Final Results 1 of 2

Standard Chartered PLC 26 February 2008 -------------------------------------------------------------------------------- 26 February 2008 TO CITY EDITORS FOR IMMEDIATE RELEASE STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 -------------------------------------------------------------------------------- HIGHLIGHTS STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 Reported Results â€¢ Operating income up 28 per cent to $11,067 million (2006: $8,620 million) â€¢ Profit before taxation up 27 per cent to $4,035 million (2006: $3,178 million) â€¢ Profit attributable to ordinary shareholders* up 25 per cent to $2,813 million (2006: $2,253 million) â€¢ Total assets up 24 per cent to $329 billion (2006: $266 billion) Performance Metrics** â€¢ Normalised earnings per share up 15.8 per cent at 197.6 cents (2006: 170.7 cents) â€¢ Normalised return on ordinary shareholders' equity of 15.6 per cent (2006: 16.9 per cent) â€¢ Annual dividend per share increased 11.7 per cent to 79.35 cents from 71.04 cents in 2006 â€¢ Normalised cost income ratio of 56.0 per cent (2006: 55.2 per cent) â€¢ Total capital ratio at 16.7 per cent (2006: 14.2 per cent) Significant achievements â€¢ Record profit before taxation at $4,035 million â€¢ Strong engines of growth in both Wholesale Banking and Consumer Banking â€¢ Broad based income growth across Wholesale Banking â€¢ Good income growth in Consumer Banking particularly in Wealth Management and SME â€¢ Launched the Standard Chartered Private Bank in 11 locations across seven markets â€¢ Over $2 billion of income and $1 billion profit before taxation in Hong Kong â€¢ Incorporated our business in China â€¢ Operating income in India exceeds $1 billion for the first time Commenting on these results, the Chairman of Standard Chartered PLC, Mervyn Davies, said: 'Standard Chartered has shown how its position in the world's growth markets and the strength of its balance sheet can deliver record results during turbulent times. We are not complacent about the future but are confident that we will deliver another strong performance in 2008.' * Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of the non-cumulative redeemable preference shares (see note 4 on page 47). ** Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items presented in note 5 on page 48. Standard Chartered PLC - Stock Code: 2888 STANDARD CHARTERED PLC - TABLE OF CONTENTS Page Summary of Results 3 Chairman's Statement 4 Group Chief Executive's Review 6 Financial Review Group Summary 11 Consumer Banking 14 Wholesale Banking 17 Risk Review 20 Capital 37 Financial Statements Consolidated Income Statement 39 Consolidated Balance Sheet 40 Consolidated Statement of Recognised Income and Expense 41 Consolidated Cash Flow Statement 42 Notes 43 Additional Information 52 Unless another currency is specified, the word 'dollar' or symbol '$' in this document means United States dollar and the word 'cent' or symbol 'c' means one-hundredth of one United States dollar. Within this document, the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'; Middle East and Other South Asia ('MESA') includes: United Arab Emirates ('UAE'), Bahrain, Qatar, Jordan, Pakistan, Sri Lanka and Bangladesh; and 'Other Asia Pacific' includes: China, Indonesia, Brunei, Thailand, Taiwan, Vietnam and the Philippines. STANDARD CHARTERED PLC - SUMMARY OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 $million $million ---------------------------------- --------- -------- ------- RESULTS Operating income 11,067 8,620 Impairment losses on loans and advances and other credit risk provisions (761) (629) Profit before taxation 4,035 3,178 Profit attributable to equity interests 2,841 2,278 Profit attributable to ordinary shareholders 2,813 2,253 ---------------------------------- --------- -------- ------- BALANCE SHEET Total assets 329,205 *266,102 Total equity 21,452 *17,395 Capital base 28,727 *21,825 ---------------------------------- --------- -------- ------- INFORMATION PER ORDINARY SHARE Cents Cents Earnings per share - normalised basis** 197.6 170.7 Earnings per share - basic 201.1 169.0 Dividend per share 79.35 71.04 Net asset value per share 1,374.2 1,208.9 ---------------------------------- --------- -------- ------- RATIOS % % Return on ordinary shareholders' equity - normalised basis** 15.6 16.9 Cost income ratio - normalised basis** 56.0 55.2 Capital ratios: Tier 1 capital 9.8 *8.3 Total capital 16.7 *14.2 ---------------------------------- --------- -------- ------- * Amounts have been restated as explained in note 9 on page 50. ** Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items presented in note 5 on page 48. STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT Final results I am delighted to report that Standard Chartered has delivered another year of record income and profits in 2007, showing the results of our investment programme over the last few years in our key growth markets of Asia, Africa and the Middle East. â€¢ Profit before taxation rose 27 per cent to $4,035 million â€¢ Income increased 28 per cent to $11,067 million â€¢ Normalised earnings per share climbed 15.8 per cent to 197.6 cents The board is recommending an annual dividend of 79.35 cents per share. These outstanding results are a reminder of Standard Chartered's transformation over the last few years and its enormous potential. Peter Sands and his team have done a great job in delivering these numbers against a backdrop of turmoil and dislocation in the global financial markets. These are extraordinary times to be chairman and it has been a very unusual time for the banking and financial services industry. Unprecedented losses; huge volatility; the recapitalisation of major banks. No international securities firm, investment company, insurance company or bank - ourselves included - has been unscathed. My reflections are that the industry as a whole has learnt: firstly, the overwhelming importance of liquidity; secondly, the need to price properly for risk; and, thirdly, the danger of over-complexity. I am often asked for my views on what this turbulence will mean for our markets in Asia, Africa and the Middle East and the degree to which they have decoupled from western markets. The global economy What is clear is that the US economy is now facing a period of weaker growth. While there is some evidence of decoupling across our markets, a US slowdown will impact the rest of the world, dampen global growth, slow the pace of trade and will take the heat out of commodity markets. If we look back at the last US slowdown in 2001, the export-oriented economies of Asia such as Hong Kong, Singapore and Malaysia were significantly impacted. Although growth rates in Asia will also slow this time, the region now enjoys a degree of insulation and resilience due to stronger domestic demand, economic resurgence in China, growing trade links within Asia and strong policy response from government and central banks. It is easy to focus on China as the growth engine but we should not underestimate the diversification of the ASEAN economies, the catch-up potential of India, huge wealth creation in the Middle East and the infrastructure boom across the regions. The emergence of sovereign wealth funds in Asia and the Middle East is emblematic of the shift in wealth that is underway. So while we forecast GDP growth rates will soften slightly in these markets in 2008, these economies will remain robust and their growth will be significantly higher than that expected in the US and Euro zone. The Group today is extraordinarily well positioned to seize these new realities thanks to its growing geographic reach and scale and the breadth of its products and capabilities developed in recent years. We have a loyal and supportive shareholder base and, in my view, exceptional management. In May, we welcomed John Peace to the board as deputy chairman and senior independent director, and Sunil Bharti Mittal as an independent non-executive director. We also welcomed Gareth Bullock to the board as group executive director in August. In September, Kai Nargolwala stepped down from the board after eight years. We would like to thank him for his significant contribution to the Group's success. We are also very grateful to Sir CK Chow, who will retire from the board this year after 10 years of dedicated service as a non-executive director. In my last report to you I was cautious about the outlook, but I did not anticipate such extremes as we have seen since then. In the past six months we have witnessed big upheavals in our sector. At Standard Chartered we know that complacency kills. We are operating in a period of sustained uncertainty. We have learnt lessons in recent months and we are constantly reminded of the importance of preserving our liquidity and capital strength. Summary Banking remains a risk-based industry and we will remain prudent in our management and pricing of risk. We are well placed to take advantage of the opportunities that will undoubtedly arise. Standard Chartered has shown how its position in the world's growth markets and the strength of its balance sheet can deliver record results during turbulent times. We are not complacent about the future but are confident that we will deliver another strong performance in 2008. Mervyn Davies, CBE Chairman 26 February 2008 STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW 2007 was my first full year as Chief Executive of Standard Chartered and I am delighted by our achievements. Despite the turbulence, financial shocks and uncertainties in the financial services industry, we have again delivered record profits. We have invested in both our businesses at record levels and stepped up the pace of organic growth: underlying income growth reached 23 per cent. We have also announced six acquisitions since our last set of results. We have not been unscathed by the financial crisis nor do we expect to be immune as it continues to unfold. But our disciplined approach to running the Group, focusing on our strategic priorities has stood us in good stead, and will continue to do so. We start 2008 confident but not complacent. The Group is in great shape and both businesses have begun the year well. It will be a testing year but it will also be exciting, with new opportunities emerging alongside new challenges. Our performance in 2007 was underpinned by firm foundations in the way we manage our liquidity, capital, risk profile and costs. Firm foundations We are a bank with strong liquidity, a well-diversified retail funding base, and a conservative balance sheet. We have a healthy A/D ratio - the ratio of customer loans to customer deposits - at 86 per cent and 24 per cent of our assets are highly liquid. Many years of managing in highly volatile markets mean we have always taken a proactive approach to managing our liquidity. We are very well capitalised. The Group's capital ratios are well above our target ranges, reflecting deliberate and effective management of the capital base. In September 2007 we raised $2 billion in Tier 2 capital which, despite stressed market conditions, was more than five times oversubscribed. We are very disciplined in the risks we take. We have no direct exposure and very limited indirect exposure to US sub-prime assets. Our entire exposure to asset backed securities ('ABS'), including collateralised debt obligations ('CDO'), is under $6 billion. We have faced challenges and taken some writedowns as a result of the financial turmoil. On Whistlejacket, the structured investment vehicle, and on our asset securitisation portfolio the profit and loss account impact was $300 million in total. On the other hand, we've had an outstanding performance on the corporate loan portfolio and kept a tight grip on consumer credit. We have also had to take some very difficult decisions - such as on Whistlejacket. We worked very hard since August to find a viable way forward for Whistlejacket and are disappointed that we were ultimately unable to do so. Overall, I am confident that our strategy for balancing risk and return and the systems and processes that underpin this are working well. We also take a very disciplined approach towards the management of our cost base. We continue to drive for greater efficiency in everything we do and manage our investment programme on a dynamic basis. We are not going to stop investing for growth. The opportunities in our markets are hugely exciting and now is the time to seize them. But, as always, we will be prepared to pace and scale this investment, taking account of changes in our markets and in our own performance. Challenges ahead These firm foundations will prove critical to our continued success as we face the challenges ahead. The turmoil in financial markets is far from over. We anticipate strains in the global economy, with the slowdown in the US having at least some effect on our markets in Asia, Africa and the Middle East. How profound that effect will be, we do not know. We also see a range of political risks in our markets. Yet as a bank that has grown up in emerging markets over more than 150 years, we have plenty of experience in dealing with such issues. Alongside these external challenges, we also face one major internal challenge: that of managing extremely rapid growth. This is about attracting and developing exceptional talent, ensuring our culture and values remain robust, ensuring our control systems and infrastructure keep pace with the business. Emerging opportunities Alongside these challenges, new opportunities are emerging. We are hiring excellent talent from our competitors, attracted by our strength, brand and growth potential. We are seeing a flight to quality, with a good inflow of deposits. We are seeing better pricing and differentiation of risk: the return of more rational pricing for risk is undoubtedly good for us and for the industry. And we're seeing opportunities to deepen our relationships with our customers. At times like these, it is critically important to be clear on our strategy and priorities. Standard Chartered has a clear and consistent strategy, well understood by staff, customers and investors. In 2003 we said we wanted to be the world's best international bank, leading the way in Asia, Africa and the Middle East. That is still our aspiration and we are making good progress on that journey. Organic growth Our near-term priorities remain consistent. Last year the first item on our management agenda was 'Accelerating organic growth'. We achieved that with an increase of