Final Results

Standard Chartered PLC 02 March 2006 2 March 2006 TO CITY EDITORS FOR IMMEDIATE RELEASE STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 HIGHLIGHTS STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Reported Results â€¢ Profit before tax up 19 per cent to $2,681 million, compared with $2,251 million in 2004 â€¢ Income up 27 per cent to $6,861 million from $5,382 million â€¢ Total assets up 46 per cent to $215 billion from $147 billion, including $58 billion in SC First Bank (SCFB, formerly Korea First Bank) â€¢ Profit attributable to ordinary shareholders up 26 per cent to $1,917 million (2004: $1,520 million) Underlying Results â€¢ Profit before tax up 10 per cent to $2,454 million, compared with $2,233 million in 2004 â€¢ Income up 14 per cent to $6,002 million from $5,274 million â€¢ Expenses up 14 per cent to $3,232 million from $2,826 million â€¢ Loan impairment charge up 24 per cent to $266 million from $214 million â€¢ Underlying normalised cost income ratio of 53.0 per cent (2004: 54.0 per cent) Performance Metrics â€¢ Normalised earnings per share up 23 per cent at 153.7 cents (2004: 124.6 cents) â€¢ Normalised return on ordinary shareholders' equity of 18.0 per cent (2004: 18.6 per cent) â€¢ Annual dividend per share increased 11 per cent to 64.0 cents â€¢ Normalised cost income ratio of 54.5 per cent (2004: 54.0 per cent) â€¢ Total capital ratio at 13.6 per cent (2004: 15.0 per cent) within target range Significant achievements â€¢ Record Group profits, driven by SC First Bank acquisition and strong underlying business momentum â€¢ Continued double-digit income growth in both Wholesale and Consumer Banking â€¢ Record normalised earnings per share â€¢ Acquisition of SC First Bank - normalised EPS accretive in the second half of 2005 Commenting on these results, the Chairman of Standard Chartered PLC, Bryan Sanderson, said: 'Standard Chartered's 2005 results demonstrate another strong performance. We are in markets with economic conditions which present us with opportunities to build on our performance track record. It is particularly pleasing to note that SC First Bank, our Korean acquisition, became EPS accretive in the second half of 2005. We are seeing the re-investment of petrodollars, strong economies all over Asia and, on the whole, increasing economic maturity in our markets. These conditions play to our strengths. We are executing our strategy well and making good progress. I am confident of the Group's prospects going forward.' Notes: - Comparatives restated in the transition to IFRS (see note 12 on pages 37 to 41). - Underlying income and costs excludes the post acquisition results of SCFB and one-off items in 2004. - Results on a normalised basis reflect the Group's results excluding items presented in note 5 on page 35. - Normalised underlying results exclude the post acquisition results of SCFB and the items in note 5 on page 35. STANDARD CHARTERED PLC - TABLE OF CONTENTS Page Summary of Results 3 Chairman's Statement 4, 5 Group Chief Executive's Review 6-9 Financial Review Group Summary 10 Consumer Banking 11-13 Wholesale Banking 13, 14 Acquisition of SC First Bank 15 Risk 16-25 Capital 25 Financial Statements Consolidated Income Statement 26 Consolidated Balance Sheet 27 Consolidated Statement of Recognised Income and Expenses 28 Consolidated Cash Flow Statement 29 Notes 30-59 Additional Information 60, 61 Index 62 On 1 January 2005 the Group adopted European Union (EU) adopted International Financial Reporting Standards (IFRSs). The comparative amounts presented have accordingly been restated to comply with EU endorsed IFRSs, with the exception of IAS 32/39. The impact of the restatement was published by the Group on 12 May 2005. Copies of this announcement are available from the Group's website at http://investors.standardchartered.com The Group has taken advantage of the transition rules of IFRS 1, First time adoption of International Financial Reporting Standards to apply IAS 32 and 39 with effect from 1 January 2005. (see note 12 on pages 37 to 41). 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 2005 2005 2004 $m $m RESULTS Operating income 6,861 5,382 Impairment losses on loans and advances 319 214 Profit before taxation 2,681 2,251 Profit attributable to equity interests 1,946 1,578 Profit attributable to ordinary shareholders 1,917 1,520 BALANCE SHEET Total assets 215,096 147,124 Total equity 12,333 10,069 Capital base 17,118 13,786 INFORMATION PER ORDINARY SHARE Cents Cents Earnings per share - normalised basis 153.7 124.6 - basic 148.5 129.6 Dividend per share 64.0 57.5 Net asset value per share 897.3 719.0 RATIOS % % Return on ordinary shareholders' equity - normalised basis 18.0 18.6 Cost income ratio - normalised basis 54.5 54.0 Capital ratios: Tier 1 capital 7.7 8.6 Total capital 13.6 15.0 Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the Group) excluding items presented in note 5 on page 35. STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT I am pleased to report another strong performance for Standard Chartered. â€¢ Profit before tax, including the post-acquisition results for SC First Bank (formerly Korea First Bank) is up 19 per cent to $2,681 