Focus back to the basics

WILLIE THAM

By CHIRATAS NIVATPUMIN

Willie Tham leans forward, hands steepled in thought as he considers the question.

"No, I can't say I am surprised about the crisis. At the end of the day, it's about morals and virtues. People were out for a fast buck, a quick return,'' said the chief executive of HSBC in Thailand.

"The origins stem fundamentally from people [in the West] spending beyond their means. People in the East did not spend enough, but only produced goods for the West and the resource-rich countries, the oil producers.... It's a triangle.''

Mr Tham shakes his head. "Investors began searching for yields, took on too much leverage. But there is no such thing as a free lunch.''

Foreign banks have been the first casualties of the financial crisis, which was set in train in mid-2007 by the collapse of the sub-prime mortgage market and then exploded full force in September 2008 with the bankruptcy of Wall Street titan Lehman Brothers.

Leading banks around the world have been forced to accept government bailouts to stay alive, while central banks and governments have pumped trillions of dollars into the markets in a bid to keep the wheels of credit moving.

HSBC, one of the world's largest banks, has not been left unscathed by the crisis, although the bank has steadfastly refused capital assistance from the UK government.

But the bank, which marked its 120th anniversary in Thailand this year, has been forced to book billions of dollars in provisions to cover losses from the US housing market. HSBC paid US$15.5 billion in 2003 to buy Household International to establish a presence in the world's largest economy, a deal that in hindsight looks foolhardy considering the sharp losses in the sub-prime mortgage market.

Mr Tham, who took over HSBC's Thai office in 2007 after serving as the bank's chief operating officer in China, said the bank had not been blind to the imbalances in the global market.

"In February 2007, we issued our first profit warning in our 140-year history. We were crucified for it. We were criticised for being conservative, for a return-on-equity below average,'' he said, adding that HSBC was the first bank to issue a warning about the sub-prime mortgage market in early 2007.

"But I think the lesson of the crisis is clearly that you can't have enough capital. And also the importance of liquidity. People had forgotten that liquidity is as important, if not more so, then capital.''

A career banker, Mr Tham decries the financial alchemy that led to the creation of complex instruments such as collateralised debt obligations that few understood but all too many investors were ready to buy.

"What needs to happen is that trust and confidence in the world financial system must be re-established - right now, bankers are lower in the pecking order than lawyers,'' he said.

"We need to address the root causes. Morals and values, fiduciary duty, corporate governance, sustainability. It's not enough to obey the letter of the law, you also have to understand and follow the spirit.''

For HSBC, the next several years will see a strategy of retrenchment, with a renewed focus on the financial basics of balance sheet strength and liquidity.

Executive incentive structures that all too often encouraged risk-taking are another likely casualty of the crisis, particularly as governments and shareholders seek to rein in the hefty pay packets of top international bankers while taxpayers are footing the bill for costly bailouts.

"I think for us, we will be looking back to our roots [in emerging markets],'' said Mr Tham.

The global crisis and Wall Street's meltdown will accelerate the shift in economic power from the US and Europe to Asia, he said.

HSBC's strategy is also predicated on several key trends, including the assumption that emerging markets will continue to outperform developed ones, that world trade will continue to beat global growth and that the elderly will continue to grow as a proportion of populations in Western nations.

Mr Tham said the crisis will also bring added regulatory scrutiny across the world, although he cautioned against an over-reaction.

"We shouldn't throw out the baby with the bathwater. You can't say that securitisation, for instance, is all bad,'' he said. "But unfettered competition is not right. There will be more regulation. Markets are never perfect.''

Mr Tham, who also serves as chairman of the Foreign Banks Association, said bankers themselves will inevitably react to the crisis by demanding higher pricing for risk.

But he said fears that banks will cut off lending altogether, further compounding the recession by starving companies of liquidity, were perhaps overblown.

"There will be up-pricing, and a rethinking of risk. Quality, not quantity will be key,'' Mr Tham said.

"But banking is driven by relationships. At the end of the day, there is no substitute for knowing your customer.''

In fact, HSBC's Thai operation expects to post "its best year ever'', with gains in its global banking, treasury, cash management and custody operations.

Mr Tham made no secret of the bank's ambition to expand on the retail side, although the one-branch restriction imposed by regulators is a major constraint. An expansion in retail space may involve the acquisition of a local bank, assuming the price is right.

"Thailand, with a population of 66 million, can't be ignored. We definitely want to grow in retail, in wealth management,'' he said.

"But even with internet banking or telephone banking, our experience is that you need [branches]. You need to put eyeballs on the customer. We'll look for growth opportunities, for acquisitions, so long as the price is right.''

On the corporate side, HSBC, like other foreign banks, focuses primarily on large multinationals and top-tier local companies rather than small- and medium-sized companies.

But Mr Tham said many Thai companies had the opportunity to expand abroad as they became increasingly linked with the global supply chain.

"[Thailand] has the biggest management chain in Southeast Asia. I see plenty of opportunities to bank these [Thai] companies as they grow,'' he said.

Mr Tham said he was cautiously optimistic for the future, although recovery may well be delayed until 2010 or 2011.

"For now, governments need to spend to limit the recession and stop a depression. Longer term, the structural imbalances need to be addressed. The East needs to spend more, and the West needs to save more,'' he said.

"Thailand as well. Consumer spending and confidence must recover. The country cannot overdepend on exports.''

Mr Tham paused. "And of course, the country needs a strong, stable government. The last thing Thailand needs is a double whammy.''