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Mervyn Davies, the CEO of Standard Chartered Bank, is a keen soccer player who serves on the board of London's famed Tottenham Hotspur soccer club. He also regularly runs in one or two of the four international marathons that his bank sponsors every year. But Davies, 52, is best at the sport of dealmaking. His latest triumph was to beat out archrival HSBC Holdings PLC (HBC
) for one of the biggest banking prizes in Asia, Korea First Bank, which Standard Chartered bought from private investors in early January for a hefty $3.3 billion.
The Korea First Bank deal follows the $366 million purchase of Indonesia's Bank Permata in October through a joint venture. The deals transform StanChart, as it is known, from an also-ran in Asian banking into a challenger to Citigroup and HSBC, the biggest foreign banks in the region. "These acquisitions will help us lead the way in Asia," says Davies.WHERE'S THE RESPECT?
Since late 1999, StanChart has spent $7 billion buying Asian banking assets, including $1.3 billion for India's Grindlays Bank, $1.33 billion to buy the retail and credit-card assets of JPMorgan Chase & Co. (JPM
) in Hong Kong, and $320 million for Thailand's Nakornthon Bank. Already well entrenched in Hong Kong, its traditional home base, the bank last year added a stake in a small Hong Kong subprime lender, PrimeCredit Ltd. StanChart is now the biggest foreign player in India, Thailand, and Indonesia. It is also Asia's top foreign mortgage lender and the region's No. 2 player in credit cards. It runs a close third in Asian deposits behind its two giant rivals. "Clearly, they now have a formidable footprint and scale in Asia," says Bonnie Lai, an analyst at brokerage Core Pacific-Yamaichi in Hong Kong.
Still, StanChart has a hard time getting any respect. Founded in 1853 as Chartered Bank, with its first branches in Bombay and Shanghai, StanChart is one of Asia's oldest colonial banks. It is headquartered in London, but does no business in Europe. With big holdings in Asia, Africa, and the Middle East, StanChart has long sold itself as a bank for the world's emerging markets. But its exposure to those markets during the financial turmoil of the 1970s and 1980s took it from crisis to crisis. It was finally rescued by Malaysian tycoon Khoo Teck Puat in 1986. The Khoo family today owns a controlling 12.5%. With the purchase of KFB, StanChart will have 900 branches in 50 countries and over $200 billion in assets. Analysts expect StanChart to post $1.35 billion in net profits for 2004 and $1.65 billion in post-merger earnings this year.
The StanChart board picked Davies, a onetime Citibanker, as CEO three years ago. He was head of StanChart's Hong Kong operations, and stepped up to the top job abruptly after former Chairman Sir Patrick Gillam and CEO Rana Talwar openly disagreed on strategy, and Talwar resigned. Davies' first task was nurturing the bank through a period when its key market, Hong Kong, was in a slump. Now, a year after Hong Kong's recovery, StanChart is on the march. "We have clearly focused on delivering better returns," says Davies. The 53-year-old Welshman has identified four growth areas for StanChart over the next three years -- China, Korea, India, and South Africa.
Davies has no plans to change the traditional focus of the bank. In Asia, retail banking, and especially mortgages, represents just over 60% of StanChart's business; the rest is corporate and trade finance. Outside Asia, particularly in the Middle East and Africa, the bulk of StanChart's business is corporate banking, trade finance, and cash management. StanChart's corporate customers, in sharp contrast to Citigroup, are mostly small and medium-size companies.
Yet to its detractors, StanChart is still an unfocused hodgepodge of franchises around the world without a clear strategy. Despite its rich history in Asia, the bank, observers say, is trying to find its niche in a region where the financial-services business is becoming fiercely competitive. "StanChart has been fighting way above its weight against the likes of giant Citigroup -- but that also means it faces huge challenges ahead since it doesn't have similar resources," says Alistair Scarff, regional bank analyst at Merrill Lynch (Asia Pacific) Ltd. (MER
) in Hong Kong.
For now, StanChart's focus is on the crucial process of integrating Korea First Bank into its Asian network. KFB will account for 22% of the enlarged StanChart's asset base and 20% of its deposit base. "KFB is a great franchise where we believe we can add a lot of value," says Davies. The bank was especially attractive because 31% of its loans are mortgages, one of StanChart's specialties. Davies' plan is to use KFB and StanChart operations elsewhere in Asia to finance Korean corporate expansion. First, however, they must get costs down. Although Citibank Korea (formerly Koram) has more assets than KFB, the smaller KFB has twice as many branches and double the staff. But cutting back in Korea, with its strict labor laws, won't be easy. The U.S.'s Newbridge Capital, which sold KFB to StanChart, didn't even try, though it is credited with streamlining operations and improving profits. "Turning KFB into a good franchise and delivering the fairly high levels of profitability that it has promised isn't going to be easy," says Richard Staite, analyst for French investment bank SG Securities in London.PAYING TOP DOLLAR
Indeed, there are some who think the KFB purchase for $3.3 billion was just StanChart's latest bad deal. HSBC walked away after bidding $2.7 billion. "StanChart doesn't exactly have a great track record with acquisitions," says Simon Maughan, an analyst at Dresdner Kleinwort Wasserstein in London. Five years ago, StanChart paid a high price for the Chase card franchise in Hong Kong just as the Hong Kong economy was sliding into recession, Maughan notes. It also paid dearly for Grindlays -- though as a result of the purchase StanChart gained new branches in South Asia and the Middle East and is now expanding rapidly along with the region.
CEO Davies responds that StanChart has "not hesitated to walk away from deals" when it thought they were too pricey, but that it is determined to expand its franchise in Asia, even at a high cost. One obvious target is China. To broaden its presence there, the bank recently bought a 20% stake in a new bank, Bohai Bank, to be started in the next few months by the city of Tianjin. StanChart is also set to boost its own eight branches in China to 20 by 2008 as the country opens to outside financial investment.
Even as Standard Chartered looks for new acquisition targets, it continues to be seen as merger bait itself. "The jury is still out on whether they will be around in 10 years or whether they will be gobbled up by some giant," says Nic Clarke, London-based analyst for brokerage Charles Stanley & Co. Several predators have been mentioned, including JPMorgan Chase and Bank of America Corp. (BAC
). Some, however, see the KFB purchase as something of a poison pill. "If there were any predators they would want to step back a bit," says Dresdner's Maughan.
For his part, Davies brushes aside questions of the bank's independence. "We believe we can grow this franchise organically and improve returns," he says. But it will be a slow and steady march: "This isn't a sprint, it's a marathon." Just what Davies is good at. By Assif Shameen in Singapore