underlying income growth from 18 per cent to 23 per cent. Our biggest single business, Consumer Banking in Hong Kong, delivered a 22 per cent increase in profits and a 17 per cent increase in income. This is the first time in six years that this business has achieved double-digit income growth. This performance was driven by strong growth in wealth management, with income up 25 per cent, and in our small and medium enterprise ('SME') business up 36 per cent. We have opened two dedicated SME banking centres and now have nearly 40,000 SME customers. Our investment in Consumer Banking in Hong Kong during 2007 has produced immediate results and we will continue to invest in this business. Wholesale Banking in Hong Kong also had an outstanding year, with profits up 50 per cent on income up 46 per cent. In fact Hong Kong as a whole, with profits up 34 per cent to just under $1.2 billion, made more than the entire Group did in 2001. The individual business that contributed the biggest change in profits was Wholesale Banking in India, where profits increased by 91 per cent to $626 million, on an 82 per cent increase in income. India is Wholesale Banking's largest business, this is a superb franchise. We have added more than 1,000 clients over the last three years and have more than 100 clients generating income of more than $1 million. We are investing in front-line staff, in new products and in infrastructure, seizing the opportunities emerging from India's rapid economic growth and the dynamism of its corporate sector. With 83 branches across the country, Standard Chartered has the largest network of branches among foreign banks in India. Including our global shared service centre in Chennai, which provides operational and technology support to our businesses across the world, we employ 18,000 people in India, making it by far our largest operation anywhere. Overall, including Consumer Banking, India broke through $1 billion in income for the first time in 2007, growing 60 per cent to $1.3 billion, with profits up 71 per cent to $690 million. India generated more profit in 2007 than in 2006 and 2005 together. It is not only our biggest businesses and markets that saw accelerated growth in 2007. We are also seeing the benefits from investments we have made to build new engines of growth. In China, income was up 73 per cent to $498 million. About three quarters of income was generated by the Wholesale Banking business. We have been investing significantly to build a business of scale and breadth. In 2007 we have more than doubled the number of permanent staff from 2,100 to over 4,300 and our local network has expanded from 21 to 38 locations. Despite investing over $60 million in the Consumer Banking business, profits from China increased by 72 per cent in 2007 and are now in excess of $180 million. Nigeria is another example. It is a country with around six per cent GDP growth, 140 million people and a rapidly growing middle class. Over the past three years we have invested in building a full range of products in both Consumer and Wholesale Banking. In 2007 we doubled the number of branches to 12 and now employ about 350 people. As a result of this investment, our income in Nigeria increased by over 62 per cent to over $140 million and profits increased by 87 per cent. In 2008, subject to approval, we plan to double again the size of our branch network in Nigeria. Another new engine of organic growth is The Standard Chartered Private Bank. Launched just nine months ago, The Private Bank is making excellent progress. With 11 offices across seven markets and 118 relationship managers, the Private Bank has $10 billion of assets under management ('AUM'), of which 28 per cent is from 1,300 clients who are entirely new to Standard Chartered. Whilst it is still early days, we are already seeing that our unique combination of local heritage and international capability, our ability to offer a broad range of onshore and offshore wealth products and our distinctive brand, are proving enormously appealing to our customers. The acquisition of American Express Bank, announced in September, will turbo charge the growth of our private banking business, adding over $22 billion in AUM, new booking centres, investment products and capabilities and another 120 experienced relationship managers. Korea, Pakistan and Taiwan In 2008 delivering on our acquisitions will remain a top priority. 2007 was undoubtedly a challenging year for our business in Korea. Whilst reported performance was adversely affected by a number of one-off items, we are still not satisfied with our performance, even after adjusting for these effects. I have changed the management team in Korea and we are now executing a range of strategic initiatives to reshape the business - to accelerate income growth, to improve productivity and to enhance return on capital. We are confident that SC First Bank is fundamentally a great business, a large growth platform in a very big, growing economy; it will be a powerful engine of sustained profit growth for the Group. In Pakistan we have made rapid progress with the integration of Union Bank. Today we are the sixth largest bank in the country in terms of profits with over 170 branches in 39 cities. However, the political environment has had a negative impact, particularly on loan impairment and we enter 2008 with a somewhat cautious stance. In Taiwan, we have made good progress since amalgamating the businesses in June. We are on course to meet our target of delivering double-digit return on investment and earnings per share accretion in 2008. Capability acquisitions While our acquisitions in Korea, Pakistan and Taiwan were primarily about achieving critical mass and distribution in key geographies, the rationale for the acquisition of American Express Bank was to reinforce our capabilities and scale in two key businesses across the world: private banking and financial institutions. I have already outlined the benefits to private banking. In financial institutions, American Express Bank will double the size of our US Dollar clearing business, and give us direct Yen and Euro clearing capability, as well as a sophisticated sales and service model. American Express Bank will also extend our reach into a number of new countries. Following completion of the transaction, Standard Chartered will be represented in over 70 markets. We expect to complete this transaction shortly and look forward to welcoming American Express Bank's 2,800 staff into Standard Chartered. Our detailed planning for the integration is going very well and has confirmed our initial view of both the scale and cost of the integration task, as well as the magnitude of the synergies. This is a highly complex integration, spanning 47 countries and involving the integration of high volume transaction systems, but the prize is also very significant. We anticipate that 2008 integration costs are likely to be around $150 million, so the acquisition is likely to be slightly dilutive this year, net of underlying earnings and early synergies. We remain confident that American Express Bank will increase earnings per share in 2009 and will deliver a double-digit return on investment. This is a great deal, strategically compelling and financially attractive. We are bringing on board some highly talented international bankers and there is a strong cultural fit. In the second half of 2007 we announced four other capability driven acquisitions, all much smaller than American Express Bank: â€¢ Pembroke, a specialist in aviation finance, which will reinforce our ability to play a part in the rapid growth of aviation across our markets â€¢ Harrison Lovegrove, an oil and gas advisory boutique, which adds to our existing strengths in the energy business â€¢ A Brain, a securities services company in Korea, which brings new capabilities and customers to our securities services business â€¢ And UTI Securities, an equity brokerage and advisory firm in India, which will enable us to provide a broader range of wealth management products to our retail and private banking clients. In January 2008 we also announced the acquisition of Yeahreum, a mutual savings bank in South Korea, which will enable us to broaden the current product offering. The logic behind all these capability-driven acquisitions is to extend and deepen our product range and expertise, enabling us to serve our clients more effectively across a broader range of needs. They add fuel to our organic growth. Sustainability Building a sustainable business is an integral part of our long-term strategy to enhance shareholder value. At Standard Chartered, we are determined to lead by example within the markets in which we operate. As well as finding ways to drive economic growth, we also want to help protect the environment and to have a positive impact on the societies where we live and work. We are constantly challenging ourselves on how we can contribute in a distinctive way in the countries where we operate. For example, at the Clinton Global Initiative in September, Standard Chartered committed $8-10 billion of financing over the next five years in renewable and clean energy projects in Asia, Africa and the Middle East. By making our commitment public, we hope to be a catalyst for change, influencing businesses to invest in the transition to a low-carbon and more sustainable future. The year ahead In the year ahead we will stick to our strategy. We will continue to focus on deepening our relationships with our clients. And we will continue to be proactive and disciplined in managing our liquidity, our capital, our risk profile and our costs. We will keep investing to sustain our organic growth momentum. In China, for example, subject to regulatory approval, we anticipate having at least 60 locations by the end of this year. This year we celebrate 150 years of being in China and India: we have deep roots in these markets and they're a huge part of our future. We will deliver on our acquisitions: make progress in Korea; deliver earnings per share growth from Taiwan; and complete the American Express Bank transaction and drive its integration. Outlook We ended 2007 with strong momentum in both businesses and the Group has had an excellent start to 2008, particularly in Wholesale Banking which had a record January. The Bank is in great shape. The foundations are firm. We are extraordinarily well-placed to capture the huge opportunities in our markets. There is more breadth and scale in the Group and our strong performance in 2007 is well spread across multiple products and multiple geographies. The level of risk and uncertainty in the external environment makes the horizon more difficult to read. However, we know what our shareholders expect us to deliver: double-digit income growth, double-digit earnings growth and mid to high teens return on equity ('ROE'). Over the last few years we have been building a track record of consistent delivery, of superior financial performance. We are committed to keep building on that track record. We will not stop investing given the opportunities we are seeing in our markets. But we will remain vigilant in our management of risk, and we will continue to flex the pace of investment to ensure costs grow broadly in line with income growth. 2007 was a year of strong performance, a year of delivery despite the external turmoil. We enter 2008 amid almost unprecedented market volatility and uncertainty, but in great shape, with great momentum. Summary 2007 was a great year for the Group. We were not unscathed by the financial crisis, but we delivered record results. I thank all our customers and shareholders for their support and the Group's staff for playing their part in our growth story in 2007. Standard Chartered has never been in better shape. Peter Sands Group Chief Executive 26 February 2008 STANDARD CHARTERED PLC - FINANCIAL REVIEW Group Summary The Group has delivered another strong performance for the year ended 31 December 2007. Profit before taxation rose 27 per cent to $4,035 million, with operating income increasing 28 per cent. Normalised cost income ratio was 56.0 per cent compared to 55.2 per cent in 2006. Normalised earnings per share increased by 15.8 per cent to 197.6 cents. Further details of basic and diluted earnings per share are provided in note 5 on page 48. The Group made a number of acquisitions in 2006 and 2007. It has owned Union Bank Limited ('Union') since 5 September 2006 and Hsinchu International Bank ('Hsinchu') since 19 October 2006. On 30 December 2006, the assets and business of Union and the Standard Chartered Bank branches in Pakistan were amalgamated into Standard Chartered Bank (Pakistan) Limited. On 30 June 2007, the assets and business of the Standard Chartered Bank branch in Taiwan were amalgamated into Hsinchu, and the combined entity was renamed Standard Chartered Bank (Taiwan) Limited. On 5 September 2006, the Group acquired an additional stake of 12.96 per cent in PT Bank Permata Tbk ('Permata'). The Group completed the acquisitions of Pembroke Group Limited ('Pembroke'), Harrison Lovegrove & Co. Limited ('Harrison Lovegrove') and A Brain Co. Limited ('A Brain') on 5 October 2007, 3 December 2007 and 5 December 2007 respectively. The underlying results of the Group exclude the results of the following: Standard Chartered Bank (Pakistan) Limited, comprising the Standard Chartered Bank branches in Pakistan and Union; Hsinchu; the incremental stake in Permata; A Brain; Pembroke; and Harrison Lovegrove. Operating Income and Profit 2007 2006 Increase $million $million % -------------------------------- -------- -------- -------- Net interest income 6,265 5,328 18 ------------------------------ Fees and commissions income, net 2,661 1,881 41 Net trading income 1,261 920 37 Other operating income 880 491 79 ------------------------------ 4,802 3,292 46 -------------------------------- -------- -------- -------- Operating income 11,067 8,620 28 Operating expenses (6,215) (4,796) 30 -------------------------------- -------- -------- -------- Operating profit before impairment losses and taxation 4,852 3,824 27 Impairment losses on loans and advances and other credit risk provisions (761) (629) 21 Other impairment (57) (15) 280 Profit/(loss) from associates 1 (2) N/A -------------------------------- -------- -------- -------- Profit before taxation 4,035 3,178 27 -------------------------------- -------- -------- -------- See page 13 for analysis of the underlying results. The external environment remained generally