Following are excerpts from a CNBC interview with Bill Winters, CEO of Standard Chartered, and CNBC's Geoff Cutmore.
GC: Well, a warm welcome, everybody, we're going to take you away from US programming now for a special interview here on our set in Davos. Some of the world's biggest international banks are feeling the impact of the broad economic slowdown, Standard Chartered is over three years in to its turnaround plan, however the bank's share price has remained under pressure, a source of much frustration, no doubt, to Bill Winters, the CEO of Standard Chartered. Good to see you, Bill-,
BW: Nice to be here, Geoff.
GC: Thanks very much for coming in. Look, let's just leave the bank to one side for a moment, and just ask you about the bigger picture, to start off with. Just give us your sense of what this growth slowdown story in China, and the IMF warning, potentially means for returns in the financial services sector.
BW: Yeah, that's something we're thinking a lot about, as you'd imagine. I think the first thing we have to note is, we've had a very long expansion, and-, without a-, without a material setback, and that's-, that's something that we-, we all face, we know that there's gonna be a downturn, of some description, at some time. Whether it's right now or not, I'm not so sure, but, in any case, there's-, there's-, there's some concern out there. And the second, we also, quite obviously, know that there are some-, some geopolitical tensions, that-, that could have a real economic impact, most obviously, the-, the China/US trade frictions. And, for the time being, we're watching that, day to day, we see, one day, it sounds a little bit better, another day, it sounds a little bit worse, no, but that definitely impacts sentiment. So, independent of-, of the-, the-, the impact-, the direct impact of the actions that have already been taken, which is pretty limited, as a-, as a matter of fact, the sentiment has definitely downshifted, and it's downshifted in the US, it's downshifted in China, and we're seeing that, in-, in the economic growth figures that come by, and we're looking-, and we're seeing that clearly in the-, in the forward indicators.
GC: We saw, at the end of 2018, risk-takers wrung out of the markets-,
BW: Mm.
GC: The elevation in volatility was extraordinary. Do you think that this is gonna be a feature of the rest of this year? How do you feel it's gonna play, for capital markets?
BW: I think it's gonna be very bumpy, uh, because the-, the-, the course of travel isn't so clear. It's, uh-, it's not very clear politically, and, you know, there's the obvious issues that are out there, in terms of-, of trade wars, and Brexit, etc., where the outcome just isn't clear to the market, and the market is reacting, day to day, to the messages that come through, and I think it's gonna be bumpy because the economy is in some sort of a transition, right? There-, there has been a-, a-, a downshift in global growth, uh, the US-, uh, strong US growth has-, has propped up the-, the global figures. If that gets weak, for whatever reason, higher interest rates, or-, or-, or otherwise, then-, then I think we'll-, we'll be in for a bit of a bumpy ride. It doesn't mean we're in for a negative ride, I-, I think we could come out of this just fine, a period of consolidation, after the-, the very strong run that the markets have had, can be a good and healthy thing, so I'm not-, I'm-, I'm not negative on the markets, but I think we should be prepared for some volatility.
GC: Are there any specific vulnerabilities that you're focused on at this point? I mean, we-, we came out of the GFC, the establishment of the FSC, the stability board-,
BW: Yeah-,
GC: That was meant to lay out-,
BW: Yeah.
GC: A path, to make the system much more resilient.
BW: Yeah.
GC: And yet it couldn't anticipate Brexit, and it couldn't anticipate protectionism, and the trade war we're now witnessing. Where do you think potential vulnerabilities may be?
BW: Well, first of all, I think the financial system, certainly the banking system, is extremely strong, I mean, vastly better capitalised than we were, pre the global financial crisis, and-, and much more liquid, with-, with much more robust risk modelling, and-, and things of that nature, where models are still being used at all. So, I-, I think the financial-, the banking system's quite strong. We were all concerned about the-, the-, the growth of a shadow banking system, in particular in China, but I think the Chinese took some very deliberate steps, a year ago, two years ago, to-, to deal with that potential bubble, that's not so concerning anymore. What we have to watch is the outright increase in debt, in particular corporate debt, but also in some emerging markets. The-, the-, the-, the debt to GDP ratios, across Africa, have moved from 25% on average to 50% on average, so it's still not very high, compared to the 100 to 120% that we're seeing in some developed countries, but that's-, that's a little bit dangerous for Africa. So, not too late to do something about it, but when we're talking about where the vulnerabilities are, as things get volatile, these are the kinds of things that we've got to keep a close eye on.
