Final Results 1 of 2

Standard Chartered PLC 27 February 2007 27 February 2007 TO CITY EDITORS FOR IMMEDIATE RELEASE STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 HIGHLIGHTS Reported Results â€¢ Operating income up 26 per cent to $8,620 million (2005: $6,861 million) â€¢ Profit before taxation up 19 per cent to $3,178 million (2005: $2,681 million) â€¢ Profit attributable to ordinary shareholders* up 18 per cent to $2,253 million (2005: $1,917 million) â€¢ Total assets up 24 per cent to $266 billion (2005: $215 billion) Results excluding acquisitions and Korea** â€¢ Operating income up 18 per cent to $6,951 million (2005: $5,904 million) â€¢ Expenses up 17 per cent to $3,733 million (2005: $3,179 million) â€¢ Profit before taxation up 11 per cent to $2,686 million (2005: $2,417 million) Performance Metrics*** â€¢ Normalised earnings per share up 11 per cent at 170.7 cents (2005: 153.7 cents) â€¢ Normalised return on ordinary shareholders' equity of 17 per cent (2005: 18 per cent) â€¢ Annual dividend per share increased 11 per cent to 71.04 cents from 64.0 cents in 2005 â€¢ Normalised cost income ratio of 55.2 per cent (2005: 54.5 per cent) â€¢ Total capital ratio at 14.3 per cent (2005: 13.6 per cent) Significant achievements â€¢ Record profit before taxation at $3,178 million â€¢ Strong organic progress with double-digit income growth in Wholesale Banking and Consumer Banking â€¢ Acquisitions of Union Bank, Pakistan and Hsinchu International Bank, Taiwan provide new growth engines â€¢ Standard and Poors long term credit rating for Standard Chartered raised to A+ Commenting on these results, the Chairman of Standard Chartered PLC, Mervyn Davies, said: 'Standard Chartered delivered another year of record income and profits in 2006, driven by strong organic growth and continued good progress in Korea. We made strategic acquisitions in Taiwan and Pakistan. We have achieved great momentum and will continue to benefit from the growth opportunities in Asia, Africa and the Middle East and from our investment in the business. We want all our stakeholders to see us as The Right Partner - Leading by Example.' * 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 39). ** Results excluding acquisitions and Korea are shown because 2006 includes the acquisitions of Union Bank Limited ('Union'), Hsinchu International Bank ('HIB') and the incremental stake in PT Permata Bank Tbk ('Permata') together with a full year of Standard Chartered First Bank Korea Limited ('SCFB') compared to only eight and a half months in 2005. *** 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 40. 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 10 Group Summary 10 Consumer Banking 11 Wholesale Banking 14 Acquisitions 17 Risk Review 18 Capital 30 Financial Statements Consolidated Income Statement 31 Consolidated Balance Sheet 32 Consolidated Statement of Recognised Income and Expenses 33 Consolidated Cash Flow Statement 34 Notes 35 Additional Information 43 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: Pakistan, United Arab Emirates ('UAE'), Bahrain, Jordan and Bangladesh; and 'Other Asia Pacific' includes: China, Indonesia, Thailand, Taiwan and the Philippines. STANDARD CHARTERED PLC - SUMMARY OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 $million $million ---------------------------------------- ------- --------- RESULTS Operating income 8,620 6,861 Impairment losses on loans and advances and other credit risk provisions (629) (319) Profit before taxation 3,178 2,681 Profit attributable to equity interests 2,278 1,946 Profit attributable to ordinary shareholders 2,253 1,917 ---------------------------------------- ------- --------- BALANCE SHEET Total assets 266,047 215,096 Total equity 17,397 12,333 Capital base 21,995 17,118 ---------------------------------------- ------- --------- INFORMATION PER ORDINARY SHARE Cents Cents Earnings per share - normalised basis 170.7 153.7 - basic 169.0 148.5 Dividend per share 71.04 64.0 Net asset value per share 1,208.9 897.3 ---------------------------------------- ------- --------- RATIOS % % Return on ordinary shareholders' equity - normalised basis 16.9 18.0 Cost income ratio - normalised basis 55.2 54.5 Capital ratios: Tier 1 capital 8.4 7.7 Total capital 14.3 13.6 ---------------------------------------- ------- --------- STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT I am very pleased to report that Standard Chartered delivered another year of record income and profits in 2006, driven by strong organic growth and continued good progress in Korea. â€¢ Profit before taxation is up 19 per cent to $3.18 billion â€¢ Income has increased 26 per cent to $8.62 billion â€¢ Normalised earnings per share growth is 11 per cent The Board is recommending an annual dividend of 71.04 cents per share. We have strong momentum in the Group, producing good financial performance while investing for future growth. Our existing businesses performed well. We made strategic acquisitions in Taiwan and Pakistan. GOVERNANCE I became Chairman of the Group in November 2006 and Peter Sands was appointed as Group Chief Executive. This is an evolution of the Group's leadership which provides continuity in strategy at a time of rapid growth. It is positive for shareholders and will enable us to continue our record of consistently good performance. An important part of my role as Chairman is to build on the relationships I have developed around the world over the past 10 years as a Board member of Standard Chartered PLC. Banking is a relationship business and that is especially true of Standard Chartered and the markets we operate in. We value highly the relationships which we have with national leaders, regulators, clients and other stakeholders and we want to be known as the right partner for them. In recent years we have considerably strengthened our Board to ensure that we have a robust level of governance in place for our business. We will continue to ensure that we have a top-quality Board in place that will challenge as well as support the Group's executive management team. In August we welcomed Lord Turner of Ecchinswell to the Board. He was Chairman of the Independent Pensions Commission until April 2006 and from 1995 to 1999 was Director General of the Confederation of British Industry. At the end of the year, Hugh Norton retired from the Board as Senior Independent Director. We are very grateful for the 11 years' service which he has given to Standard Chartered as a Board member. I would like to thank Bryan Sanderson, who stepped down as Chairman in November after serving for the three and a half years. The Group grew strongly and prospered under his chairmanship. GLOBAL ECONOMY Our relationships, deep local knowledge and international banking capability mean we are able to capitalise on opportunities in the world's most dynamic markets. The economic environment has been good. The world economy is thriving, trade is soaring, commodity markets are healthy and China and India are opening up. New trade corridors are emerging for Asia, both within the region and with other regions, and trade volumes are rising sharply. Globally, and on the ground in many of our markets, the picture looks good. The dynamics of the world economy are changing, as the global importance of Asia, Africa and the Middle East continues to grow. These changes will continue to impact the world economy. Three quarters of a billion jobs are likely to be created in Asia alone over the next decade. A young middle class is emerging across Asia. Companies in markets such as India are becoming increasingly international and, as a bank with 150 years' experience in India, we are delighted to be working with our clients as they become major forces in the global economy. Across the Middle East and parts of Africa there is a greater sense of awareness of the need to diversify economies. The combination of globalisation and deregulation are key themes for the regions in our footprint. The emergence of a new wealthy class in these markets bodes well. But inevitably there remain political and economic threats. In recent years there have also been increasing concerns about United States growth, the dollar and trade imbalances. These concerns are now joined by questions about ample liquidity, asset price inflation and whether markets are pricing sufficiently for risk. It is important to be aware of such issues. At some stage there will be a cyclical slowdown and the benign credit environment will come to an end. Banks need to be acutely aware of such risks, and must ensure they are prepared and protected. We are well-placed to gain from the many changes that are under way around the globe and will continue our focus on creating shareholder value through our existing businesses and emerging opportunities. SUMMARY During 2006 Standard Chartered made significant strategic progress. We achieved pleasing organic growth in our businesses and completed the acquisitions of Union Bank in Pakistan and Hsinchu International Bank in Taiwan. We have achieved great momentum and will continue to benefit from the growth opportunities in Asia, Africa and the Middle East and from our investment in the business. We want all our stakeholders to see us as The Right Partner - Leading by Example. We have the management depth to execute our strategy and we are attracting talented and diverse employees from around the world. The Group is in great shape and we are optimistic about the future. Mervyn Davies, CBE Chairman 27 February 2007 STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW FINAL RESULTS 2006 Standard Chartered has achieved much over the last five years. We have delivered on our promises to customers, to staff and to shareholders. 2006 was a year of continued rapid growth, strong financial performance and strategic progress. We start 2007 in great shape, with good business momentum and a clear strategy. Since 2001 our income has almost doubled. So has the number of employees, to nearly 60,000. Then we had fewer than seven million customers. Now we have over 14 million. Including Permata, we now have over 1,400 branches compared to less than 550 five years ago. Our normalised earnings per share ('EPS') have grown at a compound annual growth rate ('CAGR') of 21 per cent. I am proud to have been Group Finance Director during this period of rapid progress and growth. The fundamentals of our strategy remain the same. Our goal is to be the world's best international bank, leading the way in Asia, Africa and the Middle East. We have made great progress on our strategic journey, but there is much more to do. We see opportunities for growth across our markets. We see room for improvement on every aspect of our performance. The strategy and immediate management priorities are clear. My job is to make them happen. OUR PRIORITIES FOR 2007 - Our top priority for 2007 is to accelerate organic growth. This is the key to shareholder value creation. We increased investment in 2006 and are doing so again in 2007. - We must continue to deliver growth from our acquisitions. We do not buy to grow. We grow what we buy. In 2007 the focus will be on our most recent acquisitions in Pakistan and Taiwan. - We will continuously improve the way we work, enhancing our infrastructure and processes to improve our service to customers and to achieve greater productivity. - We must build leadership capacity, turning talented managers into true leaders. Attracting and developing the next generation of leaders is a critical challenge for me personally. - Finally, we will reinforce the brand. Standard Chartered already has a great brand, but we intend to make it much better known and much more powerful. CHINA 2006 was a year of rapid progress for our business in China. We more than doubled income to almost $300 million, tripled profits, expanded our network to 22 locations in 14 cities and almost doubled our staff numbers. 