favourable in the Group's key markets despite difficulties experienced in the financial markets in the second half of the year. Operating income grew $2,447 million, or 28 per cent, to $11,067 million. On an underlying basis, operating income grew 23 per cent. Wholesale Banking had an excellent year, with very strong income growth across all client segments and product categories. In Consumer Banking, strong income growth was achieved in Wealth Management and the SME segment. The key markets of the Group continued to perform very well, with over 20 per cent income growth achieved in Hong Kong, Singapore and the MESA region. In Hong Kong, operating income exceeded $2 billion and operating profit exceeded $1 billion for the first time. In India and China, operating income grew 60 per cent to $1,308 million and 73 per cent to $498 million, respectively. However, operating conditions remained challenging in Korea, and in the UK, income was adversely impacted by the market turmoil in the second half of the year. Net interest income was up $937 million, or 18 per cent, to $6,265 million. The increase in net interest income was predominantly from higher average balances and increased volumes from transaction banking and cash management services, together with the growth in current and savings accounts balances across the geographies. Net interest income from trade and lending revenues also grew, particularly in the MESA region. Underlying net interest income grew 12 per cent. Net interest margin was 2.5 per cent, in line with last year. Non-interest income grew $1,510 million, or 46 per cent, to $4,802 million, with underlying growth of 41 per cent. Net fees and commissions income increased by $780 million, or 41 per cent, to $2,661 million. On an underlying basis, net fees and commissions income grew 35 per cent. Robust economic growth in the Group's key markets, underpinned by good economic fundamentals and firmer domestic demand drove stock markets higher. Strong investor sentiment resulted in increased demand for investment products and services. As a consequence, sales of wealth management products such as unit trusts, insurance and structured investment products increased significantly. Custody and securities services benefited from higher volumes in the regional equity markets. Moreover, the Group achieved an increase in deal flows which drove fee income in syndications, corporate finance and advisory. Trade finance commission income benefited from higher transaction volumes, and in transaction banking, payments and cash management services delivered strong performances, driven by the growth in commercial balances. Net trading income increased $341 million, or 37 per cent, to $1,261 million. On an underlying basis, net trading income grew 32 per cent. A significant proportion of this growth was client driven, with particularly high growth in derivatives sales. Income from interest rates and foreign exchange derivatives sales grew 60 per cent as a result of an expansion in product capabilities, improved electronic channel functionality and a continued focus on cross-selling. Own account income was broadly unchanged, as gains in foreign exchange trading were offset by losses incurred on interest rate derivatives and debt securities trading, and a $155 million mark-to-market loss incurred on economic hedges on mortgages in Korea. Other operating income increased $389 million, or 79 per cent, to $880 million. On an underlying basis, other operating income increased 78 per cent, benefiting from higher dividend income received on structured finance transactions, gains realised from the sale of private equity investments and the disposal of debt securities, and a gain of $107 million in relation to the shares received as a consequence of the restructuring of Visa. Also included in other operating income is a $109 million foreign exchange gain realised on the repatriation of Singapore branch capital. These gains were offset, in part, by a loss of $116 million on the exchange of capital notes invested in Whistlejacket Capital Limited ('Whistlejacket'), a structured investment vehicle sponsored by the Group and $87 million in relation to writedowns on asset backed securities. Other operating income also included $98 million (2006: $106 million) of recoveries in respect of assets that had been fair valued at acquisition in Korea. Operating expenses increased $1,419 million, or 30 per cent, to $6,215 million. Underlying expenses grew 24 per cent. Expenses grew mainly due to the increase in staffing levels, particularly in sales staff, and higher performance related pay. Staff costs increased 36 per cent, or $1,036 million, to $3,949 million. Other investments were directed at enhancing the product suite and extending branch networks in China, Hong Kong, India, Pakistan and Korea. The Standard Chartered Private Bank was launched in 11 locations across seven markets. Further expenditure was incurred to upgrade and expand office premises and to strengthen regulatory compliance and control systems. Operating profit before impairment increased $1,028 million, or 27 per cent, to $4,852 million. On an underlying basis operating profit before impairment increased by 23 per cent. The credit environment remained generally favourable during the period, notwithstanding the turbulent market conditions triggered by the sub-prime mortgage crisis in the US. Overall loan impairment charges increased by $132 million, or 21 per cent, to $761 million. The incremental impact from acquisitions of $171 million was offset by a $39 million reduction in the underlying loan impairment charges. In Taiwan, total net impairment charges fell $96 million to $159 million, with underlying impairment falling $199 million due to the improved consumer credit environment, partially offset by a $103 million increase in impairment charges due to the full year impact of the Hsinchu acquisition. In Pakistan, total impairment charges were $65 million higher at $94 million, in part due to the full year impact of Union acquisition and also as a result of the deteriorating credit environment caused by political uncertainties. In Thailand and India, higher impairment charges were incurred due to a wider deterioration in the unsecured and consumer lending environment. Other impairment charges increased to $57 million, mainly due to $35 million impairment in asset backed securities ('ABS') and $17 million intangible asset impairment related to Whistlejacket. Underlying Results To facilitate effective review of the Group's results, the table below shows the underlying results. 2007 2006 ----------------------------- -------------------------------- Acquisitions Underlying As Acquisitions Underlying As $million $million reported $million $million reported $million $million ------------------- -------- -------- -------- -------- -------- -------- Net interest income 521 5,744 6,265 218 5,110 5,328 ------------------------------------------------------------- Fees and commissions income, net 216 2,445 2,661 75 1,806 1,881 Net trading income 72 1,189 1,261 21 899 920 Other operating income 18 862 880 8 483 491 ------------------------------------------------------------- 306 4,496 4,802 104 3,188 3,292 ------------------- -------- -------- -------- -------- -------- -------- Operating income 827 10,240 11,067 322 8,298 8,620 Operating expenses (480) (5,735) (6,215) (170) (4,626) (4,796) ------------------- -------- -------- -------- -------- -------- -------- Operating profit before impairment losses and taxation 347 4,505 4,852 152 3,672 3,824 Impairment losses on loans and advances and other credit risk provisions (208) (553) (761) (37) (592) (629) Other impairment - (57) (57) - (15) (15) Profit/(loss) from associates - 1 1 - (2) (2) ------------------- -------- -------- -------- -------- -------- -------- Profit before taxation 139 3,896 4,035 115 3,063 3,178 ------------------- -------- -------- -------- -------- -------- -------- The effect of the acquisitions on the geographic results is shown below: 2007 2006 ------------------------------- -------------------------------- Middle East and Other S Acquisitions Underlying As Acquisitions Underlying As Asia $million $million reported $million $million reported $million $million ------------------- -------- -------- ---------- -------- -------- --------- Operating income 361 1,067 1,428 226 844 1,070 Operating expenses (189) (505) (694) (113) (401) (514) Loan impairment (94) (49) (143) (29) (24) (53) ------------------- -------- -------- ---------- -------- -------- --------- Profit before taxation 78 513 591 84 419 503 ------------------- -------- -------- ---------- -------- -------- --------- 2007 2006 ------------------------------- -------------------------------- Other Asia Pacific Acquisitions Underlying As Acquisitions Underlying As $million $million reported $million $million reported $million $million ------------------- -------- -------- ---------- -------- -------- --------- Operating income 459 1,642 2,101 96 1,288 1,384 Operating expenses (286) (927) (1,213) (57) (728) (785) Loan impairment (114) (204) (318) (8) (376) (384) Other impairment - - - - (3) (3) Profit/(loss) from associates - 2 2 - (4) (4) ------------------- -------- -------- -------- -------- -------- -------- Profit before taxation 59 513 572 31 177 208 ------------------- -------- -------- -------- -------- -------- -------- The acquisition of Pembroke and Harrison Lovegrove are included within the 'Americas, UK & Europe' segment. The acquisition of A Brain is included with the 'Korea' segment. Additional disclosures of the effect of these acquisitions for these segments have not been made as the impact is not significant. Consumer Banking The following tables provide an analysis of operating profit by geographic segment for Consumer Banking: 2007 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million -------------- ---------- ---------- ---------- ---------- ---------- Operating income 1,188 471 274 1,142 1,167 Operating expenses (478) (191) (116) (907) (760) Loan impairment (53) (15) (41) (96) (308) -------------- ---------- ---------- ---------- ---------- ---------- Operating profit 657 265 117 139 99 -------------- ---------- ---------- ---------- ---------- ---------- 2007 ----------------------------------------------------------------- India Middle Africa Americas Underlying Consumer $million East $million UK & $million Banking & Other Europe Total S Asia $million $million $million ------------ -------- -------- -------- -------- --------- --------- Operating income 408 751 310 95 5,125 5,806 Operating expenses (268) (395) (224) (54) (3,003) (3,393) Loan impairment (77) (129) (17) - (544) (736) ------------ -------- -------- -------- -------- --------- --------- Operating profit 63 227 69 41 1,578 1,677 ------------ -------- -------- -------- -------- --------- --------- 2006 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million -------------- ---------- ---------- ---------- ---------- ---------- Operating income 1,019 367 221 1,146 729 Operating expenses (428) (142) (101) (799) (445) Loan impairment (53) (36) (36) (88) (390) -------------- ---------- ---------- ---------- ---------- ---------- Operating profit/(loss) 538 189 84 259 (106) -------------- ---------- ---------- ---------- ---------- ---------- 2006 ----------------------------------------------------------------- India Middle Africa Americas Underlying Consumer $million East $million UK & $million Banking & Other Europe Total S Asia $million $million $million ------------ -------- -------- -------- -------- --------- --------- Operating income 323 545 257 77 4,454 4,684 Operating expenses (201) (280) (194) (51) (2,508) (2,641) Loan impairment (46) (61) (12) 1 (686) (721) ------------ -------- -------- -------- -------- --------- --------- Operating profit/(loss) 76 204 51 27 1,260 1,322 ------------ -------- -------- -------- -------- --------- --------- An analysis of Consumer Banking income by product is set out below: Operating income by product 2007 2006 --------------------------------- $million $million -------- -------- Cards, Personal Loans and Unsecured Lending 2,089 1,799 Wealth Management and Deposits 2,621 1,938 Mortgages and Auto Finance 906 780 Other 190 167 --------------------------------- -------- -------- Total operating income 5,806 4,684 --------------------------------- -------- -------- Consumer Banking continued Consumer Banking's operating income increased by $1,122 million, or 24 per cent, to $5,806 million. Net interest income grew $649 million, or 18 per cent, to $4,194 million while non-interest income grew $475 million, or 39 per cent, to $1,689 million. Underlying income was up $671 million, or 15 per cent. In Hong Kong, income growth gained momentum with 17 per cent growth compared with four per cent last year. Elsewhere, income grew strongly in Singapore, Malaysia, the UAE and India. In Korea, operating income was flat year on year. Operating expenses grew $752 million, or 28 per cent, to $3,393 million. Underlying expenses were up $495 million, or 20 per cent. Significant investments were made in China, Hong Kong, Korea, Singapore and India. Investments were made to expand the sales force, with more than 4,000 branch sales consultants, customer relationship managers and direct sales agents recruited in the year. Over 70 new branches were opened and over 600 new ATMs installed or upgraded. The Standard Chartered Private Bank was launched in seven markets and 11 locations and the business in China was incorporated and approvals to conduct additional Renminbi businesses granted, providing further opportunities to grow the franchise. Loan impairment increased marginally to $736 million. The loan impairment charge in the Taiwan branch decreased by $199 million as the credit environment continued to improve. In Pakistan, loan impairment was higher due to the full year impact of Union and political uncertainties which disrupted collection activities. In Thailand, higher loss rates were experienced due to a wider deterioration in the unsecured loan portfolio. Underlying loan impairment charges fell 21 per cent, or $142 million, to $544 million. Operating profit improved $355 million, or 27 per cent, to $1,677 million. Underlying operating profits grew $318 million or 25 per cent, to $1,578 million. In Hong Kong, income grew $169 million, or 17 per cent, to $1,188 million. Expenses rose $50 million, or 12 per cent. Higher average customer balances in current and savings accounts, and fixed