The Bank that Never Sold
Plus: Net Interest Margins, Frank, BlackRock
Welcome to another issue of Net Interest, my newsletter on financial sector themes. This week I take a look at Standard Chartered. As a supporter of Liverpool Football Club, it struck me that I know very little about our shirt sponsor, so I thought I’d correct that. Paying subscribers also get access to results commentary after a swathe of US financial companies reported earnings today. To join them and unlock that content, you can sign up here:
In January 1976, non-league football club Kettering Town became the first in British football to have their shirts sponsored. The deal, worth a reported four figure sum, was with local firm Kettering Tyres whose logo was proudly printed onto the front of players’ shirts. Since then, most clubs have recruited sponsors and the money involved has escalated. In 2017, the shirt sleeve even became a source of further sponsorship opportunity, allowing a player to promote more than one brand as he puts in a cross.
Premier League clubs that sit at the top of English football are able to drive especially good deals. More than 1.4 billion people around the world identify as fans of one of these clubs and 3.2 billion watch them on TV over the course of a season. For sponsors, the association enhances their profile enormously.
Yet not all deals work out well for the sponsor. In an echo of the “stadium curse” that strikes US stadium sponsors, shirt sponsors often perform badly once an agreement has been signed. In the 2008/09 football season, no fewer than six of the Premier League’s 20 shirt sponsors fell into deep trouble. They included two of the worst hit companies of the global financial crisis: AIG (Manchester United) and Northern Rock (Newcastle United). Another sponsor, Britannia Building Society (Stoke City) was forced into a rescue merger.
While the rate of failures hasn’t been as bad since, and financial companies have given way to gambling companies as chief sponsors, shades of the curse are still evident. In particular, my own team’s sponsor, Standard Chartered (Liverpool) hit its all-time high stock price within months of signing its sponsorship deal around twelve years ago; its stock is down over 60% since. Worth only £20 billion today, the company trades at a 40% discount to the book value of its assets, making it one of the lowest valued banks in Europe.
Last week, its stock perked up (even as Liverpool floundered against Hollywoodbets-sponsored Brentford). The reason was news that First Abu Dhabi Bank had expressed interest in a takeover. Abu Dhabi institutions are more used to taking over football clubs than banks, so this was something new. It was immediately dismissed and Standard Chartered gave up most of its gains but it shines a light on the bank’s franchise. Is a unique global banking network built up over 160 years really worth so little? Can its value be enhanced by other owners?
We discussed the prospects for global banking in the summer, in Deglobalised Banking. It’s true that banking is becoming less global – according to data from the Bank for International Settlements, foreign bank offices’ share of banking system assets is on a declining trend relative to domestic offices. But if that bolsters the competitive standing of those that remain, it could make Standard Chartered a good catch. It’s a question bankers have pondered for years because this isn’t the first time Standard Chartered has fallen into their sights.
The Chartered Bank of India, Australia and China
Standard Chartered traces its roots back to the height of the British Empire. In order to finance expansion overseas, specialist banks were set up to facilitate trade. One of them, the Chartered Bank of India, Australia and China was founded to serve the markets of … India, Australia and China. The bank ended up not getting a charter for Australia, but succeeded in establishing a foothold in the other two fledgling markets.
Chartered’s model was that of an “exchange bank”. Capital was raised in the City of London and shipped out, often as gold or silver coins in wooden crates, to support currency transactions for British companies across the main ports of the East from Bombay to Shanghai. To mitigate against risk, the bank employed a portfolio approach, opening up over 20 overseas branches. By 1928, Chartered Bank ranked alongside HSBC as one of the largest overseas banks launched out of the UK, focused on trade finance and foreign exchange services.
The growth of Chartered and other overseas banks caught the eye of UK domestic banks. By now, the market at home had consolidated around five main banks. Previously cautious that “there would be something mildly improper about using their UK depositors’ money to fund lending in distant climes,” they began to revise their opinion.
But fortunes turned as the 1930s augured a collapse in international trade. Chartered Bank was additionally shut out of some of its core markets, in particular China, following political upheaval after the end of the Second World War. Retreating to Hong Kong, the bank managed to carve out a profitable niche. It increasingly dealt with local companies, rather than just British agency firms, and grew its loan book. To support its franchise, it later established a network of local retail outlets in order to accumulate local deposits. By the mid 1960s, Chartered Bank was adding branches at a rate of two or three a month. The success of its business in Hong Kong marked out a new future for the bank, no longer dependent on the traditional trade links of the Empire.
