Inflation is the biggest threat today and central banks have to do a little more to bring it down: Bill Winters

That the financial markets haven’t seen many accidents despite the bond bubble burst is a reflection of the strength of the banking system, though non-banks can be vulnerable, he tells MC Govardhana Rangan, Bodhisatva Ganguli and Joel Rebello. Edited excerpts:

Global economies are witnessing what they hadn’t for decades: recession and inflation. We have three different scenarios playing out in China, Europe and the US. How are you reading it?
I think the biggest threat is inflation and the inability of central banks to actually control inflation. When you just read the headlines, you think that the inflation problem is behind us. Well, it’s not right. I mean, we know the price of oil went up, and the price of oil has come down. The underlying wage growth to me, especially in the US, and the labour shortage are issues. Inflation is going to be a little bit harder to tackle than what the market is thinking. Which means higher interest rates for longer. And that could prompt a recession which would be challenging. Then the obvious geopolitical risks. I was very encouraged by the Bali (G20) handshake. I’ve been encouraged by the moderating voice of people like (Indian Prime Minister Narendra) Modi in this global conflict, particularly around Russia.

What do these rising interest rates mean for banking?
We have had very good earnings for the past year and a half, and we have guided for 5% to 7% growth, apart from interest rates. It’s interesting to read the way the market looks at banks, they’ll talk about the interest rate windfall. Well, it’s a windfall relative to zero, but zero is not normal. And zero interest rates are very hard for banking. We felt that very acutely. So, we’re back to normal. And given the intractability of inflation, it’s hard to see that we’ll go back to zero interest rates, even if we have an economic slowdown. We had quite a severe economic contraction in 2020 into 2021, but still no credit losses. And I think that’s a reflection of, obviously, the government support for sure.

How far higher can the rates go?

We are closer to the peak. I guess we will end up with a terminal (US) Fed rate of 5%. That’s substantially more than where we are today. But obviously, if the data change over the next year, or year and a half than that, maybe we don’t get there. But I’m still of the view that inflation is going to be pretty difficult to bring down. I think central banks have to do a little more. Ideally, you can slow wage growth, because I think that is really the driver at this point. You can’t slow wage growth without slowing the economy. And they’ll keep on that and there’s going to be no relaxation. I should say no tightening up on the fiscal side. The world is still run by populism.

There is some kind of triumphalism in India right now. We just became the fifth largest economy in the world overtaking old colonial powers. Is this triumphalism justified?
Absolutely. Directionally it is justified. I have been coming to India three-four times a year for 35 years and the alignment between the perspective of local business people, small businesses, medium-sized businesses, large businesses, financial institutions, external investors, domestic investors, government and economists has never been this consistent. Earlier, the beginning of every meeting was a little litany of the things that are going badly. Now, the early part of the discussion is, ‘isn’t it going great?’ We stayed fully invested in India for many years consistently building this business. We have also had problems in India through time.

How do you see the India opportunity?
We have a very strong business with internationally-minded Indian corporations and that’s becoming more and more powerful as India reaches out beyond the borders. We have shifted our focus a little bit away from being primarily a lender to a balanced lender and a provider of services. We’ve got an extremely strong business with financial institutions in India, both providing a bridge to the rest of the world, and also bringing international financial institutions in because the international financial institutions are very focused on India now. We have always had a very strong proposition for the more affluent population and that population is obviously growing dramatically.

When it comes to global banks, we see different models. Citi has sold its retail business to be completely wholesale, but DBS has bought a local bank. What is Standard Chartered’s strategy?
We have got a wholesale business, which is structural, our strength is in the wholesale part of our business with our global network the real differentiator. India is an extremely important part of that global network. Whether it’s serving Indians in the diaspora or non-resident Indians who have businesses or operations back home. There’s the global dimension and we are tapping into that quite strongly. While our market share in many individual markets is relatively small, the technology that we can deploy gives us a scale across markets. So, what we lacked in scale in an individual market, we tried to make up for scale across our markets. And we also tried to make up through partnerships.

