Nov. 4 (Bloomberg) -- Standard Chartered Plc, the third- largest bank in the United Kingdom by market value, wants to do business almost exclusively in Asia and emerging markets. Any executive of the lender who dares to depart from that strategy risks the wrath of Mike Rees, the chief executive officer for corporate banking.

“Mike will say, ‘I will bring up a cricket bat or baseball bat and hit you if you go off strategy,’” says Sean Wallace, Standard Chartered’s head of corporate finance.

Rees’s hard-nosed stand is endorsed by Standard Chartered CEO Peter Sands. “People know they get banged on the head if they go offbeat,” he says.

The reason for what Wallace calls the bank’s “maniacal” determination to stick to the Asia-based model is its history of false starts. Beginning in the 1970s, Standard Chartered went through a series of acquisitions and expansions that gave it branches and affiliates on every continent -- and landed it in a sea of red ink in the 1980s. The bank also admitted to several ethical lapses in the 1990s and got hit with disciplinary actions in India and Hong Kong, two of its biggest markets.

“We had a lot of banana skins from our previous years,” says Rees, 53, who has been with the bank since 1990. “I’ve got the scars. The tragedy would be if I let those mistakes happen again.”

Standard Chartered hasn’t made many mistakes lately. In 2009, total return on its shares soared 79 percent as of Nov. 3 -- the second-best performance of Britain’s top five banks after Barclays Plc, and four times the gain of its archrival, London- based HSBC Holdings Plc.

Rising Profits

Total return in the 12 months through Nov. 3 was 78.3 percent, compared with 9.5 percent for the FTSE All-Share Banks Index.

The bank didn’t entirely dodge the global financial upheaval; its stock fell 46 percent in 2008. Yet the bank’s profits were barely affected, rising 20 percent to a record $3.4 billion compared with 2007, on revenue that was up 26 percent to $14 billion.

Profits have quadrupled since 2002, when then-CEO Mervyn Davies made the decision to strengthen the bank’s position in emerging markets. Davies is now U.K. minister for trade and investment.

Unlike half a dozen of its peers, Standard Chartered required no bailout from the British government. Instead, Sands, 47, was an adviser to Prime Minister Gordon Brown on the rescue of Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and other institutions.

‘Lingering Doubt’

Nick Lord, head of Asia banking research at Macquarie Securities Ltd. in Hong Kong, rates the bank a buy. “If Standard Chartered goes through this downturn and performs well, that would be quite a big psychological thing,” Lord says. “There is still a lingering doubt as to whether it has genuinely become a better-quality bank.”

Though headquartered on Basinghall Avenue in the City of London, Standard Chartered is very much an Asian bank, with 71 percent of its 2008 revenue originating in the region, while another 12 percent came from the Middle East and Pakistan and 7 percent from Africa.

The bank’s biggest shareholder, with 18.3 percent of its stock, is Temasek Holdings Pte, Singapore’s state investment company. Temasek officials say they’re passive investors and play no role in management.

Sands says his institution has sailed relatively unscathed through the financial crisis because 10 years of global upheaval have taught a hard lesson: Liquidity is king. The bank’s loan- to-deposits ratio was 74.8 percent at the end of 2008 compared with more than 100 percent for three of its biggest rivals in the U.K.: Barclays Plc, Royal Bank of Scotland and Lloyds.

Borrowing to Lend

That means the other banks were borrowing money to make new loans.

Standard Chartered says it underwrote none of the subprime- mortgage-backed securities that laid low other British and American banks. It had bad-debt losses of $1.3 billion in 2008. RBS wrote down 8.1 billion pounds ($13.3 billion). The U.K. government said yesterday it will inject a further 25.5 billion pounds into RBS, for a total of 45.5 billion pounds, making it the most expensive bank bailout in the world.

Standard Chartered’s focus on emerging markets helped it outperform competitors. Gross domestic product in 26 developing Asian nations -- excluding Japan, South Korea, Singapore and Taiwan -- rose 7.6 percent in 2008, while Africa expanded 5.2 percent and the Middle East, 5.4 percent, according to the most recent data from the International Monetary Fund. That compares with a 0.4 percent expansion in the U.S. and 0.7 percent in the 16 nations that use the euro.