By the 1960s, most vestiges of the British Empire had faded. A devaluation of the pound ended its role as a reserve currency and led to the breakup of the sterling system that had underpinned the UK overseas banking model for years. Competition from US banks increased. In response, Chartered Bank merged with Standard Bank of South Africa to create a more global overseas bank with operations across Asia, the Middle East and Africa.
Like Chartered Bank, Standard Bank had been established to facilitate trade flows, in its case to Africa. Its legacy was similar. British Prime Minister John Major, a former employee of Standard Bank, wrote that both “relied for many decades on adventurous young recruits from Britain who were keen to work overseas”. (He worked for Standard Bank in Nigeria.)
For Standard, the diamond industry provided a historic route to good fortune; by the late nineteenth century, it operated almost 100 branches in South Africa, practising an almost central banking role in the country. But it, too, had to adapt to the shifting macro climate. The isolation of South Africa as Apartheid became entrenched prompted Standard to spin off its South Africa business and focus on other markets in Africa, which it consolidated through its acquisition of the Bank of British West Africa.
Before the merger, both banks had been targets of others. Barclays had held a 14% stake in Chartered Bank since 1957, having accumulated a position in Eastern Bank which Chartered acquired. In the late 1950s, international managers at Barclays urged their parent to add to this shareholding in preparation for an ultimate merger between the two firms. Midland (now part of HSBC) was also interested, approaching Chartered in 1963 with the idea of a merger. They were rebuffed, Chartered executives telling them that as well as Barclays, they’d also turned down ANZ (the Australian and New Zealand Bank) and “an American bank”.
Standard Bank similarly attracted interest from an existing shareholder. The bank was partially owned by Chase Manhattan (now part of JPMorgan) which had built up a 14.5% stake following its acquisition of the Bank of British West Africa. The banks were closely aligned – Chase’s African operations were assimilated into Standard’s network – and in early 1969, Chase and two other banks declared an intention to increase their combined stake to 40%. Standard executives weren’t happy – nor was the Bank of England. The bank’s chairman had long harboured an ambition to join with other overseas banks with links to Europe and Asia to create “a network of representation and information on a worldwide scale”. The approach prompted talks between Standard and Chartered.
The combined bank was big. It managed 1,300 branches across the world and had a headcount of almost 29,000 employees. In spite of their shared legacies though, their cultures were quite different. As well as its local Hong Kong business, Chartered remained geared to trade financing. It operated an intimate network of offices linking London to half a dozen of the world’s ports, with several hundred overseas British employees working under similar terms and conditions. In contrast, Standard was built around four decentralised branch networks with employees on contracts unique to their geographical territories, handling commercial and retail banking for largely domestic customers. Chartered employees said of Standard employees: “they were always slightly scruffy, not particularly well-mannered or well-dressed, they were all overweight and unfit, and they all drank a lot of beer and ate the wrong food.”
The market caught on. From a price of 267p when the merger closed, the stock price fell below 200p by April 1970; by the summer, it was down to 160p. Banking mergers are hard!
For many years, no attempt was made to meld the cultures; the banks were run separately. In Hong Kong, the first Standard Chartered banknotes did not appear until 1985. Rather, management wanted to expand further. In 1975, the group’s new chief executive outlined a fresh vision. “I felt that it was time we diversified internationally. The focal point of that strategy was that I wanted to have roughly 25% of the bank’s assets in North America. I wanted to build a base in Europe with 25% roughly there. To balance off, what was half roughly in Africa and half roughly in the East, with a very small presence in the UK.”
Lloyds Goes Hostile
Over the next ten years, Standard Chartered embarked on a global expansion. It bought a bank in the US (Union Bank – now owned by US Bancorp), and tried to buy one in the UK (Royal Bank of Scotland). In 1983, the group reported a profit of £405 million, of which £58 million came from the US, £114 million from South Africa and around £25 million each from Hong Kong and Singapore.
But then disaster hit. The political situation in South Africa took a turn for the worse and the country’s financial condition deteriorated. Standard Chartered was left nursing losses on a $1.4 billion loan book but more than that, the bank’s association with South Africa became deeply damaging. Its stock price fell to a level where it yielded 9.5% and bidders began to circulate.
By 1985, the stock was trading at a 50% discount to asset value. As well as its South Africa exposure, Standard Chartered was also hit by depreciation in the US dollar, which led to a year’s earnings growth being wiped out. Astute to the risk that the bank may become a target, management formed a ‘Defence Committee’ to mobilise its response. One idea was to mount a management buyout, a highly unusual move for a bank; another was to do a deal with a UK domestic bank. Meanwhile, rumours circulated about a potential bid from ANZ or American Express.