deposits, complemented by improved spreads in current and savings accounts, contributed to the increase in net interest income. Net interest income in mortgages declined as higher new mortgage sales and average balances outstanding were more than offset by intense competition and rising funding costs which adversely affected net interest margins. Net interest income from credit cards, personal loans and other lending were largely unchanged. Higher average loan balances increased personal lending income while lower average balances and rollover rates reduced credit cards income. Against the backdrop of buoyant investor sentiment and ample liquidity, fee income grew significantly as a result of higher unit trust sales, higher insurance premiums and new structured investment products sold. Additional investments were made to expand the sales force, launch the private banking business, open five new branches and relocate and upgrade several other branches. Continued advertising expenditure and direct marketing campaigns were undertaken to support the increased sales initiatives during the period. Operating profit was up 22 per cent to $657 million. In Singapore, income was up 28 per cent to $471 million. Net interest income from mortgages increased as a result of significantly higher new mortgage sales and average balances outstanding, against the backdrop of a vibrant domestic property market. Income also grew in credit cards and personal loans and the SME segment. Net interest income from deposit products was lower as the growth in average current and savings accounts balances was offset by a reduction in margins. Higher investment services fees from unit trust sales, structured investment products and foreign exchange services contributed to strong non-interest income growth. Expenses grew $49 million, or 35 per cent, to $191 million. Investments were made to expand the sales force, particularly in the SME segment and in private banking. Two new priority banking centres were opened and a customer service centre upgraded. Loan impairment fell 58 per cent to $15 million, as provisions were reduced in line with improved credit experience. Operating profit increased $76 million, or 40 per cent to $265 million. In Malaysia, income increased $53 million, or 24 per cent, to $274 million. Operating profit was up by 39 per cent to $117 million. Improved rollover rates in credit cards and increased personal lending volumes, coupled with higher average credit card balances drove net interest income growth. Higher average balances of current and savings accounts compensated for the slight deterioration in savings accounts margin. Income from mortgages grew 11 per cent through tight margin management and anti-attrition efforts despite the stiff competition. Non-interest income was higher, driven by fees from unit trust and insurance sales. Operating expenses increased $15 million, or 15 per cent, to $116 million as investments were made to launch a new flagship branch and seven SME centres during the year, as well as increased personnel costs due to higher headcount and salary adjustments. In Korea, operating income was marginally lower at $1,142 million. Net interest income grew as income from current and savings accounts increased due to margin improvements, partly offset by lower average balances. Fixed deposit balances reduced during the period as changes to regulations enabled the use of lower cost alternative funding sources to meet statutory liquidity requirements. Strong income growth was achieved in commercial lending to the SME segment with income increasing 42 per cent. Credit cards and personal loan income grew nine per cent, whilst income from mortgages was seven per cent lower due to lower average mortgages outstanding and margin deterioration. While fee income from unit trust, investment and insurance products grew, total non-interest income fell as there were additional charges incurred in relation to dormant accounts and on economic hedges of the mortgage portfolios due to accounting asymmetry, partially offset by a release of $67 million (2006: $55 million) fair value provisions due to further recoveries made. After adjusting for these items, the operating income growth would have been 10 per cent for the year. Expenses grew $108 million, or 14 per cent, to $907 million, with significant investments in distribution channels, over 100 new relationship managers recruited, four additional new branches opened, two branches relocated and 23 priority banking branches upgraded. Loan impairment was $8 million higher at $96 million. Operating profit fell $120 million, or 46 per cent, to $139 million. In Other Asia Pacific, income grew $438 million, or 60 per cent, to $1,167 million. Expenses grew $315 million, or 71 per cent, to $760 million. Consumer Banking continued Operating profit for the year was $99 million. Underlying income grew $94 million, or 15 per cent, to $742 million. Underlying expenses of the region grew $115 million, or 29 per cent. Loan impairment for the region was $82 million lower, at $308 million. Underlying loan impairment fell by $185 million primarily due to the improved credit environment in Taiwan, and lower impairment in the Philippines and by Indonesia. Loan impairment in Thailand, however, increased by $18 million as a result of a wider credit deterioration in the unsecured lending portfolio. In China, operating income grew 95 per cent, with net interest income growth driven by increased trade and lending volumes, supplemented by a significant increase in income from structured deposits and higher average current and savings accounts balances. Over $60 million of investments were made to customise retail banking products and services, to extend branches and ATM distribution infra-structure, and to increase sales, marketing and support staff. This high level of investment expenditure resulted in an operating loss for the year. In Taiwan, operating income grew by $301 million to $484 million reflecting the full year impact of the Hsinchu acquisition. In India, income increased $85 million, or 26 per cent, to $408 million while operating expenses increased $67 million, or 33 per cent, to $268 million. Significantly higher average balances and improved margins on current and savings accounts contributed to a 28 per cent increase in overall net interest income. Investment in people, premises and private banking increased expenses. Other significant costs included investments in branches, service centre centralisation, ATMs and technology. Loan impairment increased $31 million, due to a wider deterioration in the unsecured consumer lending environment and increased portfolio impairment provision in unsecured lending and credit cards as the portfolio size increased. Operating profit fell $13 million, to $63 million. Operating income in the MESA region increased by $206 million, or 38 per cent, to $751 million. Underlying income grew $99 million or 25 per cent. In the UAE, income grew 32 per cent to $302 million. Net interest income increased driven by higher average balances in current and savings accounts. Investment services and insurance continued to drive non-interest income growth. Significant growth in trade finance, business instalment loans and cash management and treasury services resulted in the doubling of operating income from the SME segment. Income in Pakistan grew 72 per cent to $256 million reflecting the full year impact of the Union acquisition. Expenses in the MESA region grew by $115 million, or 41 per cent to $395 million. Underlying expenses grew $58 million, or 29 per cent. Investments were targeted at improving premises infrastructure, expanding distribution channels and increasing the sales force. Additional expenses were also incurred for the integration of the Union acquisition. Loan impairment increased $68 million to $129 million, reflecting higher impairment in Pakistan due to increased political uncertainties, and in the UAE, in relation to the credit cards and unsecured lending portfolios. Operating profit increased $23 million to $227 million for the region. In Africa, operating profit grew $18 million, or 35 per cent to $69 million. Income grew 21 per cent, as higher volumes and improvements in margins drove deposit net interest income. Income from the SME segment improved as product capability was significantly upgraded to capture the increasing trade finance opportunities. The Americas, UK & Europe saw an increase in operating profit of $14 million to $41 million. Income grew $18 million, or 23 per cent, to $95 million driven primarily by higher average deposit balances. Operating costs increased as additional expenses were incurred to launch the private banking business and additional recruitment of sales staff. Product performance Credit Cards, Personal Loans and Unsecured Lending grew operating income by $290 million, or 16 per cent, to $2,089 million. Underlying income grew nine per cent. This included a $107 million gain in relation to the shares received from the restructuring of Visa, with approximately three quarters of this gain recorded in Hong Kong and Singapore. Asset growth was controlled with stricter credit underwriting and approval policies to ensure the balance between good growth and credit quality was maintained. Wealth Management and Deposits grew operating income by $683 million, or 35 per cent, to $2,621 million. Underlying income grew 18 per cent. The continued investment in the development of products and their wider distribution to more markets significantly enhanced the client proposition. Sales volumes of investment products increased over 50 per cent, driving a 38 per cent increase in non-interest income. Net interest income grew due to higher customer balances, with current and savings accounts now representing almost half of the deposit base. Mortgages and Auto Finance income grew by $126 million, or 16 per cent, to $906 million. Underlying income grew three per cent. Mortgage balances outstanding were broadly unchanged, reflecting competitive pressures in a number of key markets. Wholesale Banking The following tables provide an analysis of operating profit by geographic segment for Wholesale Banking: 2007 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million -------------- ---------- ---------- ---------- ---------- ---------- Operating income 870 421 184 418 933 Operating expenses (347) (239) (69) (239) (445) Loan impairment 3 (1) 3 2 (10) Other impairment - - - - - -------------- ---------- ---------- ---------- ---------- ---------- Operating profit/(loss) 526 181 118 181 478 -------------- ---------- ---------- ---------- ---------- ---------- 2007 ----------------------------------------------------------------- India Middle Africa Americas Underlying Wholesale $million East $million UK & $million Banking & Other Europe Total S Asia $million $million $million ------------ -------- -------- -------- -------- --------- --------- Operating income 899 676 485 357 5,097 5,243 Operating expenses (260) (299) (244) (672) (2,724) (2,814) Loan impairment (13) (14) (10) 15 (9) (25) Other impairment - - (2) (55) (57) (57) ------------ -------- -------- -------- -------- --------- --------- Operating profit/(loss) 626 363 229 (355) 2,307 2,347 ------------ -------- -------- -------- -------- --------- --------- 2006 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million -------------- ---------- ---------- ---------- ---------- ---------- Operating income 596 255 150 380 655 Operating expenses (292) (152) (63) (173) (336) Loan impairment 46 (3) 7 (8) 6 Other impairment - - - - (3) -------------- ---------- ---------- ---------- ---------- ---------- Operating profit 350 100 94 199 322 -------------- ---------- ---------- ---------- ---------- ---------- 2006 ----------------------------------------------------------------- India Middle Africa Americas Underlying Wholesale $million East $million UK & $million Banking & Other Europe Total S Asia $million $million $million ------------ -------- -------- -------- -------- --------- --------- Operating income 494 525 383 485 3,831 3,923 Operating expenses (174) (234) (219) (508) (2,114) (2,151) Loan impairment 7 8 (14) 43 94 92 Other impairment - - (9) (3) (15) (15) ------------ -------- -------- -------- -------- --------- --------- Operating profit 327 299 141 17 1,796 1,849 ------------ -------- -------- -------- -------- --------- --------- An analysis of Wholesale Banking income by product is set out below: Operating income by product 2007 2006 $million $million ------------------------- ----------- ----------- Trade and Lending 1,236 1,006 Global Markets* 2,673 1,895 Cash Management and Custody 1,334 1,022 ------------------------- ----------- ----------- Total operating income 5,243 3,923 ------------------------- ----------- ----------- * Global Markets comprises the following businesses: foreign exchange and derivatives, private equity, debt capital markets, corporate finance and asset and liability management ('ALM'). Wholesale Banking had a very strong year with significantly higher business volumes and income momentum. The key markets of the Group remained resilient in the midst of financial market turbulence. The investments made in a number of businesses and products have driven growth across key geographies. Operating income grew $1,320 million, or 34 per cent, to $5,243 million. Net interest income was up 16 percent to $2,148 million while non-interest income increased 50 per cent to $3,095 million. Operating profit increased $498 million, or 27 per cent, to $2,347 million. On an underlying basis, operating income grew 33 per cent. Client revenues grew 37 per cent. Client income represented approximately four fifths of total income and remained the key driver of growth. The focus on nurturing key client relationships, attracting new clients, improving product cross-sell and investing in higher-value and strategic products has resulted in a broad based income momentum across all client segments. Operating expenses grew $663 million, or 31 per cent, to $2,814 million. Underlying expenses grew 29 per cent. A large proportion of the cost growth was due to increased performance related pay and personnel costs. Further investments were targeted to expand product capabilities, such as in equity derivatives and in electronic foreign exchange dealing channels, and to broaden principal finance coverage to include the Middle East and Africa. Investments were also made to improve operational efficiencies and service levels, for