Final Results

Standard Chartered PLC 16 February 2005 Part 1 TO CITY EDITORS 16 February 2005 FOR IMMEDIATE RELEASE STANDARD CHARTERED PLC RESULTS FOR 2004 HIGHLIGHTS STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Results â€¢ Profit before tax rose 39 per cent to $2,158 million from $1,550 million* in 2003. â€¢ Net revenue up 13 per cent to $5,367 million from $4,740 million* in 2003. â€¢ Normalised cost income ratio at 53.5 per cent (2003: 53.6 per cent*). â€¢ Debt charge down 60 per cent to $214 million (2003: $536 million). â€¢ Normalised earnings per share up 40 per cent at 125.9 cents (2003: 90.1 cents*). â€¢ Normalised return on equity reaches 20.1 per cent (2003: 15.7 per cent*). â€¢ Annual dividend per share increased by 10.6 per cent to 57.5 cents. Significant achievements â€¢ Record profits exceeding $2 billion for the first time driven by good revenue growth and excellent risk management. â€¢ Consumer Banking and Wholesale Banking each achieved $1 billion in operating profit. â€¢ Achieved Return on Equity goal of 20 per cent. â€¢ Incorporated Hong Kong operations to help expansion in China. â€¢ Made significant progress on acquisitions and alliances - Korea First Bank, Bank Permata, Bohai Bank and PrimeCredit. â€¢ Raised 20 per cent of funds necessary to achieve Corporate Responsibility target of restoring sight to 1 million people. Commenting on these results, the Chairman of Standard Chartered PLC, Bryan Sanderson, said: 'I am delighted to be reporting on another successful year for Standard Chartered. We have demonstrated our ability to drive good revenue growth and continue our strong profit momentum. At the same time, we have achieved a number of significant acquisitions and alliances that will enable us to expand in key markets and products.' * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - TABLE OF CONTENTS Page Summary of Results 3 Chairman's Statement 4 Group Chief Executive's Review 6 Financial Review Group Summary 11 Consumer Banking 12 Wholesale Banking 14 Risk 17 Capital 32 Financial Statements Summarised Consolidated Profit and Loss Account 34 Summarised Consolidated Balance Sheet 35 Other Statements 36 Consolidated Cash Flow Statement 37 Notes on the Financial Statements 38 Unless another currency is specified, the word 'dollar' or symbol '$' in this document means United States dollar. STANDARD CHARTERED PLC - SUMMARY OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003* $m $m RESULTS Net revenue 5,367 4,740 Provisions for bad and doubtful debts and contingent liabilities (214) (536) Profit before taxation 2,158 1,550 Profit attributable to shareholders 1,479 1,024 BALANCE SHEET Total assets 141,688 120,202 Shareholders' funds: Equity 7,759 6,880 Non-equity 676 649 Capital resources 16,123 14,110 INFORMATION PER ORDINARY SHARE Cents Cents Earnings per share - normalised basis 125.9 90.1 - basic 121.2 82.0 Dividend per share 57.5 52.0 Net asset value per share 658.3 588.0 RATIOS % % Post-tax return on equity - normalised basis 20.1 15.7 Cost income ratio - normalised basis 53.5 53.6 Capital ratios: Tier 1 capital 8.6 8.6 Total capital 15.0 14.5 * Comparative restated (see note 12 on page 51). Results on a normalised basis reflect the Group's results excluding amortisation of goodwill, profits/losses of a capital nature, profits/losses on repurchase of share capital and subordinated debt and a donation to the Tsunami relief fund (see note 7 on page 46). STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT I am delighted to be reporting on another successful year for Standard Chartered. We have demonstrated our ability to drive good revenue growth and continue our strong profit momentum. At the same time, we have achieved a number of significant acquisitions and alliances that will enable us to expand in key markets and products. In addition, the incorporation of our business in Hong Kong will enable us to take advantage of the Closer Economic Partnership Agreement with China. This will open up further opportunities for us in the Pearl River Delta region. 2004 Results Our primary focus is on performance. We have continued to build on our track record. We have seen improvement in all our key financial metrics. There has been broad based revenue growth in almost all our geographies and our bad debt performance has been excellent. Profit before tax is up 39 per cent, supported by revenue growth of 13 per cent. Our profits have nearly doubled in three years. We have again achieved excellent earnings per share growth of 40 per cent and we have achieved our return on equity goal of 20 per cent, on a normalised basis. As a result of 2004's performance, the Board is recommending a dividend of 57.5 cents. Positioned for growth We are confident that this broad and balanced growth is sustainable. We are well positioned for growth in the future having achieved a number of strategic goals. Last year, we acknowledged that there were a number of markets and product sectors where we needed to build a bigger presence. In 2004, we added a number of acquisitions and alliances complementing our organic growth. Most recently, we entered into an agreement to acquire Korea First Bank for approximately Korean Won (KRW) 3.4 trillion ($3.3 billion), which we have financed with a placing of Standard Chartered PLC ordinary shares for approximately GBP 1.1 billion ($2 billion) together with other funding resources. This acquisition is still subject to regulatory approvals. However, it is very clear that this will be a new engine of earnings growth for the Group. We will be a partner in Bohai Bank, a unique opportunity to start a new national bank in China. Through a consortium with PT Astra International Tbk, we also acquired a controlling interest in PT Bank Permata Tbk, Indonesia's sixth largest bank. Completing the transfer of the ANZ project finance team will deepen our Wholesale Banking expertise, while PrimeCredit in Hong Kong gives us access to the consumer banking sub-prime sector. Each of these will give us competitive advantage in our chosen markets. Corporate Governance We believe good governance and good performance reinforce each other. In the past year there has been an intensified focus on regulation in the financial services industry and we are working even more closely with our regulators around the world. I have also placed great importance on reinforcing our Board strength. During 2004, we announced the appointment of three new high-calibre Non-Executive Directors: Jamie Dundas, Oliver Stocken and Val Gooding. Their appointments extend the skills base of the Board and add further to its existing diversity. We have a Board which provides a good balance of support and challenge to the Bank's senior management. Jamie Dundas has an outstanding record in areas relevant to Standard Chartered, including experience in Hong Kong and a background in banking. Former Barclays Group Finance Director, Oliver Stocken is Deputy Chairman of 3i PLC, and has wide experience as a company director. Val Gooding, chief executive of BUPA and a non-executive director at Compass Group PLC, brings marketing and brand expertise to the Group. She was previously with British Airways, her final role being Director, Asia Pacific. I would like to thank Lord Stewartby, Sir Ralph Robins and David Moir who retired from the Board in 2004. Lord Stewartby left after 14 years of service to the Group, most recently as non-executive Deputy Chairman, the Senior Independent Director and the Chairman of the Audit and Risk Committee. Sir Ralph had over 15 years of service on our Board. David was with Standard Chartered for 46 years and made an invaluable contribution, including as Chairman and Director of Standard Chartered Nakornthon Bank in Thailand and Deputy Chairman and Director of Standard Chartered Bank Malaysia Berhad. I would like to thank them all for the tremendous guidance and support they have given. Corporate Responsibility 2004 ended on a tragic note for the world when the Asian Tsunami struck after Christmas. We operate in five of the countries most affected by the Tsunami. Sadly, two of our staff were lost in the Tsunami and a number of our staff have lost family members. I am proud of the way our staff responded to this crisis. Staff donations are over $450,000. Because of the scale of this disaster, Standard Chartered has made an initial corporate $5 million donation to relief funds. We are also making good progress with our Seeing is Believing campaign and so far have achieved 20 per cent of our target of raising funds to restore the sight of one million people suffering from curable blindness. We are also actively promoting our Living with HIV programme, to raise awareness of HIV/AIDS. However, corporate responsibility is about more than community support. We have established a Corporate Responsibility Committee, which I chair. This Committee works to align business strategy with the corporate responsibility aspirations of the Group. Our approach to corporate responsibility has become an integral part of our values as a company. In summary 2004 has been a year of significant progress. We have built on our track record of performance, establishing good growth momentum. We have achieved a number of strategic goals. As a result, we are now a stronger bank with a more diversified earnings base. Bryan Sanderson CBE Chairman 16 February 2005 STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW 2004 has been a good year for the Group. We have momentum and scale in our markets and we are pleased with the strategic progress we have made. Over the last three years, we have pursued a focused agenda. We set ourselves ambitious performance goals and have consistently delivered against them. We have strengthened the infrastructure and technology of the Bank; we have developed a robust risk management capability; we are re- invigorating our brand; we have increased staff engagement and deepened our talent pool. Our organic, broad based growth has given us the shareholder support and confidence to make acquisitions and alliances. During 2004, we delivered against a balanced scorecard of growth and performance. Profit before tax was $2,158 million, a 39 per cent increase from $1,550 million. Return on equity rose from 15.7 per cent to 20.1 per cent. Cost-income ratio improved to 53.5 per cent. Earnings per share saw an increase from 90.1 cents to 125.9 cents. All these figures are on a normalised basis. For the first time, both our Wholesale and Consumer Banking businesses produced more than $1 billion each in operating profit. We are in dynamic markets and at the core of our strategy is organic growth. We will supplement this organic growth with selective acquisitions and alliances that extend our customer or geographic reach, or broaden our product range. Looking to the year ahead our industry faces a number of challenges: rising sophistication and regionalisation of local banks; new entrants including non- bank financial institutions; margin compression in many of our markets; increasingly demanding regulatory requirements; sophisticated customers demanding more for less; the risk of a major disruption from an unexpected event; and an unrelenting war for talent. Like all international businesses, retaining and attracting the best people in a highly competitive industry is always a challenge. Companies have to invest heavily in recruiting and developing the right talent. Many of these challenges are not new. What is different today is the pace and intensity of change. To compete successfully and grow, we need to be able to anticipate and react quickly to changes. We have to accept that different markets are at different stages of development so we need different strategies for them. We have been disciplined on costs and processes and innovative on products. We are standardising our technology platforms and we are absolutely focused on customers. This enables us to be more nimble and able to anticipate and respond to the changing industry environment. 