million. â€¢ Income is up 27 per cent, up 14 per cent on an underlying basis, excluding SC First Bank. â€¢ Strong earnings per share growth, with normalised EPS up 23 per cent. As a result of this strong performance, the Board is recommending an annual dividend of 64.0 cents. The underlying business is doing well and the strategic investments made in recent years are delivering results. The progress with SC First Bank (SCFB) in Korea is especially pleasing. Governance Governance across the company is robust. In addition to the established Committees of the Board we now have a Corporate Responsibility and Community Committee, focused on the environment, diversity and inclusion, community and social investment. Activities in the area of corporate responsibility have measurable, positive commercial impacts and are very much part of the fabric of the Bank. Non-Executive Director Mr Ho KwonPing has played an important part in the governance of the Group and he will retire from the Board at the conclusion of this year's Annual General Meeting. KwonPing has served for more than nine years on the Board and I would like to thank him for the valuable contribution he has made during this important period for the Group. Economic outlook In the Middle East, there is greater investment in the infrastructure aimed at economic diversification. Across Asia, moves towards deepening domestic financial markets are key to the drivers of economic growth, shifting from a reliance on exports to domestic demand. Exports are strong in Hong Kong and South Korea, but it is the sustained turn-around in consumer spending that is key to their current growth. As a result, in general, Asian growth rates are expected to remain well above those of OECD countries. We are witnessing, at first hand, cyclical strength and structural change. Strategic progress Such strong and sustainable growth enhances our existing franchise and allows us to take full advantage of the acquisitions we have made in recent years. In Thailand, where we have been present for over a century, in 1999 we took the opportunity to invest in 75 per cent of Nakornthon Bank. In 2005 we bought the remaining 25 per cent stake. Standard Chartered Bank (Thai) pcl, as it is now known, is well positioned as a locally incorporated bank with international strengths and standards. Similarly, we have had a long presence in Indonesia, a country with 240 million people. In 2004, with our consortium partner PT Astra, we took a controlling stake in Bank Permata. Permata is a consumer bank with more than one million customers, 300 branches and over 7,000 staff. The combination of Permata and our own branch offers us great access to this growing market. In India, we bought Grindlays in 2000 and this strategic acquisition changed the nature of our presence in that market. We are now India's largest international bank and we have major ambitions. Already we have over two million consumer banking customers and 800 top corporate relationships. With the economy's consistently high rate of growth we expect to see even more opportunities ahead. In China, we established our presence as the first foreign bank almost one hundred and fifty years ago. In September 2005, in the presence of Chinese Premier Wen Jiabao and UK Prime Minister the Rt. Hon. Tony Blair MP, Standard Chartered signed the documents that allowed us to take a strategic stake in China Bohai Bank. This is the first bank to be granted a national licence since 1996 and in February it opened its first branch. Such a strategic investment is just one part of our approach to taking a leading position in this emerging economic giant. Our organic operations continue to prosper. Our long experience of China has allowed us to focus on the opportunities offered by rapid growth, including those in the Pearl River Delta, one of the world's fastest growing economic zones which accounts for about one-third of China's exports. Finally, South Korea, which is Asia's third largest economy with a population of 47 million. In 2005 we made huge progress following our acquisition of Korea First Bank and SC First Bank is now well positioned for Korea's future economic development. In all our markets we have strong business relationships and extensive networks, which are serving us well as the pace of change and number of business opportunities increase. Our international network is allowing us to benefit from new trade corridors emerging between our regions. We are in growing markets and our geographic diversity is helping us to deliver good performance. Well Positioned Overall, many current economic conditions and trends are advantageous for us. We are well positioned and our management teams are focused on creating shareholder value. Standard Chartered is ideally placed to maximise the existing and future opportunities presented by our markets. In addition to the growth presented by major Asian markets, many of our businesses in the Middle East, South Asia and Africa are developing rapidly. Our management teams, at country and at Group level, balance strong local and international leadership. This ensures international standards are met, local practices are respected and market opportunities