if they are the same. They're very clearly not. And the genesis of this particular drama is it is in countries that have large current account deficits, which is not the case for most of the markets where Standard Chartered operates. Starting with China and most countries in ASEAN and many of the countries in the Middle East and elsewhere where we operate. So of course there are pockets of concern within our footprint. And there's been an overarching and an overwhelming withdrawal of liquidity from emerging markets which is what happens when the markets simplistically paint everything with the same brush. But the countries that have strong fundamentals, certainly starting with Singapore where we are right now, and the other markets in this in this part of the world will navigate this bit of turmoil just fine. And it will come out even stronger I think.
N: Sitting where we are though, do you think the drama that has already taken place, as you phrased it, will have a negative financial impact on your results in the current period?
Bill: Not in any direct way. I think the question becomes one of confidence and investment confidence. Fundamentally we finance trade and cross-border investment and facilitate trade and associated risk management. The risk management opportunities are strong right now I mean people are concerned about the way currencies are moving, and over some period of time that becomes a stabilizing or good thing for business. And the lack of confidence eventually flows through to economic activity, flows through to investment activity which could have some sort of a suppressing effect. But on balance we see this as something that happens in the ordinary course of our markets, I think we've been through regular financial crises in the world and emerging markets crises. I don't put this one at the severe end of the spectrum by any means.
N: What about in China, I mean you mention looking at the fundamental there right now, there are strong and that's crucial as an anchor for the emerging markets. Others have said we're not so comfortable with the debt levels still in China. Now they're meant to be deleveraging, some concerns they may have to put some of those efforts on hold because in part of what's going on, and the trade tensions. Does that concern you if we're going to see a big shift in the Chinese economy alone?
Bill: It would concern me if there is a big shift in the Chinese economy although I don't see that coming. I think the Chinese have been very thoughtful about the way they delivered in the period between 2017 and into early 2018. They substantially cleaned up the shadow banking system and the associated wealth management products that were a source of some concern. Of course our high debt levels in pockets of China but also very high asset levels in China from their foreign currency reserves to the ability for the population in China to absorb additional taxes should that ever be necessary. And so I think on balance the assets that China possesses are ample to deal with their liabilities and they're very thoughtful about how they're approaching this period of economic questionability. I wouldn't say lack of confidence but a bit questionability. And they've got plenty of monetary and fiscal policy tools to deal with the short term shocks.
Nancy: Overall when you look at global valuations, it doesn't seem to me that too much concerning you on the EM side of things, what about what's happening in the markets in the developed world. Do you think these valuations are justified?
Bill: The really prime valuations are in the US. The American economy is very strong. The economic backdrop is good. These policies are highly stimulative still. So even though US dollar interest rates are in the process of going up, real rates are still very low and we are running a massive budget deficit in the US which of course is highly stimulative. So for all those reasons I think corporate profits remain strong and that justifies these kinds of valuations. We could have a separate discussion about the imbalances that are building up in particular in the US, the budget deficit being the most concerning one. But those are unlikely to impact short term profitability. That's more my kids that I'm worried about.
Nancy: Yeah, long term that's definitely true. But I do wonder about the Fed, whether or not policy miscalculation from the Fed could be the next big risk, because there are so many complicating factors out there at the moment, some of the due to the budgetary reasons you've outlined. But everyone seems to say ok, 2 rate hikes this year, not looking so bad. But the Fed might have to change things very quickly....
Bill: They could. I mean there are signs of wage growth picking up and that could lead to a faster rate of US dollar rate increases. And we've seen that those US dollar rate increases have already had some predictable effects. Strong US dollar and pressure on countries running current account deficits, and pressure on countries with a high volume of, well countries or companies, with a high amount of non-local currency debt, in particular US dollar debt. And we are seeing the pain from that trend and to the extent that the US economy is stronger, inflation picks up further you get a further increase in rates. It will put more pressure on other parts of the world. I think most of the emerging markets are prepared for that. I mean it was very well signaled as far back as the taper tantrum that this is something that emerging economies should be focused on. So we've got budget deficits in good shape, we've got debt levels for the most part in good shape. We've got foreign currency reserves in good shape. So the buffers are in place in most of the world economy to absorb what's been pretty well flagged now for several years. But of course not everybody is well prepared and we're seeing some of the tremendous challenges in Argentina, in Turkey in a different way in South Africa, Russia. I mean these are some of the friction points and it's not clear that there will be some lasting damage from these effects. But it seems manageable in the context of the global economy
Nancy: Let me just ask you about a central bank with a different set of challenges on their hands, that is the Bank of England, of course your bank being listed in London, you must keep an eye on what's going on there, Mark Carney out with some pretty stark warning about a "no deal" Brexit would look like more for the consumers and the housing market. What would a "no deal" Brexit look like for Standard Chartered? How bad would it be?
