Interim Results 2009 - Part 1

RNS Number : 8067W

Standard Chartered PLC

04 August 2009

 



Standard Chartered PLC - Results

For the six months ended 30 June 2009

Highlights

Reported results

• Operating income up 14 per cent to $7,960 million from $6,987 million in H1 2008 (H2 2008: $6,981 million)

• Operating profit up 10 per cent to $2,838 million from $2,586 million in H1 2008 (H2 2008: $1,982 million)

• Profit before taxation up 10 per cent to $2,838 million, compared to $2,586 million in H1 2008 (H2 2008: $2,215 million)

• Profit attributable to ordinary shareholders* up 5.5 per cent to $1,883 million, compared to $1,785 million in H1 2008 (H2 2008: $1,513 million)

• Total assets up 3.5 per cent to $411 billion from $397 billion at H1 2008 (H2 2008: $435 billion) 

Performance metrics**

• Normalised earnings per share down 9.9 per cent at 95.0 cents from 105.4+ cents in H1 2008 (H2 2008: 69.8 cents)

• Normalised return on ordinary shareholders' equity of 17.0 per cent (H1 2008: 17.8 per cent, H2 2008: 12.4  per cent)

• Interim dividend per share++ increased 10 per cent  to 21.23 cents

• Normalised cost income ratio of 49.6 per cent (H1 2008: 56.4 per cent, H2 2008: 55.7 per cent)

• Core tier 1 capital ratio at 7.6 per cent (H1 2008: 6.1 per cent#, H2 2008: 7.5 per cent#)

• Total capital ratio at 15.8 per cent compared to 15.1 per cent# in H1 2008 (H2 2008: 15.6 per cent) 

Significant achievements

• Achieved record operating profit of $2,838 million, an increase of 10 per cent on H1 2008, and up 43 per cent on H2 2008

• Grew operating income by 14 per cent on H1 2008 

• Demonstrated focus and discipline on costs

• Maintained high levels of liquidity and a conservative funding profile

• Remained disciplined and focused on the basics of good banking

• In Consumer Banking, continued to transform the business model, positioning the franchise for an economic upturn

• In Wholesale Banking, continued to deepen customer relationships, driving growth through multiple revenue sources

Commenting on these results, the Chairman of Standard Chartered PLC, John Peace, said:

'We have achieved record results through our disciplined management approach and the diversity of our business and markets in Asia, Africa and the Middle East. I believe that the Bank has a very clear and focused strategy and we have no intention of deviating from this. Our strong levels of capital and liquidity have given us a competitive advantage and our decision to raise further capital today will reinforce this and support our future growth.'

*	Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of the non-cumulative redeemable preference shares (see note 9 on page 60).
**	Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items presented in note 10 on page 61.
+	Earnings per share has been restated for the impact of the rights issue as explained in note 10 on page 61.
++	Dividend per share has been restated for the impact of the rights issue as explained in note 9 on page 60.
#	Restated as explained on page 43.

Standard Chartered PLC - Stock Code: 02888 

  Table of Contents

	Page
Summary of results	3
Chairman's statement	4
Group chief executive's review	5 - 9
Financial review
Group summary	10
Consumer Banking	12
Wholesale Banking	15
Risk review	18
Capital	42
Financial statements
Condensed consolidated interim income statement	45
Condensed consolidated interim statement of comprehensive income	46
Condensed consolidated interim balance sheet	47
Condensed consolidated interim statement of changes in equity	48
Condensed consolidated interim cash flow statement	49
Notes	50
Statement of directors' responsibilities	86
Independent review report	87
Additional information	88
Index	98

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'; The Republic of Korea is referred to as Korea or South Korea; 'Middle East and Other South Asia' (MESA) includes: Pakistan, United Arab Emirates (UAE), Bahrain, Qatar, Jordan, Sri Lanka and Bangladesh; and 'Other Asia Pacific' includes: China, Malaysia, Indonesia, Brunei, Thailand, Taiwan, Vietnam and the Philippines.