GC: Given Standard Chartered's geographical spread and positioning, is the confirmation of much weaker growth now for China a personal disappointment for you, in terms of how the bank can perform around these markets?
BW: No, no, not-, not at all, and, you know, Chinese growth, in that-, in that 6, 6.5% range, is still very strong, and we-, you've got to remember, this is the second biggest economy in the world, and you can't grow exponentially, when you've become that big, so of course the growth is going to moderate, and it's certainly been weighed on, on the margin, by some policy actions in China, so to-, to clean up the shadow banking system, for example, and through a refocusing of the investment dollars, certainly over much of 2018, away from the-, the state-owned infrastructure sectors, a little bit more in to building a service and-, and consumer economy, that obviously went in to reverse a little bit towards the end of the year, but, no, we're not-, we're not discouraged at all, the-, over half of global growth, over the next five years, is still likely to come from the emerging Asian markets, that's-, that's the engine-, that's the growth engine for the world, and it's critical that we get that right, but not-, not discouraged by what we've seen in China so far.
GC: I read, in a-, in a-, in a particular pink paper, that Temasek, your major shareholder, is unhappy about the pace with which you're cutting costs and reconfiguring the structure of the bank. Can I believe what I read in the papers? Is that-,
BW: Well-,
GC: True? Are they on your case?
BW: So, we-, we have-, first of all, Temasek owns 15% of our shares, they've been a very supportive shareholder throughout. We have an extremely active dialogue with all of our large shareholders, of course including Temasek, so I'd be surprised if I read anything in the Financial Times that I hadn't heard, uh, from them directly. And, uh-, and our dialogue is regular and robust. Our share price is not where we want it to be, and our return on capital is not where we want it to be, we have a-, a target to-, to clear a 10% return on equity, return on tangible equity, and we're at about half of that today, so we know we have further to go. That's the bad news. The good news is we were at zero, a few years back, three years back, to be precise, so we're-, we're, sort of, halfway there, on the-, on the return story, uh, but having done the real heavy lifting, in terms of repositioning our bank for growth. So, we've generated good, solid growth in all the areas in which we focused over the past three years, right, in to double digits, in most cases. It's been-, that's about half of our bank. The other half of our bank are-, are-, are things that were either legacy challenges, that we have to work through, or businesses that required some deep restructuring, that weren't going to be fixed, in three short years, and I think that well understood by our shareholders, well understood by our-, by our management and board, and I feel like we're very much on track with our strategy. Now, are we happy that the market hasn't recognised that, and-, and given us a nice premium stock rating? No, no, we're not happy, but we understand that, and we understand that when we-, we come out to refresh our strategy, in about a month's time, that we are going to need to-, to be clear, even more clear than we have been, how we're going to address the-, the challenges that are holding us back from earning a return that is perfectly consistent with the value of our franchise.
GC: I'd love you to give me a preview of the February statement, but I suspect that's not going to happen-,
BW: Mm.
GC: On this occasion, but let me just ask you, do-, do you regret, perhaps, that you weren't more aggressive with the scalpel, taking costs out of the Middle East, and Africa, and Asia, more quickly in your tenureship?
BW: No, not at all. Well, look, our expense base, when I arrived, was 10 billion dollars, we took 3 billion dollars of expenses out, uh, without major dispositions or divestitures of assets, so that's 3 billion of-, of run rate expense, out of a 10 billion expense base, keeping the business intact, uh, so I-, I don't think we either could have or should have, uh, done more than that. Now, we reinvested all of that 3 billion in to productive capacity at our bank, initially a little bit defensively, i.e. getting our-, our systems and controls back up to-, uh, to the-, the position where they need to be, which is leading edge. More recently, we've shifted from-, as we've dealt with the-, the control problems, we've shifted that-, uh, that investment through to, uh, things that are really creating value for our clients, and-, and value for us. So, uh, I think we got it just about right, you know, would I have liked it to have gone faster? Yeah, of course. Would it have been good to have avoided the Chinese devaluation, back in the beginning of 2016? Yeah, it would've been great, if we could've avoided that. Unfortunately, that's not something that we can control, but it did set-, it set us back a bit, but we're still the leading bank, in terms of-, of all cross-border activity in China, cross-border payments, money going in, money going out of the country, uh, the, uh, trade finance, for-, for the Chinese banking system, uh, leading bank in-, in all Belt and Road projects, across the world, I mean, this is-, this is important stuff, that we've managed to plough through, despite the ups and downs in China, over the past three years, because it plays to our key strength across the emerging markets, right? We're-, we're-, we're physically present in every ASEAN country, every South Asian country, every country in the Middle East, and 17 countries in Africa. Right? That is the Belt and Road, and-, and, of course, we've got a big business, throughout Greater China. That-, that connection, that network that we have, has produced fantastic results for us, and will continue to. As we go forward, that will be a larger and larger portion of our bank, and the things that have dragged us down, typically domestic lending to corporations that don't really need us for the things that we're differentiated at, will go down further and further.