2005 PRIORITIES Our strategic intent is to be the world's best international bank - leading the way in Asia, Africa and the Middle East. We have set out our top priorities for 2005: â€¢ - Expand Consumer Banking customer segments and products â€¢ - Continue Wholesale Banking transformation â€¢ - Integrate Korea First Bank and deliver growth â€¢ - Accelerate growth in India and China â€¢ - Deliver further technology benefits â€¢ - Embed Outserve into our culture Consumer Banking Consumer Banking is a business on the move, getting more innovative every year. It continues to grow its revenue base on the back of both good asset growth outside Hong Kong and an increase in non interest income from our wealth management business. Consumer Banking also benefited from a faster than anticipated reduction in personal bankruptcies in Hong Kong. Operating profit increased by 42 per cent and we achieved revenue growth of eight per cent. There was strong performance in many markets, reflecting our increasingly broad based geographic and product mix. Our challenge is to invest at the right pace in growing markets and, at the same time, increase productivity and innovation in our more mature markets like Singapore and Hong Kong. We are seeing returns on our investments in product capabilities, network expansion and systems. For example, our Consumer Banking business in the Middle East and South Asia (MESA) region enjoyed revenue growth of 23 per cent in 2004, following significant investment in the second half of 2003. Innovative products have also set us apart in many of our markets. A good example is Manhattan Card. Manhattan is the first credit card in India and Singapore to have risk-based pricing. It is an example of customer segmentation driving product innovation. With our recent launch in three cities in India, we now have approximately 120,000 cards in issue outside of Hong Kong, and 620,000 in Hong Kong. We will launch Manhattan in three more cities in India in the next few months. MortgageOne is another example. This portfolio grew over 50 per cent in Hong Kong and accounts for 80 per cent of new mortgage sales in Malaysia. Innovation in channels is also proving an important contributor to growth. In the Republic of Korea (Korea), we have an innovative approach to customer service. Our personal loans sales staff use a bus to travel to local neighbourhoods, bringing our sales people and personal loan products directly to our customers' doorstep. Such innovation on distribution channels has become a big part of Standard Chartered, and we will continue to offer new and original ideas and approaches across all our markets. Looking ahead, we will increase customer segmentation to grow key segments such as youth and the international banking sector. We will increase the size of our Small and Medium Enterprises (SME) business. Our Priority Banking offering will be expanded in our key markets and we will be looking at opportunities to extend the reach of our consumer finance business across Asia following our acquisition of Advantage Limited (PrimeCredit) in Hong Kong. Wholesale Banking In 2004, our Wholesale Banking business enjoyed a year of robust revenue performance. We have executed well on the strategy we laid out a few years ago and delivered on our promises. Overall operating profit for Wholesale Banking is up by 28 per cent. We have grown revenues by 14 per cent and, significantly, customer revenues by 19 per cent. Disciplined investments in key sales and control functions have delivered good results across all geographies, products and all four of our customer segments. We have deepened our customer relationships and are now a top three bank to 25 per cent of our customers. However, there is still room to further improve cross-sell ratios and strengthen our product capabilities. The acquisition of the ANZ project finance portfolio is one example of how we are doing this. The emergence of China and India as economic powerhouses is changing the dynamics of trade and new trade corridors are opening, particularly between our markets. Our acquisition of Sumitomo Mitsui Banking Corporation's business in India gives us a strong position in the trade corridor between Japan and India and our network in the Middle East and Africa will also prove important in giving us leverage as trade corridors change. On-going initiatives and integration of our acquisitions will greatly benefit our Wholesale Banking business, adding to the many opportunities we see to continue to grow revenues, which we will do within our usual jaws discipline and paced capital growth. Korea First Bank Our recent acquisition of Korea First Bank, subject to regulatory approval, is the biggest in the history of Standard Chartered. We will execute it well and build our presence in Korea, expanding our reach in Asia. The scale of opportunities in Korea is tremendous. It is the world's 10th largest economy, Asia's third largest and its economy is expected to grow by four per cent in 2005. Korea's banking sector generates a revenue pool over three times the size of Hong Kong. Korea First Bank is the seventh largest banking group in Korea by assets, with a market share of approximately six per cent and over three million retail customers. It has one of the lowest levels of non-performing loans in the industry. We have appointed an experienced integration team in Korea. We are building relations with the regulators, labour unions, the local community and the staff of Korea First Bank. These are important relationships to us. Retaining key management talent is also very important and we are pleased with the quality of senior management in Korea First Bank. Full year results for Korea First Bank will be announced in March. We will give more details at our interim results following completion of this acquisition. In advance of this, the following gives a flavour of potential synergies. Korea First Bank Consumer Banking Korea First Bank has the country's fifth largest distribution network. It has over 400 branches located throughout the country and 2,100 ATMs. In a country with 60 per cent internet penetration, it has a user-friendly internet banking platform, and a strong mobile banking business. An example of one opportunity is our personal loan product, which can be introduced to Korea First Bank. With our strong credit scoring system and our tested instalment loan product, we have grown personal loans into an almost $200 million business, in just one year. Korea First Bank's own instalment loan business is relatively small and we have built our business from just one branch. We see good potential in distributing this through Korea First Bank's branch network. Our success in personal loans has been due to excellent customer segmentation, good credit quality, driven off credit bureau data, and innovative distribution channels, like the sales bus mentioned earlier. Korea First Bank Wholesale Banking Standard Chartered will build a leading Wholesale Banking franchise in Korea by leveraging our international network, product capability and management processes as well as Korea First Bank's customer base. One example of a growth opportunity is fee based income. At Korea First Bank, non-interest income represents less than 25 per cent of total revenues - at Standard Chartered this is over 40 per cent. Building a trade and cash management business will be a key priority - we can leverage our international network and products to generate new fee income. In parallel, we will strengthen Korea First Bank's Global Markets product capability, developing the necessary infrastructure as well as training for staff. We see good opportunities in foreign exchange and derivatives as well as in debt capital markets. It is clear there are significant revenue opportunities and the combination of our expertise with that of Korea First Bank will help realise the opportunities we see in the market. We are now even more confident that this acquisition will be EPS accretive in 2006. India and China India and China are our two biggest long-term opportunities. We are well on track in both these markets. With 10 new branches, taking our total network to 75 branches in 27 cities, we are the largest international bank in India. We have focused on growing our distribution network and asset base, as well as broadening revenue streams. As a result, we have strong market share in mortgages, credit cards, wealth management, fixed income and trade finance in India. We are investing heavily in India because we see the scale of the opportunity. Our focus on growing our customer base and expanding revenue may slow the pace of operating profit growth in the short term, but it will put us in a strong position to benefit in the medium term. There is no doubt that we can build on our position as the leading international bank in India. In China, our strategy has three strands: organic growth, strategic investments and taking advantage of opportunities in the Pearl River Delta. We are growing revenues at over 30 per cent per annum and we have strengthened our network with additional Renminbi (RMB) licences in Xiamen, Beijing and Nanjing. We now have five RMB licences and we are allowed to conduct RMB business with local corporates in 13 cities. We have also added a branch licence in Guangzhou. Our ambition is to remain a leading bank in China. In parallel with this organic growth, we have signed a framework agreement to take a 19.99 per cent stake in Bohai Bank - the first bank with a national licence for many years. This will be the first time that a foreign bank has been allowed to participate and take a management role in the establishment of a national bank. Bohai Bank will be able to open branches and sell products throughout China and we will be a significant part of this exciting new bank. When we mention our business in China we have to talk about Hong Kong, which is now very much a regional hub, integral to developing opportunities in China. We have seen a good performance in Hong Kong and the outlook for the economy is good. Overall, consumer confidence is being restored. We are seeing inflation for the first time in many years, and unemployment is down. A rise in tourism, with 21 million visitors in 2004, and more than 24 million expected in 2005, will continue to help the economy. But margin compression is increasing, and loan demand is not growing as fast as the economy. We are focusing on productivity to ensure we have the capacity to grow in a maturing market. We believe that our strategy in Hong Kong will pay