example, investment in a new documentary trade system which enables straight through processing as well as expenditure to strengthen the compliance and control systems. The benign credit environment persisted through most of the year with the recent turmoil in the credit markets having limited impact on the results for the year. Low specific provisions reflected strong risk management discipline and portfolio quality. Loan impairment recoveries were significantly lower, resulting in a net loan impairment charge of $25 million for the year. However, other impairment charges increased to $57 million mainly due to impairment in asset backed securities of $35 million, and $17 million intangible asset impairment relating to Whistlejacket. Wholesale Banking continued In Hong Kong, income grew $274 million, or 46 per cent, to $870 million. Operating profit grew 50 per cent to $526 million. Higher average client account balances resulting, in part, from strong equity market activities, drove overall net interest income up by $70 million. Higher foreign exchange, options and other derivatives sales contributed significantly to non-interest income growth, with improved trading performance driving own account income. Increased volumes in securities services and higher average assets under management drove custodial services fees higher. In addition, there was strong growth in fees earned from corporate finance and structured finance transactions during the year. Expenses grew $55 million, or 19 per cent, to $347 million with this increase primarily directed towards building the sales force, improving sales and performance incentives and enhancing product capabilities. Income in Singapore grew $166 million, or 65 per cent, to $421 million. Operating profit grew $81 million, or 81 per cent, to $181 million. Significant contributions from loan syndications, structured finance transactions and private equity gains added over $100 million to overall income growth. Revenues were also higher from foreign exchange and interest rate derivative sales. Own account income was flat with higher ALM income offset by lower trading income in interest rate and foreign exchange derivatives. Expenses grew $87 million, or 57 per cent, to $239 million reflecting increased recruitment, higher salary and performance related incentives and continued investments in product capabilities. In Malaysia, income increased $34 million, or 23 per cent, to $184 million. Expenses grew $6 million, or 10 per cent, to $69 million. Operating profit increased by 26 per cent to $118 million. Higher average balances contributed to net interest income growth while the growth in non-interest income was principally due to higher fees from syndications, debt financing and corporate advisory. Custody and securities services benefited from higher stock market activities. Income from foreign exchange and derivatives sales grew strongly but this was partly offset by losses incurred on own account trading. Income in Korea increased $38 million, or 10 per cent, to $418 million. Net interest income increased 11 per cent, as higher average balances drove interest income growth. Trade and lending revenues were broadly unchanged. Non-interest income increased as a result of higher income from foreign exchange and derivatives sales and private equity gains, offset by interest rate derivatives trading losses. During the period, there were $32 million (2006: $51 million) of recoveries on assets that had been fair valued at acquisition, offset by the loss arising from economic hedges due to accounting asymmetry. Excluding these items, operating income growth would have been 31 per cent. Expenses grew $66 million, or 38 per cent, to $239 million. Operating profit for the year was $181 million. Other Asia Pacific region delivered strong income growth of $278 million, or 42 per cent, to $933 million, with expenses rising 32 per cent, to $445 million. Operating profit grew $156 million, or 48 per cent, to $478 million. Underlying income grew $259 million, or 40 per cent, to $899 million. Underlying profit was up 54 per cent. In China, operating income grew 67 per cent to $379 million and operating profit increased $98 million to $215 million. Interest income from cash management was significantly higher, as average deposit balances grew over 50 per cent. Higher utilisation of trade facilities more than compensated for regulatory restrictions which affected lending revenues. Custody and securities services income grew as the number of settled trades and assets under custody increased. Fee income from debt financing and syndications were higher and there were gains realised from a private equity investment. In Indonesia, Thailand and the Philippines, there was strong income growth, up 33 per cent to $345 million, on the back of strong foreign exchange and derivatives sales. In India, income grew $405 million, or 82 per cent, to $899 million. Operating profit increased 91 per cent to $626 million. A buoyant domestic economy drove capital market activities and improved investor sentiment. Assets under administration and settlement volumes increased significantly amidst a booming equity market. Higher average customer balances and improved liability margins drove interest income higher. In addition, income grew from increased lending to the commercial real estate sector, several large acquisition finance transactions, and higher trade financing volumes. Fee income growth was generated from corporate finance and advisory, debt capital markets, structured finance transactions and private equity gains. Own account trading income increased with good performance in fixed income and foreign exchange trading. Expenses increased by $86 million, or 49 per cent, to $260 million, with increased hiring of product specialists and sales staff, increased performance related incentives, premises improvements and systems infrastructure expenditure. Operating income in the MESA region rose $151 million, or 29 per cent, to $676 million. Operating profit grew $64 million, or 21 per cent, to $363 million. Income growth was broad based across the region with most countries generating high growth in operating income and profit. In the UAE, income grew 24 per cent to $261 million. Client revenues grew across most products, notably in cash management and transaction banking, interest rate and foreign exchange derivatives sales, reflecting the benefits of investment in adding product capability and range in recent years. However, own account income was lower due to losses incurred in interest rate derivatives trading. In Bahrain and Qatar, the combined operating income was up over 51 per cent, to $145 million. In Pakistan, income grew 36 per cent, to $105 million, reflecting good underlying growth as well as the full year impact of the Union acquisition. Expenses in the region grew $65 million, or 28 per cent, to $299 million due to higher recruitment levels, premises and infrastructure costs as well as acquisition integration costs. In Africa, income grew $102 million, or 27 per cent, to $485 million. In Nigeria, income was up 60 per cent to $115 million. In Tanzania, Kenya and Uganda, the combined income grew $36 million, or 34 per cent, to $141 million. Operating income was driven by growth in transaction banking revenues, with average wholesale deposit balances increasing significantly, offsetting a small decline in margins. Higher fees were earned on corporate advisory and debt financing transactions. Wholesale Banking continued Expenses increased 11 per cent to $244 million. Operating profit increased $88 million, or 62 per cent, to $229 million. Operating income in the Americas, UK & Europe decreased by $128 million, or 26 per cent, to $357 million. Expenses grew by $164 million, or 32 per cent, to $672 million. Operating loss for the period was $355 million. In the Americas, income was up 33 per cent, or $71 million, to $289 million as revenues grew strongly in foreign exchange and derivatives sales, trade and cash management, as well as achieving higher corporate finance and ALM income. Operating expenses were up 15 per cent, or $28 million, to $212 million. Operating profit in the Americas was $86 million, or 72 per cent higher than last year. In the UK & Europe, income fell $199 million, to $68 million. Growth in client revenues was strong, particularly in foreign exchange and derivatives sales, trade finance and cash management. However this was offset by a loss of $116 million incurred on the exchange of capital notes held in Whistlejacket, and $131 million writedowns and trading losses in asset backed securities in turbulent market conditions during the second half of the year. Operating expenses were up $136 million, to $460 million, reflecting continued investment in product development, new business initiatives and higher salary costs, mainly performance related pay. Other impairment charges increased, due to a $17 million intangible asset impairment related to Whistlejacket, and $35 million impairment in asset backed securities held. Product Performance Trade and Lending income increased 23 per cent to $1,236 million, with underlying income growing 19 per cent. Trade income grew as volumes increased, driven in part by supply-chain financing and receivables services, partially offsetting the impact of tightening margins. While higher loan origination activities grew lending assets, this was offset by active loan sales and structured credit transactions to optimise capital deployment. Lending income was up 19 per cent. Global Markets' income grew 41 per cent to $2,673 million. Client revenues grew significantly on the back of improved product cross-selling efforts and higher client penetration. Derivatives and foreign exchange sales grew income by 60 per cent. Client income grew over 70 per cent in the debt capital markets and corporate finance units on the back of strong loan syndication and bond issuance volumes combined with the completion of several landmark cross-border corporate advisory and project finance transactions. Private equity investments have delivered high return on investments, with a number of realisations during the period. However, own account income was affected by losses due to writedowns and trading losses in asset backed securities of $131 million and a $116 million loss incurred on the exchange of capital notes held in Whistlejacket. Cash Management and Custody income was up 31 per cent at $1,334 million. Underlying income grew 26 per cent, as higher transaction volumes drove fee income growth, and higher cash balances increased net interest income. Securities assets under administration grew significantly as higher transaction volumes drove increased income in securities services. STANDARD CHARTERED PLC - RISK REVIEW Risk Management Review The credit environment in the majority of the Group's core markets remained generally benign throughout 2007, notwithstanding the turbulent market conditions in some western markets in the second half of the year triggered by the sub-prime mortgage crisis in the United States. The Group's strategy to pursue growth in Asia, Africa and the Middle East has resulted in no direct exposure to US sub-prime mortgages and extremely limited indirect exposure. The Group's liquidity remains strong and is being used to strengthen relationships with key clients and to continue to support growth opportunities. Market risk is tightly controlled using Value at Risk ('VaR') methodologies complemented by stress testing. VaR increased in 2007 as a consequence of increased volatility and growth in the financial markets business of the Wholesale Bank. The Wholesale Banking portfolio remains robust with new provisions continuing at a low level. The absolute level of recoveries in 2007 was lower than in recent years due to a lower stock of problem accounts after several years of benign credit conditions, and good progress in management of these accounts. Forward credit portfolio quality indicators remain stable. The Wholesale Banking asset backed securities portfolio includes mortgage backed securities and collateralised debt obligations. This portfolio, representing around two per cent of assets, has been affected by the market dislocation but has had limited impact on the Group's performance. The asset backed securities portfolio continues to be closely monitored and proactively managed. In 2007, the Consumer Banking credit portfolio performance continued to be driven primarily by country specific factors. Total net loan impairment as a percentage of loans and advances improved marginally year-on-year and gross non-performing loans were significantly lower than at last year end. There was a material improvement in Taiwan's loan impairment as compared to 2006 due to a more favourable consumer credit climate. The Consumer Banking portfolios in Singapore also performed particularly well in terms of delinquency and impairment. Economic conditions, in part resulting from political instability, led to a deterioration in credit quality in Pakistan and Thailand in 2007. Good progress is being made on the integration of risk controls and processes into the two acquisitions, Union in Pakistan and Hsinchu in Taiwan. The requirements of Basel II are broadly consistent with our established approaches to risk measurement: the Group strongly supports the principle of a more risk sensitive approach to capital adequacy, facilitated by the Basel II framework. Accordingly, we are pleased to have received from the Financial Services Authority ('FSA') in the United Kingdom approval to use the Advanced Internal Ratings Based approaches for the calculation of credit risk capital, covering the vast majority of our assets globally. We have also received a similar approval from the Hong Kong Monetary Authority in respect of our business there. Management is working closely with other regulators to ensure that the Group is well placed to benefit from the local rollout of Basel II. Risk Governance Through its risk management framework the Group seeks to efficiently manage credit, market, country and liquidity risk, which arise directly through the Group's commercial activities, as well as operational, regulatory and reputational risks which arise as a normal consequence of any business undertaking. As part of this framework, the Group uses a set of principles that describe the risk management culture the Group wishes to sustain. All risk decisions and risk management activity should be in line with, and in the spirit of, the risk principles