Asian Acquisitions

The bank has bolstered its position in Asia with a string of acquisitions. In 2000, it bought Melbourne-based ANZ Grindlays Bank Ltd., which made it the biggest foreign lender in India, Pakistan, Sri Lanka and Bangladesh. Since then, it has made 25 additional purchases.

In 2005, Standard Chartered paid $3.3 billion for Seoul- based lender Korea First Bank, now SC First Bank Korea Ltd., in its biggest deal ever. Three years later, it bought a 75 percent stake in Mumbai-based brokerage UTI Securities Ltd., and in 2009, it bought Hong Kong-based institutional broker Cazenove Asia Ltd.

Standard Chartered now has 1,600 branches in more than 70 countries.

The bank, whose staff has doubled to 70,000 since 2002, is showing off its new prosperity. In 2007, it moved into a new 200,000-square-foot (18,580-square-meter) glass headquarters in the City of London.

A Corporate Banker

Standard Chartered is a corporate banker, providing companies with cash management, local currency bond and stock issuance and M&A advice. It underwrites initial public offerings and arranges currency and interest-rate hedges. Pretax profits from Standard Chartered’s corporate lending business were $3 billion in 2008, a fourfold increase from 2002.

“The company over the last five years has had huge momentum in its corporate banking division,” says Chris White, who helps manage $98 billion for London-based Threadneedle Asset Management, which owns about 1 percent of Standard Chartered’s shares. “The risk with Standard Chartered from an investor point of view is the sustainability of the growth. The outlook for Asia and emerging markets in 2010 is going to be pretty strong, and that gives me confidence that the growth will be maintained.”

Cross-Border Deals

One positive sign for the bank is the upswing in cross- border mergers and acquisitions. In the first 10 months of 2009, Standard Chartered advised on 20 cross-border deals, most of them in Asia, valued at $8.8 billion, up from $3.3 billion for all of 2008, according to data compiled by Bloomberg. In recent years, it has underwritten a series of transactions between companies in China and Africa. The bank has Nigerians on its staff in China, and Chinese in Nigeria.

One of Standard Chartered’s biggest recent deals was a bust. It represented India’s Bharti Airtel Ltd., the country’s largest mobile-phone operator, in its proposed $23 billion acquisition of 49 percent of Johannesburg-based MTN Group Ltd., Africa’s largest wireless carrier. That transaction collapsed in late September after it failed to win approval from the South African government.

“In a lot of M&A transactions, the fees are based on success, so we won’t get our success fee,” says Vis Shankar, the bank’s chief of client relationships, without specifying the size of the fee. “It has no material impact.”

Tata a Client

One of Standard Chartered’s most important clients is Mumbai-based Tata Group. The bank arranged loans to assist Tata Motors Ltd. in its $2.3 billion purchase of the Jaguar and Land Rover car brands from Ford Motor Co. It raised $11 billion of financing for Tata Group companies from 2004 to 2008.

Standard Chartered has been leaving big footprints in Asia and Africa for 156 years. It was formed in 1969 in a merger between Standard Bank of British South Africa Ltd. and Chartered Bank of India, Australia and China. Chartered Bank’s name referred to the royal charter awarded to the bank’s founders by Queen Victoria in 1853. For 100 years, Chartered made its profits financing the movement of goods between Asia and Europe.

Standard Bank, founded in 1862, was also an empire builder. In the 1870s, it helped finance the development of South Africa’s diamond fields at Kimberley, and in the 1880s it underwrote the gold mines springing up around the new town of Johannesburg.

Leaves South Africa

By 1953, Standard Bank had 600 offices in eastern and southern Africa and expanded in 1965 to countries such as Ghana and Nigeria with the acquisition of the Bank of West Africa.

In 1987, Standard Chartered sold its 39 percent stake in its South African branch to local buyers after Europe and the U.S. imposed economic sanctions on the apartheid regime.

The bank retained its franchises in other African nations. It didn’t obtain a new commercial banking license in South Africa until 2003.

