Breaking big banks not beneficial: Douglas Flint, Group Chairman, HSBC

In an interview with ET Now, Douglas Flint, Group Chairman, HSBC, talks about the company's strategy in India and outlook of the global economy.

What does India look like to you given the various factors that are playing out at this stage in the world today?

India still looks very exciting. While there are clearly some difficulties emerging from North Africa and the Middle East in terms of geopolitical tensions, the long-term demographics of India, the enormous infrastructure investment that's taking place and that will take place over the next several decades, make India a very exciting economy to invest in.

In the short term though, could the Middle East story and what's happening in Africa turn into quite a snowball that could possibly hurt most of the recovery that we are seeing?

I do not think we should get really nervous. You can certainly paint a dramatic picture, particularly if oil prices were to spike well beyond where they are today. I do think though that there is a coordinated global attention to seek to avoid the most dramatic outcomes that would arise, and you are seeing both within North Africa and the Middle Eastern region actions are being taken by the stronger countries and concerted attention from the major nations of the world to avoid that. So, I am hopeful that that would not be too much of a problem.

Are you convinced by the signals coming out from the United States of the so-called recovery there?

It is very clear that consumer confidence is turning and the economic activity is picking up a bit. However, there is still a bit of a drag from the housing market. State finances, municipal finances and government finances have some consolidation still to do. Unemployment is staying stubbornly high. So, it is a bit of a mixed signal, but the actual economy and consumer confidence within the economy are doing well and that's very powerful for the global economy.

Would you then say in some ways you are factoring in what could be a potential jobless recovery?

One of the greatest challenges that all nations are facing is that while profitability is improving and those in jobs are feeling more secure and better off, it is very difficult to create jobs that the economies would like to create to deliver to those that have been unfortunately put out of work. And everybody now in a globalised world is competing for the same employment opportunities. So, that it is a difficult position for unemployment for the next couple of years.

Does Europe then make for any different picture?

Europe is better than people give it credit for. Yes, there are one or two countries that have got some debt issues to work through, but given the scale of Europe as a whole and the commitment that has been shown to solving this on a collected basis, Europe is well capable of solving it.

Do you think at some stage or the other we will continue to see the whole issue of, say, banking bonuses and regulatory issues, play against the recovery in today's Europe?

One of the positives that is going to come out of this whole aftermath of the financial crisis is a much better understanding of what the role of the financial system is and what the role of banks within the financial system should be. And that will cause a reflection to the social utility banking, what we do and how we benefit society through providing finance and safe haven for savings for both individuals and corporates. There will continue to be proper governance and public inspection over the role of banks, including compensation and structure, and that's inevitable and we have to understand and respect that.

You have come out pretty hard on some of the levies on banks in the UK. Do you think that regulation has gone a step too far and it could then strangle what is being seen as the green shoots of recovery?

I hope the regulation would not strangle the green shoots but it is important that people speak up, be cautious and not go too far. The particular levy that the UK has imposed covers our entire global balance sheet and not just the domestic balance sheet as other nations have done. That kind of creates an additional cost of having a multinational banking group in the United Kingdom. If that's the policy objective, then we need to understand what the implications of that could be. It is an additional cost for our shareholders, which is why we said to the extent that the levy is moderated or removed at some point, and then we would have the money safe to our dividend.

Do you think that the banking sector will have to live with a low interest rate scenario and at the same time be troubled by high cost of funding across the world? Does that look like a recipe towards disaster?

I do not think it is a recipe for disaster. It is quite likely that we will live with a lower interest rate environment than we had expected to a couple of years back. In many respects, that's going to be one of the supports to the economy. The regulatory reform on liquidity is going to put pressure on deposit raising and put the price of deposits up, which will either be reflected in lower returns to shareholders or increased cost of intermediation. At the end of the day, banks are only intermediators. So, we either make less money, which means that society pays through lower returns, or we charge more for our services, which means society pays through higher costs. This system is purely an intermediary.

What is the worst case scenario banks should be prepared for in Europe?

Most realistic worst case is a period of very low credit growth and low interest rates and, therefore, fairly stagnant profits.

Have you kept aside the possibility of further bailouts in Europe?

It is very unlikely that we will see anything of the scale that took place in 2008. I do not think it is right that anyone can say never again could circumstances arise where action has to be taken to resolve a failing institution. A great deal has been done by governments and indeed by banks to ensure that there is a better mechanism to wind down institutions in difficulty at a great deal less cost than we have seen in 2008. The circumstances that were around then have largely played through. So, it is less of a risk today than it was then.

In that respect, do you think BASEL III is a positive step?

We welcome the BASEL III reforms. When you look back, a number of capital ratings were just wrong and the liquidity that people were running with was too low. So, the reforms that are taking place under the umbrella of BASEL III are absolutely directionally right. There is a little bit more to be done on the calibration in a number of areas as we get experienced as to what the impact might be on the real economy. But there had to be reform and the industry had to restructure and that's under way today.

With regard to its timing, could it have a restrictive consequence for the supply of lending?

It could be, but that's why there is a good dialogue going on at the moment between the central banks, governments and the industries to what the implications on credit information might be, and therefore, to use the tools that exist within the framework to moderate that.

Have banks come to terms with the idea, especially in the post slowdown period, that legacy assets have to go and there is no way to let them be around?

It is certainly well through and this sort of structured assets that were created in the mid-2000s will not appear again ever or not for a very long time and never in the volume that it did then.

You have just declared numbers and they look pretty good. You have seen a growth of about 34% in emerging markets. Where do you see this growth figure going toward and how?

A lot of the rebound was mostly about that. But at the end of the day, banks are a reflection of the underlying economies and we see the best growth in emerging markets. We see the best growth in connecting emerging markets to the developed world and we are very well positioned to take advantage of that. So, we think that we can grow in line with the economies that we are serving.

