East to be growth centre for HSBC - An interview with Lloyd Maddock, Chief Executive Officer, HSBC Pakistan

Lloyd Maddock has recently taken the helm of HSBC's operations in Pakistan. He believes demand for credit is expected to revive in the upcoming year and that the global focus of HSBC is on emerging markets. Maddock shared with BR Research developments on the launch of HSBC's Islamic banking operations in Pakistan.
BR Research: Banks play a role in the long-term economic development of countries. Why then are commercial banks focusing on short term and relatively risk free investments, rather than long-term infrastructure projects?
Lloyd Maddock: My observation is that this reflects a lack of infrastructure finance opportunities versus any particular reluctance on the part of the banks. Generally, banks would support long-term infrastructure via syndicated finance or project finance.
Given the requirements for substantial investments in, for example, power and water, I would expect to see generic bank funding being complemented by export credit backed finance and hopefully bond issuances, either conventional or Sukuk. We should expect to see developments in these areas in the near term.
BRR: Companies are largely dependent on bank lending to raise funds because of the under-development of capital markets; what roles can commercial banks play in this regard?
LM: My understanding is that the State Bank and the banking sector do want to progress the development of a corporate bond market, and this will certainly transpire. The benefit to larger corporates is that bond issuance will open their potential funding options to diversified international investors. The rarity value of initial issuances should provide for good investor appetite.
Let's not forget that large markets such as Saudi Arabia only facilitated the introduction of debt capital markets in recent years. Ahead of this, it would certainly be useful for a Pakistan sovereign issue to take place to provide a benchmark against which corporates and their advisors could price risk.
BRR: When do you see a revival in private sector credit demand?
LM: This is a question which not only applies to Pakistan but to the wider region. From 3Q 2008 corporates and banks have actively de-risked (i.e. de-leveraged) balance sheets, and corporates have generally needed to rely more on equity rather than bank finance.
My observation is that the banking sector in Pakistan has fared comparatively better than many other countries, due to prudential governance by the State Bank and, in particular, the robust capital adequacy requirements. For example, we have seen no bank failures in Pakistan, unlike other countries in the emerging and developed world.
The banking sector in Pakistan is liquid, with certain banks maintaining asset to deposit ratios of 50 percent and below. Through the downturn, banks have clearly favoured shorter-term exposures, with the public sector accounting for increased funding. Yields on T-Bills are certainly an attractive asset class currently. However, going forward, banks will need to increase lending to the private sector, in order to maintain revenue trajectories.
It is fair to say that having worked through substantial levels of NPLs, banks will be more judicious in lending, and will favour companies that are well capitalised with sound business models. Such companies should be well placed to avail bank finance, although disclosure requirements in terms of audited financial statements and business forecasts will be enhanced.
The private sector has been justifiably cautious in terms of business expansion, but expansion cannot be put on hold indefinitely. So, in summary, I would be surprised if we did not see some resumption of private sector credit demand over the coming year.
BRR: By the end of the year 2009, HSBC was performing much better compared to its peers in regards to NPLs, what segments has the bank focused on -- fixed investment, working capital etc -- and what are its priorities going forward?
LM: We are a full service bank in Pakistan supporting our corporate client's requirements in trade finance, cash management, treasury and working capital finance. We also have the leading investment banking capabilities of the HSBC Group to call upon, when required. In consumer, our primary focus is upon our global "Premier" and "Advance" propositions, which support the needs of our middle to high income clients both in Pakistan and globally. With HSBC being the world's third largest private bank, we are also active in this sector.
BRR: Your bank's focus is on trade finance business - especially cash management products - but there is significant competition from Standard Chartered and Barclays. What is HSBC doing to distinguish itself?
LM: There are only a very few truly global banks; and with our presence in 76 countries, we have an excellent platform to support an end to end service for our Pakistan based corporates, in whichever markets they trade. Competition is a fact of life in every sector, but we have gained success by building long-term strategic relationships with our clients, backed by the highest level of customer service, product suite and geographical reach.
BRR: Compared to other banks, HSBC's portfolio size is much smaller, restricting lending to a niche clientele, how has that changed in the recent past?
LM: In recent years, we have expanded from two branches to twelve. We consider this to be a satisfactory pan-Pakistan footprint in terms of geographical coverage. Backed by the HSBC Group balance sheet, we face no restrictions on the quantum of credit lines we are able to provide for any given borrower, subject to our usual credit criteria being met. I would add that we are actively in the expansion mode, and looking to increase our asset book in Pakistan.
BRR: Globally, HSBC Amanah is a leader in Islamic Banking. Pakistan presents a potential market in this area and the Islamic banks here have done well recently. Why has HSBC not entered this market?
LM: Currently the Islamic banking sector accounts for approximately 3 percent of the market. We expect this share to double within the next two years. Our plans are well advanced to launch Amanah in Pakistan in both the consumer and commercial sectors, and subject to regulatory approvals, we will launch the Amanah service very shortly.
BRR: HSBC had aggressively launched a consumer portfolio in Pakistan, its been downsized significantly since the international financial crash. What is the bank's view of the consumer market in the country?
LM: That is a fair comment, but equally applicable to the sector as a whole. Currently we are actively marketing our "Premier" and "Advance" propositions, and our consumer business is expanding. Banks cannot rely solely on liability (i.e. deposit) income. I think this speaks of our intentions going forward.
BRR: What is the strategy of HSBC Holdings Plc, where does it plan to drive its growth from?
LM: HSBC maintains a strong growth focus on emerging markets (within which we include the MENA and sub-continent regions) whilst continuing to invest in developed markets. The pendulum of global growth has swung from West to East and this drives our Group strategy.
Lloyd joined HSBC in 1991, and has worked in Europe, North America, Asia and the Middle East, primarily in corporate banking, strategy and credit. Prior to assuming the Country Manager role in Pakistan, Lloyd was the Country Manager in Kuwait. He holds a Bachelor of Engineering degree in Civil and Mining engineering.