of the Group. The principles of risk management followed by the Group include: â€¢ Balancing risk and reward: risk is taken in support of the requirements of the Group's stakeholders, in line with the Group's strategy and within its risk appetite; â€¢ Responsibility: given the Group is in the business of taking risk, it is everyone's responsibility to seek to ensure that risk taking is both disciplined and focused. The Group takes account of its social, environmental and ethical responsibilities in taking risk to produce a return; â€¢ Accountability: risk is taken only within agreed authorities and where there is appropriate infrastructure and resource. All risk taking must be transparent, controlled and reported; â€¢ Anticipation: the Group looks to anticipate future risks and seeks to ensure awareness of all risks; â€¢ Competitive advantage: the Group seeks competitive advantage through efficient and effective risk management and control. Ultimate responsibility for the effective management of risk rests with the Board of Standard Chartered PLC. Acting within an authority delegated by the Board, the Audit and Risk Committee ('ARC'), whose members are all Non-Executive Directors of the Company, reviews specific risk areas and monitors the activities of the Group Risk Committee ('GRC') and the Group Asset and Liability Committee ('GALCO'). The Board's remit for management of credit risk, country risk, market risk, operational risk, regulatory risk and reputational risk is delegated to GRC. All the Group Executive Directors ('GEDs') of Standard Chartered PLC, members of the Standard Chartered Bank Court and the Group Chief Risk Officer are members of the GRC. This committee is chaired by the Group Chief Risk Officer. GALCO, through authority delegated by the Board, is responsible for the maintenance of capital ratios and the establishment of, and compliance with, policies relating to balance sheet management including management of the Group's liquidity, capital adequacy and structural foreign exchange rate risk. GALCO membership consists of all the GEDs of Standard Chartered PLC and members of Standard Chartered Bank Court. The committee is chaired by the Group Finance Director. The committee governance structure seeks to ensure that risk management standards and policies are cascaded down through the organisation from the Board through the GRC and the GALCO to functional, regional and country level committees. Information is communicated through the country, regional and functional committees to the Group level committees, which seeks to ensure that key risk issues are addressed at the appropriate level and to provide assurance that standards and policies are being followed. The Group Executive Director with responsibility for Risk ('GED Risk') and the Group Chief Risk Officer manage a Risk function which is independent of the origination and sales functions of the businesses. The Risk function performs the following core activities: â€¢ Informs and challenges business strategy, material discussions and processes to encourage rigour, quality, optimisation and transparency in relation to risk efficiency; â€¢ Independently controls the risk management processes which seeks to ensure discipline and consistency with risk standards, policy and risk appetite; â€¢ Advises on risk management frameworks, the structuring of products and transactions, and on the assessment and measurement of risk; â€¢ Facilitates and manages risk processes which seeks to ensure operational efficiency, effectiveness and best practice; â€¢ Communicates with stakeholders to demonstrate compliance with requirements in relation to risk management; Individual GEDs and members of the Standard Chartered Bank Court are accountable for risk management in their businesses and support functions, and for countries where they have governance responsibilities. This includes: â€¢ implementing the policies and standards as agreed by the GRC across all business activities; â€¢ managing risk in line with appetite levels agreed by the GRC; and â€¢ developing and maintaining appropriate risk management infrastructure and systems to facilitate compliance with risk policies. The Group's Risk Management Framework ('RMF') identifies the risk types, each of which is managed by a designated Risk Type Owner ('RTO'). The RTOs, who are all approved persons under the FSA regulatory framework, have responsibility for establishing minimum standards and governance and for implementing governance and assurance processes. The RTOs report up through specialist risk committees to the GRC or GALCO. The GED Risk and the Group Chief Risk Officer, together with Director, People, Property and Assurance and Group Internal Audit, provide assurance, independent from the businesses, that risk is being measured and managed in accordance with the Group's standards and policies. Risk Appetite Risk appetite is an expression of the amount of risk the Group is prepared to take to achieve its strategic objectives. The Group's risk appetite defines the acceptable level of earnings volatility. Recognising a range of outcomes as business plans are implemented, risk appetite reflects the Group's capacity to sustain potential losses at varying levels of probability, based on available capital resources. The Group has defined its risk appetite in the context of three key criteria: the overall capacity to take risk; balancing the expectations of all key stakeholders; and support for the Group's credit rating. The Group uses a range of quantitative risk indicators including capital ratios, profitability, return on equity, portfolio credit risk profile and market risk VaR, through which senior management monitor the Group's risk profile. In addition to financial measures of risk, the Group also controls risk through concentration caps and underwriting policies. Measures vary by country, business and product area. The annual business planning and regular performance management processes aim to ensure the expression of risk appetite remains appropriate. Stress Testing Stress testing and scenario analysis are used to assess the financial and management capability of the Group to continue operating effectively under extreme but plausible trading conditions. Such conditions may arise from economic, legal, political, environmental, and social factors. Stress testing and scenario analysis help to inform management with respect to: â€¢ the identification of potential future risks; â€¢ the setting of the Group's risk appetite; â€¢ the nature and dynamics of the risk profile; â€¢ the robustness of risk management systems and controls; â€¢ the adequacy of contingency planning; and â€¢ the effectiveness of risk mitigants. The stress testing framework has been implemented to meet the following requirements: â€¢ enable the Group to set and monitor its risk appetite; â€¢ identify key risks to the Group's strategy, financial position, and reputation; â€¢ assess the impact on the Group's profitability and business plans; â€¢ seek to ensure effective governance, processes and systems are in place to co-ordinate and integrate stress testing; â€¢ inform senior management; and â€¢ satisfy regulatory requirements. The stress testing forum is led by the Risk function with participation from the businesses, Finance and Group Treasury. Its primary objective is to seek to ensure the Group understands the earnings volatility and capital implications of given stress scenarios. A key responsibility of the stress testing forum is to generate and consider pertinent and plausible scenarios that have the potential to adversely affect the Group. Stress Testing continued In view of recent market turbulence, stress testing activity has been intensified at country, business and Group levels, with specific focus on certain asset classes, client segments and the potential impact of macro economic factors. Stress tests have taken into consideration possible future scenarios that could arise as a result of prevailing market conditions. The stress tests provide the Group with an understanding of the way in which its portfolios may react to stress events and the management actions that would need to be taken if these scenarios unfold. The results confirm that the Group's geographic and business diversity reduce the impact at a Group level with no material vulnerabilities in the short-term in the Group's overall portfolio. Credit Risk Credit Risk Management Credit risk is the risk that a counterparty to a financial instrument will cause a financial loss for the Group by failing to discharge an obligation. Credit exposures include both individual borrowers and groups of connected counterparties, and portfolios in the banking and trading books. The Group Chief Credit Officer ('GCCO') is the RTO for credit risk. The standards and Groupwide credit policies recommended by the GCCO are considered and approved by the GRC, which also oversees the delegation of credit authorities. Policies and procedures that are specific to each business are established by both Consumer and Wholesale Banking. These are consistent with the Group-wide credit policies, but are adapted to reflect the different risk environments and portfolio characteristics. There are Chief Risk Officers for both the Consumer and Wholesale Banking businesses, who have their primary reporting line into the Group Chief Risk Officer. This ensures the independence of the Risk function from the origination and sales functions. Risk Mitigation Collateral types which are eligible for risk mitigation include: cash; residential, commercial and industrial property; fixed assets such as motor vehicles, aircraft, plant and machinery; marketable securities; commodities; bank guarantees and letters of credit. The Group also enters into collateralised reverse repurchase agreements. Risk mitigation policies control the approval of collateral types. Collateral is valued in accordance with the Group's risk mitigation policy, which prescribes the frequency of valuation for different collateral types. The valuation frequency is driven by the level of price volatility of each type of collateral. Collateral held against impaired loans is maintained at fair value. The valuation of collateral is monitored regularly and is back-tested at least annually. Concentration Risk Credit concentration risk in the Wholesale Banking portfolio is managed through the Credit Issues Forum, which is chaired by the Wholesale Bank Chief Risk Officer and comprises members of senior management from the Risk function and the business. Various concentration dimensions are assessed including industry sector, geographic spread, credit rating, customer segment and exposure to single counterparties or groups of related counterparties. Credit concentration risk in Consumer Banking is managed within exposure limits set for each product segment in each country. These limits are reviewed at least annually and are approved by the responsible business and risk officer in accordance with their delegated authority level. Derivatives The credit risk arising from derivatives is managed as part of the overall lending limits to banks and customers. The amount of credit risk is the current positive fair value of the underlying contract together with potential exposures from future market movements. The Group further limits its exposure to credit losses in the event of default by entering into master netting agreements with certain market counterparties. As required by IAS 32, exposures are not presented net in the financial statements as in the ordinary course of business they are not intended to be settled net. Where appropriate, derivatives are used to reduce credit risks in the portfolio. Due to their potential impact on income volatility, derivatives are only used in a controlled manner and within a pre-defined volatility expectation. Securities Within Wholesale Banking, the Underwriting Committee approves the portfolio limits and parameters by business units for the underwriting and purchase of all pre-defined securities assets to be held for sale. The Underwriting Committee is established under the authority of the GRC. The business operates within set limits, which include country, single issuer, holding period and credit grade limits. The Underwriting Committee approves underwriting applications. Day to day credit risk management activities are carried out by Markets & Institution Risk Management ('MIRM') whose activities include oversight and approval of temporary excesses within the levels as delegated by the Underwriting Committee. Issuer risk monitoring is performed by Group Market Risk, whilst the counterparty re-settlement and settlement risk arising on the sale and purchase of securities is monitored by MIRM. The price risk in respect of these assets is controlled by the Market Risk function. Wholesale Banking Credit Risk Credit risk is managed through a framework which sets out policies and procedures covering the measurement and management of credit risk. There is a clear segregation of duties between transaction originators and the approvers in the Risk function. An alphanumeric grading system is used for quantifying the risk associated with a counterparty. The grading is based on a probability of default measure, with customers analysed against a range of quantitative and qualitative measures. The numeric grades run from 1 to 14. Counterparties with lower credit grades are assessed as being less likely to default. An A to C scale is assigned to the original numeric rating scale, to enable more granular mapping of the probability of default, which results in more refined risk assessment, risk control and pricing. A counterparty with an A suffix has a lower probability of default than a counterparty with a C suffix. Credit grades 1A to credit grade 12C are assigned to performing customers while credit grades 13 and 14 are assigned to non-performing (or defaulted) customers. There is no direct relationship between the Group's internal credit grades and those used by external rating agencies. The Group's credit grades are not intended to replicate external credit grades, although as the factors used to grade a borrower are often similar, a borrower rated poorly by an external rating agency is typically rated in the lower rank of the Group's internal credit grades. Credit Risk Management continued In addition to nominal aggregate exposure, expected loss is used in the assessment of individual exposures and for portfolio analysis. Expected loss is the long-run average credit loss across