2007 will be equally exciting. We plan to incorporate our business, which will enable us to offer renminbi services to Chinese consumers. We are accelerating investment to expand our network, enhance product capabilities and reinforce infrastructure. By the end of the year, subject to regulatory approval, we would like to have around 40 locations. China Bohai Bank, in which we have a 19.99 per cent stake, is growing fast. From a greenfield start just 12 months ago, the bank has seven locations and around $1 billion in assets. China's importance for Standard Chartered goes well beyond the mainland. In Hong Kong, where we have our biggest business, we reach out across the entire Pearl River Delta, and we also benefit from Hong Kong's increasing role as China's international financial centre. Through our relationships with China's leading companies we are deeply involved in the massive growth of China's trade and investment flows across our footprint, for example in Africa. INDIA India is equally important to us. In 2006 we made profits of over $400 million, up 69 per cent on 2005. In 2007 we will continue to invest in both businesses. In Wholesale Banking we are growing right across India and are also working to partner major Indian corporates as they now look to expand outside the country. In Consumer Banking we continue to grow our distribution reach and product offer. We now have 81 branches and 36 consumer finance outlets. MIDDLE EAST The Middle East has great organic growth momentum. Not just in Dubai, but in Abu Dhabi, Qatar and elsewhere in the region. We are very well placed to seize the opportunities: our business in the UAE grew income by 32 per cent in 2006. We are leveraging the opportunities in Islamic finance, we see great potential in the Dubai International Financial Centre and are building our presence in Abu Dhabi. China, India and the Middle East are three of our biggest opportunities for organic growth. Yet there are many other markets in which Standard Chartered is growing rapidly and where we see great potential. Two examples would be Nigeria and Vietnam. We drive organic growth not just by geography but also through innovation in the products and services we offer. Our new Private Bank and our Corporate Finance business are examples. PRIVATE BANK In 2007, Consumer Banking will be rolling out our Private Bank proposition across six markets. We have already launched successfully in Korea, with Singapore soon to follow. As a new business, our Private Bank requires considerable investment in people, systems and infrastructure. It has the potential to deliver sustained, high quality earnings growth. Our Private Bank will be different in several ways. We are international yet also local. We offer both offshore and onshore banking. We are innovative, but also have history and cherish deep longstanding relationships. Our clients will experience a new and distinctive blend of capabilities. CORPORATE FINANCE Within Wholesale Banking, our Global Markets business comprises corporate finance, debt capital markets and foreign exchange and derivatives. Corporate finance includes advisory, private equity, principal finance, project finance and structured finance. Corporate finance has grown rapidly. Over the last three years income has grown by nearly 300 per cent and doubled in 2006 alone. This success is based on the seamless way in which our client relationship model works with our product teams. As a result, the number of Wholesale Banking clients from which we derive more than $1 million of income increased by 27 per cent in 2006. Organic growth for the Group accounted for over two thirds of income growth in 2006. Yet acquisitions also play an important supporting role. ACQUISITIONS: PAKISTAN AND TAIWAN In Pakistan we have had a great start. The integration of Union Bank is proceeding rapidly: we rebranded 65 Union Bank branches overnight. With a strong management team drawn from both institutions, we have continued to grow the business, and now have 115 branches. In Taiwan we are at an earlier stage. We took direct control of the Hsinchu International Bank Board in December, de-listed the bank on 18 January 2007 and are preparing to integrate it with our existing business. Due to the complexity of legal requirements in Taiwan, the amalgamation of the two entities, upon which the realisation of synergies depends, is unlikely to occur until the second half of 2007. Hsinchu's consumer lending portfolio is more or less as we expected. The small business ('SME') portfolio is of mixed quality. We will need to reshape both these portfolios to align with our customer and product profiles. As a result we anticipate that in 2007 Hsinchu's profit contribution will be offset by the costs of integration, investment initiatives and reshaping the business. We remain confident that Hsinchu will be EPS accretive and will deliver double-digit Return on Investment in 2008. We can make Hsinchu into a powerful engine of income and earnings growth, capitalising on the opportunities in Taiwan and the rapidly growing trade and investment flows across North East Asia. CONTINUOUS IMPROVEMENT The Group has already begun to become much more efficient and effective. Now we intend to accelerate progress through a continuous effort to make the way we work simpler, better and faster. In 2003 we launched an initiative called Outserve to improve our service to customers. We made great progress with this programme, improving our understanding of customer needs, reducing turnaround times and introducing systematic tracking of customer service metrics across the Group. To drive further improvement in our quality of service, we recognise we need to address the fundamental infrastructure and processes of the Group. We have therefore launched Outserve Plus, an umbrella for initiatives to enhance our operational effectiveness. Our aim is to simultaneously enhance our quality of service, make life easier for staff and customers and improve productivity. By doing this, we will create the capacity for accelerated growth. A good example of the progress we have made is in Technology Production and Operations. This is the core engine of the Group. Through hubbing, re-engineering and selective outsourcing, we have managed to improve efficiency, whilst substantially upgrading service delivery. Technology, Production and Operations costs have grown by nine per cent CAGR over the last three years, against income growth of 22 per cent CAGR over the same period. BUILDING LEADERSHIP A key priority for 2007 and one on which I place great personal focus is building leadership. To fulfil our ambitions, we must accelerate the development of talented people across the Group, turning good managers into true leaders, people with the right values and capabilities to drive the business forward. We already have a highly talented and diverse team of people, and a culture that combines performance edge with a cooperative style and a strong set of shared values. The Group is an environment that stimulates, develops and provides new opportunities. But we are not complacent. We want to develop our existing talent further and faster and attract more potential leaders. To make this happen we are expanding and improving our graduate and MBA recruitment and development, increasing external hiring and refreshing our approach to training programmes. We also welcome the management talent that has come into Standard Chartered with our recent acquisitions. REINFORCE THE BRAND Standard Chartered is a great brand, one that is well-known across our franchise. We have begun to leverage the brand more effectively over the last few years but believe that there is much more we can do. Our goal is that everyone in our markets understands our brand promise to be 'The Right Partner - Leading by Example' and recognises our trustmark. We will achieve this partly through external marketing but, equally importantly, through the way we use the brand internally. We need the brand to be embedded in everything we do and to inform every interaction with customers. Our brand is also about the way we act within the communities in which we work. For example we are very proud of our achievements with 'Seeing is Believing', our campaign to address preventable blindness. Here we have certainly been leading by example and had a huge impact. In the same way we are now putting a lot of focus on the environment and sustainable development, working out what role we should play on issues like climate change. These are our priorities for 2007 - accelerating organic growth, delivering on acquisitions, continuously improving the way we work, developing leadership and talent and reinforcing our brand. OUTLOOK We start 2007 in great shape with good momentum. While there are many potential risks and uncertainties in the world, our businesses are performing strongly and we are clear about our strategy and priorities. For the Group as a whole, including Korea and our acquisitions, we anticipate: â€¢ Continued good income momentum with both businesses delivering good double-digit income growth for the full year. â€¢ Accelerated investment and improved productivity. We are accelerating investment, in new products, new capabilities and in extending distribution. Yet we are also accelerating our drive for improved productivity, with a range of initiatives to reengineer process, increase hubbing and enhance infrastructure. In the first half of 2007, expenses growth will exceed income growth largely due to accelerating investment in Consumer Banking, particularly in China and in Private Banking. However, taking the year as a whole we expect expenses to grow broadly in line with income. â€¢ Continued focus on risk management. In Wholesale Banking, we are not as yet seeing any deterioration in our portfolio, but do anticipate a reduction in the potential for recoveries as the stock of impaired assets falls. In Consumer Banking, we expect the impairment charge to reflect the improving environment in Taiwan balanced by the inclusion of our most recent acquisitions and the changing mix and maturity of the portfolio, such as the growth of the unsecured and SME portfolios. SUMMARY 2006 has been another very good year for Standard Chartered. I would like to thank our customers and shareholders for their support; and the Group's staff for their professionalism, enthusiasm and commitment. We look forward to another good year. Peter Sands Group Chief Executive 27 February 2007 STANDARD CHARTERED PLC - FINANCIAL REVIEW Group Summary The Group has delivered another strong performance in the year ended 31 December 2006. Profit before taxation of $3,178 million was up 19 per cent compared to 2005, with income up 26 per cent and a normalised cost income ratio of 55.2 per cent compared to 54.5 per cent in 2005. Normalised earnings per share has increased by 11 per cent to 170.7 cents. (Refer to note 4 on page 39 for the details of basic and diluted earnings per share). Operating Income and Profit 2006 2005 Increase/ $million $million (decrease) % --------------------------------------- ------ ------ ------ Net interest income 5,328 4,335 23 ------ ------ ------ Fees and commissions income, net 1,881 1,495 26 Net trading income 920 769 20 Other operating income 491 262 87 ------ ------ ------ 3,292 2,526 30 --------------------------------------- ------ ------ ------ Operating income 8,620 6,861 26 Operating expenses (4,796) (3,811) 26 --------------------------------------- ------ ------ ------ Operating profit before impairment losses and taxation 3,824 3,050 25 Impairment losses on loans and advances and other credit risk provisions (629) (319) 97 Other impairment (15) (50) (70) Loss from associates (2) - - --------------------------------------- ------ ------ ------ Profit before taxation 3,178 2,681 19 --------------------------------------- ------ ------ ------ See Group Structure on page 11 for analysis of results with Acquisitions, Korea and Underlying business shown separately. Operating income grew $1,759 million, or 26 per cent, to $8,620 million. Korea and other acquisitions contributed $712 million or 10 per cent. As in 2005, there was double-digit income growth in both Consumer Banking and Wholesale Banking with Consumer Banking increasing 23 per cent and Wholesale Banking 28 per cent. In both businesses income growth was across a broad range of geographies, products and segments. Net interest income grew $993 million, or 23 per cent to $5,328 million. Korea and other acquisitions contributed $416 million or 10 per cent. There was a strong increase in deposit balances in most geographies. Net interest margins remained flat compared to 2005 with increases in deposit spreads offset by reduced margins in the main mortgage markets. Net fees and commissions income grew $386 million, or 26 per cent, to $1,881 million. Korea and other acquisitions contributed $148 million or 10 per cent. The growth was driven by higher volumes in wealth management, cash management and global markets products across all markets. Net trading income grew $151 million, or 20 per cent, to $920 million. Korea and other acquisitions contributed $7 million or one per cent. Income was driven higher by increased foreign exchange dealing by both Consumer and Wholesale Banking customers. Good positioning, increased customer flows and enhanced product capabilities further supported income growth. Other operating income grew $229 million, or 87 per cent, to $491 million. Korea and other acquisitions contributed $141 million or 54 per cent. This increase primarily reflects realised gains in the Group's private equity business, and better than expected performance of SME assets in Korea that were fair valued at acquisition. Operating expenses grew $985 million, or 26 per cent, to $4,796 million. Korea and other acquisitions contributed $431 million or 11 per cent. Overall expense growth was broadly in line with income growth. Both businesses continued to invest in infrastructure and technology to expand in fast growing markets and to support future income growth. Consumer Banking also invested in its distribution capability whilst Wholesale Banking continued to invest in product and staff capabilities. Operating profit before impairment losses and taxation increased by $774 million, or 25 per cent, to $3,824 million. Korea and other acquisitions contributed $281 million or nine per cent. Impairment losses on loans and advances and other credit risk provisions ('loan impairment') grew $310 million, or 97 per cent, to $629 million. Korea and other acquisitions contributed $53 million or 17 per cent. The credit environment has generally remained benign through 2006 with the increase in impairment almost wholly attributable to Consumer Banking, where impairment rose $296 million, or 70 per cent, to $721 million. This was primarily due to the unsecured lending charge in Taiwan which largely arose during the first half of the year. Wholesale Banking was again in a net recovery position, driven by a significant decline in new provisions offset by a reduction in recoveries, although this was at a slightly reduced level to 2005, down $14 million, or 13 per cent, to $92 million. Profit before taxation increased $497 million, or 19 per cent to $3,178 million. Korea contributed $190 million or seven per cent and other acquisitions contributed $38 million, or one per cent, of this increase. Group Structure There have been a number of changes to the Group's structure which impact the presentation of the financial results during 2006 and 2005. On 5 September 2006 the Group acquired 95.4 per cent of Union, a provider of Wholesale and Retail Banking products in Pakistan. On 30 December 2006 the assets and business of Union and the Standard Chartered Bank branch in Pakistan were amalgamated into Standard Chartered Bank (Pakistan) Limited. The Group owned 99.0 per cent of the combined entity at 31 December 2006. On 19 October 2006 the Group acquired a controlling interest in Hsinchu International Bank Limited ('HIB'), a provider of Wholesale and Retail Banking products in Taiwan. The acquisition was achieved through a successful tender offer. The Group owned 96.2 per cent of HIB at 31 December 2006. On 5 September 2006 the Group acquired a further 12.96 per cent in Permata, a provider of Wholesale and Retail Banking products in Indonesia. The Group owned 44.51 per cent of Permata at 31 December 2006. The results of Union, HIB and the incremental stake in Permata are shown together as 'Acquisitions' and referred to in the discussions of results as 'other acquisitions'. The Group's stake in Permata is accounted for as a joint venture and therefore proportionately consolidated. The Group has owned SCFB since 15 April 2005, and on 28 November 2005 the assets and businesses of the Standard Chartered Bank branch in Korea were transferred to SCFB. The impact of the post acquisition results of SCFB in the 2005 results, together with the transfer of the branch, affect the comparability of the results for 2006 compared to 2005. The 2005 results for 'Korea' reflect a full year of the Standard Chartered Bank branch together with the post acquisition results of SCFB. To facilitate a meaningful review of the Group's results, the table below segments the Group's results into 'Acquisitions', 'Korea' and the rest of the Group, which are shown as 'Underlying'. 