Interim Results - Part 1

Standard Chartered PLC 07 August 2002 PART 1 TO CITY EDITORS 7 August 2002 FOR IMMEDIATE RELEASE STANDARD CHARTERED PLC RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2002 HIGHLIGHTS Results • Pre-tax profit up at $634 million compared with $628 million* in H1 2001 and $461 million* in H2 2001. • Net revenue up 6 per cent to $2,285 million from $2,164 million.* (H2 2001: $2,241 million*). • Costs down by 2 per cent over H1 2001 and down 6 per cent over H2 2001. • Debt charge $138 million higher at $407 million (Hong Kong personal bankruptcies caused $149 million), but $55 million lower than H2 2001. • Normalised earnings per share at 36.1 cents (H1 2001: 40.2 cents; H2 2001: 26.1 cents). • Normalised return on equity at 12.8 per cent (H1 2001: 14.4 per cent*, H2 2001: 9.3 per cent*). • Interim dividend per share increased by 10 per cent to 14.1 cents. Significant achievements • Pre-tax profit up 38 per cent from H2 2001 and 1 per cent from H1 2001. • Cost income ratio (normalised basis) reduced from 55.6 per cent* in H1 2001 to 51.9 per cent (H2 2001: 56.0 per cent*). • Strong growth in Consumer Banking in a wide range of dynamic markets. Commenting on these results, the Chairman of Standard Chartered PLC, Sir Patrick Gillam, said: 'This is a good performance. We have begun to improve our returns on equity and have achieved excellent growth in a number of Asian and Middle Eastern markets. We are beginning to see real benefits from the acquisitions made in the past few years and from our cost efficiency programme. This progress has enabled us to absorb two major issues - Hong Kong bankruptcies and Argentina - and still deliver increased profitability.' * Comparative restated (see note 15) STANDARD CHARTERED PLC - SUMMARY OF RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2002 6 months 6 months 6 months ended ended ended 30.06.02 30.06.01 31.12.01 $m $m $m RESULTS Net revenue 2,285 2,164* 2,241* Provisions for bad and doubtful debts and contingent liabilities (407) (269) (462) Profit before taxation 634 628* 461* Profit attributable to shareholders 416 404 295 BALANCE SHEET Total assets 112,817 109,837* 107,535* Shareholders' funds: Equity 6,470 6,391* 6,279* Non-equity 1,273 1,251 1,259 Capital resources 13,507 13,155* 12,959* INFORMATION PER ORDINARY SHARE Cents Cents Cents Earnings per share - normalised basis 36.1 40.2 26.1 Dividends per share 14.1 12.82 29.1 Net asset value per share 570.69 566.27* 555.33* RATIOS % % % Post-tax return on equity - normalised basis 12.8 14.4* 9.3* Cost to income ratio - normalised basis 51.9 55.6* 56.0* Capital ratios: Tier 1 capital 9.0 9.0* 9.0* Total capital 15.9 16.5* 16.2* Results on a normalised basis reflect the Group's results excluding amortisation of goodwill, profits on disposal of subsidiary undertakings and profits/losses on disposal of investment securities. * Comparative restated (see note 15) STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT As I said six months ago the challenge for us in the first half was to grow our business and produce better performance in an uncertain world. Our results today show that we have done this. This is a good performance. We have begun to improve our returns on equity and have achieved excellent growth in a number of Asian and Middle Eastern markets. We are beginning to see real benefits from the acquisitions made in the past few years and from our cost efficiency programme. This progress has enabled us to absorb two major issues - Hong Kong bankruptcies and Argentina - and still deliver increased profitability. Results Highlights of our results are shown on page one. Pre tax profits have increased by 1 per cent over the first half of 2001 and by 38 per cent over the second half of 2001. We have declared a dividend of 14.1 cents per share for the half year, an increase of 1.28 cents. Business Progress Our Group Chief Executive, Mervyn Davies, made it clear at the 2001 Annual Results announcement in February that the top priority was to turn Standard Chartered from a company that is well known for its emerging market franchise into one with a reputation for strong performance. Standard Chartered is in the right businesses and in the right markets but we need to demonstrate that we can improve returns on equity. During the past six months, the senior management team has focussed on this. A solid start has been made with Return on Equity improving to 12.8 per cent from the low of 9.3 per cent in the second half of last year. These results show we are beginning to see benefits from the acquisitions we have made in the past few years. Standard Chartered Nakornthon in Thailand has moved into profit while the benefits of the Grindlays acquisition are demonstrated by the stronger contribution from India and the Middle East, with trading profit up 43 per cent and 53 per cent respectively. Hong Kong, despite being affected by the personal bankruptcy issue, still represents a tremendous market for us. The integration of the Chase consumer business is ahead of schedule and, in Manhattan, we have a strong and complementary brand. Singapore is performing strongly and Malaysia is turning around. As a result we are a better balanced bank with a greater number of major markets contributing to overall performance. Improving our returns is our key goal whilst still making the right investments for the longer term. Last month we opened our first consumer banking branch in China, where we intend to be the leading foreign bank as this market opens up. We were also invited by the Bank of China to make a strategic investment in Bank of China Hong Kong at the time of its initial public offering. This reflects the strong and long-standing relationship between the two banks and, I believe, will result in new business opportunities for us both in and outside China. Our cost programmes have progressed extremely well. Our global hubs in Chennai and Kuala Lumpur have been a great success, while we have taken strong action to reduce central costs. Signs of Economic Recovery The strength of Asian economies has exceeded expectations. Singapore, Malaysia and Thailand have all improved with forecast growth for 2002 of 3.5 per cent, 4 per cent and 3.8 per cent STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT (continued) respectively. However Hong Kong, our largest market, remains sluggish with 1 per cent forecast growth this year. China's economic story is well-known. Less known is the impact it is having on the rest of the region. Entry into the World Trade Organisation was a significant event. While everyone seems to be aware of the competitive threat posed by China, less coverage has been given to the opportunity it now provides. It represents a huge market for the rest of Asia to sell into. Exports to China from the rest of Asia increased from 3.3 per cent of total exports in 1990 to 6.5 per cent in 2000. Although China's progress is likely to be uneven, all economies in Asia are positioning themselves in relation to China. Singapore and Hong Kong are moving themselves up the value chain. Clearly this takes time and the adjustment costs of doing so are reflected in Hong Kong's sluggish performance. Continued recovery in the region will further strengthen our position. However, in the short term, much still depends on the health of the United States, which still accounts for 25 per cent of Asia's exports. Although we are optimistic about the future we feel that a note of caution is appropriate. Capital Strategy We see listing in Hong Kong as an integral component of our strategy. It will raise our profile in our biggest market and expand our investor base. We hope to secure a dual primary listing in Hong Kong in the fourth quarter this year. Whilst we believe that a modest equity offering could optimise the impact of the listing, any decision on whether to effect such an equity offering will be taken in the context of circumstances nearer the time and our overall desire to improve Return on Equity. The Board I am delighted to welcome Peter Sands, who joined us as Finance Director in May. Peter brings a wealth of experience and a rigorous approach to the role. There is some sadness for me as this is my last Interim Results. As you know, we had hoped to announce my successor by now, but our desire to ensure that we apply the best governance standards to this process has meant that we are not in a position to make the