a range of typical economic conditions. It is used in the delegation of credit approval authority and must be calculated for every transaction to determine the appropriate level of approval. Significant exposures are reviewed and approved centrally through a Group or regional level credit committee. These committees derive their authority from GRC. To assist risk officers in monitoring the portfolio, various internal risk management reports are available on a regular basis, providing individual counterparty, counterparty group and portfolio exposure information, credit grade migration information, the status of accounts showing signs of weakness or financial deterioration and updates on credit markets. Internal Ratings Based ('IRB') portfolio metrics are widely used. Consumer Banking Credit Risk Credit risk in Consumer Banking is also managed through a framework of policies and procedures. Credit origination uses standard application forms, which are processed in central units using largely automated approval processes. Where appropriate to the customer, the product or the market, a manual approval process is in place. As with Wholesale Banking, origination and approval roles are segregated. To aid Credit Managers in portfolio management, regular internal risk management reports contain information on key environmental and economic trends across major portfolios and countries, portfolio delinquency and loan impairment performance, as well as IRB portfolio metrics including migration across credit grades and other trends. Credit grades within Consumer Banking are based on a probability of default calculated using advanced IRB models. For portfolios where such models have not yet been developed, the probability of default is calculated using portfolio delinquency flow rates. An alphanumeric grading system identical to that of the Wholesale Banking business is used as an index of portfolio quality. Loan Portfolio Loans and advances to customers have grown by $16.5 billion to $157.0 billion. The total Consumer Banking portfolio has grown by $3.6 billion since December 2006. The majority of the growth has been in the SME business, with nearly half of that growth coming from Korea. The Singapore mortgage portfolio also grew significantly, fuelled by a buoyant property market. Growth in the Wholesale Banking customer portfolio was $12.9 billion, or 21 per cent. Over 40 per cent of that growth was in Asia Pacific, widely spread across a number of countries in that region. The significant growth in Americas, UK & Europe primarily reflects the increased contribution from the Global Markets products. Exposures to banks grew by 79 per cent. This reflects the Group's strong liquidity position, with much of that liquidity placed with high quality bank counterparties. The growth was well spread across geographies, with about two thirds of it in Asia Pacific. Single borrower concentration risk has been mitigated by active distribution of assets to banks and institutional investors. The Group has achieved additional risk distribution through credit default swaps and synthetic risk transfer structures. The Wholesale Banking portfolio remains well diversified across both geography and industry, with no significant concentration within the industry classifications of Manufacturing; Financing, insurance and business services; Commerce; or Transport, storage and communication. 2007 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 11,845 4,615 2,441 22,634 6,333 Other 2,288 1,396 1,002 4,712 3,929 Small and medium enterprises 1,188 1,687 828 5,937 2,375 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 15,321 7,698 4,271 33,283 12,637 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 16 163 102 26 186 Construction 111 35 38 204 246 Commerce 1,865 2,094 369 434 2,510 Electricity, gas and water 550 76 45 176 352 Financing, insurance and business services 2,129 1,858 606 910 2,276 Governments - 3,220 3,941 8 26 Mining and quarrying - 31 8 93 159 Manufacturing 1,908 701 453 3,533 5,896 Commercial real estate 1,050 675 3 1,094 995 Transport, storage and communication 313 323 209 124 680 Other 148 338 7 424 268 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 8,090 9,514 5,781 7,026 13,594 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (47) (40) (25) (80) (182) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 23,364 17,172 10,027 40,229 26,049 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 15,156 2,531 928 1,504 4,866 ---------------------- -------- -------- -------- -------- -------- 2007 ---------------------------------------------------- India Middle Africa Americas Total $million East $million UK & $million & Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 1,638 493 254 120 50,373 Other 1,208 2,829 615 170 18,149 Small and medium enterprises 920 660 143 2 13,740 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 3,766 3,982 1,012 292 82,262 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 51 193 335 529 1,601 Construction 225 487 48 27 1,421 Commerce 722 2,430 703 1,758 12,885 Electricity, gas and water 9 411 277 883 2,779 Financing, insurance and business services 566 1,517 227 4,540 14,629 Governments - 341 8 265 7,809 Mining and quarrying 65 238 138 2,722 3,454 Manufacturing 1,789 1,524 374 3,727 19,905 Commercial real estate 364 99 8 10 4,298 Transport, storage and communication 137 709 196 1,660 4,351 Other 18 796 22 102 2,123 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 3,946 8,745 2,336 16,223 75,255 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (56) (81) (18) (6) (535) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 7,656 12,646 3,330 16,509 156,982 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 552 1,406 371 10,365 37,679 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers include $2,716 million held at fair value through profit or loss. Total loans and advances to banks include $2,314 million held at fair value through profit or loss. Loan portfolio continued 2006 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea *,**Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 11,245 3,551 2,593 23,954 5,968 Other 2,235 1,028 771 4,612 4,523 Small and medium enterprises 919 1,548 883 4,907 2,023 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 14,399 6,127 4,247 33,473 12,514 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 53 13 53 20 108 Construction 57 29 26 262 181 Commerce 1,986 1,320 331 348 1,407 Electricity, gas and water 176 17 56 31 314 Financing, insurance and business services 1,817 1,664 724 1,176 1,901 Governments - 3,328 3,397 13 20 Mining and quarrying - 3 - 50 324 Manufacturing 2,282 701 228 3,208 4,756 Commercial real estate 819 708 5 849 720 Transport, storage and communication 277 338 149 189 495 Other 220 406 9 496 357 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 7,687 8,527 4,978 6,642 10,583 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (49) (28) (26) (86) (246) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 22,037 14,626 9,199 40,029 22,851 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 6,474 939 161 1,753 4,462 ---------------------- -------- -------- -------- -------- -------- 2006 ----------------------------------------------------- India *Middle Africa Americas *Total $million East & $million UK & $million Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 1,492 416 239 155 49,613 Other 928 2,650 483 537 17,767 Small and medium enterprises 567 323 133 - 11,303 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 2,987 3,389 855 692 78,683 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 25 65 159 297 793 Construction 198 332 78 2 1,165 Commerce 608 1,995 457 1,269 9,721 Electricity, gas and water 26 193 80 815 1,708 Financing, insurance and business services 479 1,245 182 3,264 12,452 Governments - 4 - 235 6,997 Mining and quarrying 32 352 110 1,624 2,495 Manufacturing 1,435 1,848 406 2,504 17,368 Commercial real estate 231 27 7 - 3,366 Transport, storage and communication 249 810 173 1,647 4,327 Other 5 314 39 115 1,961 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 3,288 7,185 1,691 11,772 62,353 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (33) (58) (10) (6) (542) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 6,242 10,516 2,536 12,458 140,494 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 477 1,058 387 5,353 21,064 ---------------------- -------- -------- -------- -------- -------- * Amounts have been restated as explained in note 9 on page 50. ** Amounts have been re-presented following a re-analysis of acquired loan portfolios. Total loans and advances to customers include $1,194 million held at fair value through profit or loss. Total loans and advances to banks include $1,340 million held at fair value through profit or loss. Maturity Analysis Approximately 51 per cent of the Group's loans and advances to customers are short term having a contractual maturity of one year or less. The Wholesale Banking portfolio is predominantly short term, with 79 per cent of loans and advances having a contractual maturity of one year or less. In Consumer Banking, 61 per cent of the portfolio is in the mortgage book, traditionally longer term in nature and well secured. Whilst the Other and SME loans in Consumer Banking have short contractual maturities, typically they may be renewed and repaid over longer terms in the normal course of business. 2007 --------------------------------------- One year One to Over Total or less five five $million $million years years $million $million ----------------------- -------- -------- -------- -------- Loans to individuals Mortgages 3,490 8,027 38,856 50,373 Other 8,941 7,325 1,883 18,149 Small and medium enterprises 8,028 3,494 2,218 13,740 ----------------------- -------- -------- -------- -------- Consumer Banking 20,459 18,846 42,957 82,262 ----------------------- -------- -------- -------- -------- Agriculture, forestry and fishing 1,332 227 42 1,601 Construction 1,128 249 44 1,421 Commerce 11,585 1,066 234 12,885 Electricity, gas and water 1,727 398 654 2,779 Financing, insurance and business services 12,073 2,054 502 14,629 Governments 7,618 86 105 7,809 Mining and quarrying 1,515 1,029 910 3,454 Manufacturing 15,603 3,128 1,174 19,905 Commercial real estate 2,761 1,510 27 4,298 Transport, storage and communication 2,373 980 998 4,351 Other 1,704 348 71 2,123 ----------------------- -------- -------- -------- -------- Wholesale Banking 59,419 11,075 4,761 75,255 ----------------------- -------- -------- -------- -------- Portfolio impairment provision (535) ----------------------- -------- -------- -------- -------- 156,982 ----------------------- -------- -------- -------- -------- 2006* -------------------------------------- One year One to Over Total or less five five $million $million years years $million $million ----------------------- -------- -------- -------- -------- Loans to individuals Mortgages 4,378 8,729 36,506 49,613 Other 9,141 6,393 2,233 17,767 Small and medium enterprises 6,299 2,812 2,192 11,303 ----------------------- -------- -------- -------- -------- Consumer Banking 19,818 17,934 40,931 78,683 ----------------------- -------- -------- -------- -------- Agriculture, forestry and fishing 637 63 93 793 Construction 973 161 31 1,165 Commerce 9,015 630 76 9,721 Electricity, gas and water 762 334 612 1,708 Financing, insurance and business services 9,401 2,296 755 12,452 Governments 6,759 117 121 6,997 Mining and quarrying 1,836 231 428 2,495 Manufacturing 13,951 2,239 1,178 17,368 Commercial real estate 1,996 1,343 27 3,366 Transport, storage and communication 2,079 1,360 888 4,327 Other 1,177 431 353 1,961 ----------------------- -------- -------- -------- -------- Wholesale Banking 48,586 9,205 4,562 62,353 ----------------------- -------- -------- -------- -------- Portfolio impairment provision (542) ----------------------- -------- -------- -------- -------- 140,494 ----------------------- -------- -------- -------- -------- * Amounts have been restated as explained in note 9 on page 50. Problem Credit Management and Provisioning Consumer Banking Within Consumer Banking, an account is considered to be delinquent when payment is not received on the due date. For delinquency reporting purposes, the Group follows industry standards, measuring delinquency as of 30, 60, 90, 120, and 150 days past due. Accounts that are overdue by more than 30 days are closely monitored and subject to specific collections processes. The process used for raising provisions is dependent on the product. For mortgages, individual impairment provisions ('IIP') are generally raised at 150 days past due based on the difference between the outstanding amount of the loan, and the present value of the estimated future cash flows which includes the realisation of collateral. For other secured loans (where the collateral value is typically realised in less than 12 months), loan impairment is calculated using the forced sale value of the collateral without further discounting. For unsecured products, individual provisions are raised for the entire outstanding amount at 150 days past due. For all products there are certain accounts, such as cases involving bankruptcy, fraud and death, where the loss recognition process is accelerated. A portfolio impairment provision ('PIP') is held to cover the inherent risk of losses which, although not identified, are known through experience to be present in the loan portfolio. PIP covers both loans for which payments are current and loans overdue for less than 150 days. The PIP is set with reference to past experience using a flow rate methodology, as well as taking account of judgemental factors such as the economic and business environment in core markets, and the trends in a range of portfolio indicators. These include flow rates across all delinquency buckets, portfolio loss severity, collections and recovery performance trends. Non-performing loans past due by more than 90 days or have an individual impairment provision raised against them. The cover ratio reflects the extent to which the gross non-performing loans are covered by the individual and portfolio impairment provisions. The table below sets out the total non-performing loans in Consumer Banking, which includes $517 million (2006: $909 million) of net individually impaired loans. The significant decrease in non-performing loans is a result of improved conditions in Taiwan, strong performance in Singapore, and improvements in SME portfolio quality in Korea. 