What few in the Defence Committee anticipated was a hostile bid. Yet in April 1986, Lloyds launched one – the first hostile takeover bid in Britain’s banking sector. The bank initially offered a price of 785p, valuing Standard Chartered at £1.2 billion, later raising it to 822p.
To Standard Chartered executives, the price looked mean; they reckoned that their global network was worth more and that over time they would release value from it. They recruited a disparate band of new investors – “white knights” – to shore up a large enough shareholding in the group to block the bid. The tactic worked. When votes were counted, only 34% of shareholders accepted the Lloyds bid.
The White Knights agreed that Standard Chartered’s franchise offered large, untapped potential. How to extract it though was a source of conflict. Shipping magnate YK Pao (15%) was primarily interested in the influence that he could exert through the bank, particularly vis-à-vis Hong Kong’s relations with China; Khoo Teck Puat (5%) seemed intent on building a banking empire; Robert Holmes à Court (6%) was focused on profitability and urged disposals, e.g. the US business.
Before these tensions could be resolved, the bank hit another roadblock.
In the early 1980s, Standard Chartered followed other banks into the syndicated lending market, building up a large exposure to Latin American sovereign debt. Not long after the Lloyds bid failed, the market blew up. In the first half of 1987, Standard Chartered was forced to take a $646 million charge for cross-border exposures, sending the group into a loss. By year end, its shareholder funds had declined to £717 million from £1.29 billion a year earlier.
Bidders re-emerged. In November 1988, American Express proposed an offer. It was turned down. Instead, the group changed management, restructured internally (including selling Union Bank for a £90 million gain), refocused on Asia and raised money via a rights issue. A 1989 strategy review took Standard Chartered back to its roots: “Standard Chartered is a multi-domestic bank gathering funds through strong franchises in Africa and Asia, financing foreign trade supported by strong Treasury products, an extensive network and relationships with financial institutions.”
Yet continued slip-ups arose across various of the group’s markets, and it was difficult for the bank to demonstrate its value. The 1997 Asian Crisis led to further introspection. Over the five months between mid-August 1997 and mid-January 1998, the group’s stock price collapsed by 50%. The board discussed the merits of merging with a range of other banks, from DBS of Singapore to Citibank. One name came up: Barclays. And its CEO, Martin Taylor, was keen:
Barclays would have got its business internationalised in the world’s fastest growing markets, which we could see no other easy way of doing at the time. Standard Chartered would have acquired much more muscle to operate on a far grander scale. It would have been, I think, a very interesting organisation … We did a lot of work on it. There was a lot of interest within Barclays and Malcolm [Williamson, CEO of Standard Chartered] was very keen, as I remember it.
Yet again, it didn’t happen, although for years Barclays maintained an interest. Two decades later, in 2018, Barclays held “exploratory conversations” with Standard Chartered, its chairman at the time a former senior executive at Standard Chartered.
Value of the Network
Standard Chartered survived the global financial crisis well. Its downfall came three years later, when it was charged with having violated US sanctions against Iran. According to the Superintendent of New York’s Department of Financial Services, Standard Chartered had “left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity”. The bank suffered large fines and was required to bolster its compliance function. The regulatory costs coincided with a slowdown in the bank’s Asian markets, leading to a further downturn in its fortunes.
In 2015, a new CEO was brought in, Bill Winters, formerly of JPMorgan. He’s still there. He has set out four strategic priorities: continue to grow the network business; continue to grow the affluent wealth management business; return to growth in mass retail; and advance the sustainability agenda. In particular, “the Group's unique and differentiated network continues to be a source of competitive advantage through which we facilitate investment, trade and capital flows for our clients.” In the first half of 2022, ‘network income’ – that is, income booked outside a client’s headquarter country – represented around 55% of commercial banking income and was up 14% on the prior year. Winters is excited about its prospects.
But he’s also open to bidders and has invited prospective buyers to “give it a go and explain to our shareholders why they are better off in combination than they are sticking with us alone – be my guest”. Some day, one such bidder may make it work. But Liverpool FC may very well find a new owner before Standard Chartered does.
Crossing Continents by Duncan Campbell-Smith is a pretty good history of Standard Chartered Bank.
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Khoo Teck Puat’s stake in Standard Chartered would grow to 12%. His business philosophy was “when no one wants it, that’s the time to buy a few million”, and he practised this philosophy with Standard Chartered to become its largest individual shareholder. When he died, his stake was bought by Temasek which remains Standard Chartered’s largest shareholder.