announcement at this time. We will do so as soon as possible. Following a wide ranging review of potential candidates, a shortlist of strong, well-qualified candidates has been drawn up. The Nominations Committee is currently reviewing these candidates and the process is at an advanced stage. Sir Patrick Gillam 7 August 2002 Chairman STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW At our Annual Results presentation in February, I outlined my agenda for transforming Standard Chartered into a truly performance driven institution and for driving our Return on Equity towards 20 per cent. Results Our first half results show a good performance. Although economic growth has been constrained in many of our markets, we have delivered revenue growth of 6 per cent. We have also taken action to reduce costs. The benefits of our centralisation, reengineering and integration programmes have delivered a 2 per cent cost reduction over the first half of 2001. As a result, profit before provisions has increased 16 per cent first half on first half. Bad debts have had an impact on our pre-tax profit. This has been due to two major issues: the rapid increase in personal bankruptcies in Hong Kong, and Argentina. I will cover both of these in more detail later. Despite this, however, pre-tax profit has increased by 1 per cent over the first half, and by 38 per cent compared to the second half of 2001. The underlying growth clearly shows the positive impact of our strategic re-positioning - investing and growing in the right business and geographies. The United Arab Emirates and India's first half performance now place them within the Group's top five contributors in terms of trading profit. Profits in Hong Kong were down in very difficult market conditions. Singapore has delivered a 26 per cent increase in trading profits. Malaysia has improved from last year's disappointing performance and our other countries combined in the Asia Pacific Region delivered a 42 per cent increase in trading profits. Our investments in markets like Taiwan and Thailand are paying off. Progress on Management Agenda At the full year results in February, I outlined nine key tasks designed to achieve a better Return on Equity. We have made progress on every one of them. I wish to highlight a few. Consumer Banking Consumer Banking has many attractive qualities as a business and continues to be a great opportunity for us. It has a high Return on Equity, high barriers to entry and regulated environments. In Consumer Banking, excluding Hong Kong, we have achieved a 54 per cent increase in trading profit. This is an outstanding performance. Our Hong Kong business has been seriously affected by the rise in personal bankruptcies. The Hong Kong Government is launching a consultation on changes to privacy rules which would allow the establishment of a positive credit checking bureau. We are hopeful that this will be in place by the end of the year. It would be a major factor in resolving the issue for the banking industry. STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW (continued) Hong Kong remains a core and attractive market. For example, we had a good first half in mortgages, with revenue growth once again being achieved. Our second biggest market is Singapore. Having attained qualifying full bank licence status, we have managed to grow our customer base by 11 per cent and have enhanced our distribution capability through a shared ATM network. All in all, with the growth of cards, mortgages, unit trusts and Bancassurance, Singapore achieved a growth in profitability of 15 per cent. Cards and personal loans One of our most important businesses is cards. We already have about six million cards in issue. Cards and personal loans generate high returns on equity. We delivered 21 per cent growth in year-on-year revenues and a nine per cent increase in number of cards in issue. We have strong market shares. Let me take India as an example. In India, the card industry is growing at the rate of 25-30 per cent CAGR. There are approximately five million cards in issue of which Standard Chartered has around 1.3 million. We have been traditionally weak in the under 35 age group for cards and the roll out of the Manhattan brand proposition across Asia will attract this customer segment. We continue to improve our end-to-end processing. This will allow us to drive cost efficiencies from our scale. Wealth Management Cards is not our only great opportunity in Consumer Banking. The first half of this year saw a seven per cent growth in revenue in all wealth management products despite a lower margin environment. Despite the gloom affecting markets globally, unit trust sales recorded impressive growth. Assets under management have grown in the last 12 months from $ 2.6 billion to $ 3.6 billion, with an increasing contribution from Taiwan, India and Indonesia. In Hong Kong we have been a market leader in the launch of corporate bonds distributed to retail customers. Although small at this stage, retail foreign exchange has grown by 75 per cent. Hong Kong and Singapore currently account for 87 per cent of the revenues, but this is a significant cross sell opportunity across all of our markets. Finally, Bancassurance continues to flourish with revenues 28 per cent ahead of the first half of last year, with Hong Kong alone up 84 per cent. STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW (continued) Wholesale Banking One of my stated objectives was to increase our focus on value creating businesses within Wholesale Banking and to prioritise our capital allocation. We are exiting from some relationships that are not generating the returns that we need. We have reduced committed levels on investment grade companies by $2.1 billion to $43 billion. This is having a short term impact on revenue, but it is absolutely the right thing to do to improve our returns. We are prioritising Consumer Banking in the allocation of incremental capital. This is not only helping the Consumer Bank to grow but also ensures that we are driving our capital within the Wholesale Bank towards those relationships which have the highest returns. There are several high return areas in which we have been actively growing our Wholesale Banking business. Bond markets in Asia are developing rapidly. Our pipeline of capital market transactions is excellent. This should not overshadow the fact that we continue to win high quality mandates in cash management, custody and trade. For example, we were recently appointed by the Hong Kong Monetary Authority as the Settlement Institution for Euro clearing in Hong Kong. Latin America has been a drag on our profitability and we are consequently undergoing a review of this business. We are in the process of transforming our Wholesale business. We are making good progress - in the first half there was a particularly good story on the bad debt line in Asia - but we need to do even better. Controlling Risk Given the current risk environment we are operating in we have taken steps to enhance our control of risk. We have expanded our market risk and operational risk teams and conducted a review of our procedures and processes. We continue to dedicate resources to meeting the requirements of the Basel project. We are limiting our exposure to higher risk industry sectors. The first half of this year has seen our problems confined largely to the personal bankruptcies problem in Hong Kong and to Argentine defaults. With regard to the problem of personal bankruptcies in Hong Kong we have taken action to tackle the issue. Internally, we have tightened our approval criteria on new applications whilst reducing lines on higher risk customers. We have also developed early warning trigger mechanisms and improved our collections processes. Externally, we have been very active in supporting the development of a positive credit bureau. We have led the lobbying for credit bureaux across Asia and sponsored the recent gathering of central banks in Thailand on this subject. We were the first bank to recognise the bankruptcy problem in Hong Kong, the first to take action to address it and we believe that we have a good chance of being the first bank to recover from these problems. STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW (continued) Delivering Efficiency in Technology and Operations A huge amount of work has been underway to upgrade our technology and operations. There has been