are leveraged. We offer the ability to invest in growth, mainly in Asia, with UK regulation. Summary Standard Chartered's 2005 results demonstrate another strong performance. We are in markets with economic conditions that present us with opportunities to build on our performance track record. It is particularly pleasing to note that SC First Bank, our Korean acquisition, became EPS accretive in the second half of 2005. We are seeing the re-investment of petrodollars, strong economies all over Asia and, on the whole, increasing economic maturity in our markets. These conditions play to our strengths. We are executing our strategy well and making good progress. I am confident of the Group's prospects going forward. Bryan Sanderson, CBE Chairman 2 March 2006 STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW Standard Chartered is in good shape and we continue to deliver strong financial results. Our strategic intent is to be the world's best international bank, leading the way in Asia, Africa and the Middle East. We are seizing opportunities in our markets, driving value creation and actively seeking future opportunities. We are building diversity in our products so we can reach more customers, diversity in our markets so our business has a broader base and diversity in our people, so we can have the best available talent working for us. Our customer base has increased from seven million customers in 2003 to 12 million today. Income has increased from $4.7 billion in 2003 to $6.9 billion in 2005. The Group is growing rapidly, organically and through strategic alliances and acquisitions and has expanded from 450 branches in 2003 to 1,200 today. The scale of Standard Chartered is changing. Performance During 2005 the Group made significant financial progress. Profit before tax, including SCFB, was $2,681 million, a 19 per cent increase from $2,251 million in 2004. Normalised earnings per share saw an increase of 23 per cent to 153.7 cents and normalised return on equity was 18.0 per cent. We intend to be known as a Group that delivers good results and also as one that is creating a robust future. China and India These two major economies already make a good contribution to our performance and we are excited about our future in these markets. Our network in India covers 31 cities with a combined population in excess of 76 million. India is a country with major potential, not just for Standard Chartered, but for the world economy. Though increasing competition has led to short term margin erosion in some product areas, we are confident that Standard Chartered is well positioned to realise the potential offered by this dynamic market. We have been investing in new branches, ATMs, people, infrastructure and new businesses, including launching a new consumer finance business. In China, in 2005 the income from our organic business grew over 80 per cent and we increased the number of directly employed staff by more than 40 per cent to 1,200. Our network now covers 14 cities with a combined population of over 100 million. The Consumer Banking business now offers services in five out of the ten largest cities in China, including Shanghai and Beijing. While managing a profitable business today we are also preparing for the future. Of our recent graduate intake from China, 25 per cent are currently on assignment in other countries, developing broader skills and perspectives to take back to their market in due course. SC First Bank, Korea In Korea, we re-branded all 407 branches, 2,100 ATMs and seven kilometres of signage as SC First Bank over one weekend and the Standard Chartered branch has been integrated into the SC First Bank network. The leadership team is experienced, established and is a balance of local and international executives. It is Standard Chartered's intent to be a leader in the Korean financial services industry. The speed and success of the integration reflects the talent, focus and commitment of our Korean staff. The Wholesale Banking business in Korea is progressing well. We have an enhanced product portfolio and a fully operational dealing room. In Consumer Banking in Korea we have launched 12 new products, including the 'Welcome Back' mortgage campaign - which featured a one month interest waiver, and brought in 38,000 new accounts and $4 billion of new mortgage sales. When this acquisition was announced we said it would be EPS accretive in 2006 and we are very pleased to have met this target on a normalised basis in the second half of 2005. We are at the early stages of our journey but we have made a great start. Korea is a huge market and we are in a good position for the future. Consumer Banking In Consumer Banking, operating profits were up 21 per cent on last year, and income up 41 per cent. This performance reflects very good momentum in the underlying business, excellent post-acquisition progress in Korea and disciplined management of risk and costs. Excluding SCFB, operating profit was up 8 per cent and income was up 16 per cent. Expansion of our Consumer Banking customer segments and products continues and despite pressure on mortgage margins, the increased breadth and balance has meant that, overall, the business