2007 ---------------------------------------------------- Asia Pacific ---------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 65 61 166 336 475 Individual impairment provision (24) (26) (38) (125) (329) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 41 35 128 211 146 Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio ---------------------- -------- -------- -------- -------- -------- 2007 ---------------------------------------------------- India Middle Africa Americas Total $million East $million UK & $million & Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 56 126 38 1 1,324 Individual impairment provision (19) (75) (18) (1) (655) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 37 51 20 - 669 Portfolio impairment provision (412) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 257 ---------------------- -------- -------- -------- -------- -------- Cover ratio 81% ---------------------- -------- -------- -------- -------- -------- 2006 ---------------------------------------------------- Asia Pacific ---------------------------------------------------- Hong Singapore Malaysia Korea *Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 80 100 202 531 821 Individual impairment provision (29) (38) (67) (239) (387) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 51 62 135 292 434 Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio* ---------------------- -------- -------- -------- -------- -------- 2006 ------------------------------------------------- India *Middle Africa Americas *Total $million East & $million UK & $million Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 48 98 24 5 1,909 Individual impairment provision (17) (62) (10) (3) (852) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 31 36 14 2 1,057 Portfolio impairment provision (448) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 609 ---------------------- -------- -------- -------- -------- -------- Cover ratio* 68% ---------------------- -------- -------- -------- -------- -------- * Individual impairment provisions relating to the finalisation of acquisition fair values have been restated as explained in note 9 on page 50. Gross non-performing loans within 'Other Asia Pacific' have been increased by $153 million to reflect additional non-performing loans identified as part of the finalisation of these fair values. Wholesale Banking In Wholesale Banking, accounts or portfolios are placed on Early Alert when they display signs of weakness or financial deterioration, for example where there is a rapid decline in the client's position within the industry, a breach of covenants, non-performance of an obligation, or there are issues relating to ownership or management. Such accounts and portfolios are subject to a dedicated process with oversight involving senior officers from the Risk function and Group Special Asset Management ('GSAM'), the specialist recovery unit. Account plans are re-evaluated and remedial actions are agreed and monitored. Remedial actions include, but are not limited to, exposure reduction, security enhancement, exit of the account or immediate movement of the account into the control of GSAM. Loans are classified as impaired and considered non-performing where analysis and review indicates that full payment of either interest or principal is questionable, or as soon as payment of interest or principal is 90 days overdue. Impaired accounts are managed by GSAM which is independent of the main businesses of the Group. Where any amount is considered uncollectable, an individual impairment provision is raised, being the difference between the loan carrying amount and the present value of estimated future cash flows. Future cash flows are estimated by taking into account the individual circumstances of each customer and can arise from operations, sales of assets or subsidiaries, realisation of collateral or payments under guarantees. Cash flows from all available sources are considered. In any decision relating to the raising of provisions, the Group attempts to balance economic conditions, local knowledge and experience, and the results of independent asset reviews. Where it is considered that there is no realistic prospect of recovering an element of an exposure against which an impairment provision has been raised, then that amount will be written off. As with Consumer Banking, a PIP is held to cover the inherent risk of losses which, although not identified, are known through experience to be present in any loan portfolio. In Wholesale Banking, the PIP is set with reference to past experience using loss rates, and judgemental factors such as the economic environment and the trends in key portfolio indicators. The cover ratio reflects the extent to which gross non-performing loans are covered by individual and portfolio impairment provisions. At 75 per cent, the Wholesale Banking non-performing portfolio is well covered. The balance uncovered by individual impairment provision represents the value of collateral held and/or the Group's estimate of the net value of any work-out strategy. The following table sets out the total non-performing portfolio in Wholesale Banking, which includes net individually impaired loans of $372 million (2006: $538 million): 2007 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 92 26 23 47 358 Individual impairment provision (50) (18) (21) (12) (235) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 42 8 2 35 123 Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio ---------------------- -------- -------- -------- -------- -------- 2007 ---------------------------------------------------- India Middle Africa Americas Total $million East $million UK & $million & Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 27 147 79 193 992 Individual impairment provision (25) (122) (48) (87) (618) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 2 25 31 106 374 Portfolio impairment provision (124) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 250 ---------------------- -------- -------- -------- -------- -------- Cover ratio 75% ---------------------- -------- -------- -------- -------- -------- Wholesale Banking continued 2006 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea *Other $million $million $million $million Asia Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 167 69 29 110 626 Individual impairment provision (130) (46) (25) (46) (238) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 37 23 4 64 388 Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio* ---------------------- -------- -------- -------- -------- -------- 2006 --------------------------------------------------- India *Middle Africa Americas *Total $million East & $million UK & $million Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 24 121 100 152 1,398 Individual impairment provision (22) (114) (58) (151) (830) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 2 7 42 1 568 Portfolio impairment provision (95) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 473 ---------------------- -------- -------- -------- -------- -------- Cover ratio* 66% ---------------------- -------- -------- -------- -------- -------- * Individual impairment provisions relating to the finalisation of acquisition fair values have been restated as explained in note 9 on page 50. Gross non-performing loans within 'Other Asia Pacific' have been increased by $375 million to reflect additional non-performing loans identified as part of the finalisation of these fair values. 2007 ----------------------------------------------------- Asia Pacific ----------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 22 7 1 5 11 Recoveries/provisions no longer required (25) (9) (4) (3) (5) ---------------------- -------- -------- -------- -------- -------- Net individual impairment (credit)/charge (3) (2) (3) 2 6 Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net impairment charge ---------------------- -------- -------- -------- -------- -------- 2007 ---------------------------------------------------- India Middle Africa Americas Total $million East $million UK & $million & Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 13 18 15 2 94 Recoveries/provisions no longer required (7) (11) (14) (17) (95) ---------------------- -------- -------- -------- -------- -------- Net individual impairment (credit)/charge 6 7 1 (15) (1) Portfolio impairment provision 26 ---------------------- -------- -------- -------- -------- -------- Net impairment charge 25 ---------------------- -------- -------- -------- -------- -------- 2006 ----------------------------------------------------- Asia Pacific ----------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 14 9 2 7 3 Recoveries/provisions no longer required (50) (6) (8) (3) (11) ---------------------- -------- -------- -------- -------- -------- Net individual impairment (credit)/charge (36) 3 (6) 4 (8) Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net impairment credit ---------------------- -------- -------- -------- -------- -------- 2006 ---------------------------------------------------- India Middle Africa Americas Total $million East $million UK & $million & Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 9 10 19 7 80 Recoveries/provisions no longer required (19) (18) (6) (49) (170) ---------------------- -------- -------- -------- -------- -------- Net individual impairment (credit)/charge (10) (8) 13 (42) (90) Portfolio impairment provision (2) ---------------------- -------- -------- -------- -------- -------- Net impairment credit (92) ---------------------- -------- -------- -------- -------- -------- Movement in Group Individual Impairment Provision The following tables set out the movements in the Group's total individual impairment provision against loans and advances: 2007 ----------------------------------------------------- Asia Pacific ----------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Provisions held at 1 January 2007 159 84 92 285 625 Exchange translation differences - 2 5 (1) 6 Amounts written off (161) (62) (92) (128) (468) Recoveries of acquisition fair values - - - (98) - Recoveries of amounts previously written off 34 12 16 - 42 Discount unwind (4) (4) (4) (21) (28) Other - - - - 2 ----------------------------------------------------- New provisions 113 52 109 119 484 Recoveries/pro visions no longer required (67) (40) (67) (19) (99) ----------------------------------------------------- Net charge against/(credit) to profit 46 12 42 100 385 ---------------------- -------- -------- -------- -------- -------- Provisions held at 31 December 2007 74 44 59 137 564 ---------------------- -------- -------- -------- -------- -------- 2007 ---------------------------------------------------- India Middle Africa Americas Total $million East $million UK & $million & Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Provisions held at 1 January 2007 39 176 68 154 1,682 Exchange translation differences 5 (3) 5 1 20 Amounts written off (84) (115) (19) (54) (1,183) Recoveries of acquisition fair values - - - - (98) Recoveries of amounts previously written off 19 12 1 3 139 Discount unwind (1) (1) (2) (1) (66) Other 1 7 - - 10 -------- -------- -------- -------- -------- New provisions 98 170 35 2 1,182 Recoveries/provisions no longer required (33) (49) (22) (17) (413) -------- -------- -------- -------- -------- Net charge against/(credit) to profit 65 121 13 (15) 769 ---------------------- -------- -------- -------- -------- -------- Provisions held at 31 December 2007 44 197 66 88 1,273 ---------------------- -------- -------- -------- -------- -------- 2006 ----------------------------------------------------- Asia Pacific ----------------------------------------------------- Hong Singapore Malaysia Korea *Other Kong $million $million $million Asia $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Provisions held at 1 January 2006 279 140 96 361 179 Exchange translation differences - 7 6 29 8 Amounts written off (119) (108) (51) (64) (403) Recoveries of acquisition fair values - - - (106) - Recoveries of amounts previously written off 49 8 11 8 18 Acquisitions - - - - 463 Discount unwind (2) (2) (4) (32) (7) Other (63) - - 14 1 -------- -------- -------- -------- -------- New provisions 126 71 94 131 403 Recoveries/provisions no longer required (111) (32) (60) (56) (37) -------- -------- -------- -------- -------- Net charge against/(credit) to profit 15 39 34 75 366 ---------------------- -------- -------- -------- -------- -------- Provisions held at 31 December 2006 159 84 92 285 625 ---------------------- -------- -------- -------- -------- -------- 2006 ------------------------------------------------- India *Middle Africa Americas Total $million East & $million UK & $million Other Europe S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Provisions held at 1 January 2006 40 64 60 167 1,386 Exchange translation differences 1 (2) (1) 9 57 Amounts written off (64) (88) (17) (48) (962) Recoveries of acquisition fair values - - - - (106) Recoveries of amounts previously written off 17 12 2 3 128 Acquisitions - 144 - - 607 Discount unwind (1) - (2) (2) (52) Other 1 - - 67 20 ----------------------------------------------------- New provisions 76 79 44 9 1,033 Recoveries/provisions no longer required (31) (33) (18) (51) (429) ----------------------------------------------------- Net charge against/(credit) to profit 45 46 26 (42) 604 ---------------------- -------- -------- -------- -------- -------- Provisions held at 31 December 2006 39 176 68 154 1,682 ---------------------- -------- -------- -------- -------- -------- * Amounts have been restated as explained in note 9 on page 50. Total exposures to Asset Backed Securities At 31 December 2007, the Group had the following exposures to asset backed securities prior to writedowns noted below: Asset Purchased Total Percentage Securitisation from $million of Group Whistlejacket Portfolio $million $million % ------------------------------ ------- ------- ------- ------- Residential Mortgage Backed Securities ('RMBS') 607 1,316 1,923 33 Collateralised Debt Obligations ('CDOs') 219 491 710 12 Commercial Mortgage Backed Securities ('CMBS') 830 308 1,138 19 Other Asset Backed Securities ('Other ABS') 970 1,115 2,085 36 ------------------------------ ------- ------- ------- ------- 2,626 3,230 5,856 100 ------------------------------ ------- ------- ------- ------- This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW FR EAFAKAESPEEE

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