Stuart Davis | RBI may cut rates in June, not April

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Mumbai: After a three-year stint as India CEO of The Hongkong and Shanghai Banking Corp. Ltd, Stuart Davis is heading to Hong Kong, the bank’s Asia headquarters, in April. Stuart spoke in an interview about the turnaround of retail business, the bank’s likely acquisition of retail assets of Royal Bank of Scotland Plc (RBS) in the second half of the year, tight liquidity and a reversal in the interest-rate cycle. Edited excerpts:
You came to India in April 2009 when the stock market was down and the economy was reeling under the impact of an unprecedented global credit crunch. How has the assignment been?
Stuart Davis, CEO, HSBC India. Photo: Bloomberg
It has been fascinating. It’s hard to believe that the Sensex then was less than 10,000. The sentiment was quite sombre. We were in the midst of an election and there was a concern that… the election results could be indecisive. As it turned out, there was a convincing win by the Congress and sentiment suddenly turned around. We had a recovery in the capital markets, the loan market opened up and we saw the Sensex rising to 22,000.
And life beyond banking?
It’s quite an adjustment from Sydney where I was before. Certainly, getting used to the traffic was quite something. Now, I am very good at crossing the roads; I have no fear of cars speeding by. But it was relatively easy adjusting. One of the things about Mumbai is that it is a welcoming city. People are very open, asking you to their homes… but most important of all is that I love Indian food. Unfortunately though, I have put on a bit of weight.
We are told dosas are a must for breakfast and gulab jamun for dessert.
Not everyday, but my cook cooks a great dosa. I do love gulab jamun for dessert, which I think explains why I put on those kilos here.
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Stuart Davis, the outgoing chief executive of HSBC in India talks about his experience in the country, the 2009 downturn, and what’s causing India’s economy to slow down .
HSBC’s business also gained weight since you came here. Its 2011 profit was the highest among foreign banks in India.
When I arrived, we were suffering quite badly from unsecured retail lending, where we took some significant losses. From 2004 to 2007, we grew very strongly with open-market sourcing but when we had the slowdown in the second half of 2008, some of those weaknesses in that strategy came out and as a result we had quite significant loan impairments in 2009.
On commercial banking again, we had some customers who suffered from the financial crisis and we had some loan impairments from there as well. The last few years have been a journey. First, we fixed the asset-quality problems and then moved onto the next stage, which is growing our business and achieving our goal of $1 billion pretax profit in 2013.
While the retail business has turned around, the biggest concern now is corporate assets.
What we are seeing in the market is that non-performing advances are increasing for domestic banks but while that’s increasing, it’s coming off a relatively low base. In terms of the size of the market in India, I don’t see that as a huge concern. One factor which I have been watching and was new to me since I came to India was the concept of restructured loans. I found that quite interesting.
When I arrived in 2009, there were a lot of restructured loans. Now we have seen a lot of those loans have become good and that for me was a test of the market. When I talked to the chairmen of public sector banks and asked them what percentage of those restructured loans have become non-performing, generally it was between 15% and 18%. I found that quite surprising because it was a very low number and I found that interesting because it means the concept of restructuring in India has been good. The loans that otherwise would have gone bad have been recovered to the extent of 80% to 85%.
What has it been like for HSBC?
We took our pain in 2009 in both unsecured retail book and commercial assets. In fact, at this point of time our loan impairments are negligible. So, from our perspective, we have been cautious about our lending and ensured that the relationships we have developed with large or small companies are principally ones of national orientation. That is, either they are investing overseas, trading or subsidiaries of multinationals. Today we find that our asset quality is extremely good.
So you are not seeing any strains in corporate balance sheets.
Certainly we are seeing some CRR (credit risk rating) migration. We have seen a negative movement over the last 12 months and certainly in terms of companies we are monitoring it’s a bit higher but nothing more than what you would expect at this stage of the cycle.
Are there instances of corporate borrowers coming and asking for loan restructuring?
We find that our customers, particularly the large ones, plan a long way ahead. They are not coming to us at the last minute and asking for restructuring. We want long-term relationships and we want to be closely involved with their strategy in terms of capital and debt raising to ensure that they can meet any ups and downs in the normal economic cycle.
What’s your exposure to infrastructure, particularly power and airlines?
In terms of infrastructure and power, what we have done is associated ourselves with strong sponsors — promoters and companies who have the ability to be able to withstand any short-term problems in relation to the projects. We do not have the ability to provide long-term rupee funding because we do not have the deposit base for that. So we provide a lot of ECA (export credit agency) financing. For example, if they want to import a turbine for a power plant, we provide funding, usually foreign currency, using Exim (export-import bank) or some other agencies. We have found that it is a good way for us to participate in infrastructure and power sector.
What about airlines?
We don’t have exposure in airlines. For us, it’s an industry where we have had an involvement in different stages of evolution… We saw the stresses a number of years ago. There are some structural changes required in the industry and the participants in the industry. I am confident that they will find their way through it because at the end of the day, there is huge demand for people flying around India and India being a big country, it has to have strong domestic airlines.
What do you think is the main factor behind the slowdown in India — policy paralysis or tight money policy?
There is a danger if you try and find one reason for the slowdown. What invariably happens is that there are a lot of factors which cause a slowdown like the issues in Europe. It has had a big impact on growth in Europe, which will affect exports and also had an impact on European banks who were big lenders to India. They had to curtail their exposure to India. It has also had the challenges in the US where the green shoots we saw two and a half years ago failed to grow into anything significant. A slow-growing US has an impact on the world.