performed well. We are investing for the future, developing new products and client coverage, and increasing our sales channels. During 2005, there were over 240 product launches across our franchises including e-Saver, My Dream Account and LinkOne. Our branch 'footprint' is rapidly expanding and we now have 1,200 branches. This growth has been fuelled by Korea, where the number of branches has increased to over 400; Indonesia, where, through our stake in Permata, we now have over 300 and in Pakistan and the Middle East, where we have doubled our branch network in the past two years. Consumer Banking has increasingly balanced earnings streams. Its focus on wealth management and SME is paying dividends. Wholesale Banking We are continuing to make good progress with our Wholesale Banking business. Operating profits for 2005 were up 22 per cent on 2004, with income up 19 per cent. Excluding SCFB, operating profit was up 15 per cent and income was up 11 per cent. Client income growth was strong at 19 per cent and was well balanced across geographies, products and client segments. We have seen strong growth in most key markets, but results have been impacted by Zimbabwe's economic problems. Our client-led strategy continues to drive performance in key markets and across key products. We are investing for sustainable growth, extending our product reach and increasing our global markets capabilities. We have expanded our franchise in a number of markets and strengthened local corporate teams. Previous investments in key product areas, such as in debt capital markets and corporate finance, are paying off with excellent growth across all client segments. Proactive risk management has been complemented by a benign credit environment with strong recoveries resulting in a net release. We are continuing to invest in regulatory compliance, control infrastructure, risk management and technology . Overall, 2005 was a good year in terms of performance. The Group is now engaged on reaching its goals for 2006 and we have set out our management agenda. Management Agenda 2006 â€¢ To accelerate growth in both businesses, by focusing on priority markets and extending our geographic and customer reach. â€¢ In Wholesale Banking we will deepen client relationships and cross-sell more. â€¢ In Consumer Banking we will enter new customer segments, such as private banking and consumer finance. â€¢ Korea is a huge opportunity and, therefore, a continued priority. We will drive growth and performance. â€¢ Across the Group we will accelerate improvements in service and innovation. â€¢ It remains our intent to lead by example in corporate responsibility. Our programmes on diversity, environment, to help fight blindness, HIV and malaria, are important to the communities where we operate, differentiate our brand and make a difference to current and prospective employees. Looking forward There are changing trends in demographics worldwide, which will inevitably influence our business going forward. In five years time there will be over 100 million people in China aged over 65 and, in India, over 350 million under the age of 15. These types of changes have major implications for our business. We will see increased product segmentation, as different age groups have very different aspirations and we will have to think deeply about how we develop our brand in different markets. The environment is becoming a major agenda item for all businesses. In markets where we operate there are concerns about energy, air quality, even water, which may impact on our customer base. We have to pay new attention to resources - to how we as a business are using them, to our lending policies around them and to our participation in the debates on the future economic impacts of these issues. Transparency is another evolving area that affects our business. More information, moving at higher speeds, in many ways presents exciting opportunities for us, for our employees and our customers. Equally, regulatory requirements and pressures are increasing and create something of a burden, despite the positive motivations behind them. These are some of the subjects on which we are focusing our thoughts. We recognise that to ensure continued performance we need to be thinking ahead. We believe there are three major capabilities we must have to meet future challenges. We must have a real understanding of our customers. We must have the ability to innovate and create the right environment for innovation to happen. In order to do that we must be able to develop the right quality of people. Being close to our customers is key and our customer knowledge is increasing all the time. The Group's Outserve initiative is making great progress in reaching our customers and understanding their needs. We carry out world-wide research, providing us with over three million data points from more than 25,000 respondents. In Consumer Banking, our survey carried out in 22 countries told us that in 2005, 80% of customers were 'loyal and positive'. This number was up on the previous year, and the increase equates to an additional 400,000 'loyal and positive' customers - which is very encouraging for us. Our brand promise is to be 'The