substantial consolidation in many different areas of our business. We are re-engineering our HR and Finance functions and have standardised many of our operating models. Such initiatives are already starting to deliver substantial cost savings and increased operational flexibility. The introduction of Global Shared Service Centres in Chennai and Kuala Lumpur is transforming the way our business is managed. By the year end we will have 2,000 people working in these centres, only 18 months after they opened. We are also looking into a third hub in China which is likely to provide call centre services and processing. The financial benefits of this are, as yet, unquantified. The benefit of our progress can be seen in our headcount numbers. We have reduced headcount from a total of 31,000 at the end of 2000 to 28,000 today. This is helping us make substantial progress in driving towards a cost income ratio of 50 per cent. We have also created a better mix. In the first half of this year the number of sales and marketing staff has increased by 22 per cent while the number of processing and support staff have been reduced by 13 per cent. China In July, we opened in Shanghai our first Consumer Banking branch in China in modern times. This branch has been approved by the People's Bank of China to provide customers, including local Chinese citizens, a full-range of foreign currency products and services. Standard Chartered Bank is one of only a few international banks to have been granted such approval. We will be opening three more branches in China during the next eight months in Shenzhen, Guangzhou and Beijing. Last month we also took a $50 million stake in the initial public offering in the Bank of China Hong Kong. The fact that we were the only bank invited to subscribe ahead of the listing speaks volumes about the strength of the relationship that we have with the Bank of China. We believe that this stake will materially enhance this relationship and benefit business development. Given the competitive advantages which we already have in China, we are very well positioned to build a large profitable business there in the future. Transitioning Thailand and Taiwan to Profitability One of my agenda items was to move both Thailand and Taiwan to profitability. I am pleased to say that both were profitable in the first half of 2002. In Thailand we have successfully completed the integration of Nakornthon, with all operations merged and the overall branch network rationalised. Our people and organisation have been upgraded, new products and services launched and a compliance and control culture fully embedded. Of the 67 Nakornthon branches acquired, we closed or combined 35 which were unprofitable or in the wrong locations. We have added eight new branches, seven of which are in Tesco-Lotus hypermarket sites. STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW (continued) The result of these actions is a strong turnaround in performance. Trading profit in Standard Chartered Nakornthon Bank (SCNB) has been transformed from a loss of $47 million in the first 12 months after acquisition in September 1999 to a profit of $3 million in the first half of this year. Likewise, in Taiwan, trading profit for the branch has been increased from a loss of $25 million in 1999 to a profit of $11 million in the first half of this year. Simplified Management Agenda Thailand and Taiwan have been transitioned to profitability and we are now managing them as business as usual. We are combining our cost objectives into one. The agenda therefore has been simplified to six items: 1. Improve capital efficiency; 2. Consumer - build market share; 3. Reposition Wholesale to drive returns; 4. Control risk and balance with reward; 5. Drive cost efficiency; 6. Capture profitable growth in China and India. India, which saw a 43 per cent increase in trading profits for the first half, has been added to the management agenda. Although the Grindlays integration has gone well there is more potential in this market. Middle East and Other South Asia (MESA) MESA's performance warrants special mention. It reflects very strong organic business growth and highlights the success of the Grindlays integration. Revenues are 16 per cent higher than the same period last year and costs are 7 per cent lower, resulting in an increase in trading profits of 53 per cent. Headcount has been reduced by 21 per cent and we now have a wide array of innovative products. The United Arab Emirates generates trading profit in excess of $100 million a year and Pakistan, Bangladesh and Bahrain are all well established businesses with great potential. THE FUTURE We are confident about our ability to grow, although the pace of growth will reflect market conditions. We are also confident about controlling the cost base, although investment spend will accelerate in the second half. Against this the Hong Kong bankruptcy situation remains uncertain, and the world in general is highly unpredictable. Given this mix of opportunities and uncertainty we feel that cautious optimism is the right stance to take. Mervyn Davies 7 August 2002 Group Chief Executive STANDARD CHARTERED PLC - FINANCIAL REVIEW GROUP SUMMARY The results for the six months to 30 June 2002 indicate a strong performance with operating profit before provisions 16 per cent higher than the equivalent period last year at $1,041 million. Provisions for bad debts have been adversely affected by two major issues: bankruptcies in Hong Kong and the economic deterioration in Argentina in the first quarter. Despite these issues the Group's profit before taxation was $634 million compared to $628 million last year. In February 2002 the Urgent Issues Task Force of the Accounting Standards Board issued guidance on the application of accounting standards to capital instruments that have characteristics of both liabilities and shareholders' funds. The Group has complied with these requirements and as a result has reclassified its Trust Preferred Securities and Step-up Callable Perpetual Trust Preferred Securities from minority interests - non-equity to liabilities and moved the cost of this capital from minority interests non-equity to interest payable. The impact has been restated as follows:- 6 months ended 6 months ended 6 months ended 30.06.02 30.06.01 31.12.01 Net Profit Net Profit Net Profit Interest Before Interest Before Interest Before Tax Tax Tax $m $m $m $m $m $m As previously published 1,578 670 1,428 651 1,531 497 Transfer from minority interests to interest payable on: Euro 500m issued March 2000 (18) (18) (18) (18) (18) (18) GBP 300m issued May 2001 (18) (18) (5) (5) (18) (18) As published 30 June 2002 1,542 634 1,405 628 1,495 461 If the changes caused by the UITF had not applied the Groups net tax profit for the six months ended 30 June 2002 would have been $670 million. Revenue has grown by six per cent to $2,285 million. This is a satisfactory performance given the economic climate with weak demand in many of our markets, particularly Hong Kong. Net interest income increased by ten per cent driven largely by volume growth in Consumer Banking and strong earnings on asset and liability management. The Group's average interest earning assets rose by $3.1 billion compared to the first six months of 2001, an increase of three per cent. Overall the average net interest margin was 3.1 per cent compared to 3.0 per cent in the equivalent period last year. Fees and commissions are broadly flat at $476 million compared to $477 million which reflects generally weak demand for corporate banking products, partially offset by growth in Wealth Management. Dealing profits have fallen by $20 million or eight per cent. This is mainly due to lower volumes in Africa. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Total operating expenses fell by two per cent compared to the first half of 2001. The benefits of the centralisation and operational efficiency programmes, together with the higher than targeted cost synergies driven from the integration of acquisitions, have contributed net cost benefits of $78 million in the six months to 30 June 2002. This has enabled the Group to continue to invest for future growth. The cost income ratio improved from 55.6 per cent in the first half of 2001 to 51.9 per cent this period on a normalised basis. Net provisions for bad and doubtful debts and contingents at $407 million were $138 million higher than the equivalent period last year but lower than the second half of last year. Two significant issues drove the debt charge. The worsening economic situation in Argentina in the first quarter resulted in provisions of $75 million in addition to $35 million taken in the second half of last year, and the Hong Kong bankruptcy situation which caused provisions of $149 million. Post tax return on equity (normalised) was 12.8 per cent, down from 14.4 per cent in the first half of 2001. Compared to the second half of 2001 the Return on Equity has improved from 9.3 per cent. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) CONSUMER BANKING Consumer Banking remains the key growth engine of the bank. Revenue in Consumer Banking has increased by 13 per cent from $1,078 million to $1,215 million, and costs have been cut seven per cent by $46 million. However the total debt charge has increased by $198 million to $321 million mainly due to the bankruptcy situation in Hong Kong. This has had the effect of reducing the operating profit by four per cent. The following table provides an analysis of operating profit before tax by geographic segment for Consumer Banking. 6 months ended 30.06.02 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Revenue 533 149 75 135 Costs (200) (49) (38) (80) Charge for debts (238) (16) (10) (30) Operating profit 95 84 27 25 6 months ended 30.06.02 Americas Middle UK & East & Group Consumer Other Head Banking India S Asia Africa Office Total $m $m $m $m $m Revenue 101 102 70 50 1,215 Costs (62) (49) (60) (30) (568) Charge for debts (18) (7) (1) (1) (321) Operating profit 21 46 9 19 326 6 months ended 30.06.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Revenue 506 122 69 97 Costs (227) (43) (35) (84) Charge for debts (88) (6) (3) (8) Operating profit 191 73 31 5 6 months ended 30.06.01 Americas Middle UK & East & Group Consumer Other Africa Head Banking India S Asia Office Total $m $m $m $m $m Revenue 96 86 62 40 1,078 Costs (70) (52) (67) (36) (614) Charge for debts (9) (7) (1) (1) (123) Operating profit 17 27 (6) 3 341 6 months ended 31.12.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Revenue 534 128 70 113 Costs (247) (52) (42) (87) Charge for debts (138) (11) (8) (27) Operating profit 149 65 20 (1) 6 months ended 31.12.01 Americas Middle UK & East & Group Consumer Other Africa Head Banking India S Asia Office Total $m $m $m $m $m Revenue 94 93 69 43 1,144 Costs (62) (56) (55) (39) (640) Charge for debts (10) (8) (2) (3) (207) Operating profit 22 29 12 1 297 Hong Kong profits have fallen overall by 50 per cent from $191 million to $95 million. Market conditions are difficult with the bankruptcy problem affecting the whole industry, a deflationary environment and higher unemployment. Customer loans and deposits both fell two per cent (the advances/deposits ratio was 74 per cent). Despite this, revenue has improved by five per cent and costs reduced by 12 per cent. However the $150 million increase in bad debts led to the overall decline in profitability. In addition to the bankruptcy situation, the Group incurred a further charge STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) of $11 million in Hong Kong by reducing the charge off period on credit cards from 150 days to 120 days past due. Singapore has increased operating profit by 15 per cent. Significant market share inroads have been made in Consumer Banking leveraging Standard Chartered's Qualifying Full Banking license. Other Asia Pacific increased profits five-fold from $5 million to $25 million. This was mainly due to the Group's investments in the markets of Taiwan and Thailand. Thailand benefited from higher volume and margin in the unsecured lending business. Taiwan saw dramatic growth in consumer business due to a successful mortgage campaign. MESA increased operating profit by 70 per cent to $46 million and India by 24 per cent to $21 million. This is due to the success of the Grindlays integration and growth in the business. Africa delivered operating profit of $9 million after a loss of $6 million in the first half of last year. The region has been successful despite a tough environment and depreciating currencies. The Americas and the UK have increased profit from $3 million to $19 million, as we reposition off-shore banking. An analysis of revenue by product is set out below: 6 months 6 months ended 6 months ended ended 30.06.01 31.12.01 30.06.02 Revenue by product $m $m $m Cards / Personal Loans 557 462 523 Wealth Management / Deposits 412 386 388 Mortgages and Auto Finance 232 201 194 Other 14 29 39 1,215 1,078 1,144 There has been strong revenue growth in credit cards and personal loans of 21 per cent, and they continue to make impressive returns. Cards revenue alone grew 14 per cent and cards in issue grew nine per cent despite a cautious approach to new account acquisition in Hong Kong. Mortgages have shown robust growth, with new product innovation. Margins have remained flat throughout the period. In Hong Kong, mortgages grew by five per cent. The average book margin was Prime less 167 basis points, with new business pricing staying at Prime less 236 basis points - better than the market average. The delinquency ratio was 0.76 per cent (June), 33 per cent better than the market average. Wealth management has performed well and revenues are up seven per cent over the first half of 2001. This has been driven by growth in fee earning activities which offset the impact of the lower interest rate environment. Total costs in Consumer Banking have fallen by seven per cent as a result of stringent cost control, particularly in Hong Kong. Despite the overall cost reduction the Group has maintained its investment in initiatives key to future growth, for example customer sales and service capability. Investment in Consumer Banking is ongoing with the Manhattan brand about to be rolled out across Asia, and end-to-end processing being improved. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) The net debt charge increased from $123 million to $321 million as a result of the bankruptcy situation that has affected the whole industry in Hong Kong. Charges relating to this in the first half amounted to $149 million, predominantly in our unsecured lending non-mortgage business. The data from the Official Receiver's Office show that petition numbers have stabilised in the last quarter. However, the situation is volatile and unemployment high. We need to be cautious on the outlook. In addition, the charge off period for credit cards has been reduced from 150 days past due to 120 days past due in Hong Kong as a consequence of the market environment. Elsewhere the growth in bad debts reflects higher volumes, changes in the business mix and economic conditions. Outside Hong Kong, trading profit growth of 54 per cent required incremental risk weighted assets of only $2 billion, indicating that growth in Consumer Banking need not be hugely capital intensive. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) WHOLESALE BANKING The Wholesale Banking business is being developed from a traditional lending orientated and capital intensive business to one focused on debt capital markets, treasury, cash management and structured trade business that will deliver better returns. The Group is rejecting business opportunities that do not deliver an adequate return to the bank which in the short term has an impact on revenue growth. Overall revenues fell by one per cent. The following table provides an analysis of operating profit before tax by geographic segment: 6 months ended 30.06.02 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Revenue 201 86 40 148 Costs (96) (48) (35) (115) Charge for debts 7 (1) - (4) Operating profit 112 37 5 29 6 months ended 30.06.02 Americas Middle UK & East & Group Wholesale India Other Africa Head Banking S Asia Office Total $m $m $m $m $m Revenue 97 140 106 252 1,070 Costs (41) (43) (51) (179) (608) Charge for debts (1) 7 4 (98) (86) Operating profit 55 104 59 (25) 376 6 months ended 30.06.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Revenue 191 96 55 168 Costs (103) (56) (26) (116) Charge for debts (14) (17) (52) (19) Operating profit 74 23 (23) 33 6 months ended 30.06.01 Americas Middle UK & East & Group Wholesale Other Africa Head Banking India S Asia Office Total $m $m $m $m $m Revenue 74 122 115 265 1,086 Costs (36) (47) (43) (158) (585) Charge for debts (2) (4) (2) (36) (146) Operating profit 36 71 70 71 355 6 months ended 31.12.