  Standard Chartered PLC - Summary of results

For the six months ended 30 June 2009

	6 months ended 30.06.09 $million	6 months ended 30.06.08 $million	6 months ended 31.12.08 $million
Results
Operating income	7,960	6,987	6,981
Impairment losses on loans and advances and other credit risk provisions	(1,088)	(465)	(856)
Other impairment	(15)	(26)	(443)
Operating profit	2,838	2,586	1,982*
Profit before taxation	2,838	2,586	2,215
Profit attributable to parent company shareholders	1,933	1,844	1,564
Profit attributable to ordinary shareholders^	1,883	1,785	1,513
Balance sheet
Total assets	411,220	396,820**	435,068
Total equity	23,890	20,905	22,695
Total capital base	32,324	30,271#	29,442
Information per ordinary share	Cents	Cents	Cents
Earnings per share    - normalised basis (post-rights)***	95.0	105.4+	69.8
- basic (post-rights)	98.8	110.6+	91.8
Dividend per share (post rights)	21.23	19.30++	42.32
Net asset value per share	1,133.1	1,325.7	1,091.1
Ratios	%	%	%
Return on ordinary shareholders' equity - normalised basis***	17.0	17.8	12.4
Cost income ratio - normalised basis***	49.6	56.4	55.7
Capital ratios (Basel II basis):
Core Tier 1 capital	7.6	6.1#	7.5#
Tier 1 capital	10.5	8.5#	9.9#
Total capital	15.8	15.1#	15.6
	6 months ended 30.06.09 $million	6 months ended 30.06.08 $million	6 months ended 31.12.08 $million
Results
Operating income	7,960	6,987	6,981
Impairment losses on loans and advances and other credit risk provisions	(1,088)	(465)	(856)
Other impairment	(15)	(26)	(443)
Operating profit	2,838	2,586	1,982*
Profit before taxation	2,838	2,586	2,215
Profit attributable to parent company shareholders	1,933	1,844	1,564
Profit attributable to ordinary shareholders^	1,883	1,785	1,513
Balance sheet
Total assets	411,220	396,820**	435,068
Total equity	23,890	20,905	22,695
Total capital base	32,324	30,271#	29,442
Information per ordinary share	Cents	Cents	Cents
Earnings per share    - normalised basis (post-rights)***	95.0	105.4+	69.8
- basic (post-rights)	98.8	110.6+	91.8
Dividend per share (post rights)	21.23	19.30++	42.32
Net asset value per share	1,133.1	1,325.7	1,091.1
Ratios	%	%	%
Return on ordinary shareholders' equity - normalised basis***	17.0	17.8	12.4
Cost income ratio - normalised basis***	49.6	56.4	55.7
Capital ratios (Basel II basis):
Core Tier 1 capital	7.6	6.1#	7.5#
Tier 1 capital	10.5	8.5#	9.9#
Total capital	15.8	15.1#	15.6

*	Operating profit represents profit before taxation excluding the gain of $233 million on the rights issue option (see note 7 on page 59).
^	Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of the non-cumulative redeemable preference shares (see note 9 on page 60).
**	Restated as explained in note 37 on page 83.
***	Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items presented in note 10 on page 61.
+	Earnings per share has been restated for the impact of the rights issue as explained in note 10 on page 61.
++	Dividend per share has been restated for the impact of the rights issue as explained in note 9 on page 60.
#	Restated as explained on page 43.

  Standard Chartered PLC - Chairman's statement

In the first six months of 2009 Standard Chartered has again achieved very good results:

•	Profit before taxation rose 10 per cent to $2.84 billion
•	Income rose 14 per cent to $7.96 billion
•	Normalised cost-income ratio improved 6.8 per cent to less than 50 per cent

The Board has declared an interim dividend of 21.23 cents per share.

These remain testing times for banks and we remain cautious about the near term global economic outlook. However, we have achieved record results through our disciplined management approach and the diversity of our business and markets in Asia, Africa and the Middle East.

Wholesale Banking has had a very strong first half, as we drive to become the core bank for more of our clients, deepening relationships and providing them with a broader range of value-added products and services.