GC: Can China actually maximise that opportunity, with a President in the White House currently, who seems to feel that it's his personal objective to check China's expansion, both militarily, strategically and financially?
BW: Well, I-, I don't know if that's specifically the-, the President's objective, I think the objectives have been-,
GC: That's just a reading, based on what he seems to be doing at the moment-,
BW: Yeah, and-,
GC: I don't know-, if you've got another interpretation, you know-,
BW: Well, there-, there-,
GC: I'd be happy to hear.
BW: There's obviously a trade discussion going on, which is critically important, and for this thing to resolve, China will have to make some changes, and every indication is, China's prepared to make some changes, relative to the way that they've operated in the past, uh, and I would hope that that would get the-, the US to the place where-, where, from a US perspective, you can say, yeah, China is a full and-, and fair participant in-, in the market for global trade, and now we can work in a collaborative way. We all know, at the end of the day, China's still gonna be here, and the United States is still gonna be here, and they're either going to coexist, for the betterment of-, of-, of the planet, uh, or they're going to squabble, which would hurt everybody, or-, or worse, which, of course, would be a disaster. And, uh, I-, I do-, I'm an optimist, I believe that rationality prevails, at the end of the day, and I think everybody would like to have a better world for their children than they had for themselves, and the best way to do that is for China and the US to come together constructively and collaboratively.
GC: Since I have you here, can I just ask you, again, it's something I've read in the papers, that some people are not happy with the potential replacement for you, um, of-, of the two candidates that are being talked about-,
BW: I'm not happy with a replacement for me, I don't wanna go anywhere-,
GC: Well-,
BW: I-,
GC: Yeah, I-, I understand that, but, you know, time moves on-,
BW: I know-,
GC: People move on-,
BW: I know, I know-,
GC: And you'll go on to bigger and better things-,
BW: Oh-,
GC: No doubt-,
BW: That's-,
GC: I mean, Mark Carney is heading off soon, there'll be a vacancy at the BoE…
BW: [Laughs].
GC: I could always-,
BW: Okay.
GC: Put your name forward. But-,
BW: Thank you so much.
GC: But you-, you understand the-, the question I'm asking-,
BW: I understand.
GC: I mean, is-, is there any reality to that, at the moment? That-, that internal candidates are not satisfying-,
BW: Right, first of all, we-,
GC: The people that-, that are overseeing the bank?
BW: Yeah, we have some fantastic people, at Standard Chartered, so I-, I would dismiss any notion that we don't have outstanding talent at Standard Chartered, uh, people that could take my job one day, or-, or-, or others, that are-, that are a little bit further away. Uh. We, uh-, we have a very robust succession planning process, led by our Chairman, and the board, it's something that I spend a lot of time on, personally, and part of what I recognise, and I think this is-, any CEO would say the same thing, uh, is that all talent needs to be developed. I need to be developed, and shareholders, happy with me, not happy with me, that-, that'll be their choice, over time, but, uh, I'm still learning, and, uh-, and I'm still developing, and the people who work for me are also learning, and they're learning pretty fast. So, I-, I'm very, very, very optimistic about the future for our company, and, uh, what I also know is that-, that if, for whatever reason, it turns out that we don't have the right person, the perfect person inside-,
GC: Mm.
BW: There's plenty of people outside that would die to come work at Standard Chartered. It's a fantastic franchise.
GC: Mm.
BW: Now, I don't want to give that person a chance, until we've completed our-, our turnaround, and got our share price up to the level that it should be, but of course that's not in my hands either.
