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Mon 1 Jan 2007 12:00 AM

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Emerging focus

Standard Chartered Bank has a long history of working in the Middle East and emerging markets. MONEY met with Christos Papadopoulos, the bank's global head of financial institutions, to discover why 90% of its profits are generated from those regions.

“People now seem to understand that what goes up will come down”

When Christos Papadopoulos was appointed as global head of financial institutions for Standard Chartered Bank (SCB) in July of last year he quickly started eyeing Dubai as one of the finance house’s major expansion markets.

“I am talking double digit plus growth for Dubai in the next few years. We want to massively expand not only banking, but also the investor and intermediary sectors”, he boasts. And, Papadopoulos’ ambitions do not seem too far-fetched, particularly as the financial sector is becoming increasingly mature and attracting a wider range of banks and private institutions. Consequently, the banks then look for a partner that can offer them global investment options with a high return on interest (ROI) while being hedged effectively.

Papadopoulos, a Cypriot with an accounting degree from the London School of Economics, seems easy-going, dressed smart casually in a pink-striped shirt, loafers and blue trousers. But, although he could be easily pictured having dinner in a trendy Greek restaurant – rather than heading a global board of high-ranking bankers – he proves to be the true professional you would expect him to be throughout our meeting.

“Liquidity pools in the region are now rising rapidly in both size and sophistication,” he explains. “Arab investors are therefore increasingly diversifying their portfolios and we can see a big shift towards the Asian and Middle Eastern markets. Also many investors are now interested in alternatives such as real estate, private equity or hedge funds.”

SCB is one of the world’s largest and most established financial institutions with a large presence in the UAE and the Middle East and was recently the focus of a US$1bn (AED 3.65bn) investment by Dubai Holding’s private equity arm Istithmar giving it a 2.7% stake in the 150-year old financial institution. One of the services the bank offers is balance-sheet management, where it supports clients with their investment portfolio structure. “We help to expand or limit the institution’s exposure to certain sectors, we buy or sell out or create assets,” says Papadopoulos.

Arab investors, he argues, are used to very high investment returns and tend to be more risk-taking than European investors, for example.” The recent stock market correction, however, brought a change in attitude”, he observes. “People now seem to understand that what goes up will come down. Investors have started to be interested in products that they should have always been interested in, such as capital protected investments that offer very decent returns but with a lower risk potential,” he adds.

Market speciality

SCB, which specializes in emerging markets, generates more than 90% of its profits from its Middle Eastern, Asian and African operations. “The reason why we can operate in those volatile areas is that we have a longterm commitment and great market knowledge of the areas we operate in.

If you are in a market long-term the fundamentals will eventually become dominant, regardless of temporary instabilities.

Yet sometimes we are too short-sighted to see when the longterm comes in,” explains Papadopoulos.

“Short-sightedness”, however, does not seem to be a problem for Papadopoulos.

He is a rational strategist who always looks at the bigger picture. “After each event such as a governmental coup or a natural catastrophe there is a certain lifespan until the market recovers. Although there is no formula to distinguish the length of this time period it will happen eventually.

“As opposed to so-called ‘suitcase bankers’ that just pack up their stuff and leave when a crisis occurs we have the size and liquidity to support our clients throughout these difficult times,” Papadopoulos says. In general, he believes that it is difficult to draw an exact correlation between instability and prosperity. “If, for example, a bigger disruption happens in Iran, it will have a negative effect on Dubai and it could create a temporary economic slowdown. On the other hand, political insecurity also causes regional investors to put their money into assets in a safe place such as the UAE, which logically boosts markets,” he notes.

Papadopoulos underlines that micro- economic factors often influence financial markets more than political instabilities, which therefore short-time events are normally less damaging than long-term economic mismanagement. “A military coup in Thailand is by far less devastating for the local economy than, for example, the government in Zimbabwe,” he observes.

A more realistic threat to Dubai’s prosperity, Papadopoulos argues, could be a change in investor sentiment, which could potentially be triggered by a possible real estate market correction – an issue many people fear could become a reality. “In Dubai we see more and more financial institutions opening up, and investor appetite is strong, which makes you believe that people have confidence that things will work out. But, we do expect a real estate market correction in the next 18 months, and although there are many end-users now in the market it is still very much sentiment driven, [just] like the stock market,” he explains.

Papadopoulos feels that Dubai’s property market will collapse like many other over-valued ones before, and it could take a long time for the market to bounce back.

“Once properties go down, by let’s say 30 to 40%, it will affect investors and they might shift to other markets.

A similar scenario happened in the UK, which took 10 to 12 years to recover from the real estate crash,” he says.

The stock market will mature eventually, he reasons. “The investor base is not mature, but will grow to become more sophisticated. Many people who have been burned won’t come back that easily, but once the property market undergoes a correction phase investors will take a fresh look at other alternatives such as equity,” he predicts.

Product knowledge

Papadopoulos says that SCB has always been a bank based on emerging markets, and that it has an old history with most of those regions.

“We are usually the number one or two largest foreign bank in the countries we operate in. Many institutions want to profit from the high returns of the investments in these markets, but you can only succeed there when you have a long history with them. You need to fully understand your clients and the local market to develop a wider strategy,” he adds.

Many of Standard Chartered’s clients are local banks that lend heavily and therefore need to hedge their risk. “First we evaluate what our clients need, we take a close look at the trend that drives their needs and the market they operates in. We see if these trends are global, regional, local or industry specific. We then get a clear understanding of how the world markets are operating, and how this affects our clients, so we can offer solutions and not only products,” Papadopoulos says.