2006 2005 -------------------------------------------- ---------------------------- Acquisitions Korea* Underlying As Korea* Underlying As $million $million (excluding reported $million (excluding reported Korea and $million Korea) $million acquisitions) $million $million ---------------- ------- ------- ------- ------- ------- ------- ------- Net interest income 94 1,147 4,087 5,328 825 3,510 4,335 ------- ------- ------- ------- ------- ------- ------- Fees and commissions income, net 41 152 1,688 1,881 45 1,450 1,495 Net trading income 6 64 850 920 63 706 769 Other operating income 6 159 326 491 24 238 262 ------- ------- ------- ------- ------- ------- ------- 53 375 2,864 3,292 132 2,394 2,526 ---------------- ------- ------- ------- ------- ------- ------- ------- Operating income 147 1,522 6,951 8,620 957 5,904 6,861 Operating expenses (91) (972) (3,733) (4,796) (632) (3,179) (3,811) ---------------- ------- ------- ------- ------- ------- ------- ------- Operating profit before impairment losses and taxation 56 550 3,218 3,824 325 2,725 3,050 Impairment losses on loans and advances and other credit risk provisions (18) (96) (515) (629) (61) (258) (319) Other impairment - - (15) (15) - (50) (50) Loss from associates - - (2) (2) - - - ---------------- ------- ------- ------- ------- ------- ------- ------- Profit before taxation 38 454 2,686 3,178 264 2,417 2,681 ---------------- ------- ------- ------- ------- ------- ------- ------- * Reported on a segmental basis Consumer Banking The following tables provide an analysis of operating profit by geographic segment for Consumer Banking: 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 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 Group Total S Asia Head $million $million Office $million Operating Income 323 545 257 77 3,415 4,684 Expenses (201) (280) (194) (51) (1,760) (2,641) Loan impairment (46) (61) (12) 1 (616) (721) ------------ --------- --------- --------- --------- --------- --------- Operating profit/(loss) 76 204 51 27 1,039 1,322 ------------ --------- --------- --------- --------- --------- --------- 2005 ----------------------------------------------------------------- Asia Pacific ----------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million $million Asia $million Pacific $million -------------- ---------- ---------- ---------- ---------- ---------- Operating Income* 976 324 210 697 611 Expenses (415) (126) (95) (505) (342) Loan impairment (34) (30) (37) (56) (166) Other impairment - - - - - -------------- ---------- ---------- ---------- ---------- ---------- Operating profit 527 168 78 136 103 -------------- ---------- ---------- ---------- ---------- ---------- 2005 ----------------------------------------------------------------- India Middle Africa Americas Underlying Consumer $million East $million UK & $million Banking & Other Group Total S Asia Head $million $million Office $million ------------ --------- --------- --------- --------- --------- --------- Operating Income* 286 379 258 61 3,105 3,802 Expenses (179) (182) (205) (52) (1,596) (2,101) Loan impairment (56) (33) (13) - (369) (425) Other impairment - - (3) - (3) (3) ------------ --------- --------- --------- --------- --------- --------- Operating profit 51 164 37 9 1,137 1,273 ------------ --------- --------- --------- --------- --------- --------- * Restated. See note 2 on page 35. An analysis of Consumer Banking income by product is set out below: 2006 2005* Operating Income by product Total Total $million $million ------------------------------------------- ------ ------ Cards, Personal Loans and Unsecured Lending 1,799 1,528 Wealth Management and Deposits 1,938 1,442 Mortgages and Auto Finance 780 758 Other 167 74 ------------------------------------------- ------ ------ Total operating income 4,684 3,802 ------------------------------------------- ------ ------ * Restated. See note 2 on page 35. Consumer Banking income grew $882 million, or 23 per cent, to $4,684 million. Korea and other acquisitions contributed $572 million, or 15 per cent. Organic income growth in the second half of 2006 over the same period last year was 14 per cent. The increased focus of the business on Wealth Management products and the SME segment has delivered business growth in most markets. Over 230 products were rolled out by Wealth Management across the network in 2006 compared to 120 in 2005. There was good income growth across most geographies, with over ten countries now contributing more than $100 million of income. The markets of Singapore and India have both grown revenues at 13 per cent. MESA continued to increase its rate of income growth, with income growing at 44 per cent in 2006, compared to 28 per cent in 2005. Expenses grew $540 million, or 26 per cent, to $2,641 million. Korea and other acquisitions contributed $376 million, or 18 per cent. The business slowed cost growth in the first half of the year to mitigate the impact of the Taiwan credit issue. As management action contained the Taiwan issue, so investment spend was almost doubled in the second half of 2006. Expenditure was targeted at customer facing areas such as branches and the sales force. 25 new branches were added together with 40 new consumer finance branches, and 107 ATMs were installed. 2006 also saw significant expenditure on the new private banking offering with a new brand, premises in Singapore and the acquisition of key staff. Impairment increased $296 million, or 70 per cent, to $721 million. Korea and other acquisitions contributed $49 million, or 11 per cent. Excluding Taiwan, the increase was $146 million, or 45 per cent, to $473 million. The first half charge for the unsecured portfolio in Taiwan was $203 million, up from $75 million in the second half of 2005. In the second half of 2006 the Taiwan impairment charge of $45 million was down sharply from the first half, as the credit situation trended towards more normal levels. The increase in impairment outside Taiwan reflects the recent business emphasis on unsecured lending and is commensurate with the higher risk and reward levels. The credit environment in Thailand still warrants caution, although the environment in Indonesia has improved from the first half. Operating profit grew $49 million, or four per cent, to $1,322 million. Hong Kong delivered income growth of $43 million, or four per cent over 2005. Wealth Management income increased 18 per cent with innovative product launches, such as Marathon Savings and My Dream account, driving growth. The SME segment grew income by 41 per cent as new product launches and a 36 per cent increase in the sales force helped grow the business. Other products, such as the new HIBOR based mortgage offering, helped bolster income. Expense growth of $13 million, or three per cent, was in line with income growth and reflected investment in the sales and distribution capability, as well as enhancements to ATMs and call centres. Impairment increased by $19 million, or 56 per cent, to $53 million. The increase was due to lower recoveries and increased impairment in line with business volume growth. Operating profit was up two per cent to $538 million. Customer liabilities grew over 13 per cent, whilst assets reduced four per cent as mortgage balances reduced in a strongly competitive market. Singapore grew income by $43 million, or 13 per cent, to $367 million, a much improved performance compared to 2005. Wealth Management grew strongly with new products such as Xtrasaver and Family Link supporting the increase in customer liabilities by 30 per cent. Unit trust sales increased over 40 per cent driving up fee income. Within SME new product launches, such as SME Express, helped deliver strong growth in income. Mortgage income fell 13 per cent, as improved margins were more than offset by a competitive environment and repricing actions by competitors, which increased attrition and reduced customer assets by 11 per cent. Expenses grew $16 million, or 13 per cent, to $142 million reflecting significant investment in new products and the forthcoming Private Bank launch. Impairment was up $6 million, or 20 per cent, to $36 million, reflecting lower releases albeit the credit environment remained benign. The gains in income drove operating profit up $21 million, or 13 per cent, to $189 million. Malaysia grew income by $11 million, or five per cent, to $221 million. Wealth Management grew strongly, with growth in customer liabilities of 22 per cent and product launches, such as Premium Currency Investment and FlexiFD, driving income growth. Unsecured lending also grew as enhanced service and new products attracted customers. Expenses increased by $6 million, or six per cent, to $101 million as the business invested in its distribution channels with five new branches launched in the second half of the year and a further three branches upgraded. There was also investment in customer service initiatives, such as E-statements. Impairment remained flat year on year at $36 million, as the credit environment remained benign. Operating profit increased $6 million, or eight per cent. Korea includes SCFB which was acquired on 15 April 2005. As a result the comparatives reflect in large part the comparison of 12 months ownership in 2006 versus eight and a half months in 2005. Korea income has grown $449 million, or 64 per cent to $1,146 million. This includes $106 million of recoveries in respect of assets that had been fair valued on acquisition. Growth has been driven by Wealth Management products and the SME segment. During 2006 over 100 new Wealth Management products were introduced to the market place and over 400,000 new customer accounts added. SME growth was driven by record Business Instalment Loan sales and new products such as Business Plus. Expenses increased $294 million or 58 per cent to $799 million. This reflects investment in business infrastructure, with investment in four new consumer finance centres and three priority banking centres and in ATM upgrades. Impairment increased $32 million or 57 per cent. This increase was in line with the business' focus and growth in unsecured lending and a rise in personal bankruptcy. The increase was mitigated by tighter credit control measures and dedicated collection teams to address the impact of rising personal bankruptcy. Operating profit was up 90 per cent to $259 million. Other Asia Pacific grew income by $118 million, or 19 per cent, to $729 million. This growth was constrained by Taiwan where contraction in the unsecured lending business reduced income by 27 per cent. Growth was particularly strong in China, where income more than doubled as mortgage balances increased 66 per cent and the SME segment doubled revenue on the back of strong cash sales. Expenses grew $103 million, or 30 per cent, to $445 million. Around half of the increase in expenses came in China as investment in 12 new branches and 20 ATMs drove up costs. As a result of the reduced income in Taiwan, operating profit before impairment only increased by $15 million, or six per cent, to $284 million. Impairment increased by $224 million, or 135 per cent, to $390 million mainly due to the unsecured impairment charge in Taiwan. The operating profit reported in 2005 of $103 million deteriorated to an operating loss of $106 million in 2006. Acquisitions contributed an operating profit of $20 million. India grew income by $37 million, or 13 per cent, to $323 million. Income from the SME segment grew strongly, driven by Business Instalment Loans, new products such as SME Trade, and the addition of six additional distribution locations focused on SME business during the year. Wealth Management grew strongly with good growth in investment services and insurance sales and customer liabilities growing 16 per cent. Mortgage and auto income reduced eight per cent as assets declined in a competitive market although there were some benefits as the bank took the opportunity to exit unprofitable business. Personal loans grew strongly with unsecured lending