GC: No, and that's the-, that's the bizarre thing, isn't it? I mean, I-, I, like you, I think, have a little bit of a frustrated sense, when I look at some of the performance of the banking stocks, and, um, you look at the price to book, and-, and some of these stocks look very attractive, and yet, I don't know whether it's the Brexit overhang-,
BW: Mm.
GC: In the UK, and the listing in the UK, or what it is, at the moment, I don't know whether you have a sense of why people are just reluctant, at the moment, to pledge their capital to banks.
BW: Yeah. No, well, they-, they-, they-, they clearly are-,
GC: Because, I mean, you're not the only one, obviously-,
BW: No, no, no, no. No-,
GC: That's had a difficult phase, over the last few-, few years.
BW: We're not. No, we've had-, well, just really over the past few months, if-, if you-, if you look, uh, look carefully, and that's, uh-, the European banking sector was derated, uh, around the middle of the year of 2018, I think Brexit played a part, I think slower economic growth, in Europe, and in the world, played a part. I think the, uh-, the recognition that-, that we haven't quite bottomed out regulatory certainty yet, so it's-, it's not quite clear, uh, where banks will need to end up, in terms of their-, uh, their capital ratios, uh, that they're carrying. So I think those things have-, together with-, with earnings that are-, that are lagging, right? So, the-, if you look at the return on equity for most European banks, of course there are some exceptions, but most European banks are below the cost of capital. And, uh, that could be because there are too many European banks, it could be because the-, uh, the-, the competitive environment is particularly intense, or because economic growth has been a bit slow, or because there's surplus capacity. Now, as we know, through time, capital markets tend to take care of those things themselves, but in a European banking landscape, where, for various reasons, including regulatory, uh, limitations, banks are-, are unable to merge, so-, so the banking industry hasn't consolidated, the way other industries would, when faced with a structural, uh, destruction of value, through a-, a return lower than cost of capital. That, I don't think, is the issue at Standard Chartered, but-,
GC: Mm.
BW: If we're looking at the European banking system, I think it is, and, interestingly, we've been, sort of, swept in to the-, the European bank, uh, derating, at least to some extent.
GC: I think the other thing that, uh, markets maybe have taken on board, is that interest rates are just not gonna go up as quickly as they previously thought, and that did seem like a good reason-,
BW: Mm.
GC: To go back in to the banking sector. Do you think the Fed is done here? At this point? I mean, what's your read on the rates story?
BW: I don't think the Fed is-, is quite done. I mean, I think, if we look at the-, at the-, at the data, we can see that-, that wage growth is-, is picking up, but inflation is still very subdued. Now, more recently, that's been because of the-, the-, the movement in commodity prices, but, uh, I think, until the inflation story is a little bit clearer, I don't think we can expect to go back to the rate hiking, uh, trajectory that we thought we were in, as recently as six months ago. But, we are still seeing strong wage growth, very strong underlying economic activity, and, uh, I think the Fed has-, has a rate hike or two left in them, before they-, before they call halt.
BW: Mm.
GC: For the last few years. Um. Current view, I mean, obviously we're now waiting to see what happens in this vote next week, and then whether we get an extension or not. You-, are-, are you adjusting, uh, your-, your plans for the February announcement-,
BW: Well-,
GC: Based on what we hear next week?
BW: Look, I think we, and I think every other bank is in the same position, are ready for anything, so-, I mean, the-, the worst case, obviously, would be a-, a-, a hard exit, on March 29th, and if that happens, we'll be ready, uh, and I expect everyone else will be, because I think the-, the Bank of England, and the PRA, and-, uh, and I'm sure their European counterparts have been very focused on making sure the banks are ready for the worst case, not because anybody's forecasting that, or because we want it, but that's what we have to be ready for, we-, we-, the banking system can't fail, uh, to-, to-, to perform its function on March 29th. That said, we have very high hopes that, uh-, that parliament will get its act together, its act is clearly not together, right now, and, uh, reach agreement, ideally, uh, bringing something across party lines, uh, so that we could have, uh, just a-, a glimmer of national unity, at a time of-, of potential national crisis, uh, and in the strongest possible terms, I would urge, uh, the-, the Parliament to work with the government, to come up with a solution that, uh-, that is the best for the country.
GC: Bill, a pleasure catching up with you as always, thanks so much for giving us your time here.
BW: Thank you, Geoff.
GC: Bill Winters, the CEO of Standard Chartered.
ENDS