We had these factors affecting India. Probably the other key factors were input costs into industries like oil, coal, commodities and that had a big impact on companies in India because they have not been able to pass on these input costs onto their end users.
The other thing at the moment is unusual. With the slowdown in the US and Europe you would expect oil prices to fall but in fact we had oil prices increase. The increase in oil prices had a huge impact on energy-hungry India, which had to import most of its oil. So there are a lot of factors.
On top of that, demand has been strong in India but supply has not kept pace… Part of that is policy paralysis and part of it is structural issues on land acquisition or getting the different parts of the governments to coordinate to get approvals for projects. That led to high inflation which has had its impact on monetary policy and led to 13 rate hikes.
So you don’t blame the central bank.
No, not at all. I think RBI (Reserve Bank of India) has been quite responsible. You can’t allow inflation to get out of control so it had to adjust policy rates to try and curb inflation. Probably the only criticism I would have is that it had a couple of opportunities to move (the rate up) more significantly. That’s just a question of timing.
Is the time now right for rate cuts?
I think it’s too early to take a call. RBI does not want to start the cuts until it is confident that inflation is under control. Certainly, there are some positive signs but I still think we need a few more data points about inflation and a few more signs around some of the growth numbers in the industry. The next move will definitely be down, it’s just a question of timing. My prediction is that the next one will be in the June policy, not in April.
Are you concerned about the tight liquidity situation?
Certainly, that needs to be watched. The cuts in CRR (cash reserve ratio) have assisted but even with 125 basis points (bps) cuts we would have expected more liquidity than we are seeing in the present time. (One bps is one-hundredth of a percentage point.)
Do you expect a CRR cut in April?
No, I don’t think we would see a CRR cut. After having done 125 bps, I think RBI would be very reluctant to cut CRR rate further, but there are other initiatives like increase open-market operations and pump money. But of course when you are keeping interest rates high to curb inflation and then start pumping liquidity into the system, then you then run the risk of having conflicting policies.
Are you back on the growth path in the retail business?
I guess one of the great things during my three years here is the turnaround in the retail operations from the significant losses in 2009 back to profitability. We now have a retail business which is well placed and growing well so our focus will be to aggressively grow our mortgage book. We want to grow in a measured way our credit cards and personal loans. But we will not do open-market sourcing. We will be focusing on existing customers and corporate employee programmes and other tie-ups. We see that this gives us lots of opportunities to exploit in India. We also have coming down the track the acquisition of RBS’ retail and commercial businesses.
You have been saying that for the past two years. Is it actually going to happen?
I am very confident that we will close the transaction in the second half of the year. There were some complexities around the transaction related to the fact that we are only buying part of RBS’ business whereas most acquisitions were whole operations. But our dialogues have been good with the RBI and I feel more confident than six months ago that we will close the transaction in the second half of the year.
Looking back, would it be correct to say your best memory would be turning around the retail business but that you regret not being able to close the RBS transaction?
There’s been more to our business than the retail business. The turnaround has been satisfying but we have also continued to work on the wholesale banking business. We have got a first-class team. We do a large percentage of the foreign exchange business and interest rate side of the market and are well placed to continue to grow in that segment. On the global banking side, we have continued to engage strongly with our customers. In the first half of last year we moved up in the league tables of M&A (mergers and acquisitions) but unfortunately the market closed in the second half. We have got some great traction with our customers and there is some activity developing in the market, which we are well placed for.
But you have also retrenched people. Globally, 30,000 are to be sacked. What will be the impact on India?
For us in India, like in the whole group, we are trying to de-layer and taking out the bureaucracy in the organization for faster decision making to make it easier for our staff to do business with our customers and customers to do business with us.
Can you give a sense of how many people this will involve?
I won’t give any indications in terms of numbers. But there will be roles that will disappear and reductions in staff but as much as we can, we will look to redeploy the staff.
Let’s talk cricket — you once flew to Nagpur to watch Sachin Tendulkar score a century.
Tendulkar is unique and I was just pleased that I was able to see him score a hundred in that match. I went to see him bat twice at the Sydney Cricket Ground when I was living there but unfortunately both times he went cheaply. There is nothing more exciting than seeing him in full flow.
How do you rate Ricky Ponting?
Pointing is a great cricketer but he will always be second to Tendulkar. Unfortunately, I never had a chance to see Don Bradman bat. I guess Bradman is number one and number two is Tendulkar.
In the next few days, you will hand over charge to successor Stuart Milne. What will be your advice to him?
I would say to him exactly what I say to foreign investors and companies when I meet them in my role here. I tell them that it’s very important to look at India with an Indian lens, not a British or a US lens because if you do you won’t see the opportunities that are here. India has a lot of uniqueness and you just have to accept that as part of what makes you great and frustrating. Some things will take a long time to get done but that’s a part of being here. But the growth opportunities are going to be phenomenal.
My key advice to him will be the growth story in India is just as valid today as it was the first day I arrived here as CEO. While growth may have slowed today, that’s only cyclical. The factors which underpin growth in India over the long term are just as valid as five years ago.
My advice to him is to make sure that we have the operation here in India positioned to take advantage of this growth because I still believe that India will grow at 8% over the next 10 years.

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