Do you think that some amount of money or interest will suddenly get reduced from emerging markets back into developed markets because there is a recovery visible there?

We are in a very interconnected world. A lot of our growth in the developed world is, in fact, the infrastructure that is being shifted to the developing world. So, all the infrastructure that's going into India and other places in terms of power plants and transportation and energy, a lot of the equipment being manufactured in the West and we are financing a great deal of that. So, credit activity takes place may not be in fact where the ultimate goods are being delivered to and utilized. So, we are more focussed on the connectivity between markets and how we can interpose ourselves to fund those trades.

Where does India fit into that strategy?

India is one of the biggest infrastructure investment platforms over the next 20-30 years. We have got a terrific operation in India. Our profitability this year was the highest we have ever had, recovering of a weak year last year. We are expanding. We are doing very well in insurance, mutual funds and trade finance. Our retail business is turning into profitability. We would love to have more opportunities to do more but what we have got is doing very well.

India always seems to be a relatively small part of the excitement shown by a lot of banks in emerging markets. Is that in many ways restricted by regulation here or do you think it is a complex market, and therefore, it does not expose itself to big numbers?

It is both. Part of the issue is that foreign banks have a limited ability to expand within India under current regulation. We welcome the review that's going on at the moment to see whether there might be ways for foreign banks to play a bigger role and we have been in India since 1865 and we do not feel like a foreign bank.

Do you think the review is somewhat constructive? Are you excited about expanding in India and if so, do you have plans?

We do not have specific plans yet because we are still analysing what the opportunities might be based on the proposals that are being put out for consultation, but we are excited about the direction of travel.

How does inflation dent the story around emerging markets? It is out of control right now. China has made a serious effort towards putting the brakes. India is in the process, interest rates are going to go up. Could that somewhat take away from the growth story?

It could do in the short term, but in the long term, the demographics are such that the emerging markets, particularly India, China and Latin America, have got an enormously powerful investment story. Inflation may be a constraint in the short term and need to sort out clearly political pressures, but in the longer term, the infrastructure growth that's going to be required and indeed the demographics of the nations make these countries very exciting.

Do you buy the idea that there is truly going to be that change of axis, which was being propagated in a big way during the thick of the recession, that the world have now moved towards the East as opposed to being driven by the West?

It is a complex equation. We are excited that there might be some change. I also think that interconnectivity is increasingly important in the developing world, which clearly has an enormous amount of growth opportunity within itself, will progressively create its own international companies on great scale as indeed India already has and as they move outside, they are going to want access to foreign markets and foreign financial systems and so on. Therefore, the opportunity to save the inflows and the outflows from these economies as the developed is really what we are positioning ourselves to do and that's why there may well be opportunities to get more access in a number of countries because it would be a two-way flow eventually.

What's very important for this flow is also the confidence in the banking system to return from West to East and East to West, has that come back?

There is some way to go to get true public confidence. There was understandable anger at some of the things that went on. We have a lot to do to rebuild trust but we have come a long way through the specific circumstances to cause the problems in 2007-08.

Is the government intervention here to stay?

There will be more intrusive regulation and more intrusive supervision, and there is nothing wrong with that.

What is HSBC's take on the whole bonus debate?

We are in a free market. The people in our organisation who get paid the numbers that get public scrutiny are international bankers doing international activity based all over the world whether they are in London, Sao Paulo, Mumbai, Hong Kong, Singapore or New York. There is a market price for these individuals because of the skills they bring and the risks that they manage on behalf of the organisation and their customers. We are in an international world, we may wish we were in a different world but we have got to respond to the world we actually do live in.

There was restructuring in HSBC about five months ago. Where is the bank headed post the leadership change in structure?

We have had a change in leadership, but actually everyone who is in the organisation at the top level has worked together for a large number of years. In every sense it has been a very seamless transition. We are focussed on the future and we are excited about the future and we are hoping that we can build on what was a record year in India last year and be more relevant and more successful in India.

There is a debate on whether banks should remain big banks or break into smaller banks. What is your take on that?

As the base of it whether that would be beneficial, we do not really think so. There is a great deal of evidence that smaller banks did not do any better than bigger banks. Banks that have come through the crisis best are among the most diversified and largest in the world. So, it is an area that does deserve some study, but the evidence is very powerful that being big enough to cope is actually a great strength for financial systems and the economies that host them.

The new financial order is less about euphoria as we have seen last one year, the bounce back was such that possibly led by stories of Wall Street and capital markets in various countries, but has it made it pretty clear that we do have to be a lot more cautious than we have been even in the comeback story of the recession?

One should not get euphoric about a bounce back from what was a very terrible place. I do not think our industry felt euphoric. We felt relieved that we are at the beginning of the end and the acute period was over. But I do think that there is a huge amount to be done within the industry, even for those that were not directly involved in getting support to re-establish societies' trust in the system, rebuild confidence in the banking system and better articulate the social value that banks play within economies.

At the IIF, what is Mr. Flint's big pitch to the Indian regulatory bodies?

How pleased we are to be in India, how much we would like to have the opportunity to be a bigger parts of India's financial future and to talk about the pace direction and structure regulatory reform because there are a variety of views around the world depending on the shape of the financial system the economy and the experience over the last 3 to 4 years and the financial crisis in this imparting views and receiving wisdom that makes coming here a very interesting opportunity for this conference.

Would you say keep up the pace on regulation as you did while things were looking bad for the rest of the world?

It is really important we take the opportunity to reform regulation and supervision and governance to have the best possible chance of avoiding another crisis like we have gone through and having better tools to deal with it should it recur.