Papadopoulos says that when the bank gets a holistic view on an organization it can either “create depth capital” or balance a clients’ capital by supporting to invest in another alternative such as real estate. On a global scale, he sees Brazil, Russia, India and China as the most promising markets. The regions of these countries include other markets such as Dubai, Qatar, Saudi Arabia and Kuwait, but it is “hard to leave anyone out”, he comments. “Dubai has probably most successfully positioned itself as the financial gateway to the Gulf and the Middle East. Qatar is trying to catch up, but the gap is now quite wide with Dubai clearly ahead of the other Gulf States. Dubai has managed to heavily expand in the key sectors such as transport, banking and telecommunications, just like Singapore did in the past. And today Singapore is comparing itself to Dubai, not the other way around, which obviously points to the big success of the emirate,” he points out.

The model Dubai – a mini state with an open market economy in the midst of a troubled region – becomes more and more appealing to other heads of states, he says. “The Georgian president said recently that he wanted to create an investment haven like Dubai in his country, so Russian and other former Soviet Union nation funds can flow there. These so-called security investments are also very common in the United Arab Emirates.”

Evolving landscape

SCB has come a long way in the Middle East. The bank opened up in Bahrain in the 1920s and, according to Papadopoulos, has contributed heavily to the prosperity of the region. “Until now we have worked closely with the central banks and regulators, and we are part of the financial institutions committee that offers solutions for the region.”

The one missing component in the region’s banking community is a Middle Eastern commercial banks association that is able to discuss current industry issues and market challenges, notes Papadopoulos. “We find this [type of discussion forum] in other regions of the world that have a much less sophisticated banking system, so why does the Arab [banking] world not have one?”, he asks.

“Especially issues like currency pegs, interest rates and latest financial developments should be discussed interregionally.”

A significant concern for Papadopoulos is the weakening of the US dollar and its attachment to most gulf currencies. “The dollar will eventually collapse. Central banks are converting their assets, and there might be a change in commodity and funds that are now priced in dollars, among other reasons,” he predicts. “If oil was not priced in the dollar anymore, that would create a huge devaluation.

Countries should now reconsider their options if they want to remain pegged to the dollar,” he says. “The dollar is not oversold yet, however, and a very week dollar is in nobody’s interest,” he adds.

Aggressive positioning

Standard Chartered is notorious for buying other banks and is alleged to have purchased a 40% stake in the Riyadh-based Saudi Hollandi Bank from Dutch group ABN Amro, with its stake worth around US$1.07bn (AED 3.9bn) against the bank’s current share price. “We are definitely very interested in the Saudi market and to expand our presence there. But I do not want to comment on any specific institution,” Papadopoulos says cagily.

Last year the bank bought the entire Korea First Bank for US$3.3bn (AED 12bn) - making the Korea stake 20% of the total bank. And this year SCB bought further shares in banks in Taiwan, Pakistan and Indonesia.

In Dubai, Standard Chartered was the first bank to receive a commercial banking license to operate inside the Dubai International Financial Centre (DIFC) when it opened in September 2004, and one year later became the clearing bank for the Dubai International Financial Exchange (DIFX).

“We have significant plans for the rest of the region and want to continue to be actively involved with its growth,” Papadopoulos affirms.

The future of financial institutions banking lies in portfolio diversification, he believes. “Investors are less and less willing to take significant risks. They are asking for even more widely spread portfolios in diverse asset categories...Often investors want a more UAE, China or India-based focus, so we cater according to their demand with products such as loans, real estate, residential property mortgages or the trading of assets.”

With globalization spreading to the most remote areas of the world, organizations such as SCB are likely to have much more to explore and Papadopoulos will surely be a busy man for many years to come.

A year in the life of SCB

3 November 2006:

Standard Chartered places an offer for Hsinchu International Bank. A month-long tender offer for Hsinchu shares closes on 31 October in a deal that values Hsinchu’s entire issued share capital at US$1.2bn (AED 4.4bn). The transaction represents the biggest international investment in Taiwan’s banking history.

5 September 2006:

Together with PT Astra International SCB acquires an additional 50% share in Indonesian Bank Permata on top of the 25.9% already owned. Permata is one of the largest banks in Indonesia with 310 branches, one million customers and assets worth US$3.9bn (AED 14.2bn)

9 August 2006:

SCB Pakistan acquires an 80.86% interest in Union Bank for US$413m (AED 1.5bn)

13 March 2006:

SCB launches a corporate building in the Dubai International Finance Centre (DIFC). SCB is the fi rst bank within the DIC to purchase its own premises.

8 December 2005:

SCB Private Equity Limited (SCPEL), the private equity arm of Standard Chartered Bank, invests US$50m (AED 182m) in the Dongfeng Motor Group (Dongfeng) Hong Kong.

25 October 2005:

SCB opens three more sub-branches in Shanghai, Beijing and Shenzhen respectively - a signifi cant step forward in the bank’s expansion plans in China. 30 June 2005: SCB increases its capital in Nigeria by an additional US$140m to meet the capitalisation requirements of the Central Bank of Nigeria.

15 June 2005:

SCB acquires the commercial banking of American Express Bank Limited in Bangladesh for approximately US$24.5m (AED 89.4m).

10th January 2005:

Standard Chartered buys the Korea First Bank for US$3.3bn (AED 12bn).

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