off. Delivering technology benefits Across the industry, the key themes are data centre consolidation, security, service delivery channels for customers, and pressure to reduce telecommunications costs. We will continue our efforts to ensure we can stay ahead of changes in the industry. Improvements in our technology platform have underpinned much of our ability to grow. Our Global Shared Service Centres in Chennai and Kuala Lumpur continue to develop scale and efficiencies. We estimate that our Shared Service Centres have generated annual cost savings of $80 million. We have created economies of scale and tighter control has meant our technology production costs are down year-on-year. This has created capacity for increased investment in business applications and infrastructure. The stability and efficiency of our operations have been enhanced. Moving forward, we will continue to emphasise standardising technology as we migrate to a lower cost and modern core banking platform globally. We have completed our Know Your Customer roll out and we have migrated our platforms to meet changing reporting requirements under International Financial Reporting Standards. Outserve In line with our brand promise to be The Right Partner, we believe that service will be a differentiator for us in an increasingly competitive banking industry. To this end, we began a series of internal initiatives in 2004 to build our service culture and processes. We call these initiatives 'Outserve' and we believe it will have a profound impact on our shareholder value. Outserve comprises four key components: the voice of the customer, process improvements, metrics and measurements, change management and communication. We have taken the best methodologies on Voice of Customer, and developed an improved model tailored to our industry and market needs. Our service metrics include over 100 indicators to monitor every aspect of the customer experience. We are managing culture change and improving the way we communicate about customers. Our top 220 leaders in the company, including myself, are completing First Hand Days, where we experience somebody else's job on the front line to understand service issues and remove blockages to improved service. We are obsessive about our customer service and will use this as a source of distinction because we believe that our Outserve initiative will create revenue, reduce customer attrition and create value. OUTLOOK We have had a strong performance in 2004 and the revenue momentum into 2005 is good. Both of our businesses have good growth potential and we have robust controls in place. We continue to make progress towards our ambitious goals to be a leader in India and China. The smooth integration of Korea First Bank is a high priority. We will continue to produce strong profit growth for our shareholders in the short term. However, we will also focus on building a long term sustainable business. Overall, Standard Chartered is in good health and we are optimistic about the future. Mervyn Davies CBE Group Chief Executive 16 February 2005 STANDARD CHARTERED PLC - FINANCIAL REVIEW GROUP SUMMARY The Group delivered another strong performance in the year ended 31 December 2004 with a record profit before tax of $2,158 million, up 39 per cent on the previous year. Normalised earnings per share has grown by 40 per cent to 125.9 cents. (Refer to note 7 on page 46 for the details of basic and diluted earnings per share). This performance is the result of broadly based organic growth across both businesses and a significantly improved debt performance. The results have also benefited from several one-off items, described on page 12, which together generated profit of $85 million before tax. Operating profit before tax adjusted to exclude these one-off items increased by 34 per cent compared to 2003. Prior period figures have been restated, principally to reflect the full adoption of the provisions of FRS 17 ' Retirement Benefits'. See note 12 on page 51. The Group has made several acquisitions in 2004. In August, it acquired 100 per cent of Advantage Limited (' PrimeCredit'), a consumer finance business in Hong Kong, and increased its share in Standard Chartered Bank Nepal Limited from 50 per cent to 75 per cent. In November, the Group entered into a consortium agreement with PT Astra International Tbk to acquire a controlling interest in PT Bank Permata Tbk ('Permata'), an Indonesian commercial bank. The Group's effective interest in Permata at 31 December 2004 was 31.55 per cent. It has been accounted for as a joint venture. In December 2004 the Group acquired from ANZ part of its project finance business, a team of specialists and a portfolio of loan commitments amounting to $1.26 billion. Together these acquisitions contributed $8 million to profit before tax in 2004. Net revenue has grown by 13 per cent in total to $5,367 million compared to 2003. The increase is 11 per cent when adjusted for the one-off items above. Business momentum is strong and revenue has grown at twice the pace of revenue growth a year ago. Revenue from outside Hong Kong and Singapore, our two most mature and competitive markets, now comprise 64 per cent of the Group's total revenue and grew at 19 per cent over 2003. Net interest income grew by seven per cent to $3,168 million. A fall in interest margins from 2.8 per cent to 2.7 per cent has been offset by 10 per cent growth in average earning assets. Interest spread fell from 2.5 per cent to 2.4 per cent. Other finance income at $10 million compares with a finance charge of $13 million in 2003, principally as a result of contributions made to the UK and Hong Kong funds. Net fees and commissions increased by 15 per cent from $1,156 million to $1,334 million. Growth was seen in most markets, driven by wealth management, mortgages and corporate advisory services. Dealing profits grew by 23 per cent from $525 million to $648 million, largely driven by customer led foreign exchange dealing. In particular, retail foreign exchange performed well. Other operating income at $207 million compares to $104 million in 2003. The increase reflects the one-off items partly offset by a fall in profits on investment securities as a result of a programme to reduce the risk in the book in 2003. Total operating expenses increased from $2,643 million to $2,996 million. Of this increase $44 million arose from accelerated goodwill amortisation. The adjusted cost increase, excluding goodwill and one-off items, was 11 per cent, in line with adjusted revenue growth. The normalised cost income ratio has fallen from 53.6 per cent in 2003 to 53.5 per cent in 2004. The Group's investment programmes over recent years in market expansion, new products, distribution outlets and sales capabilities have been paying back in good revenue growth. This investment continued in 2004 together with increased spend on the Group's regulatory and control infrastructure. Provisions for bad and doubtful debts fell from $536 million to $214 million, a reduction of 60 per cent. This includes a $55 million release from the Group's general provision. This performance is a direct result of significantly strengthened risk management discipline, as well as a favourable credit environment. One-off items from Corporate Activity In January 2004, the Group sold its investment in BOC Hong Kong (Holdings) Limited realising a net profit of $36 million and in May 2004, it disposed of its investment in KorAm Bank realising a net profit of $95 million. These gains were partially offset by a $23 million premium paid on the repurchase of surplus subordinated debt in India and are reported in other operating income. One-off costs of $18 million were incurred on incorporating the Group's business in Hong Kong and, at the end of December, the Group agreed to donate $5 million to the Tsunami relief effort. The effect of these gains and charges, all of which arose from corporate decisions taken at the centre and which are non-recurring in nature, have not been attributed to either Consumer Banking or Wholesale Banking in the business segmental results. CONSUMER BANKING Consumer Banking has built up strong momentum with operating profit up 42 per cent in 2004 to $1,064 million. The accelerated investment in growth opportunities in 2003 is delivering results. Revenue increased by eight per cent, which is twice the rate that was achieved in 2003, to $2,693 million. This was driven by loan growth of 18 per cent outside Hong Kong and an increased contribution across all product segments, in particular the SME business. Investing for growth has led to a 10 per cent increase in costs when compared to 2003. The specific bad debt charge fell by 43 per cent. The debt charge in Hong Kong fell significantly and charges elsewhere also improved. In addition, $29 million of general provision held against the consumer portfolio has been released in 2004. Hong Kong delivered an increase in operating profit of 77 per cent to $462 million. This resulted from a lower debt charge, cost efficiencies and improved mortgage margins, although these showed some decline in the second half. Revenue was flat at $954 million. Improved margins in mortgages and a good performance in wealth management was offset by subdued loan demand across the market. Costs were tightly controlled and, in the fourth quarter, an operational efficiency programme was initiated to reduce back office costs and improve productivity. In Singapore, operating profit was broadly flat at $180 million in an intensely competitive environment. Although asset growth was strong at 16 per cent and there was good performance in wealth management and the SME business, revenue was offset by contracting margins, particularly in the mortgage business. Cost growth was five per cent, largely supporting product investment. Operating profit in Malaysia was up 17 per cent to $75 million with strong performance across all products and a lower debt charge. Revenue grew by eight per cent. Continued margin pressure in the mortgage portfolio was more than offset by higher volume. Revenue from wealth management increased significantly, driven by unit trust sales. Costs increased by nine per cent as a result of significant infrastructure investment. In Other Asia Pacific, operating profit at $97 million was 11 per cent higher than in 2003 with revenue up 18 per cent. Thailand, Taiwan, Indonesia and Korea performed well across a broad range of products. Costs increased by 23 per cent as the Group continued to invest in China and Korea. In India, strong asset growth and a lower debt charge drove operating profit up by 100 per cent to $78 million, despite contracting margins in both mortgages and deposit accounts. Costs increased by 22 per cent to $153 million as a result of continued investment in enhanced risk management, new products and delivery channels to support rapid business growth. Operating profit in the United Arab Emirates (UAE) increased by 42 per cent to $64 million with revenue up by 22 per cent, driven by credit cards, personal loans and wealth management. Costs were 11 per cent higher than in 2003, reflecting further investment in infrastructure and product capability. Elsewhere in MESA operating profit grew by 38 per cent to $69 million with strong performances