balances increasing 30 per cent, with products such as Smart Credit driving growth. Expenses increased $22 million, or 12 per cent, as the business invested in distribution capabilities opening 30 new Consumer Finance centres, 18 ATMs and a new branch in Mumbai. Impairment reduced by $10 million or 18 per cent, reflecting the impact of a significant one time legal recovery in the first half of 2006. Operating profit increased $25 million, or 49 per cent, to $76 million. MESA grew income by $166 million, or 44 per cent, to $545 million. Political difficulties in Lebanon, Sri Lanka and Bangladesh made trading conditions difficult in these countries, although this was offset by the booming economies of the Gulf states. Growth came from SME, Wealth Management and unsecured lending. The SME segment progressed with strong asset growth led by the Business Instalment Loan, and customer liability accounts which more than tripled in volume as the business targeted growth in current and savings accounts. Wealth Management income increased sales of bancassurance products and foreign exchange activities grew. Customer liabilities increased by 13 per cent as new savings products, such as Islamic savings were launched. The unsecured business grew with the launch of new products such as Personal Instalment loans which helped build customer assets. In MESA overall, assets increased 20 per cent and customer liabilities rose by 21 per cent. Expenses increased $98 million, or 54 per cent, to $280 million, as the business invested to support the strong income growth. Investment was primarily in the areas of sales and distribution, with 22 new ATMs in UAE and an expanded sales force. Impairment increased $28 million, or 85 per cent, in line with business volume growth. Operating profit increased $40 million, or 24 per cent, to $204 million. Acquisitions contributed $4 million to operating profit. Africa income was broadly flat year on year at $257 million although excluding Zimbabwe, income grew nine per cent. Income increased across a broad range of geographies particularly in Nigeria 62 per cent, Zambia 59 per cent and Uganda 11 per cent, and there was double-digit asset growth in both unsecured lending and the SME segment with a sustained sales drive and new products such as Express Trade. Wealth Management introduced further new products, such as the Safari Account and the Junior Savings account, which helped to grow customer liabilities 14 per cent. Expenses decreased by $11 million, or five per cent, to $194 million although excluding Zimbabwe there was a five per cent increase. The business continued to invest, with a new branch in both Nigeria and Uganda and new core banking systems in South Africa and Nigeria. The South African business was restructured which delivered significant cost improvements. Impairment remained flat at $12 million with little change seen to the credit environment. Operating profit increased $14 million, or 38 per cent, to $51 million. The Americas, UK and Group Head Office income grew by $16 million or 26 per cent, to $77 million. This was due primarily to improvements in the Jersey business where deposit volumes were up five per cent and widening margins drove revenue higher. Expenses and impairment remained flat at 2005 levels. Operating profit tripled from $9 million to $27 million. Consumer Banking product performance Cards and Personal Loans delivered a $271 million, or 18 per cent, increase in income to $1,799 million. The contraction in Taiwan held back growth in this product area. In other geographies new product launches, such as CashOne, Business Platinum Card and Titanium Card helped grow the business, particularly in MESA. Personal loans also grew strongly in 2006. In Wealth Management, product innovation and an aggressive drive to capture customer deposits has helped to increase income by $496 million, or 34 per cent, to $1,938 million. Product development and deployment has accelerated in 2006 bringing nearly double the number of new products to market than in previous years. Product sophistication continues to grow strongly, particularly in the area of investment and unit trust products. Strong geographic contributors include MESA, Singapore, Malaysia, India and Hong Kong. Liabilities growth has been double-digit in 2006. Mortgage income continued to be under pressure in 2006. Rising interest rates and intense competition have served to keep margins under pressure in some markets, particularly Hong Kong, Singapore and India. Income increased by $22 million or three per cent, to $780 million. Product development has helped to stem the decrease in some markets such as Hong Kong, where the ground breaking HIBOR mortgage now forms a significant part of new sales and has been widely imitated in the market place. In other markets, such as Singapore, repricing has helped improve margins and unprofitable business has been exited. Wholesale Banking The following tables provide an analysis of operating profit by geographic segment for Wholesale Banking: 2006 ---------------------------------------------------------------- Asia Pacific ---------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million Asia $million $million Pacific $million ------------- ---------- ---------- ---------- ---------- ---------- Operating Income 596 255 150 380 655 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 Group Total S Asia Head $million $million Office $million ------------ --------- --------- --------- --------- --------- --------- Operating Income 494 525 383 485 3,519 3,923 Expenses (174) (234) (219) (508) (1,969) (2,151) Loan impairment 7 8 (14) 43 101 92 Other impairment - - (9) (3) (15) (15) ------------ --------- --------- --------- --------- --------- --------- Operating profit 327 299 141 17 1,636 1,849 ------------ --------- --------- --------- --------- --------- --------- 2005 ---------------------------------------------------------------- Asia Pacific ---------------------------------------------------------------- Hong Singapore Malaysia Korea Other Kong $million $million Asia $million $million Pacific $million ------------- ---------- ---------- ---------- ---------- ---------- Operating Income* 508 190 125 260 446 Expenses (234) (120) (55) (127) (268) Loan impairment (83) (13) 7 (5) 117 Other impairment (1) - - - - -------------- ---------- ---------- ---------- ---------- ---------- Operating profit 190 57 77 128 295 -------------- ---------- ---------- ---------- ---------- ---------- 2005 ---------------------------------------------------------------- India Middle Africa Americas Underlying Wholesale $million East $million UK & $million Banking & Other Group Total S Asia Head $million $million Office $million ------------ --------- --------- --------- --------- --------- --------- Operating Income* 307 433 295 495 2,799 3,059 Expenses (127) (157) (194) (428) (1,583) (1,710) Loan impairment 6 42 (30) 65 111 106 Other impairment 1 - (8) (3) (11) (11) ------------ --------- --------- --------- --------- --------- --------- Operating profit 187 318 63 129 1,316 1,444 ------------ --------- --------- --------- --------- --------- --------- * Restated. See note 2 on page 35. An analysis of Wholesale Banking income by product is set out below: Operating Income by product 2006 2005* ------------------------------------------ Total Total $million $million ------- ------- Trade and Lending 1,006 880 Global Markets** 1,895 1,437 Cash Management and Custody 1,022 742 ------------------------------------------ ------- ------- Total operating income 3,923 3,059 ------------------------------------------ ------- ------- * Restated. See note 2 on page 35. ** 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 income grew $864 million, or 28 per cent, to $3,923 million. Korea and other acquisitions contributed $144 million or five per cent. Organic income growth in the second half of 2006 was 28 per cent over the same period last year. Growth was across a broad range of products and geographies as the client led strategy continued to deliver sustained growth. Double-digit income growth was delivered in nearly all markets with India, Hong Kong and Singapore advancing strongly. Client income continues to comprise the most significant part of the business' income. Other trading income has benefited from the absence of the Zimbabwe hyperinflation charge taken in 2005 and a strong performance in the private equity business. Expenses increased $441 million or 26 per cent to $2,151 million. Korea and other acquisitions contributed $55 million or three per cent. Investment has been directed towards expanding client coverage, extending product reach, developing the franchise, upgrading system architecture, and in regulatory compliance and control. Staff costs are increasingly directed at variable compensation with fixed remuneration forming a decreasing proportion of personnel costs. On a geographic basis expenditure has been targeted at strategically important markets such as China and India. Loan recoveries decreased from $106 million in 2005 to $92 million in 2006, although impairment charges from Korea and other acquisitions increased $4 million. The impairment charge before recoveries reduced year on year reflecting a continuing benign credit environment and the Group's traditional strong credit discipline. Operating profit increased $405 million, or 28 per cent, to $1,849 million. Growth in Risk Weighted Assets and Contingents ('RIWAC') was 26 per cent, at the same pace as overall income growth and has been focused on strategically important markets. Distribution activity has doubled in 2006 with innovative products, such as collateralised loan obligations, helping to further manage RIWAC. When looking at the performance of Wholesale Banking on a geographic basis it is important to note that it is essentially a network business primarily managed on a product and customer segment basis. Hong Kong income grew $88 million, or 17 per cent, to $596 million. Income growth was strong in cash management products which benefited from increased balances and improved margins in a rising interest rate environment. Global Markets income grew strongly with increased customer deal volumes, particularly in derivatives and foreign exchange reflecting increased product capabilities in these areas. Expenses increased $58 million, or 25 per cent, to $292 million. The business invested in sales and product capabilities to support the fast growing Global Markets business and specialised client services. Impairment decreased from a charge of $83 million in 2005 to a net recovery of $46 million in 2006 as a result of significant recoveries and effective credit control with no significant new provisions. Operating profit increased $160 million, or 84 per cent, to $350 million. Singapore income grew $65 million, or 34 per cent, to $255 million. Income grew predominantly from the client based business driven by product innovation and specialisation, with particularly strong growth in foreign exchange and derivatives. Cash Management performed well, benefiting from an enhanced product range, together with excess market liquidity and higher interest rates. There was good growth across all customer segments especially financial institutions and local corporates. Expenses increased $32 million, or 27 per cent, to $152 million as the business invested in new products and sales capabilities. Impairment decreased from $13 million in 2005 to $3 million in 2006. This was due to a continuing benign credit environment, although recoveries slowed as the stock of distressed assets continued to fall. Operating profit increased $43 million, or 75 per cent, to $100 million. Malaysia income grew $25 million, or 20 per cent, to $150 million. There was broad based growth across all products with foreign exchange and derivatives, corporate finance and Cash Management all growing strongly. Expenses increased $8 million, or 15 per cent, to $63 million driven higher by investment in business infrastructure, and in compliance and governance capabilities. Loan recoveries remained flat at $7 million and the benign credit environment together with sound risk practices resulted in no new provisions from the performing portfolio. Operating profit increased $17 million, or 22 per cent, to $94 million. Korea includes SCFB which was acquired on 15 April 2005. As a result the comparatives reflect in large part the comparison of 12 months ownership in 2006 versus eight and a half months in 2005. Korea income increased by $120 million, or 46 per cent, to $380 million. Growth has been led by client revenues, with double-digit income growth driven by foreign exchange and derivatives. There was steady growth in transaction banking products such as Sweep2Bank and supply chain finance driving growth. Expenses increased by $46 million or 36 per cent to $173 million. The increase in expenses primarily reflects investment in staff and product capabilities, partially offset by lower integration costs. Impairment was broadly flat year on year. Other Asia Pacific income grew $209 million, or 47 per cent, to $655 million. Thailand recorded double-digit income growth as client related revenues grew strongly mainly in foreign exchange and derivatives. Expenses increased $68 million, or 25 per cent, to $336 million reflecting investment in the business. Net recoveries reduced from $117 million in 2005 to $6 million in 2006, the former largely reflecting recoveries in Thailand. Operating profit increased $27 million, or nine per cent, to $322 million. Acquisitions contributed $11 million to operating profit. India income grew $187 million, or 61 per cent, to $494 million. This was driven primarily from increased client activity, notably in transaction banking