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Revenue 211 94 43 151 Costs (102) (54) (28) (117) Charge for debts (17) (17) (67) (32) Operating profit 92 23 (52) 2 6 months ended 31.12.01 Americas Middle UK & East & Group Wholesale Other Head Banking India S Asia Africa Office Total $m $m $m $m $m Revenue 91 135 109 263 1,097 Costs (41) (52) (61) (151) (606) Charge for debts (6) (20) (8) (88) (255) Operating profit 44 63 40 24 236 The greater focus on global markets was partially responsible for the improved results of Hong Kong. In Malaysia profit improved by $28 million. This is due to the improvement in the trading environment which has resulted in debt charges reducing from $52 million to $Nil. In India, there is a 53 per cent rise in operating profit, and MESA increased operating profit by 46 per cent. Both regions show sustained revenue growth and improved debt charges. The improved performance is in part due to the integration of the Grindlays acquisition. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) The profit in the Americas and the UK has fallen from $71 million to a loss of $25 million. This is mainly due to a $75 million charge for Argentina, which followed a charge of $35 million in the second half of 2001. Despite almost all lending in Argentina being to banks, and in particular subsidiaries of international banks for the purpose of trade finance, substantial further provisioning was required in these extremely uncertain circumstances. The Group now has approximately 50 per cent cover of outstandings in Argentina. The Group has also reviewed its exposure to Brazil. At 30 June 2002, there were net exposures of $663 million. The Group is taking a cautious approach with a reduction programme in place, and this exposure has been reduced by approximately $100 million. Most of the Group's exposure is to banks. The Group has reviewed this bank portfolio carefully and has concluded that no provisions are required. An analysis of revenue by product is set out below: 6 months 6 months ended 6 months ended ended 30.06.01 31.12.01 30.06.02 Revenue by product $m $m $m Trade and Lending 393 439 410 Global Markets 488 429 485 Cash Management 158 166 189 Custody 31 52 13 1,070 1,086 1,097 Trade/lending revenues have reduced from $439 million to $393 million. Market demand has been weak and the reduction is in part due to the repositioning of the business. Global markets revenue has increased by $59 million to $488 million. Asset and liability management revenue comprises over half of Global Markets revenue and is influenced by the prevailing level of interest rates. Cash management balances have grown significantly by 24 per cent but revenues have not improved as margins have declined as a result of the low interest rate environment. The reduction in custody revenues by 40 per cent reflects the decrease in equity activity. The revenue for this business is driven by volume and equity values. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) RISK Risk is inherent in the Group's business and the effective management of that risk is seen as a core competence within Standard Chartered. Through its risk management structure the Group seeks to manage efficiently the eight core risks: Credit, Market, Country and Liquidity risk arise directly through the Group's commercial activities whilst Business, Regulatory, Operational and Reputational risk are a normal consequence of any business undertaking. The key element of risk management philosophy is for the risk functions to operate as an independent control function working in partnership with the business units to provide a competitive advantage to the Group. Credit Risk Credit risk is the risk that a counterparty will not settle its obligations in accordance with agreed terms. Credit exposures include individual borrowers, connected groups of counterparties, and portfolios, on the banking and trading books. The following table sets out an analysis of the Group's net loans and advances as at 30 June 2002, 30 June 2001 and 31 December 2001 by the principal category of borrowers, business or industry and/or geographical distribution: 30.06.02 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Loans to Individuals Mortgages 12,764 3,447 1,970 1,104 Other 2,952 1,324 541 1,159 Consumer Banking 15,716 4,771 2,511 2,263 Loans to Governments - 40 338 67 Agriculture, Forestry and Fishing 2 2 68 42 Mining and Quarrying - 1 27 20 Manufacturing 1,129 500 203 1,999 Electricity, Gas and Water 330 44 24 285 Construction 53 47 28 108 Commerce 1,048 536 236 664 Transport, Storage and Communication 304 196 68 202 Financing, Insurance and Business services 1,643 641 208 621 Other 930 997 49 285 Wholesale Banking 5,439 3,004 1,249 4,293 General Provisions Total loans and advances to customers 21,155 7,775 3,760 6,556 Total loans and advances to banks 4,053 2,644 725 2,771 30.06.02 Middle Americas East & UK & Group Head Other Office Total India S Asia Africa $m $m $m $m $m Loans to Individuals Mortgages 192 26 36 520 20,059 Other 812 1,467 188 204 8,647 Consumer Banking 1,004 1,493 224 724 28,706 Loans to Governments 2 13 - 446 906 Agriculture, Forestry and Fishing 13 16 91 182 416 Mining and Quarrying 9 126 33 744 960 Manufacturing 792 940 302 2,510 8,375 Electricity, Gas and Water 31 99 22 124 959 Construction 6 138 17 7 404 Commerce 61 799 253 864 4,461 Transport, Storage and Communication 45 157 89 1,162 2,223 Financing, Insurance and Business services 101 318 49 1,822 5,403 Other - 135 22 120 2,538 Wholesale Banking 1,060 2,741 878 7,981 26,645 General Provisions (468) (468) Total loans and advances to customers 2,064 4,234 1,102 8,237 54,883 Total loans and advances to banks 335 1,731 279 7,565 20,103 The Consumer Banking portfolio is dominated by the mortgage portfolio in Hong Kong. Other loans to individuals include both secured and unsecured exposure of which credit card funding is 41.4 per cent (June 2001: 50.0 per cent; December 2001: 43.4 per cent) STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) In Wholesale Banking, the portfolio is well spread across all industry groupings. Major areas of classification, including Manufacturing, Finance, Insurance and Business Services and Commerce all reflect well diversified portfolios and individual industry levels. 30.06.01 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Loans to Individuals Mortgages 12,284 2,964 1,965 569 Other 3,088 641 249 785 Consumer Banking 15,372 3,605 2,214 1,354 Loans to Governments - - 198 71 Agriculture, Forestry and Fishing 9 30 90 82 Mining and Quarrying - 3 30 133 Manufacturing 1,132 254 344 1,953 Electricity, Gas and Water 391 49 78 167 Construction 37 22 45 58 Commerce 1,050 653 221 623 Transport, Storage and Communication 453 308 85 103 Financing, Insurance and Business services 2,329 630 238 458 Other 839 617 7 374 Wholesale Banking 6,240 2,566 1,336 4,022 General Provisions Total loans and advances to customers 21,612 6,171 3,550 5,376 Total loans and advances to banks 4,082 4,093 1,174 3,292 30.06.01 Middle Americas East & UK & Other Group India S Asia Africa Head Office Total $m $m $m $m $m Loans to Individuals Mortgages 119 41 17 446 18,405 Other 642 1,194 145 123 6,867 Consumer Banking 761 1,235 162 569 25,272 Loans to Governments 7 2 5 429 712 Agriculture, Forestry and Fishing 14 19 77 242 563 Mining and Quarrying - 2 33 638 839 Manufacturing 877 857 322 2,748 8,487 Electricity, Gas and Water 33 16 25 314 1,073 Construction 15 120 19 123 439 Commerce 36 740 220 1,318 4,861 Transport, Storage and Communication 30 122 53 1,077 2,231 Financing, Insurance and Business services 116 243 39 2,012 6,065 Other 15 636 18 346 2,852 Wholesale Banking 1,143 2,757 811 9,247 28,122 General Provisions (467) (467) Total loans and advances to customers 1,904 3,992 973 9,349 52,927 Total loans and advances to banks 255 1,455 225 12,391 26,967 31.12.01 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Loans to Individuals Mortgages 12,560 3,005 1,784 698 Other 3,368 1,172 519 1,111 Consumer Banking 15,928 4,177 2,303 1,809 Loans to Governments - - 309 19 Agriculture, Forestry and Fishing 8 16 69 64 Mining and Quarrying - 2 28 35 Manufacturing 1,005 510 277 2,261 Electricity, Gas and Water 318 34 28 188 Construction 56 57 40 39 Commerce 936 554 223 605 Transport, Storage and Communication 313 247 75 88 Financing, Insurance and Business services 1,836 558 309 