Until recent decades, Standard Chartered was the quintessential colonial bank; its role was to facilitate the shipment of manufactured goods to the U.K.’s far-flung colonies and to finance the movement of raw materials back to Britain.

“It was a gentlemanly club with immense loyalties,” says John Brinsden, 67, who retired in 1999 as resident director for Indochina after 38 years with the bank. “You would never, ever dream of letting the club down.”

The push to modernize and expand to other parts of the world started in the 1970s. From 1972 to 1980, Standard Chartered opened a dozen new branches in the U.K. and started up new banking franchises in Paris, Frankfurt, Milan, Rotterdam, Amsterdam and Antwerp, Belgium.

Hong Kong to Venezuela

In North America, chief executive Peter Graham opened Standard Chartered offices in Chicago, Seattle and Toronto, and in 1979 he bought the Union Bank of California, which gave Standard Chartered dozens of branches in the U.S.’s biggest state and a presence in Brazil and Venezuela.

The aggressive buildout turned into a train wreck with the onset of a global recession in the early 1980s. By 1986, Standard Chartered was in such a weakened state that Lloyds Bank made a hostile bid to take it over for 1.3 billion pounds. Standard Chartered would go on to lose 381 million pounds in 1987.

It was saved only when a group of three businessmen bought a 35 percent stake to fend off Lloyds. One of them was Malaysian-born property tycoon Khoo Teck Puat, who purchased 5 percent of the bank’s shares, which he later increased to 13.4 percent. Khoo died in 2004, and in 2006 his family sold most of the stake to Temasek for about $4 billion.

Scandal in Asia

In 1992, scandal broke when banking regulators charged several employees of Standard Chartered in Mumbai with illegally diverting depositors’ funds to speculate in the stock market. Fines by Indian regulators and provisions for losses cost the bank almost 350 million pounds, a third of its capital.

“If you lose a third of your equity, you’ve got a problem,” says Patrick Gillam, Standard Chartered’s chairman from 1993 to 2003.

Scandal erupted again in 1994, when the Sunday Times of London wrote that executives of Mocatta Group, the bank’s metals-trading arm, had bribed officials in Malaysia and the Philippines in order to win business. The bank, in a statement on July 18, 1994, said there were “discrepancies in expense claims” that “included gifts to individuals in certain countries to facilitate business, a practice contrary to bank rules.”

In 1997, Standard Chartered sold Mocatta to Toronto-based Scotiabank for $26 million.

Executive Turmoil

In 1994, the Hong Kong Securities and Futures Commission found that Standard Chartered’s Asian investment bank had illegally helped to artificially support the price of new shares they had underwritten for six companies from July 1991 to March 1993. The bank admitted the offense, apologized and reorganized its brokerage units.

The commission banned the bank from underwriting IPOs in Hong Kong for nine months. Standard Chartered’s Asian investment banking operations never recovered, and in 2000 the bank closed them down.

The ethics issues and financial losses triggered turmoil in Standard Chartered’s London executive suite. The bank went through three CEOs in three years: Malcolm Williamson was replaced in 1998 by Rana Talwar, who was in turn unseated by Mervyn Davies in 2001. By the time Davies took over, his predecessors had systematically sold off the bank’s holdings in continental Europe and the Americas.

Former CEO Talwar traces Standard Chartered’s troubles over the years to its failure to hire local talent. The Indian-born Citigroup Inc. veteran became the bank’s first non-British CEO when he was appointed in 1998.

Grindlay’s Acquisition

It was Talwar who bought Grindlays in July 2000, a deal that CEO Sands describes as “one of the most successful acquisitions in the bank’s history.” The bank’s revenues and profits were shrinking at the time, and the acquisition gave it momentum that hasn’t stopped since, Talwar says.

Talwar lasted only until 2001, when he was dismissed by the bank’s board. “It was a question of management style and performance, and the board took the view that it wasn’t working,” says former Chairman Gillam, who appointed Talwar along with other non-Britons to important posts in the bank.

Talwar, 61, who went on to head Singapore-based private equity firm Sabre Capital Inc., argues that it was the bank’s London-centric view of the world that caused the damage in the 1980s and 1990s.