We have also made good progress in Consumer Banking in the first half, despite unhelpful head winds, repositioning the business to service customers in well-defined segments, whilst at the same time improving operational and service efficiency.

I believe that the Bank has a very clear and focused strategy and we have no intention of deviating from this. Our strong levels of capital and liquidity have given us a competitive advantage and our decision to raise further capital today will reinforce this and support our future growth.

We recognise the need to rebuild trust in banking and believe that international banks are an essential part of any successful economy. Whether it is facilitating the resurgence of trade across our markets, enabling our multinational clients to conduct complex business transactions or servicing the needs of an increasingly international class of consumer, global recovery will not happen without international banks such as Standard Chartered.

I joined the Bank's board two years ago in August 2007 as Deputy Chairman and more recently became Chairman. During that time, I have travelled to many of the countries in which we operate and have experienced at first hand our deep local heritage. This year we are celebrating the Bank's 150-year anniversary both in Hong Kong and Singapore. These are very important milestones which serve to remind us all just how we are part of the fabric of our markets.

Our people have an extraordinary set of shared values, including a firm belief that building a sustainable business means that long-term economic profit is dependent on the sustainability of the communities of which we are an important part. This governs how we go about our business every day.

These are powerful reasons to want to be involved with Standard Chartered and why I am delighted to have been chosen as Chairman of the Bank.

Standard Chartered today has a strong Board and talented management team with a great diversity of experience and, over the coming months, we will be seeking to further strengthen our Board of Directors.

I am very pleased that Mike Rees, will be joining the Board as Group executive director with immediate effect. Over the last six years Mike has done an exceptional job in transforming Wholesale Banking and he will be a great addition to the Board.

I would like to take this opportunity to thank Sunil Mittal for the valuable contribution he has made to the Board over the past two years. With the increasing demands placed on his time, we agreed it was difficult for him to spend as much time as he considered appropriate on Standard Chartered business and he decided to step down last month.

So, in summary, we have had a very good start to the year. We have sustained our good performance despite the difficult external environment. 

John Peace
Chairman
4 August 2009

  Standard Chartered PLC - Group chief executive's review 

In the first half of 2009, Standard Chartered delivered record profits on the back of record income. I would like to give a bit more colour on our performance over the last six months, set out the strategic priorities for both businesses and the Group as a whole and, in that context, explain the logic of the equity placing announced today. 

In looking at the strength of our performance over the last six months, I would not want you to think it is simply because we somehow escaped the storm, that our markets, our businesses were in some way immune to the crisis. In fact, in the first half of 2009 the full force of the global economic crisis hit Asia, Africa and the Middle East. Exports and GDP fell dramatically. Unemployment and business failures surged. Despite such turbulence, we continued to deliver.

Against this backdrop I could spend a lot of time talking about our achievements. And there is much to be proud of. Markets like Singapore and Africa put in outstanding performances. Businesses like Foreign Exchange and Rates did superbly well. But rather than do that, I have deliberately chosen to focus on some of the more challenging markets and businesses, where we've faced real headwinds.

Korea

First of all, Korea. Obviously a 61 per cent drop in profits is not a great outcome. The extent of this fall was exaggerated by the depreciation in the Korean won, but even adjusting for this, profits were down sharply.

Income fell 19 per cent, largely due to falling demand for Wealth Management products as well as the impact of de-risking the Small and Medium Enterprise (SME) book. Costs were also reduced, falling 23 per cent. But loan impairment almost doubled to $185 million.

But beneath these rather disappointing numbers, we are making good progress in transforming our business in Korea. In Consumer Banking we have great traction in current and savings accounts (CASA). Our share of new deposit inflows is up over 50 per cent to 8.9 per cent. And we are also winning market share in mortgages, with new business at significantly higher margins. 

New and relocated branches, numbering 25 in the first half, outperform existing branches across a range of metrics. For example, revenue per customer is three times higher and asset booking eight times higher.