532 Other 745 673 44 202 Wholesale Banking 5,217 2,651 1,402 4,033 General Provisions Total loans and advances to customers 21,145 6,828 3,705 5,842 Total loans and advances to banks 1,227 2,315 607 3,184 31.12.01 Middle Americas East & UK & Other Group India S Asia Africa Head Office Total $m $m $m $m $m Loans to Individuals Mortgages 142 38 16 506 18,749 Other 721 1,462 155 158 8,666 Consumer Banking 863 1,500 171 664 27,415 Loans to Governments 5 12 1 576 922 Agriculture, Forestry and Fishing 103 16 80 281 637 Mining and Quarrying 15 139 32 726 977 Manufacturing 553 1,037 288 2,410 8,341 Electricity, Gas and Water 80 29 40 248 965 Construction 22 104 16 68 402 Commerce 45 703 245 928 4,239 Transport, Storage and Communication 103 192 38 1,173 2,229 Financing, Insurance and Business services 124 312 40 1,468 5,179 Other 10 73 18 402 2,167 Wholesale Banking 1,060 2,617 798 8,280 26,058 General Provisions (468) (468) Total loans and advances to customers 1,923 4,117 969 8,476 53,005 Total loans and advances to banks 398 1,704 325 9,818 19,578 STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Problem Credits The Group employs a variety of tools to monitor the portfolio and to ensure the timely recognition of problem credits. In Wholesale Banking, accounts are placed on Early Alert when they display signs of weakness. Such accounts are subject to a dedicated process involving senior risk officers and representatives from a specialist recovery unit, which is independent of the business units. 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 the specialist recovery unit. In Consumer Banking, an account is considered to be in default when payment is not received on due date. Accounts which are overdue by more than 30 days (60 days for mortgages) are considered delinquent. These are closely monitored and subject to a special collections process. In general, loans are treated as non-performing when interest or principal is 90 days or more past due. Consumer Banking Provisions are derived on a formulaic basis depending on the product: • Mortgages: a provision is raised where accounts are 150 days past due based on the difference between the outstanding value of the loan and the forced sale value of the underlying asset. • Credit cards: a charge off is made for all balances which are 150 days past due except in Hong Kong where a charge off is made immediately on petition for bankruptcy and at 120 days past due for other balances. • Other unsecured Consumer Banking products: a charge off is made at 150 days past due. • Other secured Consumer Banking products: a provision is raised at 90 days past due for the difference between the outstanding value and the forced sale value of the underlying asset. The underlying asset is then revalued periodically until disposal. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) The following table sets out the non-performing portfolio in Consumer Banking: 30.06.02 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Loans and advances - Gross 200 115 172 136 non-performing Specific provisions for bad and (121) (18) (21) (27) doubtful debts Interest in suspense - (3) (21) (9) Net non-performing loans and 79 94 130 100 advances 30.06.02 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Loans and advances - Gross 40 85 17 11 776 non-performing Specific provisions for bad (9) (54) (6) (3) (259) and doubtful debts Interest in suspense (5) (20) (8) (1) (67) Net non-performing loans and 26 11 3 7 450 advances 30.06.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Loans and advances - Gross 132 41 152 125 non-performing Specific provisions for bad and (53) (15) (19) (20) doubtful debts Interest in suspense - (2) (19) (7) Net non-performing loans and 79 24 114 98 advances 30.06.01 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Loans and advances - Gross 46 71 17 10 594 non-performing Specific provisions for bad (14) (54) (6) - (181) and doubtful debts Interest in suspense (4) (12) (6) - (50) Net non-performing loans and 28 5 5 10 363 advances 31.12.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Loans and advances - Gross 164 115 168 126 non-performing Specific provisions for bad and (70) (15) (20) (24) doubtful debts Interest in suspense - (2) (20) (8) Net non-performing loans and 94 98 128 94 advances 31.12.01 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Loans and advances - Gross 39 78 18 21 729 non-performing Specific provisions for bad (11) (52) (5) (13) (210) and doubtful debts Interest in suspense (6) (15) (7) - (58) Net non-performing loans and 22 11 6 8 461 advances Specific provisions and interest in suspense together cover 42 per cent (30 June 2001: 39 per cent; 31 December 2001: 37 per cent) of gross non-performing loans. The apparent low level of cover reflects the provisioning policy which identifies loans as non-performing at 90 days or more past due, whilst provisions are, generally, raised at 150 days past due. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Wholesale Banking Loans are designated as non-performing as soon as payment of interest or principal is 90 days or more overdue or where sufficient weakness is recognised that full payment of either interest or principal becomes questionable. Where customer accounts are recognised as non-performing or display weakness that may result in non-performing status being assigned, they are passed to the management of a specialist unit, which is independent of the main businesses of the Group. For loans and advances designated non-performing, interest continues to accrue on the customer's account but is not included in income. Where the principal or a portion thereof, is considered uncollectable and of such little realisable value that it can no longer be included at its full nominal amount on the balance sheet, a specific provision is raised. 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 the principal of an account against which a specific provision has been raised, then that amount will be written off. The Group reports non-performing loans at net at risk two years after first raising a specific provision. Net at risk is the result of netting interest in suspense and specific provision against applicable gross outstandings. Normal account management and collection efforts are not impacted by this process. The following table sets out the non-performing portfolio in Wholesale Banking: 30.06.02 Asia Pacific Hong Other Kong Singapore Malaysia Asia Pacific $m $m $m $m Loans and advances - Gross 151 109 247 868 non-performing Specific provisions for bad and (32) (27) (112) (107) doubtful debts Interest in suspense (15) (12) (26) (22) Net non-performing loans and 104 70 109 739 advances 30.06.02 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Loans and advances - Gross 27 147 83 667 2,299 non-performing Specific provisions for bad (17) (90) (40) (266) (691) and doubtful debts Interest in suspense (7) (25) (27) (20) (154) Net non-performing loans and 3 32 16 381 1,454 advances 30.06.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Loans and advances - Gross 383 157 230 1,014 non-performing Specific provisions for bad and (96) (51) (72) (217) doubtful debts Interest in suspense (56) (20) (21) (33) Net non-performing loans and 231 86 137 764 advances 30.06.01 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Loans and advances - Gross 54 349 93 365 2,645 non-performing Specific provisions for bad (22) (197) (39) (148) (842) and doubtful debts Interest in suspense (11) (52) (25) (17) (235) Net non-performing loans and 21 100 29 200 1,568 advances STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) 31.12.