in wealth management, cards and personal loans, particularly in Bangladesh, Pakistan and Bahrain. In Africa, operating profit increased from $7 million to $17 million with revenue up by 28 per cent to $218 million. This was largely a result of strong asset growth as new products were launched in a number of countries, including Nigeria, South Africa and Kenya, together with improved margins in Zimbabwe. Costs have grown by 23 per cent. This was driven by continued investment in South Africa and inflationary pressures. The Americas, UK and Group Head Office has seen an increase in operating profit of 10 per cent to $22 million, mostly through firm cost control. The re-focused international banking offering has delivered good profit growth, with revenues largely booked in Hong Kong, Singapore and Dubai. The following tables provide an analysis of operating profit by geographic segment for Consumer Banking: 2004 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Net revenue 954 330 175 393 258 Costs (415) (116) (86) (231) (153) Specific (88) (40) (18) (69) (29) General 11 6 4 3 2 Charge for debts (77) (34) (14) (66) (27) Income from joint venture - - - 1 - Operating profit 462 180 75 97 78 2004 Other Americas Middle UK & East & Group Consumer Other Head Banking UAE S Asia Africa Office Total $m $m $m $m $m Net revenue 124 172 218 69 2,693 Costs (51) (93) (195) (48) (1,388) Specific (10) (11) (6) - (271) General 1 1 - 1 29 Charge for debts (9) (10) (6) 1 (242) Income from joint venture - - - - 1 Operating profit 64 69 17 22 1,064 2003* Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Net revenue 954 328 162 333 223 Costs (411) (110) (79) (188) (125) Specific charge for (282) (40) (19) (58) (59) debts Operating profit 261 178 64 87 39 2003* Other Americas Middle UK & East & Group Consumer Other Head Banking UAE S Asia Africa Office Total $m $m $m $m $m Net revenue 102 138 170 78 2,488 Costs (46) (83) (159) (58) (1,259) Specific charge for debts (11) (5) (4) - (478) Operating profit 45 50 7 20 751 * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) An analysis of Consumer Banking revenue by product is set out below: Revenue by product 2004 2003* $m $m Cards and Personal Loans 1,117 1,043 Wealth Management / Deposits 891 805 Mortgages and Auto Finance 638 603 Other 47 37 2,693 2,488 * Comparative restated (see note12 on page 51). Cards and personal loans have delivered increased revenue of seven per cent in a very competitive price environment. Assets have grown by 25 per cent outside of Hong Kong. Hong Kong has returned to profitability despite a seven per cent decline in cards outstandings. Wealth management revenue has increased by 11 per cent to $891 million with strong demand for investment products, partially offset by compression in deposit margins. Mortgages and auto finance revenue has grown by six per cent to $638 million driven by new products, increased fee income and, in Hong Kong, improved mortgage margins. Costs in Consumer Banking have increased by 10 per cent to $1,388 million. This was a direct result of the investment which began in 2003 to expand distribution outlets and launch new products and services in key growth markets. The specific net charge for debts in Consumer Banking has fallen by 43 per cent to $271 million. The specific net debt charge in Hong Kong fell significantly as bankruptcy losses continued to fall sharply due to the improving economic environment. Other areas showed a stable or improving performance while sustaining strong business growth. WHOLESALE BANKING Wholesale Banking delivered a strong broadly based performance across all geographies, products and customer segments. Operating profit was up 28 per cent at $1,190 million. This was achieved on controlled economic capital, through expanding product capabilities and deepening customer relationships. Revenue increased by 14 per cent to $2,566 million. Customer revenues were up by 19 per cent. Costs increased by 12 per cent due to increased investment in product capabilities such as debt capital markets and derivatives, increased spend on infrastructure and controls, and an increase in performance driven compensation. There was a net specific debt release in 2004 of $2 million compared to a charge of $68 million in 2003. This reflected success in changing the risk profile of the business and also a benign credit environment. In addition, a $26 million release was made from the general provision held against the Wholesale portfolio (2003: $10 million). STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) The following tables provide an analysis of operating profit by geographic segment for Wholesale Banking: 2004 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Net revenue 418 183 95 422 231 Costs (221) (110) (57) (277) (97) Specific (54) (2) 11 22 3 General 6 3 1 4 2 Charge for debts (48) 1 12 26 5 Amounts written off fixed asset - - - - 2 investments Income from joint venture - - - 1 - Operating profit 149 74 50 172 141 2004 Other Americas Middle UK & East & Group Wholesale Other Head Banking UAE S Asia Africa Office Total $m $m $m $m $m Net revenue 147 205 366 499 2,566 Costs (48) (75) (162) (357) (1,404) Specific 6 7 (6) 15 2 General 2 2 - 6 26 Charge for debts 8 9 (6) 21 28 Amounts written off fixed - - - (3) (1) asset investments Income from joint venture - - - - 1 Operating profit 107 139 198 160 1,190 2003* Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Net revenue 401 158 73 348 243 Costs (207) (100) (57) (241) (87) Specific (23) 7 21 (41) (1) General - - - - - Charge for debts (23) 7 21 (41) (1) Amounts written off fixed asset - - - - (4) investments Operating profit 171 65 37 66 151 2003* Other Americas Middle UK & East & Group Wholesale Other Head Banking UAE S Asia Africa Office Total $m $m $m $m $m Net revenue 132 177 273 447 2,252 Costs (45) (62) (123) (328) (1,250) Specific 9 9 (5) (44) (68) General - - - 10 10 Charge for debts 9 9 (5) (34) (58) Amounts written off fixed - - - (7) (11) asset investments Operating profit 96 124 145 78 933 * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) In Hong Kong, net revenue grew by four per cent from $401 million to $418 million. The growth was largely from foreign exchange and derivatives on the back of strong trade flows. Costs were $14 million higher at $221 million with continued investment in the front office partially offset by a reduction in technology costs. Revenue in Singapore grew by 16 per cent. Strong customer revenue, particularly from global markets products, more than offset a decline in revenue from asset and liability management. Costs increased by 10 per cent to $110 million mainly due to investment in risk and governance infrastructure. In Malaysia, revenue increased from $73 million to $95 million with good growth in global markets products facilitated by a wider product mix and advisory services. Costs were held flat at $57 million through tight control. The Other Asia Pacific region delivered strong results with excellent contributions in all countries and, in particular, from Korea and Taiwan. Revenue grew by 21 per cent to $422 million. This increase was broadly spread across the commercial banking and global markets product range. Costs increased by 15 per cent to $277 million reflecting investment in product capability in the region. In India, profit on the sale of investment securities arising as a result of a programme to reduce the risk in the book was significantly lower in 2004. Excluding the effect of this, revenue grew by around 12 per cent. This reflected broad based product growth and positive contribution from all customer segments. The increase in costs of 11 per cent to $97 million is the result of investment in new businesses, people and infrastructure to capture further growth opportunities. In the UAE revenue increased by 11 per cent to $147 million, driven largely by foreign exchange, cash management and structured global markets products. Elsewhere in the MESA region revenue grew by $28 million to $205 million, led by significant cross-selling of global markets products. The increase in costs in the region was due to expansion into new markets, investment in new products, infrastructure and continued strengthening of risk and governance functions. In Africa, revenue at $366 million was 34 per cent higher than in 2003. High commodity prices and relative economic stability in a number of key markets have contributed to this result. The contribution from Botswana and Zimbabwe was particularly strong. Costs grew by 32 per cent, mainly due to inflationary pressure and expansion in Nigeria and South Africa. The Americas, UK and Group Head Office has seen revenue increase by 12 per cent to $499 million. Strong fees and commissions were partially offset by reduced yield on asset and liability management. An analysis of Wholesale Banking revenue by product is set out below: Revenue by product 2004 2003* $m $m Trade and Lending 868 815 Global Markets 1,209 1,054 Cash Management and Custody 489 383 2,566 2,252 * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Trade and lending revenue has increased by seven per cent to $868 million. Trade finance, underpinned by strong intra-Asian trade flows, has outstripped lending growth. Global markets revenue has grown strongly at 15 per cent. Investment in new product capability in debt capital markets, asset backed securities, structured trade and derivatives has started to deliver good returns. Revenue from asset and liability management was lower than in 2003 due to the shape of the yield curves, but the decline has stabilised. Cash management and custody revenue was up by 28 per cent. Cash management grew on the back of higher transaction volumes and an increase of more than 30 per cent in average balances. Custody increased by more than 40 per cent with assets under administration up by more than 50 per cent. Costs in Wholesale Banking increased by 12 per cent. This was due to further investment for growth, increased spending on infrastructure and controls and higher performance driven costs, largely due to variable compensation. The Wholesale Banking had a net specific debt release of $2 million compared to a $68 million charge in the previous period. Gross provisions were down by 37 per cent and recoveries down by 13 per cent. This has been achieved through continued enhancement of risk management processes and improvement in the risk profile, together with a favourable credit environment. $26 million of general provision was released against the Wholesale portfolio in 2004 (2003: $10 million). RISK Through its risk management structure the Group seeks to manage efficiently the core risks: credit, market, country and liquidity risk arise directly through the Group's commercial activities whilst business, regulatory, operational and reputational risk are normal consequences of any business undertaking. The key element of risk management philosophy is for the risk functions to operate as an independent control working in partnership with the business units to provide a competitive advantage to the Group. The basic principles of risk management followed by the Group include: â€¢ - ensuring that business activities are controlled on the basis of risk adjusted return; â€¢ - managing risk within