In Wholesale Banking, which now constitutes 40 per cent of total income, we are deepening client relationships and expanding product capabilities. Onshore income grew eight per cent: income from Korean clients booked elsewhere in the network increased by 150 per cent to $75 million.

In June we became the first foreign institution to gain approval to form a financial holding company.  This will allow us to cross-sell products to our client base and enhance efficiency through sharing resources.

So despite these first half results, I am confident about the prospects for our business in Korea. We still have much to do, but we have big aspirations for this business. Indeed I will not be satisfied until we are making at least $1 billion in profits in Korea. 

Middle East & Other South Asia region

Middle East & Other South Asia (MESA) is another region where we have faced challenges, with a sharp reduction in profits, down 43 per cent year-on-year.

The MESA region includes Pakistan and the Middle East itself. In Pakistan a challenging political and security environment, a depreciating currency and the impact of the global crisis resulted in income falling 21 per cent and profits down 75 per cent on a year-on-year basis. 

We have taken action to de-risk the book and reduce costs and we will continue to run our business in Pakistan defensively. While we do not anticipate a strong return to growth in the near term, neither do we see much further downside.

The Middle East is being affected quite severely by the crisis and this has had a negative impact on both our businesses.

In the first half we achieved strong income growth, up 29 per cent, driven by Wholesale Banking. But we have also seen a sharp and significant increase in loan impairment in both businesses. Consumer Banking loan impairment increased by 88 per cent to $143 million. Wholesale Banking took significant provisions relating to certain local corporates in the region; loan impairment increased from only $4 million in the first half of 2008 to $317 million in this first half. 

In response to the deteriorating environment, we have acted decisively to de-risk our portfolios in both businesses and to contain costs. However, despite the immediate challenges, the Middle East has extraordinary wealth and huge potential for growth. So although we will continue to be quite defensive in our risk stance, we are still very much open for business, still investing to grow. 

Wealth Management and Deposits

From a business perspective, Wealth Management and Deposits in Consumer Banking has been one of the most severely affected. In the first six months of 2008, Wealth Management and Deposits contributed $1.5 billion, 47 per cent of total Consumer Banking income. 

Following the failure of Lehman, demand for investment products collapsed, while reductions in interest rates cut deposit margins. Wealth Management and Deposit income fell to $1.3 billion in the second half of 2008 and to $1.1 billion in the first six months of 2009, a $400 million reduction year-on-year.

Wealth Management accounted for most of this decline, as individual investors fled from unit trusts, equity-linked products and anything highly structured. But there are now indications that investor appetite for risk is beginning to reappear. 

In Hong Kong, for example, average daily fee income in June was more than double the rate for the fourth quarter of 2008 and around 60 per cent of the level this time last year. It is still early days, but with the second quarter Wealth Management income seven per cent up on the first quarter this year, the signs are encouraging.

Deposit income also fell by about $100 million year-on-year, with margin compression more than offsetting the 12 per cent increase in deposit balances as we continued to benefit from a flight to quality.

Both Wealth Management and Deposits are geared to the upswing. When investor confidence returns and interest rates begin to rise, income will surge; and this will have a powerful effect on the bottom line of Consumer Banking. 

But we are not anticipating it will be like it was. We are fundamentally reconfiguring our Wealth Management business, shifting the balance from product sales to client needs, focusing more on portfolio management and sourcing more of our investment products internally. And the emphasis is on CASA deposits not time deposits and on winning primary bank relationships through payroll and other innovative propositions tailored to the needs of specific segments.

Korea, MESA and Wealth Management are examples of some of the challenges we have faced in navigating the crisis. We have not come through unscathed. Nor did we expect to. But the strength and diversity of our business and the way we have tackled problems have enabled us to continue to deliver record profits.

Consumer Banking

In Consumer Banking, faced with a sharp reduction in income and a rapidly deteriorating credit environment, Steve Bertamini and his team responded swiftly, cutting costs, and de-risking the lending book. But we have not stopped at tactical actions. We have also begun a comprehensive transformation of the business.