Your reading is inflation is a problem. The rates have risen too fast and there’s a bond bubble burst. We have seen crypto bubbles burst, and issues like Archegos and Credit Suisse. What’s in store?
I think it is amazing that we haven’t had more accidents. This is the worst year in markets since 1972. It has been horrific in both equity and fixed-income markets. Archegos was just good old-fashioned leverage. FTX was good old-fashioned leverage again. These are just badly managed liquidity portfolios in what may or may not have been good businesses. But these are small things for the global economy. And I think about the massive shadow banking system that existed in China five years ago. No accidents despite a substantial drop in real estate values in China. No systemic banks have even gotten into trouble. Credit Suisse hasn’t needed government support. And so, I think it really speaks to the actions that everyone took after the financial crisis to desensitise the core financial system to financial shocks. So, we all know that the credit cycle is not dead, the credit cycle is still there. And credit cycles are pretty manageable unless it transmits through to the financial system.

What do events like the UK bond market crashing in a matter of a few days and then Blackstone stopping withdrawals in some of its funds show? Is the system fragile?
I think there are pockets of fragility for sure. The Blackstone example is really an interesting one because there is still a reasonably substantial maturity mismatch in the non-bank sector. I think in the banking sector, we are very heavily regulated. Regulation is not the binding constraint for us in terms of our liquidity profile, the binding constraint is our own risk appetite. But just in case we got a bit crazy, regulators would stop that. You don’t have regulation in a private real estate or private credit fund. And I think that Blackstone example, the experience was a really salutary one for the whole private fund business. Interestingly, a $4.5 billion investment came into that Blackstone fund from the California Endowment Fund. The Blackstone fund actually is an excellent investment vehicle, but they were offering short-term liquidity on what are essentially long-term assets. And the story plays over and over again. So, I think that’s the system working actually, rather than not working.

So, you don’t see a crisis lurking in the financial system?
On average, we have two or three financial crises someplace in the world every year and a global financial crisis every nine or 10 years. And then a really bad one once a generation. You get a massive shock with a pandemic and then a further massive shock with wars and the effects of climate change and geopolitical tensions. And there’s almost no impact on the economy because the banking system is rock solid. The average level of bank capital in 2006 was 5.5%. The 14% is the basis now plus another 10% loss-absorbing capital. So, you were 24% capital ratios now relative to what was about 6%.

With the conflicts and regional trade blocks springing up, what’s happening to globalisation?
Globalisation is definitely not dead. It’s just taking on new characteristics. From our perspective, what’s happening is just fabulous. Because the reshoring or nearshoring is going out of China, into markets where we actually have a bigger market share. Some of it is coming into India. Yeah, there are Chinese companies investing in India as well, but some of that is going into Vietnam, Thailand, Malaysia, Indonesia, and parts of the Middle East. And these are markets where we have a very strong presence. So, trade volumes are up. Our cross-border investment volumes are up, the associated currency risk management is up. We do have a front-row seat on this repositioning of supply chains through our trade business, but also through our investment business. Obviously, there are glitches along the way.

The Indian and European regulators are in dispute over inspections of institutions. What’s your view?
Given the very substantial play in the Indian money markets, we are extremely interested in the outcome. We are concerned, but hopeful of a resolution.

Did First Abu Dhabi Bank approach you for a takeover?
No. I was looking at my computer screen. And so our share price jumped 20%, pretty much instantaneously. I got off the call and wanted to know what was going on. Then I saw the Bloomberg story. My take on that is, of course, I have not discussed with First Abu Dhabi Bank and I had no idea about this. The first thing which is quite encouraging to me is that people are beginning to see that there’s real value in Standard Chartered Bank. We’ve got a super clean balance sheet, we’ve got good earnings growth, we are operating in very exciting markets. You can’t create this franchise. The second thing that’s clear is that bank combinations are very complicated and particularly complicated for us because we’re operating in so many different markets, and each regulator has a say on these things. If somebody wants to buy us, be my guest but make sure that you reflect the full value of this franchise.

ESG has been a hot topic. Now Fed chairman Jerome Powell has said he isn’t touching it. Is that the right thing to do?
It’s a tricky area, particularly in the US because it has become political. So, I don’t know what prompted the Fed chairman to make these comments about regulation. But I assume that he’s responding to the noise in the US, which is that the US government or even private companies shouldn’t be focused on sustainability. What’s motivating us to have a very clear and aggressive sustainability strategy? One is that it’s the right thing to do. We operate in all the large markets in Africa, and these are the markets that are going to be destroyed. So, we have a self-interest in protecting the environment.