where volumes rose sharply and margins rose in line with higher interest rates. The foreign exchange and derivatives business has also grown strongly from the middle market segment. Corporate finance performed strongly with several significant cross border deals, and there has been strong income from private equity, as the Group has taken the opportunity to exit a number of successful investments. Expenses increased $47 million, or 37 per cent, to $174 million, the growth being primarily due to investment in people and in performance related compensation. There has also been investment in systems capabilities. Loan recoveries were broadly flat compared to 2005, a reflection of a continuing benign credit environment together with strong risk management. Operating profit increased $140 million, or 75 per cent, to $327 million. MESA income grew $92 million, or 21 per cent, to $525 million. Client revenues continued to grow strongly with Cash Management, corporate finance and capital market products being the main contributors. Within this the Wholesale Banking business in the UAE grew income by 25 per cent. Expenses increased $77 million, or 49 per cent, to $234 million, as investment in people and infrastructure continued to support the rapid growth in income. The business also invested in establishing its presence in the Dubai International Financial Centre. Loan recoveries decreased by $34 million, or 81 per cent, to $8 million. As a result of the decline in recoveries operating profit decreased $19 million, or six per cent, to $299 million. Acquisitions contributed $3 million to operating profit. Africa income grew $88 million, or 30 per cent, to $383 million as the hyperinflation charge taken in Zimbabwe in 2005 was not repeated. This increase in income was driven by sales in core products such as lending, cash and sales. There was strong progress in corporate finance and corporate advisory services driven in part by the investment in First Africa and a new agribusiness finance team. Expenses increased $25 million, or 13 per cent, to $219 million partly due to the acquisition of new sales capabilities, the set up of the structured finance team in South Africa, and investment in infrastructure. Impairment decreased from $30 million in 2005 to $14 million in 2006, reflecting disciplined credit processes. Operating profit more than doubled increasing $78 million to $141 million. Americas, UK and Group Head Office income was down $10 million, or two per cent, to $485 million. Income was lower primarily due to private equity where the gains of 2005 were not repeated. Cash Management was up 19 per cent across the region as a result of volume growth and interest rate increases. Trade was up 10 per cent, benefiting from strong flows in commodity markets. Expansion of the foreign exchange and derivatives business resulted in double-digit growth. The key focus in UK and Americas remains on growing customer relationships that benefit the Group's international network. Expenses increased $80 million, or 19 per cent, to $508 million as the business invested in its infrastructure. Loan recoveries decreased by $22 million, or 34 per cent, to $43 million. Operating profit decreased $112 million, to $17 million. Product Performance Trade and Lending operating income increased by $126 million, or 14 per cent, to $1,006 million. Trade income grew as a 35 per cent increase in average balances more than offset pricing pressures in a fiercely competitive market. In lending, income was flat as distribution capability was built and as margins remained under pressure in a highly liquid market. Global Markets income had another very strong year with growth of $458 million, or 32 per cent, to $1,895 million as the Group benefited from the investment of recent years in product capability and direct relationship management. Rates and foreign exchange grew strongly in the core markets of Korea, India and MESA driven by foreign exchange and derivative products. Capital markets and corporate finance also posted double-digit income growth with profits from private equity investments driving up income. ALM revenues were up slightly on 2005 although conditions remained difficult in a flat yield curve environment. Cash Management and Custody income grew strongly by $280 million, or 38 per cent, to $1,022 million. Income was driven higher by increased balances, up 27 per cent, and better margins as higher interest rates prevailed through the year. Acquisitions Operating Income and Profit The impact of acquisitions on the results of the Group is not material for 2006, Union, Permata and HIB together contributing $147 million of income. Expenses for the acquisitions were $91 million. These expenses include post acquisition integration costs. The cost income ratio for the acquisitions was 61.9 per cent. Impairment losses on loans and advances was $18 million arising mainly in Union. The post-acquisition profit of Union has been included in the Group results within the MESA segment, HIB and the increased share of Permata has been included in the Group results within the Other Asia Pacific segment. The effect of the acquisitions on the geographic results is shown below. MESA segment - Total 2006 2005 ------------------------------- --------------------------------- -------- Total Acquisitions Underlying Total $million $million $million $million ------------------------------- ------- ------- ------- ------- Operating Income 1,070 51 1,019 812 Expenses (514) (34) (480) (339) Loan impairment (53) (10) (43) 9 ------------------------------- ------- ------- ------- ------- Profit before taxation 503 7 496 482 ------------------------------- ------- ------- ------- ------- Other Asia Pacific segment - Total 2006 2005 ------------------------------- --------------------------------- -------- Total Acquisitions Underlying Total $million $million $million $million ------------------------------- ------- ------- ------- ------- Operating Income 1,384 96 1,288 1,057 Expenses (785) (57) (728) (610) Loan impairment (384) (8) (376) (49) Other impairment (3) - (3) - Loss from associates (4) - (4) - ------------------------------- ------- ------- ------- ------- Profit before taxation 208 31 177 398 ------------------------------- ------- ------- ------- ------- The effect of the acquisitions on the business results for 2006 is shown below: Consumer Wholesale Total Banking Banking As $million $million reported $million ------------------------------------ ------- ------- ------- Operating Income 123 24 147 Expenses (82) (9) (91) Loan impairment (17) (1) (18) ------------------------------------ ------- ------- ------- Profit before taxation 24 14 38 ------------------------------------ ------- ------- ------- STANDARD CHARTERED PLC - RISK REVIEW Risk Management Review During 2006 the credit risk environment has generally been benign and outside of Taiwan the Group has seen little evidence of stress in its major geographies. The OECD market has seen a rise in default levels. However tight management of risk in Wholesale Banking, coupled with pro-active management of accounts has resulted in very low levels of provisions. The benign economic conditions in the Group's core markets, together with good progress on the management of problem accounts has resulted in further high levels of recoveries during the year. The Consumer Banking impairment charge for the year has been significantly impacted by the consumer credit climate in Taiwan, which particularly affected the first half of the year. The Consumer Banking business has demonstrated a strong capability for dealing with such circumstances throughout the crisis, as evidenced by the material improvement in the impairment rate in the second half. Consumer Banking continues to take initiatives to further improve its risk management capability. Risk control systems are being enhanced so the business can maintain its competitive advantage in this respect while growing assets profitably. Despite the generally benign conditions, what is noticeable is that the credit environment is exhibiting many of the characteristics that have in the past indicated a downturn. Nevertheless, liquidity remains strong across most key geographies, and the ability to distribute risk widely, or to take protection at reasonable cost, indicate that any downturn may be gradual in nature and less of a dramatic decline. The Group has made some significant acquisitions over the last two years. Risk controls and processes have been integrated into SCFB. The Group is also progressing well with the integration of the risk governance framework into its latest acquisitions in Taiwan and Pakistan. The Group strongly supports the principle of a more risk sensitive approach to capital adequacy and therefore the new Basel II framework. The Group recognises that Basel II is a driver for continuous improvement of risk management practices, but in the short term it is also a significant regulatory exercise. The Group continues its preparation for Basel II. Work started in 2002, with priority initially given to enhancing risk models to Basel II standards, and on developing the infrastructure required to gather and use the more detailed data required by the models. More recently, the Group has addressed the changes in capital management and regulatory processes in line with the Financial Services Authority ('FSA') guidelines. The Group is now in the process of applying to the FSA for formal approval of its Basel II practices. Management is also in contact with local regulators; not all regulators will adopt Basel II at the same time and their detailed requirements will differ, presenting the Group with a complex implementation process that will take the next two to three years to complete. The Group continues to work closely with the FSA on these matters, recognising its role as the lead regulator. Risk Governance Through its risk management structure the Group seeks to manage efficiently the core risks: credit, market, country and liquidity risk. These arise directly through the Group's commercial activities whilst compliance and regulatory risk, operational risk and reputational risks are normal consequences of any business undertaking. The basic 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. Risk should be taken in support of the Group strategy and within its risk appetite. â€¢ Responsibility: given the Group is in the business of taking risk, it is everyone's responsibility 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 to maximise awareness of all risk. â€¢ Risk management: the Group aims to have a world class specialist risk function, with strength in depth, experience across risk types and economic scenarios. Ultimate responsibility for the effective management of risk rests with the Company's Board. 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'). GRC, through authority delegated by the Board, is responsible for credit risk, market risk, operational risk, compliance and regulatory risk, legal risk and reputational risk. GALCO, through authority delegated by the Board, is responsible for liquidity risk, for structural interest rate and foreign exchange exposures, and for capital ratios. 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. The GRC is responsible for agreeing Group standards for risk measurement and management, and also delegating authorities and responsibilities to risk committees and to the Group and Regional Credit Committees and Risk Officers. GALCO membership consists of all the GEDs of Standard Chartered PLC and members of the Standard Chartered Bank Court. The committee is chaired by the Group Finance Director. GALCO is responsible for 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 risk. The committee process ensures that standards and policy are cascaded down through the organisation from the Board through the GRC and the GALCO to the functional, regional and country level committees. Key information is communicated through the country, regional and functional committees to Group so as 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 businesses, which: â€¢ recommends Group standards and policies for risk measurement and management; â€¢ monitors and reports Group risk exposures for country, credit, market and operational risk; â€¢ approves market risk limits and monitors exposure; â€¢ sets country risk limits and monitors exposure; â€¢ chairs the credit committee and delegates credit authorities; â€¢ validates risk models; and â€¢ recommends risk appetite and strategy. 