Mike Rees, Chief executive officer, Wholesale Banking
Wholesale Banking had an outstanding year in 2008, with broad-based income growth across client segments, products and markets. This resulted in record operating profits for the business, which reached $3 billion.
Deepening client relationships Standard Chartered partnered with Tata Chemicals on the $1 billion acquisition of US-based General Chemicals, creating the world’s second largest soda-ash producer. The Group’s role as mergers and acquisitions advisor, lead arranger and structuring bank anchored the transaction.
Photo: Tata Chemicals
Operating income rose 43 per cent, supported by a 25 per cent growth in client income and a significant increase in own account income, which more than doubled. Operating profit grew by 28 per cent.
Expenses grew by 34 per cent, a far lower rate than income growth, due to disciplined growth in staff costs, the largest component of the cost base. Variable expenses now account for almost 44 per cent of total staff costs, increasing our flexibility in a challenging economic environment.
Wholesale Banking’s continued strong performance was underpinned by consistent execution against our client-centred strategy with the goal to become a top-three bank to more clients. In 2008, the number of clients generating over $5 million of income per year increased by 85 per cent and those generating over $10 million increased by 88 per cent.
The business delivered strong growth across all client segments over the course of the year. In particular, the Local Corporates segment was a major engine of growth in our core markets and grew by 31 per cent. Cross-border income grew by 33 per cent, reflecting the strength of our network franchise.
The business also delivered strong performances across product segments, with the Transaction Banking, Financial Markets and Corporate Finance businesses delivering strong growth, mainly driven by Trade Finance, Fixed Income and Corporate Advisory respectively.
Cash Management and Trade Finance, which are core to Transaction Banking, grew strongly. Although trade volumes fell globally, trade finance capacity across the industry fell more rapidly, leaving Standard Chartered well positioned to take market share. Net interest margins in Trade Finance increased following several years of compression, and volumes rose more than 40 per cent.
Global Markets, which includes Financial Markets, Corporate Finance and Principal Finance, achieved 60 per cent growth. The Rates business, which deals with interest rate derivatives and is a part of Financial Markets, had an exceptional year. Given high market volatility in interest rates, there was strong demand for hedging products and the number of clients purchasing Rates products increased by 28 per cent.
The Bank’s trading activities are primarily based on leveraging client flows, which increased substantially in 2008 due to greater fluctuations in interest and exchange rates, and we were able to take advantage of the opportunities provided by high market volatility.
The Capital Markets segment performed well, with continued good levels of origination of Asia Pacific syndicated loans and Asian local currency bonds. Standard Chartered is consistently ranked among the top three banks in these markets.
The Principal Finance business, which has had a strong track record of creating value through its investments, was impacted by the depressed equity markets, leading to lower realisations than in 2007. Income from the segment declined 37 per cent and the value of the portfolio was impaired by $171 million, reflecting falling prices of comparable securities in the market. The Bank remains confident in the underlying quality of the portfolio.
As a business, Wholesale Banking continues to be disciplined in managing the relationship between risk weighted assets (RWA) and income growth, with an ongoing focus on origination and distribution of assets. The business experienced good demand for secondary market securities.
To strengthen capabilities and scale in key growth regions, Wholesale Banking has focused on maximising synergies resulting from the integration of American Express Bank and further increasing strategic capabilities with the acquisition in 2009 of JPMorgan Cazenove’s Asian operations.
The business’s tight discipline in managing capital, liquidity and risk is a key enabler of growth and a differentiating competitive advantage. The business remains vigilant to the changing external environment and focused on proactive and robust risk management. In 2008, the Group’s successful embedding of Basel II into the business drove significant efficiency gains in RWA. We have been increasingly looking to use collateral to reduce risk, whilst regularly conducting stress testing to highlight and pre-emptively mitigate any major risks to the business.