What we are doing in Consumer Banking now has many parallels with what we did in Wholesale Banking several years ago; a shift in emphasis from products to customers, significant investment in global re-engineering projects and rolling out standardised platforms and a more disciplined market participation model.

Central to this transformation is the shift away from product sales towards much greater focus on deep, multi-product customer relationships. This is not just marketing buzz. We are changing the way we manage performance, incentivise staff, make risk decisions and design products. This is a big, complex change programme.

Priority Banking - our service for premium customers - is a tangible example of what we are doing. We have completely redesigned the proposition to make it truly distinctive. We launched this new proposition two weeks ago in Hong Kong, last week in Singapore and will roll it out across eight key markets over the next two months. We have increased the number of Priority Banking Relationship Managers by 110 in the last six months and plan to take it to around 1,650 by the end of the year.

Consumer Banking has had a tough twelve months, but I am confident we are through the worst of it. First quarter income was up on the fourth quarter of last year. The second quarter this year was up on the first. Loan impairment has stabilised and costs are under tight control. 

We are making very good progress in reshaping Consumer Banking and I am confident that we can and will turn this business into a powerful engine of sustainable profit growth.

Most of this growth will be organic. But we will also look to make acquisitions where they complement our organic investments. For example, we are in discussions to buy some small businesses in India and China, which may or may not result in a transaction. If they do, the consideration is likely to be in the low hundreds of millions of dollars. 

However, as we have said many times before, looking - or even discussing - and actually doing, are by no means the same thing. We have to be convinced of the strategic logic, the cultural and business fit and, above all, it has to make financial sense.

Wholesale Banking

Wholesale Banking continues to have strong momentum, with profits up 36 per cent on the back of income up 37 per cent.

We have stuck to our client-led strategy. At heart, we are a classic commercial bank, focusing on lending, trade, cash management and associated interest rate and foreign exchange hedging.  The majority of Wholesale Banking client revenue comes from these core activities. 

Transaction banking relationships are the bedrock of our client franchise. They provide the platform from which we can provide 'value-added' and 'strategic' services, such as debt capital markets and corporate finance.

Our focus is on building deep, long relationships. In fact we have not sought to add many new clients during the crisis. Instead, we have deployed our capital and liquidity primarily in support of existing clients; and in doing so have further deepened these relationships. Income from our top 50 clients is up over 40 per cent and the number of clients from whom we earn annualised income of over $10 million is up 67 per cent.

Underpinning this deepening of relationships is a steady development of our capabilities. Corporate Finance is one example. In 2002, we had a very small Corporate Finance business making a few tens of millions of dollars. In the first six months of 2009 the 450 staff in Corporate Finance generated over $600 million. 

This is an example of adding capabilities to meet the needs of our clients. It is important to emphasise it is that way round: we look at our clients and work out what we can provide in a competitively advantaged way. We do not start by building product capability and then find clients to sell to. That is what we mean by a client-focused strategy.  

I am frequently asked about the sustainability of own account income. We look at own account in three broad segments: ALM, Principal Finance and the flow trading component of our Financial Markets business. In the first half, flow trading in Financial Markets has been the big driver. 

Substantial increases in client trading volumes and wider bid-offer spreads as a result of volatility drove our flow trading income, which is essentially the income that results from being a market-maker to clients. It is not proprietary trading. We have no proprietary trading desks, nor do we intend to.

Looking ahead to the second half of the year, we do anticipate some negative pressures. ALM income is likely to be lower given the shape of the yield curve and the Bank's positioning and flow trading will probably be affected by the narrowing of bid-offer spreads and the seasonal effects on trading volumes. Principal Finance realisations, by their nature, are lumpy and hard to predict. However, our general expectation is that, over time, own account will tend to grow broadly in line with client income.

Our priorities

So our two businesses have somewhat different priorities. In Consumer Banking it is about dealing with the headwinds whilst simultaneously transforming the business model. In Wholesale Banking it is about disciplined, sustainable growth, striking the balance between grasping the opportunities, while not overreaching. Mike Rees has done a tremendous job as Chief executive of Wholesale Banking, consistently striking the right balance between boldness and caution. I am delighted to welcome him to the Board.