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 activity; 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 policy. The Group's Risk Management Framework ('RMF') identifies 18 risk types, which are managed by designated Risk Type Owners ('RTOs'), who are all approved persons under the FSA regulatory framework, and who have responsibility for setting minimum standards and governance and implementing governance and assurance processes. The RTOs report up through specialist risk committees to the GRC, or in the case of liquidity risk, to the GALCO. In support of the RMF the Group uses a set of risk principles, which are sanctioned by the GRC. These comprise a set of statements of intent that describe the risk culture that the Group wishes to sustain. All risk decisions and risk management activity should be in line with, and in the spirit of, the overall risk principles of the Group. The governance process ensures: â€¢ business activities are controlled on the basis of risk adjusted return; â€¢ risk is managed within agreed parameters with risk quantified wherever possible; â€¢ risk is assessed at the outset and throughout the time that the Group continues to be exposed to it; â€¢ applicable laws, regulations and governance standards in every country in which the Group does business are abided by; â€¢ high and consistent ethical standards are applied to the Group's relationships with its customers, employees and other stakeholders; and â€¢ activities are undertaken in accordance with fundamental control standards. These controls include the disciplines of planning, monitoring, segregation, authorisation and approval, recording, safeguarding, reconciliation and valuation. The GED Risk and the Group Chief Risk Officer, together with 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. Stress Testing Objectives and purpose of stress testing Stress testing and scenario analysis are important components of the Group's risk assessment processes, and 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 which define the context within which the Group operates. It is intended that stress testing and scenario analysis will help to inform senior and middle management with respect to: â€¢ the nature and dynamics of the risk profile; â€¢ the identification of potential future risks; â€¢ the setting of the Group's risk appetite; â€¢ the robustness of risk management systems and controls; â€¢ the adequacy of contingency planning; and â€¢ the effectiveness of risk mitigants. Stress testing framework The framework has been designed to satisfy the following requirements: â€¢ identify key risks to the Group's strategy, financial position, and reputation; â€¢ ensure effective governance, processes and systems are in place to coordinate stress testing; â€¢ integrate current stress testing and scenario analysis procedures; â€¢ engage and inform senior management; â€¢ assess the impact on the Group's profitability and business plans; â€¢ enable the Group to set and monitor its risk appetite; and â€¢ satisfy regulatory requirements. Key to the framework is the formation of a Stress Testing Forum that is a formally constituted body deriving its powers from the GRC. The primary objective of this forum is to identify and assess the extreme but plausible risks to which the Group may be subjected, and to make recommendations to senior management for suitable scenarios. Group-wide scenario analysis represents a wide ranging assessment of potential impact. Therefore it is coordinated through a Group risk function, which is responsible for consolidating the analysis and highlighting existing mitigants, controls, plans, and procedures to manage the identified risk, as well as any additional management action required. Risk Appetite Risk appetite is the amount of risk the Group wants to take pursuant to its strategic objectives. The RMF summarises the Group's risk appetite for each of the identified risk types, as well as the related management standards. Risk appetite setting is the Group's chosen method of balancing risk and return, recognising a range of possible outcomes, as business plans are implemented. The Group adopts quantitative risk appetite statements where applicable, and aggregates risk appetite across businesses where appropriate. For example, a formal quantitative statement from the Board communicates the Group's overall credit risk appetite and ensures this is in line with the strategy and the desired risk-reward trade off for the Group. Where risk appetite statements are qualitative, these are supported with measures that allow business units to judge whether existing and new business and processes fall within the risk appetite. The annual business planning and performance management process and associated activities ensure the expression of risk appetite remains appropriate, and the GRC supports this work. Credit Risk Credit Risk Management Credit risk is the risk that a counterparty will not settle its obligations in accordance with agreed terms. Credit exposures include both individual borrowers and groups of connected counterparties and portfolios in the banking and trading books. The GRC has clear responsibility for credit risk. Standards are approved by the GRC, which oversees the delegation of credit authorities. Procedures for managing credit risk are determined at the business levels with specific policies and procedures being adapted to different risk environment and business goals. Risk officers are located in the businesses to maximise the efficiency of decision making, but have a reporting line which is separate from the business lines into the Group Chief Risk Officer. The businesses working with the risk officer take responsibility for managing pricing for risk, portfolio diversification and overall asset quality within the requirements of Group standards, policies and business strategy. Where appropriate, derivatives are used to reduce credit risks in the portfolio. Due to the income statement volatility which can result, derivatives are only used in a controlled manner and within a pre-defined volatility expectation. Wholesale Banking Within the Wholesale Banking business, a numerical 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. Expected Loss is used for the further assessment of individual exposures and portfolio analysis. There is a clear segregation of duties with loan applications being prepared separately from the approval chain. Significant exposures are reviewed and approved centrally through a Group or regional level credit committee. These committees are responsible to the GRC. Consumer Banking For Consumer Banking, standard credit application forms are generally used, 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. Loan Portfolio Loans and advances to customers have grown by $28.3 billion to $140.5 billion. Included in this is the effect of acquisitions made during the year in Pakistan and Taiwan. The Union portfolio has increased loans and advances in Consumer Banking by $0.6 billion. The Union Wholesale Banking portfolio is $0.5 billion and is well diversified. Of the $9.5 billion HIB total portfolio, 84 per cent relates to Consumer Banking, and of this 61 per cent represents the mortgage portfolio. The Wholesale Banking portfolio stands at $1.6 billion. Growth in the Consumer Banking portfolio has been constrained with mortgages, both in Hong Kong and Singapore seeing increased attrition rates as the local markets have become highly competitive. Growth in the Wholesale Banking portfolio was $15.2 billion, or 34 per cent, excluding recent acquisitions. Growth was seen in the Manufacturing, Commerce, and Financing, insurance and business services industries. This was well spread across geographies. The use of derivatives has partially offset the risks arising from the growth in the balance sheet during the period. 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. 2006 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 11,245 3,551 2,593 23,954 6,107 Other 2,235 1,028 771 4,612 4,163 Small and medium enterprises 919 1,548 883 4,907 3,037 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 14,399 6,127 4,247 33,473 13,307 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 53 13 53 20 108 Construction 57 29 26 262 88 Commerce 1,986 1,320 331 348 1,244 Electricity, gas and water 176 17 56 31 307 Financing, insurance and business services 1,817 1,664 724 1,176 1,436 Governments - 3,328 3,397 13 20 Mining and quarrying - 3 - 50 324 Manufacturing 2,282 701 228 3,208 5,376 Commercial real estate 819 708 5 849 650 Transport, storage and communication 277 338 149 189 293 Other 220 406 9 496 32 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 7,687 8,527 4,978 6,642 9,878 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (49) (28) (26) (86) (313) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 22,037 14,626 9,199 40,029 22,872 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 6,474 939 161 1,753 4,462 ---------------------- -------- -------- -------- -------- -------- 2006 --------------------------------------------------- India Middle Africa Americas UK Total $million East & $million & Group $million Other Head Office S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 1,492 416 239 155 49,752 Other 928 2,650 483 537 17,407 Small and medium enterprises 567 323 133 - 12,317 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 2,987 3,389 855 692 79,476 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 25 65 159 297 793 Construction 198 332 78 2 1,072 Commerce 608 2,004 457 1,269 9,567 Electricity, gas and water 26 193 80 815 1,701 Financing, insurance and business services 479 1,245 182 3,264 11,987 Governments - 4 - 235 6,997 Mining and quarrying 32 352 110 1,624 2,495 Manufacturing 1,435 1,848 406 2,504 17,988 Commercial real estate 231 27 7 - 3,296 Transport, storage and communication 249 810 173 1,647 4,125 Other 5 314 39 115 1,636 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 3,288 7,194 1,691 11,772 61,657 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (33) (58) (10) (6) (609) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 6,242 10,525 2,536 12,458 140,524 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 477 1,058 387 5,353 21,064 ---------------------- -------- -------- -------- -------- -------- 2005 ----------------------------------------------------- Asia Pacific ----------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 12,051 4,129 2,532 22,522 996 Other 2,154 1,043 663 3,954 3,145 Small and medium enterprises 791 1,673 794 4,727 989 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 14,996 6,845 3,989 31,203 5,130 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 24 - 44 9 110 Construction 91 48 11 90 64 Commerce 2,004 958 325 237 598 Electricity, gas and water 290 1 65 17 284 Financing, insurance and business services 1,425 925 589 1,135 1,065 Governments - 2,323 1,976 66 101 Mining and quarrying 24 11 8 19 140 Manufacturing 1,223 302 344 1,702 2,955 Commercial real estate 1,194 834 3 797 555 Transport, storage and communication 320 235 240 80 304 Other 50 85 49 750 11 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 6,645 5,722 3,654 4,902 6,187 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (57) (26) (30) (68) (107) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 21,584 12,541 7,613 36,037 11,210 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 5,688 2,431 173 3,222 2,213 ---------------------- -------- -------- -------- -------- -------- 2005 --------------------------------------------------- India Middle Africa Americas Total $million East & $million UK & Group $million Other Head S Asia Office $million $million ---------------------- -------- -------- -------- -------- -------- Loans to individuals Mortgages 1,469 132 88 152 44,071 Other 947 2,001 525 158 14,590 Small and medium enterprises 332 78 107 - 9,491 ---------------------- -------- -------- -------- -------- -------- Consumer Banking 2,748 2,211 720 310 68,152 ---------------------- -------- -------- -------- -------- -------- Agriculture, forestry and fishing 17 25 183 234 646 Construction 139 223 41 6 713 Commerce 392 1,324 420 819 7,077 Electricity, gas and water 49 180 12 664 1,562 Financing, insurance and business services 502 1,235 168 1,842 8,886 Governments - 70 7 331 4,874 Mining and quarrying 10 185 75 656 1,128 Manufacturing 1,019 1,210 402 2,186 11,343 Commercial real estate 61 5 13 18 3,480 Transport, storage and communication 108 452 174 1,477 3,390 Other 5 257 46 40 1,293 ---------------------- -------- -------- -------- -------- -------- Wholesale Banking 2,302 5,166 1,541 8,273 44,392 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (33) (29) (10) (7) (367) ---------------------- -------- -------- -------- -------- -------- Total loans and advances to customers 5,017 7,348 2,251 8,576 112,177 ---------------------- -------- -------- -------- -------- -------- Total loans and advances to banks 238 1,255 313 7,426 22,959 ---------------------- -------- -------- -------- -------- -------- Maturity Analysis Approximately 48 per cent of the Group's loans and advances are short term having a contractual maturity of one year or less. The Wholesale Banking portfolio is predominantly short term, with 78 per cent of loans and advances having a contractual maturity of one year or less. In Consumer Banking, 63 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. 2006 2005 ---------------------------------- ------------------------------------ One year One to Over Total One year One to Over Total or less five five $million or less five five $million $million years years $million years years $million $million $million $million ------------------------ ----- ----- ----- ------ ----- ----- ----- ------ Consumer Banking Mortgages 4,817 10,376 34,559 49,752 4,756 9,598 29,717 44,071 Other 8,787 6,506 2,114 17,407 8,352 4,666 1,572 14,590 SME 6,592 3,242 2,483 12,317 5,883 1,687 1,921 9,491 ------------------------ ----- ----- ----- ------ ----- ----- ----- ------ Total 20,196 20,124 39,156 79,476 18,991 15,951 33,210 68,152 ------------------------ ----- ----- ----- ------ ----- ----- ----- ------ Wholesale Banking 48,065 8,647 4,945 61,657 33,450 7,246 3,696 44,392 Portfolio impairment provision (609) (367) ------------------------ ----- ----- ----- ------ ----- ----- ----- ------ Loans and advances to customers 68,261 28,771 44,101 140,524 52,441 23,197 36,906 112,177 ------------------------ ----- ----- ----- ------ ----- ----- ----- ------ Problem Credit Management and Provisioning Consumer Banking An account is considered to be in default when payment is not received on the due date. Accounts that are overdue by more than 30 days are considered delinquent. These accounts are closely monitored and subject to a collections process. The process used for raising provisions is dependant 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. Loan impairment for other secured loans utilises the forced sale value of the collateral without 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 performing loans and loans overdue for less than 150 days. The provision is set with reference to past experience using 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. The cover ratio reflects the extent to which the gross non-performing loans are covered by the individual and portfolio impairment provisions. The balance of non-performing loans uncovered by the individual impairment provisions reflects the level of collateral held and/or the estimated net value of any recoveries. The table below sets out the total non-performing portfolios in Consumer Banking. The significant decrease in non-performing loans in Korea is primarily as a result of the successful exiting of SME accounts and the realisation of collateral. The increase in individual impairment provisions in Other Asia Pacific and Middle East and Other S Asia includes the impact of the acquisitions of HIB and Union respectively. 