Small banks must bet on riskier assets - An interview with Mohsin Nathani, Chief Executive, Standard Chartered Bank

In this interview, focused on the overall banking climate in the country, Nathani speaks to BR Research about the challenges lying ahead, particularly for small banks. The high spread environment and high cost of funds, he believes, will keep small banks on their toes, which might favour prospective consolidations. Nathani is optimistic about NPLs and the outlook of the industry in general.
BR Research: What is your outlook on the banking industry?
Mohsin Nathani: Undoubtedly there are challenges in the industry but those are more linked with the state of the economy; the industry on its own is very well regulated.
There are silver linings across different sectors despite the prevailing challenges. If you look at the latter half of 2009, the outlook was far more challenging than it is today. There are large pockets in the industry which are showing good signs of recovery as well.
Ensuring profitability, finding good asset growth and growing NPLs are some of the challenges for the banking industry, but on the whole the industry is still doing quite well.
One more thing in the context of the industry is that we have seen and we will probably continue to see that some of the smaller banks will be looking more towards consolidation. That applies more to the local banks than the foreign ones.
BRR: How successful have the mergers and consolidations been?
MN: Mergers and consolidations are never that easy or successful anywhere in the world. Nevertheless, the journey has started. There will be challenges but that's the way the industry will move ahead.
BRR: How was that experience with the Union Bank?
MN: Union Bank predates me significantly; I was not around here then. But I think it was a pretty good move as it gave us the required scale to operate efficiently and deliver on improved customer proposition. So, it was a very important strategic move. It gave Standard Chartered a great positioning in the local Industry.
BRR: How did Standard Chartered cope up with the cultural difference between the two banks after the acquisition?
MN: People have unrealistic expectations with mergers; they expect everything to be on track without any differences in just six months. That does not happen anywhere in the world. I have seen many international mergers; a merger needs lot of hard work and time as there are lot of challenges.
In our case, the post-merger challenges were exacerbated by the fact that the economy took a nosedive; valuations were high, but markets came down. When you go for a merger of banks you don't take a two-year or three-year timeline, you look at much longer periods.
Union Bank gave us a lot of synergies and products - most of which we wanted. I am not saying we did not have a fair share of challenges, but those challenges were expected like in any merger.
BRR: Do you think NPLs have peaked and are now coming down?
MN: I am a bit more optimistic about the NPLs than some of the people I have talked to. I see enough silver linings in the industry.
After the economy took a U-turn, interest rates moved upwards, all the major banks absorbed the write-offs rapidly in the last 3-4 years. So, the rate of increase in NPLs might slow down from now on.
Even on the corporate side and the SME side, there have been challenges because of the state of the economy. Having said that I don't think they are going to be significantly higher than what we have seen in the recent years.
But at the same time, they won't be declining significantly because there is the flood situation, and the resultant slower economic growth. I believe NPLs will be there but I don't see a significant rise.
BRR: When do you see that turnaround happening?
MN: It again depends on the state of the economy, the disposable income and the interest rates. Back in 2007 people used to get car loans at 7~8 percent; today the interest rate is 20 -26 percent. It's no rocket science that times are tough, so we have to be realistic.
BRR: Any plans to be more aggressive in the SME segment within the retail sector?
MN: We have been focusing on the SME sector and will continue to do so.
BRR: Do you plan to venture into m-banking?
MN: There is nothing specific at this point in time. Though, it is not something that we rule out, but there is nothing at present.
BRR: Do you plan to expand your branch network?
MN: I think we have a good branch footprint at this stage. We want to be where customers want us and where we see opportunities.
BRR: SCB's operational effeciency indicators appear to be on the higher side. Your view on this?
MN: We have made significant investment in technology platforms, infrastructure improvement and capacity enhancement which results in higher depreciation charges. Those expenses will definitely come down with the passage of time.
BRR: Banking spreads are generally high in Pakistan. Why is that?
MN: It is obvious that the cost of funds will be high for smaller banks and the spread will be lower for them. The bigger banks have no motivation to keep the lending rate low. We all pretty much lend at similar prices. But the small banks may struggle to lend at that rate, so they have to go for the high yielding riskier assets.
The spread difference between the big and small banks is a scale function. Nobody is kicking anybody out.
Our regulatory environment today is a very supportive one, so anybody who wants can go and increase the size. This is what market competition is.
BRR: What is your concentration on the agri business?
MN: We have a very low presence in the agri sector. We do lend to bigger companies that are associated with agriculture, such as fertilizers, but not directly to small farmers.
BRR: How is the consumer segment progressing?
MN: Our strategy remains unchanged. Our overarching business opportunity is growing market share in chosen products and customer segments.
There has been momentum in deposit mobilisation. This is testimony of the strength of the Standard Chartered brand and our expanded geographical footprint.
BRR: What is your share in the remittances market?
MN: Our share is moderate, the simple reason being larger presence of the local banks spread well across the country, more importantly in the rural areas.
BRR: There seems to be huge potential in corporate farming in Pakistan? Do you think that local and foreign banks will go in?
MN: Yes, the potential very much looks there. But I think it will take time for the foreign banks to enter this area, because of the network and the limited presence in the rural areas.
Profile: Mohsin Nathani
Nathani, the Chief Executive of Standard Chartered Bank (SCB) Pakistan, is a seasoned corporate banker with over 20 years of local and international banking experience. He was the Country Head and Managing Director of Barclays Bank Pakistan prior to joining SCB. An MBA from Institute of Business Administration, Karachi, Nathani's experience spreads across corporate banking, fixed income markets and Islamic Banking.