agreed parameters with risk quantified wherever possible; â€¢ - assessing risk at the outset and throughout the time that we continue to be exposed to it; â€¢ - abiding by all applicable laws, regulations, and governance standards in every country in which we do business; â€¢ - applying high and consistent ethical standards to our relationships with all customers, employees and other stakeholders; and â€¢ - undertaking activities in accordance with fundamental control standards. These controls include the disciplines of planning, monitoring, segregation, authorisation and approval, recording, safeguarding, reconciliation and valuation. Risk Management Framework Ultimate responsibility for the effective management of risk rests with the Company's Board of Directors. The Audit and Risk Committee reviews specific risk areas and guides and monitors the activities of the Group Risk Committee and the Group Asset and Liability Committee. All the Executive Directors of Standard Chartered PLC and members of the Standard Chartered Bank Court are members of the Group Risk Committee which is chaired by the Group Executive Director responsible for Risk ('GED Risk'). This Committee has responsibility for determining the Group standards and policies for risk measurement and management, and also delegating authorities and responsibilities to various sub committees. The committee process ensures that standards and policy are cascaded down through the organisation from the Board through the Group Risk Committee and the Group Asset and Liability Committee to the functional, regional, and country level committees. Key information is communicated through the country, regional, and functional committees to Group, to provide assurance that standards and policies are being followed. The GED Risk manages an independent risk function which: â€¢ - recommends Group standards and policies for risk measurement and management; â€¢ - monitors and reports Group risk exposures for country, credit, market and operational risk; â€¢ - approves market risk limits and monitors exposure; â€¢ - sets country risk limits and monitors exposure; â€¢ - chairs the credit committee and delegates credit authorities subject to oversight; â€¢ - validates risk models; and â€¢ - recommends risk appetite and strategy. Individual Group Executive Directors are accountable for risk management in their businesses and support functions and for countries where they have governance responsibilities. This includes: â€¢ - implementing the policies and standards as agreed by the Group Risk Committee across all business activity; â€¢ - managing risk in line with appetite levels agreed by the Group Risk Committee; and â€¢ - developing and maintaining appropriate risk management infrastructure and systems to facilitate compliance with risk policy. The GED Risk, together with Group Internal Audit, provides independent assurance that risk is being measured and managed in accordance with the Group's standards and policies. 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 and connected groups of counterparties and portfolios on the banking and trading books. Clear responsibility for credit risk is delegated from the Board to the Group Risk Committee. Standards and policies for managing credit risk are determined by the Group Risk Committee which also delegates credit authorities through the GED Risk to independent Risk Officers at Group and at the Wholesale Banking and Consumer Banking business levels. Procedures for managing credit risk are determined at the business levels with specific policies and procedures being adapted to different risk environment and business goals. The Risk Officers are located in the businesses to maximise the efficiency of decision-making, but have an independent reporting line into the GED Risk. Within the Wholesale Banking business, credit analysis includes a review of facility detail, credit grade determination and financial spreading/ratio analysis. The Bank uses a numerical grading system for quantifying the risk associated with a counterparty. The grading is based on a probability of default measure with customers analysed against a range of quantitative and qualitative measures. There is a clear segregation of duties with loan applications being prepared separately from the approval chain. Significant exposures are reviewed and approved centrally through a Group or Regional level Credit Committee. This Committee receives its authority and delegated responsibilities from the Group Risk Committee. The businesses, working with the Risk Officers, take responsibility for managing pricing for risk, portfolio diversification and overall asset quality within the requirements of Group standards, policies, and the business strategy. For Consumer Banking, standard credit application forms are generally used which are processed in central units using manual or automated approval processes as appropriate to the customer, the product or the market. As with Wholesale Banking, origination and approval roles are segregated. Loan Portfolio Loans and advances to customers have increased by 20 per cent during the year to $71.6 billion. In Consumer Banking growth has resulted from increases in the mortgage book, mainly in Singapore, Malaysia and India. In Wholesale Banking growth was across all regions. This was particularly in trade, syndications and project finance, including the acquisition of the $1.2 billion ANZ project finance portfolio. Approximately 49 per cent (2003: 53 per cent) of the portfolio relates to Consumer Banking, predominantly retail mortgages. Other Consumer Banking covers credit cards, personal loans and other secured lending. Approximately half of the Group's loans and advances are short term in nature and have a maturity of one year or less. The Wholesale Banking portfolio is predominantly short term, with 75 per cent of loans and advances having a maturity of one year or less. In Consumer Banking, 63 per cent of the portfolio is in the mortgage book, traditionally longer term in nature. The following tables set out by maturity the amount of customer loans net of provisions: 2004 One One to Over year five five or less years years Total $m $m $m $m Consumer Banking Mortgages 1,877 4,156 15,985 22,018 Other 5,241 3,876 403 9,520 Small and medium enterprises 989 440 2,050 3,479 Total 8,107 8,472 18,438 35,017 Wholesale Banking 27,670 5,145 4,099 36,914 General provisions - - - (335) Net loans and advances to customers 35,777 13,617 22,537 71,596 2003* One One to Over year five five or less years years Total $m $m $m $m Consumer Banking Mortgages 1,917 4,143 14,229 20,289 Other 4,874 3,534 553 8,961 Small and medium enterprises 558 217 1,631 2,406 Total 7,349 7,894 16,413 31,656 Wholesale Banking 22,209 4,526 1,778 28,513 General provisions - - - (425) Net loans and advances to customers 29,558 12,420 18,191 59,744 * The analysis of net loans and advances to customers for Consumer and Wholesale Banking at 31 December 2003 has been restated to separately disclose small and medium enterprises within Consumer Banking. This has resulted in a transfer of $514 million from the Wholesale Banking portfolio to Consumer Banking. There was no impact on total net loans and advances to customers. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) The following tables set out an analysis of the Group's net loans and advances as at 31 December 2004 and 31 December 2003 by the principal category of borrowers, business or industry and/or geographical distribution: 2004 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Loans to individuals Mortgages 12,189 5,064 2,422 737 1,194 Other 2,097 651 488 2,622 1,201 Small and medium 731 1,622 578 200 230 enterprises Consumer Banking 15,017 7,337 3,488 3,559 2,625 Agriculture, forestry - 26 55 56 15 and fishing Construction 154 27 6 34 105 Commerce 1,560 804 136 895 262 Electricity, gas and 387 40 71 271 104 water Financing, insurance and 1,914 1,608 554 762 415 business services Loans to governments - 306 1,551 - - Mining and quarrying - 65 63 122 1 Manufacturing 1,343 423 269 2,512 814 Commercial real estate 984 721 2 388 - Transport, storage and 366 280 128 321 226 communication Other 19 128 51 354 43 Wholesale Banking 6,727 4,428 2,886 5,715 1,985 General provision Total loans and advances 21,744 11,765 6,374 9,274 4,610 to customers Total loans and advances 2,852 2,399 480 3,554 325 to banks 2004 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Loans to individuals Mortgages - 87 63 262 22,018 Other 819 1,109 431 102 9,520 Small and medium 13 29 76 - 3,479 enterprises Consumer Banking 832 1,225 570 364 35,017 Agriculture, forestry and - 19 171 314 656 fishing Construction 103 136 46 4 615 Commerce 824 378 353 1,113 6,325 Electricity, gas and - 119 102 300 1,394 water Financing, insurance and 951 411 47 2,268 8,930 business services Loans to governments - 16 7 225 2,105 Mining and quarrying 92 57 95 1,032 1,527 Manufacturing 236 1,031 404 2,294 9,326 Commercial real estate - - 29 2 2,126 Transport, storage and 56 243 165 1,177 2,962 communication Other 38 205 24 86 948 Wholesale Banking 2,300 2,615 1,443 8,815 36,914 General provision (335) (335) Total loans and advances 3,132 3,840 2,013 8,844 71,596 to customers Total loans and advances 535 932 510 7,335 18,922 to banks Under 'Loans to individuals - Other', $1,270 million (2003: $1,371 million) relates to the cards portfolio in Hong Kong. The total cards portfolio is $3,586 million (2003: $3,329 million). The Wholesale Banking portfolio is well diversified across both geography and industry, with no concentration in exposure to sub-industry classification levels in manufacturing, financing, insurance and business services, commerce and transport, storage and communication. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) 2003* Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Loans to individuals Mortgages 11,974 4,450 1,951 831 640 Other 2,219 703 660 1,990 999 Small and medium 577 1,162 541 - 126 enterprises Consumer Banking 14,770 6,315 3,152 2,821 1,765 Agriculture, forestry 6 2 76 49 12 and fishing Construction 104 9 13 43 34 Commerce 1,350 848 187 717 30 Electricity, gas and 327 36 25 240 56 water Financing, insurance and 1,575 883 428 657 194 business services Loans to governments - 61 747 8 - Mining and quarrying - 14 78 35 - Manufacturing 1,326 745 214 2,016 943 Commercial real estate 873 663 7 250 - Transport, storage and 491 143 38 118 71 communication Other 23 62 44 170 1 Wholesale Banking 6,075 3,466 1,857 4,303 1,341 General provision Total loans and advances 20,845 9,781 5,009 7,124 3,106 to customers Total loans and advances 2,113 1,045 204 2,784 239 to banks 2003* Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Loans to individuals Mortgages - 67 30 346 20,289 Other 677 1,127 430 156 8,961 Small and medium - - - - 2,406 enterprises Consumer Banking 677 1,194 460 502 31,656 Agriculture, forestry and - 24 144 387 700 fishing Construction 83 91 19 13 409 Commerce 619 394 398 725 5,268 Electricity, gas and 3 69 127 84 967 water Financing, insurance and 434 320 116 1,184 5,791 business services Loans to governments - 13 - 281 1,110 Mining and quarrying 59 59 16 470 731 Manufacturing 179 916 283 1,738 8,360 Commercial real estate - 1 18 3 1,815 Transport, storage and 30 237 114 1,513 2,755 communication Other 26 166 44 71 607 Wholesale Banking 1,433 2,290 1,279 6,469 28,513 General provision (425) (425) Total loans and advances 2,110 3,484 1,739 6,546 59,744 to customers Total loans and advances 605 889 308 5,167 13,354 to banks * The analysis of net loans and advances to customers for Consumer and Wholesale Banking at 31 December 2003 has been restated to separately disclose small and medium enterprises within Consumer Banking. This has resulted in a transfer of $514 million from the Wholesale Banking portfolio to Consumer Banking. There was no impact on total net loans and advances to customers. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Problem Credits The Group employs a variety of tools to monitor the loan portfolio and to ensure the timely recognition of problem credits. In Wholesale Banking, accounts or portfolios are placed on Early Alert when they display signs of weakness. Such accounts and portfolios are subject to a dedicated process involving senior risk officers and representatives from the 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 the due date. Accounts that 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 or earlier as circumstances dictate. In Hong Kong charge-off is currently at 120 days. Other unsecured Consumer Banking products are charged off at 150 days past due. For 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 re-valued periodically until disposal. It is current practice to provision and write-off exposure in respect of Hong Kong bankruptcies at the time the customer petitions for bankruptcy. The Small and Medium Enterprises (SME) portfolio is provisioned on a case by case basis. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) The following tables set out the non-performing portfolio in Consumer Banking: 2004 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Loans and advances Gross 72 146 181 60 42 non- performing Specific provisions for (32) (24) (28) (13) (12) bad and doubtful debts Interest in suspense (1) (4) (24) (7) (8) Net non-performing loans 39 118 129 40 22 and advances Cover ratio 2004 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Loans and advances Gross 14 28 24 46 613 non- performing Specific provisions for (11) (11) (9) (5) (145) bad and doubtful debts Interest in suspense (2) (13) (8) (7) (74) Net non-performing loans 1 4 7 34 394 and advances Cover ratio 36% 2003 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Loans and advances Gross 138 115 192 63 43 non- performing Specific provisions for (48) (17) (26) (15) (11) bad and doubtful debts Interest in suspense (1) (3) (23) (9) (9) Net non-performing loans 89 95 143 39 23 and advances Cover ratio 2003 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Loans and advances Gross 16 23 18 10 618 non- performing Specific provisions for (11) (8) (7) (5) (148) bad and doubtful debts Interest in suspense (5) (8) (7) (2) (67) Net non-performing loans - 7 4 3 403 and advances Cover ratio 35% The relatively low Consumer Banking cover ratio reflects the fact that the Group classifies all exposure which is more than 90 days past due as non-performing, whilst specific provisions on unsecured lending are only raised at the time of charge-off. For secured products, provisions reflect the difference between the value of the underlying assets and the outstanding loan (see details relating to the raising of provisions above). 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 so 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 uncollectible 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 following tables set out the total non-performing portfolio in Wholesale Banking including the portfolio covered by a Loan Management Agreement ('LMA') with a Thai Government Agency. This portfolio amounted to $236 million net of provisions at 31 December 2004 (2003: $660 million). The net non-performing loan portfolio has decreased by $607 million (54 per cent) over 2003. 2004 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Loans and advances Gross 409 185 117 558 68 non- performing Specific provisions for (257) (89) (68) (256) (29) bad and doubtful debts Interest in suspense (92) (56) (35) (54) (26) Net non-performing loans 60 40 14 248 13 and advances 2004 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Loans and advances Gross 49 126 104 674 2,290 non- performing Specific provisions for (31) (69) (46) (435) (1,280) bad and doubtful debts Interest in suspense (13) (55) (42) (127) (500) Net non-performing loans 5 2 16 112 510 and advances 2003 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Loans and advances Gross 357 236 194 1,077 86 non- performing Specific provisions for (220) (106) (118) (375) (44) bad and doubtful debts Interest in suspense (91) (64) (55) (68) (30) Net non-performing loans 46 66 21 634 12 and advances 2003 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Loans and advances Gross 52 180 116 887 3,185 non- performing Specific provisions for (40) (99) (51) (460) (1,513) bad and doubtful debts Interest in suspense (12) (66) (43) (126) (555) Net non-performing loans - 15 22 301 1,117 and advances STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Wholesale Banking Cover Ratio The following tables show the Wholesale Banking cover ratio. The non-performing loans recorded below under Standard Chartered Nakornthon Bank (SCNB) are excluded from the cover ratio calculation as they are the subject of a Loan Management Agreement (LMA) with a Thai Government Agency. At 86 per cent, the Wholesale Banking non-performing portfolio is well covered. The balance uncovered by specific provision and interest in suspense represents the value of collateral held and/or the Group's estimate of the net value of any work-out strategy. 2004 Total SCNB excl Total (LMA) LMA $m $m $m Loans and advances - Gross non-performing 2,290 351 1,939 Specific provisions for bad and doubtful debts (1,280) (115) (1,165) Interest in suspense (500) - (500) Net non-performing loans and advances 510 236 274 Cover ratio 86% 2003 Total SCNB excl Total (LMA) LMA $m $m $m Loans and advances - Gross non-performing 3,185 772 2,413 Specific provisions for bad and doubtful debts (1,513) (112) (1,401) Interest in suspense (555) - (555) Net non-performing loans and advances 1,117 660 457 Cover ratio 81% STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Group The following tables set out the movements in the Group's total specific provisions against loans and advances: 2004 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Provisions held at 1 268 123 144 390 55 January 2004 Exchange translation - 3 - 4 2 differences Amounts written off (154) (62) (63) (142) (65) Recoveries of amounts 29 7 10 12 24 previously written off Other 4 - (2) (42) (1) New provisions 207 60 36 95 106 Recoveries/provisions no (65) (18) (29) (48) (80) longer required Net charge against/ 142 42 7 47 26 (credit to) profit Provisions held at 31 289 113 96 269 41 December 2004 2004 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Provisions held at 1 51 107 58 465 1,661 January 2004 Exchange translation (3) (1) 2 8 15 differences Amounts written off (13) (29) (21) (58) (607) Recoveries of amounts 3 4 4 2 95 previously written off Other - (5) - 38 (8) New provisions 15 28 27 35 609 Recoveries/provisions no (11) (24) (15) (50) (340) longer required Net charge against/ 4 4 12 (15) 269 (credit to) profit Provisions held at 31 42 80 55 440 1,425 December 2004 2003 Asia Pacific Other Hong Asia Kong Singapore Malaysia Pacific India $m $m $m $m $m Provisions held at 1 255 159 235 358 60 January 2003 Exchange translation 2 2 - 13 3 differences Amounts written off (353) (85) (99) (120) (87) Recoveries of amounts 23 14 10 13 18 previously written off Other 36 - - 27 1 New provisions 364 72 34 142 142 Recoveries/provisions no (59) (39) (36) (43) (82) longer required Net charge against/ 305 33 (2) 99 60 (credit to) profit Provisions held at 31 268 123 144 390 55 December 2003 2003 Other Americas Middle UK & East & Group Other Head UAE S Asia Africa Office Total $m $m $m $m $m Provisions held at 1 108 144 53 452 1,824 January 2003 Exchange translation - 2 1 10 33 differences Amounts written off (64) (32) (6) (64) (910) Recoveries of amounts 1 1 1 3 84 previously written off Other 4 (4) - 20 84 New provisions 14 22 24 90 904 Recoveries/provisions no (12) (26) (15) (46) (358) longer required Net charge against/ 2 (4) 9 44 546 (credit to) profit Provisions held at 31 51 107 58 465 1,661 December 2003 STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) Group (continued) General Provision The general provision is held to cover the inherent risk of losses, which, although not identified, are known by experience to be present in a loan portfolio and to other material uncertainties where specific provisioning is not appropriate. It is not held to cover losses arising from future events. The Group sets the general provision with reference to past experience by using both Flow Rate and Expected Loss methodology, as well as taking judgemental factors into account. These factors include, but are not confined to, the economic environment in our core markets, the shape of the portfolio with reference to a range of indicators and management actions taken to pro-actively manage the portfolio. During the year, $39 million of the general provision was applied to cover litigation in India dating back to 1992 and $4 million was added from acquisitions. $55 million has been released from the general provision reflecting the benign economic environment, the significant improvement in the Hong Kong bankruptcy situation and other portfolio indicators. At 31 December 2004, the balance of general provision stood at $335 million, 0.5 per cent of Loans and Advances to Customers (2003: $425 million, 0.7 per cent). 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. This covers the risk that: â€¢ - the sovereign borrower of a country may be unable or unwilling to fulfil its foreign currency or cross-border contractual obligations; and/or â€¢ - a non-sovereign counterparty may be unable to fulfil its contractual obligations as a result of currency shortage due to adverse economic conditions or actions taken by the government of the country. The Group Risk Committee approves country risk policy and procedures and delegates the setting and management of country limits to the Group Head, Credit and Country Risk. The businesses and country Chief Executive Officers manage exposures within these set limits and policies. Countries designated as higher risk are subject to increased central monitoring. The following table, based on the Bank of England Cross Border Reporting (CE) guidelines, shows the Group's cross border assets including acceptances where they exceed one per cent of the Group's total assets. 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. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) 2004 2003 Public Public sector Banks Other Total sector Banks Other Total $m $m $m $m $m $m $m $m USA 824 745 2,660 4,229 1,436 902 2,149 4,487 Netherlands - 2,639 406 3,045 - 1,729 275 2,004 Hong Kong 4 199 2,719 2,922 14 112 2,301 2,427 Singapore - 325 1,939 2,264 - 160 1,509 1,669 India 74 1,132 867 2,073 60 641 1,052 1,753 Korea 47 1,258 698 2,003 3 1,393 475 1,871 China* 101 686 902 1,689 - - - - France 149 1,243 183 1,575 4 1,529 253 1,786 Germany** - - - - - 1,292 315 1,607 * Less than one per cent of total assets at 31 December 2003 ** Less than one per cent of total assets at 31 December 2004 Market Risk The Group recognises market risk as the exposure created by potential changes in market prices and rates. The Group is exposed to market risk arising principally from customer driven transactions. Market Risk is governed by the Group Risk Committee, which agrees policies and levels of risk appetite in terms of Value at Risk (VaR). The Group Market Risk Committee provides market risk oversight and guidance on policy setting. Policies cover the trading book of the Group and also market risks within the non-trading books. Limits by location and portfolio are proposed by the businesses within the terms of agreed policy. Group Market Risk approves the limits within delegated authorities and monitors exposures against these limits. Group Market Risk complements the VaR measurement by regularly stress testing market risk exposures to highlight potential risk that may arise from extreme market events that are rare but plausible. In addition, VaR models are back tested against actual results to ensure pre-determined levels of accuracy are maintained. Additional limits are placed on specific instrument and currency concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. Option risks are controlled through revaluation limits on currency and volatility shifts, limits on volatility risk by currency pair and other underlying variables that determine the options' value. Value at Risk The Group uses historic simulation to measure VaR on all market risk related activities. The total VaR for trading and non-trading books combined at 31 December 2004 was $15.4 million (2003: $12.2 million). Interest rate related VaR was $15.6 million (2003: $12.2 million) and foreign exchange related VaR was $3.0 million (2003: $1.3 million). The total VaR of $15.4 million recognises offsets between interest rate and foreign exchange risks. The average total VaR for trading and non-trading books during the year was $15.8 million (2003: $13.6 million) with a maximum exposure of $19.4 million (2003: $16.0 million). VaR for interest rate risk in the non-trading books of the Group totalled $16.7 million at 31 December 2004 (2003: $9.5 million). The increase in VaR reflects the rise in interest rates and positional changes. The Group has no significant trading exposure to equity or commodity price risk. The average daily revenue earned from market risk related activities was $3.8 million, compared with $3.5 million during 2003. Foreign Exchange Exposure The Group's foreign exchange exposures comprise trading, non-trading and structural foreign currency translation exposures. Foreign exchange trading exposures are principally derived from customer driven transactions. The average daily revenue from foreign exchange trading businesses during 2004 was $1.6 million (2003: $1.3 million). Interest Rate Exposure The Group's interest rate exposures comprise trading exposures and non trading structural interest rate exposures. Structural interest rate risk arises from the differing re-pricing characteristics of commercial banking assets and liabilities. The average daily revenue from interest rate trading businesses during 2004 was $2.2 million (2003: $2.2 million). Derivatives Derivatives are contracts whose characteristics and value derive from underlying financial instruments, interest and exchange rates or indices. They include futures, forwards, swaps and options transactions in the foreign exchange and interest rate markets. Derivatives are an important risk management tool for banks and their customers because they can be used to manage the risk of price, interest rate and exchange rate movements. The Group's derivative transactions are principally in instruments where the mark-to-market values are readily determinable by reference to independent prices and valuation quotes or by using standard industry pricing models. The Group enters into derivative contracts in the normal course of business to meet customer requirements and to manage its own exposure to fluctuations in interest and exchange rates. The Group applies a potential future exposure methodology to manage counterparty credit exposure associated with derivative transactions. This is calculated by taking the cost of replacing the contract, where its mark-to-market value is positive together with an estimate for the potential future change in the market value of the contract, reflecting the volatilities that affect it. The credit risk on contracts with a negative mark-to-market value is restricted to the potential future change in their market value. The credit risk on derivatives is therefore usually small relative to their notional principal values. For an analysis of derivative contracts see notes 9 and 10 on pages 48 to 50. Liquidity Risk The Group defines liquidity risk as the risk that the bank either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can access them only at excessive cost. It is the policy of the Group to maintain adequate liquidity at all times, in all geographical locations and for all currencies. Hence the Group is in a position to meet all obligations, to repay depositors, to fulfil commitments to lend and to meet any other commitments made. Liquidity risk management is governed by the Group Asset and Liability Committee (GALCO). This Committee, chaired by the GED Finance and with authority derived from the Board, is responsible for both statutory and prudential liquidity. These responsibilities are managed through the provision of authorities, policies and procedures that are co-ordinated by the Liquidity Management Committee (LMC) with regional and country Asset and Liability Committees (ALCO). Due to the diversified nature of the Group's business, the Group's policy is that liquidity is more effectively managed locally, in-country. Each Country ALCO is responsible for ensuring that the country is self-sufficient and is able to meet all its obligations to make payments as they fall due. The Country ALCO has primary responsibility for compliance with regulations/Group policy and maintaining a Country Liquidity Crisis Contingency Plan. A substantial portion of the Group's assets are funded by customer deposits made up of current and savings accounts and other deposits. These customer deposits, which are widely diversified by type and maturity, represent a stable source of funds. Lending is normally funded by liabilities in the same currency. The Group also maintains significant levels of marketable securities either for compliance with local statutory requirements or as prudential investments of surplus funds. The GALCO oversees the structural foreign exchange and interest rate exposures that arise within the Group. Policies and terms of reference are set within which Group Corporate Treasury manage these exposures on a day-to-day basis. Policies and guidelines for the setting and maintenance of capital ratio levels are also delegated by GALCO. Group ratios are monitored centrally by Group Corporate Treasury, while local requirements are monitored by the local ALCO. Operational Risk Operational risk is the risk of direct or indirect loss due to an event or action resulting from the failure of technology, processes, infrastructure, personnel and other risks having an operational impact. The Group seeks to ensure that key operational risks are managed in a timely and effective manner through a framework of policies, procedures and tools to identify, assess, monitor, control, and report such risks. The Group Operational Risk Committee (GORC) has been established to supervise and direct the management of operational risks across the Group. GORC is also responsible for ensuring adequate and appropriate policies and procedures are in place for the identification, assessment, monitoring, control and reporting of operational risks. An independent Group operational risk function is responsible for establishing and maintaining the overall operational risk framework, and for monitoring the Group's key operational risk exposures. This unit is supported by Wholesale Banking and Consumer Banking Operational Risk units. They are responsible for ensuring compliance with policies and procedures in the business, monitoring key operational risk exposures, and the provision of guidance to the respective business areas on operational risk. Compliance with operational risk policies and procedures is the responsibility of all managers. Every country operates a Country Operational Risk Group (CORG). The CORG has in-country governance responsibility for ensuring that an appropriate and robust risk management framework is in place to monitor and manage operational risk. Business Risk Business risk is the risk of failing to achieve business targets due to inappropriate strategies, inadequate resources or changes in the economic or competitive environment and is managed through the Group's management processes. Regular reviews of the performance of Group businesses by the Group Management Committee, comprising Group Executive Directors and other senior management are used to assess business risks and agree management action. The reviews include corporate financial performance measures, capital usage, resource utilisation and risk statistics to provide a broad understanding of the current business position. Compliance and Regulatory Risk Compliance and Regulatory risk includes the risk of non-compliance with regulatory requirements in a country in which the Group operates. The Group Compliance and Regulatory Risk function is responsible for establishing and maintaining an appropriate framework of Group compliance policies and procedures. Compliance with such policies and procedures is the responsibility of all managers. Legal Risk Legal risk is the risk of unexpected loss, including reputational loss, arising from defective transactions or contracts, claims being made or some other event resulting in a liability or other loss for the Group, failure to protect the title to and ability to control the rights to assets of the Group (including intellectual property rights), changes in the law, or jurisdictional risk. The Group manages legal risk through the Group Legal Risk Committee, Legal risk policies and procedures and effective use of its internal and external lawyers. Reputational Risk Reputational risk is defined as the risk that any action taken by the Group or its employees creates a negative perception in the external market place. This includes the Group's and/or its customers' impact on the environment. The Group Risk Committee examines issues that are considered to have reputational repercussions for the Group and issues guidelines or policies as appropriate. It also delegates responsibilities for the management of legal/ regulatory and reputational risk to the business through business risk committees. In Wholesale Banking, potential reputational risks resulting from transactions or policies and procedures are reviewed and actioned through the Wholesale Banking Reputational Risk Committee. Consumer Banking's Product and Reputational