2006 -------------------------------------------------- Asia Pacific -------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 80 100 202 531 668 Individual impairment provision (29) (38) (67) (239) (377) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 51 62 135 292 291 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio ---------------------- -------- -------- -------- -------- -------- 2006 -------------------------------------------------- India Middle Africa Americas UK Total $million East & $million & Group $million Other Head Office S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 48 98 24 5 1,756 Individual impairment provision (17) (64) (10) (3) (844) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 31 34 14 2 912 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (452) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 460 ---------------------- -------- -------- -------- -------- -------- Cover ratio 74% ---------------------- -------- -------- -------- -------- -------- 2005 -------------------------------------------------- Asia Pacific -------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 81 117 171 856 101 Individual impairment provision (22) (31) (63) (310) (61) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 59 86 108 546 40 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio ---------------------- -------- -------- -------- -------- -------- 2005 -------------------------------------------------- India Middle Africa Americas Total $million East & $million UK & Group $million Other Head S Asia Office $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 53 22 17 29 1,447 Individual impairment provision (13) (16) (9) (3) (528) ---------------------- -------- -------- -------- -------- -------- Non-performing loans net of individual impairment provision 40 6 8 26 919 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (278) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 641 ---------------------- -------- -------- -------- -------- -------- Cover ratio 56% ---------------------- -------- -------- -------- -------- -------- Wholesale Banking In Wholesale Banking, accounts or portfolios are placed on Early Alert when they display signs of weakness. Such accounts and portfolios are subject to a dedicated process with oversight involving senior Risk Officers and Group Special Asset Management ('GSAM'). Account plans are re-evaluated and remedial actions are agreed and monitored until complete. 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, the specialist recovery unit. Loans are designated as impaired and considered non-performing where recognised weakness indicates that full payment of either interest or principal becomes questionable or as soon as payment of interest or principal is 90 days or more 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. 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 account against which an impairment provision has been raised, then that amount will be written off. A portfolio impairment provision 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 portfolio impairment provision 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 87 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 Wholesale Banking net non-performing loan portfolio as at 31 December 2006 was 56 per cent lower than as at 31 December 2005. This was driven by a decrease in gross non-performing loans in most of the Group's key regions, except those affected by recent acquisitions. The following table sets out the total non-performing portfolio in Wholesale Banking. 2006 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 167 69 29 110 251 Individual Impairment provision (130) (46) (25) (46) (154) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 37 23 4 64 97 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio ---------------------- -------- -------- -------- -------- -------- 2006 -------------------------------------------------- India Middle Africa Americas UK Total $million East & $million & Group $million Other Head Office S Asia $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 24 121 100 152 1,023 Individual Impairment provision (22) (102) (58) (151) (734) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 2 19 42 1 289 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (158) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 131 ---------------------- -------- -------- -------- -------- -------- Cover ratio 87% ---------------------- -------- -------- -------- -------- -------- 2005 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 355 125 36 156 133 Individual Impairment provision (257) (109) (33) (51) (118) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 98 16 3 105 15 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances -------- -------- -------- -------- -------- ---------------------- Cover ratio ---------------------- -------- -------- -------- -------- -------- 2005 -------------------------------------------------- India Middle Africa Americas Total $million East & $million UK & Group $million Other Head S Asia Office $million $million ---------------------- -------- -------- -------- -------- -------- Loans and advances Gross non-performing 83 60 89 210 1,247 Individual Impairment provision (27) (48) (51) (164) (858) ---------------------- -------- -------- -------- -------- -------- Non-performing loans and advances net of individual impairment provision 56 12 38 46 389 ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (90) ---------------------- -------- -------- -------- -------- -------- Net non-performing loans and advances 299 ---------------------- -------- -------- -------- -------- -------- Cover ratio 76% ---------------------- -------- -------- -------- -------- -------- 2006 ---------------------------------------------------- Asia Pacific ---------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 14 9 2 7 3 Recoveries/provisions no longer required (50) (6) (8) (3) (11) ---------------------- -------- -------- -------- -------- -------- Net individual impairment charge/(credit) (36) 3 (6) 4 (8) ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net impairment credit ---------------------- -------- -------- -------- -------- -------- 2006 -------------------------------------------------- India Middle Africa Americas UK Total $million East & $million & Group $million Other Head Office 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 charge/(credit) (10) (8) 13 (42) (90) ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision (2) ---------------------- -------- -------- -------- -------- -------- Net impairment credit (92) ---------------------- -------- -------- -------- -------- -------- 2005 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 70 25 2 - 5 Recoveries/provisions no longer required (6) (12) (9) (1) (117) ---------------------- -------- -------- -------- -------- -------- Net individual impairment charge/(credit) 64 13 (7) (1) (112) ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision ---------------------- -------- -------- -------- -------- -------- Net impairment credit ---------------------- -------- -------- -------- -------- -------- 2005 --------------------------------------------------- India Middle Africa Americas Total $million East & $million UK & Group $million Other Head S Asia Office $million $million ---------------------- -------- -------- -------- -------- -------- Gross impairment charge 6 9 40 12 169 Recoveries/provisions no longer required (12) (50) (8) (72) (287) ---------------------- -------- -------- -------- -------- -------- Net individual impairment charge/(credit) (6) (41) 32 (60) (118) ---------------------- -------- -------- -------- -------- -------- Portfolio impairment provision 12 ---------------------- -------- -------- -------- -------- -------- Net impairment credit (106) ---------------------- -------- -------- -------- -------- -------- 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: 2006 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $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) (170) (403) Recoveries of amounts previously written off 49 8 11 8 18 Acquisitions - - - - 369 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 92 285 531 ---------------------- -------- -------- -------- -------- -------- 2006 --------------------------------------------------- India Middle Africa Americas UK Total $million East & $million & Group $million Other Head Office 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) (1,068) Recoveries of amounts previously written off 17 12 2 3 128 Acquisitions - 134 - - 503 Discount unwind (1) - (2) (2) (52) Other 1 - - 67 20 -------- -------- -------- -------- -------- New provisions 76 79 44 9 1,033 Recoveries/pro visions 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 39 166 68 154 1,578 ---------------------- -------- -------- -------- -------- -------- 2005 --------------------------------------------------- Asia Pacific --------------------------------------------------- Hong Kong Singapore Malaysia Korea Other Asia $million $million $million $million Pacific $million ---------------------- -------- -------- -------- -------- -------- Provisions held at 1 January 2005 294 119 127 1 319 Exchange translation differences (7) (2) 1 4 (8) Amounts written off (156) (30) (58) (21) (204) Recoveries of amounts previously written off 49 6 11 5 36 Acquisitions - - - 352 - Discount unwind (3) (3) (4) (28) (2) Other 1 - - - 19 -------- -------- -------- -------- -------- New provisions 165 92 62 57 153 Recoveries/provisions no longer required (64) (42) (43) (9) (134) -------- -------- -------- -------- -------- Net charge against/(credit) to profit 101 50 19 48 19 ---------------------- -------- -------- -------- -------- -------- Provisions held at 31 December 2005 279 140 96 361 179 ---------------------- -------- -------- -------- -------- -------- 2005 -------------------------------------------------- India Middle Africa Americas Total $million East & $million UK & Group $million Other Head S Asia Office $million $million ---------------------- -------- -------- -------- -------- -------- Provisions held at 1 January 2005 43 125 64 457 1,549 Exchange translation differences (1) 5 (4) (13) (25) Amounts written off (66) (70) (43) (223) (871) Recoveries of amounts previously written off 21 14 4 7 153 Acquisitions - - - - 352 Discount unwind (1) - (2) (5) (48) Other (1) 1 (2) 3 21 -------- -------- -------- -------- -------- New provisions 105 48 60 12 754 Recoveries/provisions no longer required (60) (59) (17) (71) (499) -------- -------- -------- -------- -------- Net charge against/(credit) to profit 45 (11) 43 (59) 255 ---------------------- -------- -------- -------- -------- -------- Provisions held at 31 December 2005 40 64 60 167 1,386 ---------------------- -------- -------- -------- -------- -------- Country Risk Country Risk is the risk that a counterparty is unable to meet its contractual obligations as a result of adverse economic conditions or actions taken by governments in the relevant country. The GRC approves country risk limits and delegates the setting and management of country limits to the Deputy Group Chief Risk Officer. The business and country Chief Executive Officers manage exposures within these limits and policies. Countries designated as higher risk are subject to increased central monitoring. Cross border assets comprise loans and advances, interest bearing deposits with other banks, trade and other bills, acceptances, amounts receivable under finance leases, certificates of deposit and other negotiable paper and investment securities where the counterparty is resident in a country other than that where the assets are recorded. Cross border assets also include exposures to local residents denominated in currencies other than the local currency. Cross border exposure to countries in which the Group does not have a significant presence is predominantly in relation to money market and global corporate activity. This business is originated in the Group's key markets, but is conducted with counterparties domiciled in the country against which the exposure is reported. The following table, based on the Bank of England Cross Border Reporting ('CE') guidelines, shows the Group's cross border assets including acceptances where they exceed one per cent of the Group's total assets. 