Bill: It's exactly what we're prepared for. And I think I can safely say every bank in the UK and probably in Europe is prepared for a no deal Brexit, not because we think it's likely or because we think it would be good. It would not be good. I'd have to agree with the direction of Governor Carney's comments but we have prepared it by setting up the appropriate legal entities within the Eurozone. We are acquiring and then have every reason to think we will acquire all the appropriate licenses and we've got plans to move the people that we have to move. And it's painful, it's expensive, it's inconvenient, it's not productive for us or the global economy or the European economy but that's what we have to do because we can't not be prepared.
Nancy: Would it force you to consider moving even more people or perhaps moving the base out of London?
Bill: No, our business as you know it is spread across primarily Asia, the Middle East and Africa with important businesses in Europe and the US focusing back on these markets. London is our headquarters. It's our hub. Singapore is our operational hub for all intents and purposes. Hong Kong is our East Asian hub; we would continue to operate that way.
Nancy: What are you seeing in the way of business in the Middle East, especially in the Gulf region? Because it seems a lot of international investors, the enthusiasm, some changes going on around there, shift away from dependence on oil, also some skepticism as well. I'm curious what you what you're seeing in that market?
Bill: The economy in the Middle East is a bit sluggish and hasn't fully recovered from the drop in oil prices a few years back. The pace of investment has slowed a bit. But of course oil prices have returned to levels that are comfortable. There are fascinating things going on in Saudi, with a tremendous modernization of governance and the economy. The plans are extremely ambitious. (Nancy: Do you think they are too ambitious?) No, I think it's good to have ambitious plans. I don't think you want to hook your future on the achievement of every single item in your ambitious plan but it's good to have those objectives and the Saudis have that. And we are very keen to continue to grow our business there in addition to the other markets we operate in the Middle East. It is sluggish right now. But the future through ongoing investment and reform is pretty positive.
Nancy: Just finally I want to ask about the bank and the share price performance. Has it been frustrating for you that there hasn't been a greater pickup given all the steps you've put in place?
Bill: Yeah. It is frustrating. We try to tease apart how much is things that are happening in the market and how much are things that we haven't properly communicated in Standard Chartered. Of course there's a third possibility which is that we're not doing the right things which I don't think is the case. I think we've made tremendous progress in initially going back three years stabilizing the bank but our investing in things that make Standard Chartered a special and important partner for our clients in other markets where we operate. We've made great progress both financially but also strategically and we'll continue to do that. Of course is coming against the backdrop of tremendous pressure on emerging markets generally on the banking sector mostly outside the US and on all things related to China around the concerns about the US-China trade tensions and we take all three of those boxes. So the share price is not something we're happy with at all but we have every confidence that the progress that we've made, the investments that we're making will flow through increasingly to earnings and growth and get us back to a share price that's consistent with the value.
Nancy: Given there are some many external factors you can't control, when you look at the internal things you can do, does it suggest that you look at more cost cuts, more restructuring in elements that could make the bank leaner, and see more job cuts on the way?
Bill: Standard Chartered is a growth story. We operate in some of the most exciting markets in the world. We've tripled the pace of investment in our bank over the past three years. Those investments are paying off and those investments are targeted at growth. So growth is what we're focused on. Growth is the opportunity for us. Of course there's constant focus on becoming more efficient. There is constant focus on digitizing everything that we do and digitization as we know displaces some people. Interestingly our headcount as a bank is slightly higher than the day that I arrived three years ago. But along the way we reduced about a third of our expenses and then reinvested all of that back in the business. So we will see continued migration and as part of that people go, other people come. That's the nature of any business and we can expect that to continue.
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