Risk Committee provides similar assurance. Independent Monitoring Group Internal Audit is an independent Group function that reports directly to the Group Chief Executive and the Audit and Risk Committee. Group Internal Audit provides independent confirmation that Group and business standards, policies and procedures are being complied with. Where necessary, corrective action is recommended. Hedging Policies The Group does not generally hedge the value of its foreign currency denominated investments in subsidiaries and branches. Hedges may be taken where there is a risk of a significant exchange rate movement but, in general, management believes that the Group's reserves are sufficient to absorb any foreseeable adverse currency depreciation. The Group also seeks to match its assets denominated in foreign currencies with corresponding liabilities in the same currencies. The effect of exchange rate movements on the capital risk asset ratio is mitigated by the fact that both the value of these investments and the risk weighted value of assets and contingent liabilities follow substantially the same exchange rate movements. CAPITAL The Group believes that being well capitalised is important. The Group Asset and Liability Committee targets Tier 1 and Total capital ratios of 7 - 9 per cent and 12 - 14 per cent respectively. Basel II The Group has a centrally managed Basel programme with work streams operating in businesses covering both credit and operational risk. Work is well advanced and the Group expects to be in line to gain compliance with the Basel Accord by 1 January 2007. There is close alignment between the objectives of Basel II and the Group's own best practice goals. As a leading international bank, we are concerned by the potential impact of inconsistent implementation of the Basel Accord cross border and regard this as a key industry issue for Regulators to address. International Financial Reporting Standards (IFRS) From 1 January 2005, the Group will be required by European Directives to report its consolidated financial statements under IFRS, as endorsed by the European Union. Our first published results under IFRS will be the 2005 Interim Report. In May 2005 we intend to present to investors and analysts the impact of IFRS on the Group following the restatement of our 2004 financial statements. The transition to IFRS represents a significant change in our accounting policies. The principal changes are: â€¢ - recording all derivatives and certain debt security assets at fair value on the balance sheet; â€¢ - recording additional bad debt charges for time-value discount provisions; â€¢ - recording interest on a 'level yield' basis; â€¢ - recording the cost of share options awarded to employees on a fair value basis; â€¢ - ceasing goodwill amortisation; â€¢ - dividends proposed but not declared are no longer accrued as a liability; â€¢ - grossing up of the balance sheet for items no longer permitted to be netted; â€¢ - consolidating certain assets and liabilities previously permitted to be off balance sheet; â€¢ - reclassification between liabilities and shareholders' funds of certain preferred securities and shares; and â€¢ - deferred tax effect on IFRS adjustments. IFRS does not change net cash flows or the underlying economics of our business. However, excluding the potential impact of recording all derivatives on balance sheet at fair value, we expect an increase in shareholders' funds, particularly from not accruing dividends until declared. The cost of awarding share options to employees is expected to increase. The accounting rules for fair valuing all derivatives is expected to cause some degree of earnings volatility in the future. Although the Group will aim to minimise this volatility, our priority will be to ensure risk is managed effectively. Our expectation is that the impact of IFRS on the Group's regulatory capital will be minimal. STANDARD CHARTERED PLC - FINANCIAL REVIEW (continued) CAPITAL (continued) 2004 2003* $m $m Tier 1 capital: Shareholders' funds 8,435 7,529 Minority interests - equity 111 83 Innovative Tier 1 securities 1,246 1,155 Less: restriction on innovative Tier 1 securities (68) (160) Unconsolidated associated companies 30 13 Less: goodwill capitalised (1,900) (1,986) Add: provision for retirement benefits after tax 110 124 Total Tier 1 capital 7,964 6,758 Tier 2 capital: Qualifying general provision 335 387 Perpetual subordinated debt 1,961 1,914 Other eligible subordinated debt 3,525 2,898 Restricted innovative Tier 1 securities 68 160 Total Tier 2 capital 5,889 5,359 Investments in other banks (33) (742) Other deductions (34) (4) Total capital 13,786 11,371 Risk weighted assets 71,096 58,371 Risk weighted contingents 21,028 19,791 Total risk weighted assets and contingents 92,124 78,162 Capital ratios: Tier 1 capital 8.6% 8.6% Total capital 15.0% 14.5% 2004 2003 $m $m Shareholders' funds: Equity 7,759 6,880 Non-equity 676 649 8,435 7,529 Post-tax return on equity (normalised) 20.1% 15.7% * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - FINANCIAL STATEMENTS SUMMARISED CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 December 2004 Before 2004 2003* Acquisitions Acquisitions Total Total Notes $m $m $m $m Interest receivable 5,208 24 5,232 4,790 Interest payable (2,062) (2) (2,064) (1,822) Net interest income 3,146 22 3,168 2,968 Other finance income 10 - 10 (13) Fees and commissions receivable, net 1,334 - 1,334 1,156 Dealing profits and exchange 647 1 648 525 Other operating income 206 1 207 104 2,187 2 2,189 1,785 Net revenue 5,343 24 5,367 4,740 Administrative expenses: Staff (1,529) (5) (1,534) (1,332) Premises (319) (2) (321) (290) Other (716) (5) (721) (640) Depreciation and amortisation, of which: (418) (2) (420) (381) Amortisation of goodwill (179) (2) (181) (134) Other (239) - (239) (247) Total operating expenses (2,982) (14) (2,996) (2,643) Operating profit before provisions 2,361 10 2,371 2,097 Provisions for bad and doubtful debts (210) (4) (214) (536) Amounts written off fixed asset investments (1) - (1) (11) Income from joint venture - 2 2 - Operating profit including joint venture 2 2,150 8 2,158 1,550 before taxation Taxation 4 (635) (2) (637) (497) Operating profit after taxation 1,515 6 1,521 1,053 Minority interests (42) - (42) (29) Profit for the period attributable to 1,473 6 1,479 1,024 shareholders Dividends on non-equity preference shares (58) - (58) (55) Dividends on ordinary equity shares (725) - (725) (611) Retained profit 690 6 696 358 Normalised earnings per ordinary share 125.9c 90.1c Basic earnings per ordinary share 121.2c 82.0c Diluted earnings per ordinary share 119.3c 81.0c Dividend per ordinary share 57.5c 52.0c * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - FINANCIAL STATEMENTS SUMMARISED CONSOLIDATED BALANCE SHEET As at 31 December 2004 2004 2003* $m $m Assets Cash, balances at central banks and cheques in course of collection 2,269 1,982 Treasury bills and other eligible bills 4,425 5,689 Loans and advances to banks 18,922 13,354 Loans and advances to customers 71,596 59,744 Debt securities and other fixed income securities 28,295 23,141 Equity shares and other variable yield securities 253 359 Interests in joint venture - share of gross assets 1,179 - - share of gross liabilities (992) - - share of net assets 187 - Intangible fixed assets 1,900 1,986 Tangible fixed assets 844 884 Prepayments, accrued income and other assets 12,997 13,063 Total assets 141,688 120,202 Liabilities Deposits by banks 15,813 10,924 Customer accounts 84,572 73,767 Debt securities in issue 7,378 6,062 Accruals, deferred income and other liabilities 17,802 15,339 Subordinated liabilities: Undated loan capital 1,588 1,568 Dated loan capital 5,144 4,399 Minority interests: Equity 111 83 Non-equity 845 531 Shareholders' funds 8,435 7,529 Total liabilities and shareholders' funds 141,688 120,202 * Comparative restated (see note 12 on page 51). STANDARD CHARTERED PLC - FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 31 December 2004 2004 2003* $m $m Profit attributable to shareholders 1,479 1,024 Exchange translation differences 93 69 Actuarial loss on retirement benefits (5) (65) Deferred tax on actuarial gain on retirement benefits 1 20 Total recognised gains and losses for the period 1,568 1,048 Prior year adjustments** (186) Total recognised gains and losses since the last annual report 1,382 * Comparative restated (see note 12 on page 51). ** Including cumulative actuarial gains/losses arising in prior periods NOTE OF CONSOLIDATED HISTORICAL COST PROFITS AND LOSSES For the year ended 31 December 2004 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 the historical cost profits and losses has been included. Accounting Convention The accounts of the Group have been prepared under the historical cost convention, modified by the revaluation of certain fixed assets and dealing positions. The accounting policies, as listed in the Annual Report 2003, continue to be consistently applied, apart from the items referred to in note 12 on page 51, principally the adoption of FRS17 for Retirement Benefits, which have resulted in a restatement of comparative figures. STANDARD CHARTERED PLC - FINANCIAL STATEMENTS Consolidated cash flow statement For the year ended 31 December 2004 2004 2003* $m $m Net cash inflow from operating activities (see note 1) 2,503 3,748 Returns on investment and servicing of finance Interest paid on subordinated loan capital (338) (298) Dividends paid to minority shareholders of subsidiary undertakings (17) (22) Dividends paid on preference shares (58) (55) Net cash outflow from returns on investment and servicing of finance (413) (375) Taxation UK taxes paid (33) (161) Overseas taxes paid (540) (353) Total taxes paid (573) (514) Capital expenditure and financial investment Purchases of tangible fixed assets (240) (156) Acquisitions of treasury bills held for investment purposes (9,396) (12,604) Acquisitions of debt securities held for investment purposes (75,353) (49,247) Acquisitions of equity shares held for investment purposes (121) (194) Disposals of tangible fixed assets 51 14 Disposals and maturities of treasury bills held for investment purposes 10,778 12,632 Disposals and maturities of debt securities held for investment purposes 71,482 49,498 Disposals of equity shares held for investment purposes 356 13 Net cash outflow from capital expenditure and financial investment (2,443) (44) Net cash (outflow)/inflow before equity dividends paid and financing (926) 2,815 Net cash outflow from the purchase of interests in subsidiary undertakings, joint (333) - venture and businesses Net cash inflow/(outflow) from disposal of interests in subsidiary and associated 6 (95) undertakings and the business of a branch Net cash outflow from acquisitions and disposals (327) (95) Equity dividends paid to members of the Company (587) (531) Financing Gross proceeds from issue of ordinary share capital - 3 Repurchase of preference share capital - (20) Gross proceeds from issue of preferred securities 499 - Repayment of subordinated liabilities (25) - Net cash inflow/(outflow) from financing 474 (17) (Decrease)/increase in cash in the period (1,366) 2,172 â€¢ Comparative restated (see note 12 on page 51). 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