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Loans and advances - Gross 252 120 275 905 non-performing Specific provisions for bad and (60) (36) (126) (122) doubtful debts Interest in suspense (18) (11) (23) (14) Net non-performing loans and 174 73 126 769 advances 31.12.01 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Loans and advances - Gross 43 284 87 498 2,464 non-performing Specific provisions for bad (29) (121) (47) (200) (741) and doubtful debts Interest in suspense (10) (33) (29) (29) (167) Net non-performing loans and 4 130 11 269 1,556 advances Included in Wholesale Banking in Other Asia Pacific are net non-performing loans of $631 million (30 June 2001: 621 million; 31 December 2001: $621 million) in Standard Chartered Nakornthon Bank ('SCNB'). Refer to note 10. The Group reports non-performing loans at net at risk two years after first raising a specific provision. The cumulative amount written down including SCNB at June 2002 is $1,737 million (30 June 2001: $1,433 million; 31 December 2001: $1,660 million). Excluding SCNB specific provisions and interest in suspense together cover 49 per cent (30 June 2001: 51 per cent; 31 December 2001: 47 per cent) of gross non-performing loans (if lending and provisions are adjusted to reflect the cumulative amount of the netting exercise, the cover ratio would be 75 per cent (30 June 2001: 71 per cent; 31 December 2001: 72 per cent) STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Specific Provisions The following table sets out the movements in the Group's total specific provisions against loans and advances. 6 months ended 30.06.02 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Provisions held at 1 January 2002 130 51 146 146 Exchange translation differences 2 1 - (6) Amounts written off and written down (215) (26) (29) (46) Recoveries of amounts previously written off 5 2 6 6 New provisions 269 25 21 62 Recoveries/provisions no longer required (38) (8) (11) (28) Net charge against profit 231 17 10 34 Provisions held at 30 June 2002 153 45 133 134 6 months ended 30.06.02 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Provisions held at 1 January 2002 40 173 52 213 951 Exchange translation differences - (1) (3) 1 (6) Amounts written off and written down (38) (29) - (44) (427) Recoveries of amounts previously written off 6 1 - - 26 New provisions 45 17 3 108 550 Recoveries/provisions no longer required (27) (17) (6) (9) (144) Net charge against profit 18 - (3) 99 406 Provisions held at 30 June 2002 26 144 46 269 950 6 months ended 30.06.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Provisions held at 1 January 2001 227 90 71 292 Exchange translation differences (4) (3) - 8 Amounts written off and written down (180) (47) (43) (68) Recoveries of amounts previously written off 4 3 8 5 Other - - - (27) New provisions 129 32 71 64 Recoveries/provisions no longer required (27) (9) (16) (37) Net charge against profit 102 23 55 27 Provisions held at 30 June 2001 149 66 91 237 6 months ended 30.06.01 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Provisions held at 1 January 2001 53 209 52 152 1,146 Exchange translation differences (1) (6) (5) (3) (14) Amounts written off and written down (32) 8 (5) (37) (404) Recoveries of amounts previously written off 4 1 - 5 30 Other 1 28 - (6) (4) New provisions 27 24 6 51 404 Recoveries/provisions no longer required (16) (13) (3) (14) (135) Net charge against profit 11 11 3 37 269 Provisions held at 30 June 2001 36 251 45 148 1,023 6 months ended 31.12.01 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific $m $m $m $m Provisions held at 1 July 2001 149 66 91 237 Exchange translation differences 1 1 - (2) Amounts written off and written down (179) (49) (21) (162) Recoveries of amounts previously written off 4 4 3 5 Other - - (2) 9 New provisions 189 39 83 76 Recoveries/provisions no longer required (34) (10) (8) (17) Net charge against profit 155 29 75 59 Provisions held at 31 December 2001 130 51 146 146 6 months ended 31.12.01 Americas Middle UK & East & Group Other Head India S Asia Africa Office Total $m $m $m $m $m Provisions held at 1 July 2001 36 251 45 148 1,023 Exchange translation differences - 4 - (2) 2 Amounts written off and written down (22) (114) (4) (46) (597) Recoveries of amounts previously written off 4 - 1 - 21 Other 6 4 - 22 39 New provisions 41 42 14 106 590 Recoveries/provisions no longer required (25) (14) (4) (15) (127) Net charge against profit 16 28 10 91 463 Provisions held at 31 December 2001 40 173 52 213 951 STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Of the amounts written off and the recoveries of amounts previously written off: 6 months 6 months 6 months ended ended ended 30.06.02 30.06.01 31.12.01 $m $m $m Covered by specific provisions raised in previous periods 321 323 494 Not covered by specific provisions raised in previous periods 106 81 103 Recoveries of loans previously written off (26) (30) (21) 401 374 576 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 following table shows the Group's cross border assets, including acceptances, where they exceed 1 per cent of the Group's total assets. Cross border assets exclude facilities provided within the Group. They 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 cross border asset is recorded. Cross border assets also include exposures to local residents denominated in currencies other than the local currency. 30.06.02 Public Banks Other Total sector $m $m $m $m USA 1,078 1,154 2,078 4,310 Germany - 3,554 118 3,672 Italy 438 1,322 323 2,083 Singapore 10 395 1,420 1,825 Hong Kong 8 100 1,671 1,779 France 4 1,316 336 1,656 Korea 164 1,355 128 1,647 Austria - 1,216 - 1,216 Australia 387 656 94 1,137 30.06.01 Public Sector Banks Other Total $m $m $m $m Germany - 4,930 25 4,955 USA 1,658 1,323 1,229 4,210 France 280 1,510 587 2,377 Hong Kong 19 480 1,713 2,212 Italy 218 1,503 77 1,798 Korea - 1,297 320 1,617 Singapore 14 520 1,071 1,605 STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) 31.12.01 Public Sector Banks Other Total $m $m $m $m USA 1,637 1,330 1,750 4,717 Germany - 3,546 119 3,665 Hong Kong 8 167 1,685 1,860 Singapore 25 310 1,485 1,820 France - 1,281 409 1,690 Italy 396 1,047 239 1,682 Korea 5 1,214 203 1,422 Market Risk The Group recognises market risk as the exposure created by the potential changes in market prices and rates. The Group measures the impact of market price and rate risk using Value at Risk ('VaR') models. The total VaR for market risks in the Group's trading book as at 30 June 2002 was $5.8 million (31 December 2001: $3.5 million). Of this total $3.6 million related to interest rate risk and $2.8 million to exchange rate risk. The corresponding figures as at 31 December 2001 were $2.1 million and $1.5 million respectively. The differences are a result of increased market volatility. The Group has no significant trading exposure to equity or commodity price risk. No offsets are allowed between exchange rate and interest rate exposures when VaR limits are set. The average VaR in the trading book during the six months to 30 June 2002 was $6 million (12 months to 31 December 2001: $5.1 million) with a maximum exposure of $9.6 million. The average level of risk was higher than in 2001 due to an increase in market volatility. VaR for interest rate risk in the non-trading books of the Group totalled $11.2 million at 30 June 2002, compared to $11.6 million at 31 December 2001. Liquidity Risk The Group defines liquidity risk as the risk that funds will not be available to meet liabilities as they fall due. A range of tools are used for the management of liquidity. These comprise commitment and wholesale borrowing guidelines, key balance sheet ratios and medium term funding requirements. At the local level, in line with policy, the day to day monitoring of future cash flows takes place and suitable levels of easily marketable assets are maintained by the businesses. Operational and Other Risks Operational Risk is the risk of direct or indirect loss due to an event or action causing failure of technology, processes, infrastructure, personnel, and other risks having operational risk impact. Other risks recognised by the Group include Business, Legal, Regulatory and Reputational risks. Standard Chartered seeks to minimise actual or potential losses from Operational Risk failures through a framework of policies and procedures that identify, assess, control, manage and report risks. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) An independent Group Operational Risk function is responsible for establishing and maintaining the overall Operational Risk framework. The Group Operational Risk function provides reports to the Group Risk Committee and the Audit and Risk Committee. Compliance with Operational Risk policy is the responsibility of all managers. In every country, a Country Operational Risk Group (CORG) has been established. It is the responsibility of the CORG to ensure appropriate risk management frameworks are in place and to monitor and manage operational risk. CORGs are chaired by Country Chief Executives. Business units are required to monitor their Operational Risks using Group and business level standards and indicators. Significant issues and exceptions must be reported to the CORG. Where appropriate, issues must also be reported to Business Risk Committees and the Group Risk Committee. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) CAPITAL Standard Chartered's policy is to maintain a conservative balance sheet and strong capital base. The Group Asset and Liability Committee targets Tier 1 and Total capital ratios of 7 - 9 per cent and 12 - 14 per cent respectively. Capital ratios 30.06.02 30.06.01 31.12.01 $m $m $m Tier 1 capital 6,581 6,170* 6,232* Tier 2 capital 5,185 5,130 5,010 11,766 11,300 11,242 Less supervisory adjustments (214) (30) (19) Adjusted capital base 11,552 11,270 11,223 Risk weighted assets 55,756 53,373 53,825 Risk weighted contingents 17,096 15,138 15,517 Total risk weighted assets and contingents 72,852 68,511 69,342 Capital ratios % % % Tier 1 capital 9.0 9.0* 9.0* Total capital 15.9 16.5* 16.2* 30.06.02 30.06.01 31.12.01 $m $m $m Shareholders' funds Equity 6,470 6,391* 6,279* Non Equity 1,273 1,251 1,259 7,743 7,642 7,538 Post tax Return on Equity (normalised) 12.8% 14.4%* 9.3%* * Comparative restated (see note 15) The Group identified improving the efficiency of capital management as a strategic priority for 2002. Progress has been made during the first half of the year to develop a capital plan to achieve this. The plan includes several key elements. The Group believes that being well capitalised is important. However, there is potential to reduce the amount of Tier 2 capital and to improve the overall capital mix within the broad target ratios. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) EFFICIENCY PROGRAMME In August 2000 the Group announced an efficiency programme, the purpose of which was to improve productivity and to build an operational platform to support future growth. Excellent progress continues to be made. Headcount reductions have exceeded the original targets set. Original Target Achieved at 30.06.02 over 3 Years Headcount Headcount Headcount Headcount reduction addition reduction addition Centralising of processing and support operations 1,200 1,020 2,000 1,000 Operational efficiencies 2,890 - 2,100 - Integration of acquisitions 2,570 - 2,100 - 6,660 1,020 6,200 1,000 Achieved Target Cost Synergies 6 months Full year ended Original Revised 2001 30.06.02 2001 2002 2003 Centralising of processing and support operations 19 19 29 64 100 Operational efficiencies 60 41 29 80 90 Integration of acquisitions 70 57 50 100 115 149 117 108 244 305 Investment Spend (93) (39) (167) (114) (136) Net Cost Benefit 56 78 (59) 130 169 Original Net Cost Benefit (59) 82 159 At the end of last year the Group increased its targets for savings from the Efficiency Programme. We are well on track to deliver these higher targets in 2002. STANDARD CHARTERED PLC - FINANCIAL STATEMENTS CONSOLIDATED PROFIT AND LOSS ACCOUNT For the six months ended 30 June 2002 6 months 6 months 6 months ended ended ended 30.06.02 30.06.01* 31.12.01* Notes $m $m $m Interest receivable 2,553 3,400 3,019 Interest payable (1,011) (1,995) (1,524) Net interest income 1,542 1,405 1,495 Fees and commissions receivable, net 476 477 500 Dealing profits and exchange 3 229 249 221 Other operating income 4 38 33 25 743 759 746 Net revenue 2,285 2,164 2,241 Administrative expenses: Staff (634) (617) (624) Premises (138) (150) (135) Other (315) (348) (387) Depreciation and amortisation, of which: (157) (152) (172) Amortisation of goodwill (68) (68) (72) Other (89) (84) (100) Total operating expenses (1,244) (1,267) (1,318) Operating profit before provisions 1,041 897 923 Provisions for bad and doubtful debts 1,2,9 (406) (269) (463) Provisions for contingent liabilities and commitments (1) - 1 Opening profit before taxation 1,2 634 628 461 Taxation 5 (201) (218) (160) Profit after taxation 433 410 301 Minority interests (equity) (17) (6) (6) Profit for the year attributable to shareholders 416 404 295 Dividends on non-equity preference shares 6 (56) (12) (56) Dividends on ordinary equity shares 7 (160) (145) (329) Retained profit 200 247 (90) * Comparative restated (see note 15) STANDARD CHARTERED PLC - FINANCIAL STATEMENTS (continued) SUMMARISED CONSOLIDATED BALANCE SHEET As at 30 June 2002 30.06.02 30.06.01* 31.12.01* $m $m $m Notes Assets Cash, balances at central banks and cheques in course of collection 1,004 1,172 1,174 Treasury bills and other eligible bills 4,501 3,227 5,105 Loans and advances to banks 1 20,103 26,967 19,578 Loans and advances to customers 1 54,883 52,927 53,005 Debt securities and equity shares 18,790 14,393 16,080 Intangible fixed assets 2,201 2,342 2,269 Tangible fixed assets 993 970 992 Prepayments, accrued income and other assets 10,342 7,839 9,332 Total assets 112,817 109,837 107,535 Liabilities Deposits by banks 1 13,281 14,771 11,688 Customer accounts 1 70,178 66,884 67,855 Debt securities in issue 1 3,485 4,983 3,706 Accruals, deferred income and other liabilities 12,366 10,044 11,327 Subordinated liabilities: Undated loan capital 1,829 1,788 1,804 Dated loan capital 3,767 3,645 3,544 Minority interests (equity) 168 80 73 Shareholders' funds 12 7,743 7,642 7,538 Total liabilities and shareholders' funds 112,817 109,837 107,535 * Comparative restated (see note 15) STANDARD CHARTERED PLC - FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the six months ended 30 June 2002 6 months 6 months ended 6 months ended ended 30.06.01 31.12.01 30.06.02 $m $m $m Notes Profit attributable to shareholders 416 404 295 Exchange translation differences (39) (98) (21) Total recognised gains and losses relating to the current period 377 306 274 Prior year adjustment 15 156 - - Total recognised gains and losses since the last annual report 533 306 274 NOTE OF CONSOLIDATED HISTORICAL COST PROFITS AND LOSSES For the six months ended 30 June 2002 There is no material difference between the results as reported and the results that would have been reported on a historical cost basis. Accordingly, no note of historical cost profits and losses has been included. STANDARD CHARTERED PLC - FINANCIAL STATEMENTS (continued) Consolidated cash flow statement For the six months ended 30 June 2002 6 months 6 months 6 months ended ended ended 30.06.02 30.06.01* 31.12.01* $m $m $m Net cash inflow from operating activities (see note 14) 960 1,258 4,855 Returns on investment and servicing of finance Interest paid on subordinated loan capital (208) (164) (157) Subordinated loan capital issue expenses - (12) - Dividends paid to minority shareholders of subsidiary undertakings (1) (3) (15) Dividends paid on preference shares (57) (11) (30) Net cash outflow from returns on investment and servicing of finance (266) (190) (202) Taxation UK taxes paid (29) (52) (51) Overseas taxes paid (154) (198) (219) Total taxes paid (183) (250) (270) Capital expenditure and financial investment Purchases of tangible fixed assets (99) (115) (168) Acquisitions of treasury bills held for investment purposes (5,449) (4,043) (6,340) Acquisitions of debt securities held for investment purposes (15,044) (13,427) (12,929) Acquisitions of equity shares held for investment purposes (37) (8) (20) Disposals of tangible fixed assets 13 16 42 Disposals and maturities of treasury bills held for investment purposes 6,177 4,735 4,403 Disposals and maturities of debt securities held for investment purposes 13,622 8,763 11,799 Disposals of equity shares held for investment purposes 9 13 4 Net cash outflow from capital expenditure and financial investment (808) (4,066) (3,209) Net cash (outflow)/inflow before acquisitions and disposals, equity dividends (297) (3,248) 1,174 paid and financing Acquisitions and disposals Disposals of interests in subsidiary and associated undertakings - 2 (2) Net cash inflow/(outflow) from acquisitions and disposals - 2 (2) Equity dividends paid to members of the Company (308) (298) (144) Financing Gross proceeds from issue of ordinary share capital 25 15 7 Issue of preference share capital - 1,000 - Preference shares - issue expenses - (31) - Issue of subordinated loan capital - 700 - Proceeds from issue of preferred securities - 418 3 Repayment of subordinated liabilities - (3) (201) Net cash inflow/(outflow) from financing 25 2,099 (191) (Decrease)/increase in cash in the period (580) (1,445) 837 * Comparative restated (see note 15) This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW IR SSUEFMSESEDA

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