‘A Colonial Institution’

“When I joined, it was a colonial institution,” he says. “They had gone from one scandal to another, largely because the decision making was done by a bunch of people sitting in London who had never lived in these countries and didn’t understand the local culture and customers.”

Today, Standard Chartered’s board is made up of 12 Britons and 1 American. By contrast, HSBC’s 21-member board includes three businessmen from Hong Kong and one from India. In September, HSBC announced that CEO Michael Geoghegan will move to Hong Kong from London in 2010 as the bank increases its focus on emerging markets.

CEO Sands says the fact that his board is dominated by Britons is a nonissue. “We have a small board with extensive emerging-markets experience, combined with a senior management team drawn from more than 19 nationalities, including Taiwan, Pakistan, Kenya and Singapore,” he says.

An Oxford Grad

Sands himself was born in Malaysia, a British colony until 1957. His father, who was also born there, ran rubber plantations for the London Asiatic Rubber and Produce Co. His mother was born in India, another former British colonial outpost.

Sands graduated from Brasenose College at the University of Oxford in 1984 and later earned a master’s degree in public administration from Harvard University’s Kennedy School of Government.

He worked as a consultant for McKinsey & Co. in London from 1988 to 2002 and was named a partner in 1996. Starting that year, he worked on a series of projects for Standard Chartered. CEO Davies hired him as finance director in 2002 and picked him as his successor four years later.

The CEO says he at first scoffed at Davies’s job offer: “I remember saying to him, ‘More work, more risk, same money; why would I do that?’ Mervyn is an extraordinarily persuasive person.”

Sands and other current and former executives say Davies attracted top talent with his plan to refocus the bank on emerging markets.

Focus on Asia

“When he became the CEO, the bank gave up any pretense of trying to be a big bank in Europe,” says Kai Nargolwala, a former Standard Chartered board member who’s now CEO of Credit Suisse Asia-Pacific. “He said, ‘We want to focus on Asia, Africa and the Middle East.’ That sounds like a very simple thing, but many organizations don’t have that clarity of focus.”

Under Sands, Standard Chartered has taken advantage of the turmoil in global finance to make some strategic hires -- and reboot its Asian investment banking business. Wallace, 47, hired as head of corporate finance in March 2008, had been chief of global capital markets for Asia Pacific at JPMorgan Chase & Co.Lenny Feder, 40, was taken on in May 2007 after working in Asia and New York for Bear Stearns Cos. for 11 years.

“At Bear, we used to build a product hoping we can sell it,” Feder says as he gives a tour of the trading floor in Singapore, where about 400 currency derivatives, bond and commodity traders work surrounded by multitudes of computer screens. “It’s an ego play. Here we build a product because we’re trying to solve our clients’ needs.”

The bank has 40 such dealing rooms around the world.

Earning Their Keep

The pair has been earning its keep. Feder’s financial markets team of 1,800 people bucked volatile markets in 2008 to post a 79 percent increase in revenue from 2007. Wallace’s corporate finance division, with 450 staff, reported a 64 percent gain, fueled by increased M&A advisory deals in South Asia. His unit has been bolstered by the February 2009 acquisition of Hong Kong-based investment bank Cazenove Asia from JPMorgan.

The new Standard Chartered hasn’t entirely shaken off incidents that recall its troubled past. One was the currency derivatives fiasco that rocked South Korea in 2008. SC First Bank was one of 13 banks that got caught up in a tense imbroglio with Korean corporate clients after it sold the companies currency options intended to protect them against losses caused by the rising won.

Plummeting Won

When the won plummeted in value during the financial crisis, the companies ended up owing SC First millions of dollars they couldn’t pay.

From Mike Rees’s standpoint, the bank committed a worse sin in 2006 when it strayed far from its Asian territory and loaned an undisclosed amount of money to Brookings, South Dakota-based VeraSun Energy Corp., the second-largest U.S. ethanol producer. VeraSun filed for bankruptcy in 2008 after ethanol prices plunged, and the loan may never be repaid.

That deal is a clear candidate for Rees’s cricket bat.

To contact the reporters on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net; Jon Menon in London at jmenon1@bloomberg.net.

Last Updated: November 3, 2009 18:00 EST