The overall strategy of the Group remains unchanged.

We have taken the time to step back and review our strategy in the light of the crisis and the fundamental changes happening in the world of banking. Put simply, our main conclusion was that our strategy appears even more compelling than it was before.

•	We will remain focused on Asia, Africa and the Middle East markets that offer growth and which we know intimately.
•	We will remain focused on building long-term deep relationships with our clients. In fact, the shift to a more customer focused model in Consumer banking reinforces this.
•	We will continue to run our balance sheet conservatively. Our liquidity and capital strength have proved a real competitive advantage.
•	We will continue to run ourselves as One Bank, leveraging the synergies between the businesses and geographies, stamping on any silos.
•	We will continue to focus on organic growth as the primary driver of value creation, with acquisitions playing an important, but secondary role.
•	We will continue to nurture and reinforce our distinctive culture. Standard Chartered is a rather different sort of Bank and I want to keep it like that.

Equity placing

This morning we announced we would raise about £1 billion or $1.6 billion via an accelerated book build. Why are we doing this, when we are delivering record profits and when we are already strongly capitalised?

At its most simple, the answer is that we are strong and with more capital we will be even stronger.

We have learned the power of playing from strength. Our distinctively strong capital and liquidity position have proved a powerful competitive advantage. Our balance sheet strength reassures stakeholders and attracts customers, which in turn reinforces the balance sheet.

More capital will also enable us to take full advantage of the opportunities emerging from the crisis. Asia will emerge faster than the rest of the world. Our clients are moving to grasp the opportunities. Our deal pipelines are strong. We are winning market share in both businesses, in many products, in many of our markets. We want to be there to support our customers as they turn the crisis to their competitive advantage.

We also see merit in having a substantial capital buffer, well above what we strictly need, at a time of almost unprecedented uncertainty. Whilst the economic environment has undoubtedly got somewhat better, particularly in our markets, we're far from out of the woods. And regulatory expectations about capital requirements have, if anything, got more confused and confusing, with new numbers and arguments appearing by the week. In this context, it makes sense to have the margin to stand above the fray.

It is also important to make clear what are not the reasons for making this placing:

•	It is not about filling some black hole in our balance sheet. While we have experienced increased loan impairment, the strength of our overall performance means we have been able to take this in our stride.
•	It is not because we are intensely gloomy about the outlook. There are challenges but, on the whole, our parts of the world are looking better.
•	And it is not about funding an acquisition spree. We may find some opportunities, but we will be extremely selective.

We are raising capital not because we need to, not because anyone has told us to, but because we want to reinforce our competitive edge and support our clients and to take advantage of the opportunities in our markets.

Outlook

The Bank is in great shape - we have finished the first half with good momentum and we have begun the second half strongly. We are in the right parts of the world and we have got the right strategy.

But whilst I am very positive about the Bank - our strategy, our momentum, the shape of the business - I do not underestimate the scale of what is going on around us. The aftershocks of the crisis, the rebalancing of the world economy, the rewriting of the rules for the banking - these are far from over. 

Summary

Standard Chartered has a long history. Last year we celebrated 150 years of history in China and India. This year we are celebrating our 150th anniversaries in Hong Kong and Singapore. We have experienced a lot of ups and downs along the way. But this is a Bank that rises to a challenge, that works together as one team. Indeed I would like to take this opportunity to thank the people of Standard Chartered for their professionalism, commitment and teamwork.

By sticking to our strategy, staying focused on the basics of banking and staying true to our values and culture, we have shown resilience throughout the crisis, consistently delivering record profits. I am confident we will continue to deliver for the rest of the year and beyond.

But simply weathering the storm is not enough. Whilst I do not underestimate the challenges, we do see this crisis as a strategic opportunity to deepen our relationships with clients, to win market share and to transform our competitive position. That is our goal.

Peter Sands
Group chief executive
4 August 2009

 

END

 

 

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