2006 2005 ----------------------------------- ----------------------------------- Public Banks Other Total Public Banks Other Total sector $million $million $million sector $million $million $million $million $million ------------------------ ----- ----- ----- ----- ----- ----- ----- ----- USA 1,194 1,027 2,895 5,116 1,227 555 2,505 4,287 Hong Kong 4 576 4,531 5,111 1 311 2,776 3,088 Korea 8 1,029 3,439 4,476 13 1,476 2,006 3,495 Singapore - 584 3,471 4,055 - 326 1,945 2,271 India 3 1,335 2,585 3,923 1 949 1,456 2,406 France 62 3,591 167 3,820 159 2,550 155 2,864 Australia - 2,794 258 3,052 - 1,587 242 1,829 Dubai - 1,504 1,413 2,917 - 702 690 1,392 China 94 1,055 1,571 2,720 63 982 1,405 2,450 ------------------------ ----- ----- ----- ----- ----- ----- ----- ----- Market Risk The Group recognises market risk as the exposure created by potential changes in market prices and rates. The Group is exposed to market risk arising principally from customer driven transactions. Market risk is governed by the GRC, which agrees policies and levels of risk appetite in terms of Value at Risk ('VaR'). The Group Market Risk Committee ('GMRC') provides market risk oversight and guidance on policy setting. Policies cover both trading and non-trading books of the Group. The trading book is defined as per the FSA Handbook BIPRU. Limits by location and portfolio are proposed by the businesses within the terms of agreed policy. Group Market Risk ('GMR') approves the limits within delegated authorities and monitors exposures against these limits. Additional limits are placed on specific instruments and currency concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. Option risks are controlled through revaluation limits on currency and volatility shifts, limits on volatility risk by currency pair and other variables that determine the options' value. VaR models are back tested against actual results to ensure pre-determined levels of accuracy are maintained. GMR complements the VaR measurement by regularly stress testing market risk exposures to highlight potential risk that may arise from extreme market events that are rare but plausible. Stress testing is an integral part of the market risk management framework and considers both historical market events and forward looking scenarios. Ad hoc scenarios are also prepared reflecting specific market conditions. A consistent stress testing methodology is applied to trading and non-trading books. Stress scenarios are regularly updated to reflect changes in risk profile and economic events. GMRC has responsibility for reviewing stress exposures and, where necessary, enforcing reductions in overall market risk exposure. GRC considers stress testing results as part of its supervision of risk appetite. The stress test methodology assumes that management action would be limited during a stress event, reflecting the decrease in liquidity that often occurs. Value at Risk The Group uses historic simulation to measure VaR on all market risk related activities. The total VaR for trading and non-trading books combined at 31 December 2006 was $10.3 million (2005: $10.8 million). Interest rate related VaR was $9.3 million (2005: $10.3 million) and foreign exchange related VaR was $1.5 million (2005: $1.1 million). The average total VaR for trading and non-trading books during 2006 was $10.6 million (2005: $12.4 million) with a maximum exposure of $14.0 million (2005: $20.6 million). VaR for interest rate risk in the non-trading books of the Group totalled $8.0 million at 31 December 2006 (2005: $9.2 million). The Group has no significant trading exposure to equity or commodity price risk. The average daily income earned from market risk related activities during 2006 was $5.2 million, compared with $4.1 million during 2005. Foreign Exchange Exposure The Group's foreign exchange exposures comprise trading and non-trading foreign currency translation exposures and structural currency exposures in net investments in non US dollar units. Foreign exchange trading exposures are principally derived from customer driven transactions. The average daily income from foreign exchange trading businesses during 2006 was $2.0 million (2005: $2.0 million). Interest Rate Exposure The Group's interest rate exposures arise from trading and non-trading activities. Structural interest rate risk arises from the differing re-pricing characteristics of commercial banking assets and liabilities. The average daily income from interest rate trading businesses during 2006 was $3.2 million (2005: $2.1 million). Derivatives Derivatives are contracts whose characteristics and value derive from underlying financial instruments, interest and exchange rates or indices. They include futures, forwards, swaps and options transactions in the foreign exchange, credit and interest rate markets. Derivatives are an important risk management tool for banks and their customers because they can be used to manage the risk of price, interest rate and exchange rate movements. The Group's derivative transactions are principally in instruments where the mark-to-market values are readily determinable by reference to independent prices and valuation quotes or by using standard industry pricing models. The Group enters into derivative contracts in the normal course of business to meet customer requirements and to manage its own exposure to fluctuations in interest, credit and exchange rates. Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Recognition of fair value gains and losses depends on whether the derivatives are classified as trading or for hedging purposes. The Group applies a future exposure methodology to manage counterparty credit exposure associated with derivative transactions. Hedging In accounting terms, hedges are classified into three types: fair value hedges, where fixed rates of interest or foreign exchange are exchanged for floating rates; cash flow hedges, where variable rates of interest or foreign exchange are exchanged for fixed rates, and hedges of net investments in overseas operations translated to the parent company's functional currency, US dollars. The Group uses futures, forwards, swaps and options transactions in the foreign exchange and interest rate markets to hedge risk. The Group occasionally hedges the value of its foreign currency denominated investments in subsidiaries and branches. Hedges may be taken where there is a risk of a significant exchange rate movement but, in general, management believes that the Group's reserves are sufficient to absorb any foreseeable adverse currency depreciation. The effect of exchange rate movements on the capital risk asset ratio is mitigated by the fact that both the net asset value of these investments and the risk weighted value of assets and contingent liabilities follow substantially the same exchange rate movements. Liquidity Risk The Group defines liquidity risk as the risk that the bank either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can access them only at excessive cost. It is the policy of the Group to maintain adequate liquidity at all times, in all geographical locations and for all currencies. Hence the Group aims to be in a position to meet all obligations, to repay depositors, to fulfil commitments to lend and to meet any other commitments. Liquidity risk management is governed by GALCO, which is chaired by the Group Finance Director. GALCO is responsible for both statutory and prudential liquidity. These responsibilities are managed through the provision of authorities, policies and procedures that are co-ordinated by the Liquidity Management Committee ('LMC') with country Asset and Liability Committees ('ALCO'). Due to the diversified nature of the Group's business, the Group's policy is that liquidity is more effectively managed locally, in-country. Each ALCO is responsible for ensuring that the country is self-sufficient and is able to meet all its obligations to make payments as they fall due. The ALCO has primary responsibility for compliance with regulations and Group policy and maintaining a country liquidity crisis contingency plan. A substantial portion of the Group's assets are funded by customer deposits made up of current and savings accounts and other deposits. These customer deposits, which are widely diversified by type and maturity, represent a stable source of funds. Lending is normally funded by liabilities in the same currency. The Group also maintains significant levels of marketable securities either for compliance with local statutory requirements or as prudential investments of surplus funds. The GALCO also oversees the structural foreign exchange and interest rate exposures that arise within the Group. These responsibilities are managed through the provision of authorities, policies and procedures that are co-ordinated by the Capital Management Committee. Policies and guidelines for the maintenance of capital ratio levels are approved by GALCO. Compliance with Group ratios is monitored centrally by Group Corporate Treasury, while local requirements are monitored by the local ALCO. Operational Risk Operational risk is the risk of direct or indirect loss due to an event or action resulting from the failure of internal processes, people, and systems, or from external events. The Group seeks to ensure that key operational risks are managed in a timely and effective manner through a framework of policies, procedures and tools to identify, assess, monitor, control, and report such risks. The Group Operational Risk Committee ('GORC') has been established to supervise and direct the management of operational risks across the Group. GORC is also responsible for ensuring adequate and appropriate policies and procedures are in place for the identification, assessment, monitoring, control and reporting of operational risks. A Group operational risk function, independent from the businesses is responsible for establishing and maintaining the overall operational risk framework, and for monitoring the Group's key operational risk exposures. This unit is supported by Wholesale Banking and Consumer Banking Operational Risk units. These units are responsible for ensuring compliance with policies and procedures in the business, monitoring key operational risk exposures, and the provision of guidance to the respective business areas on operational risk. Compliance with operational risk policies and procedures is the responsibility of all managers. Every country operates a Country Operational Risk Group ('CORG'). The CORG has in-country governance responsibility for ensuring that an appropriate and robust risk management framework is in place to monitor and manage operational risk. Compliance and Regulatory Risk Compliance and Regulatory risk includes the risk of non-compliance with regulatory requirements in a country in which the Group operates. The Group Compliance and Regulatory Risk function is responsible for establishing and maintaining an appropriate framework of Group compliance policies and procedures. Compliance with such policies and procedures is the responsibility of all managers. Legal Risk Legal risk is the risk of unexpected loss, including reputational loss, arising from defective transactions or contracts, claims being made or some other event resulting in a liability or other loss for the Group, failure to protect the title to and ability to control the rights to assets of the Group (including intellectual property rights), changes in the law, or jurisdictional risk. The Group manages legal risk through the Group Legal Risk Committee, Legal Risk policies and procedures and effective use of its internal and external lawyers. Reputational Risk Reputational risk is any material adverse effect on the relations between the Group and any one of its significant stakeholders. It is Group policy that the protection of the Bank's reputation should take priority over all activities including revenue generation at all times. Reputational risk is not a primary risk, but will arise from the failure to effectively mitigate one or more of country, credit, liquidity, market, legal and regulatory and operational risk. It may also arise from the failure to comply with Social, Environmental and Ethical standards. All staff are responsible for day to day identification and management of reputational risk. From an organisational perspective the Group manages reputational risk through the Group Reputational Risk and Responsibility Committee ('GRRRC') and Country Management Committees. Wholesale Banking has a specialised Responsibility and Reputational Risk Committee which reviews individual transactions. In Consumer Banking, potential reputational risks resulting from transactions or products are reviewed by the Product and Reputational Risk Committee. Issues are then escalated to the GRRRC. A critical element of the role of the GRRRC is to act as a radar for the Group in relation to the identification of emerging or thematic risks. The GRRRC also ensures that effective risk monitoring is in place for Reputational Risk and reviews mitigation plans for significant risks. At a country level, the Country CEO is responsible for the Group's reputation in their market. The Country CEO and their Management Committee must actively: â€¢ promote awareness and application of the Group's policy and procedures regarding reputational risk; â€¢ encourage business and functions to take account of the Group's reputation in all decision making, including dealings with customers and suppliers; â€¢ implement effective functioning of the in country reporting system to ensure their management committee is alerted of all potential issues; and â€¢ promote effective, proactive stakeholder management. Monitoring Group Internal Audit is a separate function that reports to the Group Chief Executive and the ARC. Group Internal Audit provides independent confirmation that Group and business standards, policies and procedures are being complied with. Where necessary, corrective action is recommended. This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW FR EAFAXALFXEEE

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