Right Partner, Leading By Example'. Customer feedback is at the centre of everything we do. Listening to customers helps us generate new ideas. For example in response to customer feedback we launched our online cheque template - the e-Cheque - in Singapore. Early take up is encouraging and we have patented it. This is one example of increasing innovation in the Bank and of the type of product that changes the market place. As well as customer driven innovation, speed to market is critical. The Group's work in technology in recent years means we have reduced development times and still maintain the stringent checks expected of a bank. For example, we implemented our consumer finance platform in India in just 72 days. To Outserve our customers and to drive innovation we need good people. Happily, the Group is increasingly a magnet for talent. The growing economies and exciting markets where we do business are appealing to many high calibre individuals. Through our graduate development programme we recruit and grow the talent we need for the long term. The 2006 international graduate programme has received over 40,000 applications, including over 19,000 from China. Across the Group we are developing an increasingly international, mobile, talented young workforce. We are committed to talent development and have a company wide process that identifies talent at all levels and allows us to accelerate the development of the best. In 2005, for example, nearly 40 per cent of our high potential employees had some form of job development move and 16 per cent were international assignments. In our established workforce, turnover of high performers and high potential staff is low. Last year 80 per cent of senior management appointments were made from within the Group. Having the right people remains key to supporting our continued growth. We believe our investment in people now will give us real competitive edge going forward. We are working hard to 'Lead the Way' in the areas which will underpin our business performance now and in the future. Outlook In 2005, the Group achieved a good financial performance and made significant strategic progress. The outlook for 2006 is promising. Whilst we can never be immune to external shocks, we anticipate double-digit income growth across the Group as a whole. Our strength, diversity and breadth give us resilience and flexibility. The Consumer Banking and Wholesale Banking businesses, including SC First Bank, have good momentum and we are well positioned to leverage the opportunities available to us in our markets. We will maintain our disciplined approach to managing expenses. We will continue to focus on improving productivity and sustain our investment in new products, new capabilities and expanded distribution. Expense growth will be broadly in line with income growth for the full year. We will dynamically manage the pace of investment spend through the year factoring in both the risk environment as well as the performance. We will continue to manage risks proactively. In Consumer Banking, we expect loan impairment charges will tend to grow in line with the size and mix of the overall book though Taiwan will continue to present some challenges. For Wholesale Banking, while the credit environment in most of our markets remains benign, we are somewhat cautious on the credit outlook. Moreover, the level of recoveries and releases achieved in 2005 will not recur in 2006. Consequently, we expect Wholesale Banking will revert to having a net charge in 2006. In summary Standard Chartered is making good progress. We are clear on our strategy and well positioned to take advantage of the many opportunities in our markets. Mervyn Davies, CBE Group Chief Executive 2 March 2006 GROUP SUMMARY The Group has continued its strong performance trajectory with another good set of results for the year ended 31 December 2005. Operating profit before tax of $2,681 million was up 19 per cent over the same period in 2004. Normalised earnings per share has increased by 23 per cent to 153.7 cents. (Refer to note 5 on page 35 for the details of basic and diluted earnings per share). On 15 April 2005 the Group acquired 100 per cent of Korea First Bank (KFB). On 10 September 2005 KFB was renamed SC First Bank (SCFB) and on 28 November 2005 the assets and businesses of the Standard Chartered branch in Korea were transferred to SCFB. The impact of the post acquisition results of SCFB in the 2005 results, together with significant one-off items affecting the 2004 results, make the comparability of the full year results to December 2005 with the equivalent period in 2004 complex. The table below therefore sets out underlying results for the two years excluding these two components. 2005 2004 SCFB Underlying As *One off Underlying As $m $m reported items $m reported $m $m $m Net interest income 781 3,554 4,335 - 3,182 3,182 Fees and commissions income, 29 1,466 1,495 - 1,332 1,332 net Net trading income 23 746 769 - 651 651 Other operating income 26 236 262 108 109 217 78 2,448 2,526 108 2,092 2,200 Operating income 859 6,002 6,861 108 5,274 5,382 Operating expenses (579) (3,232) (3,811) (23) (2,826) (2,849) Operating profit 280 2,770 3,050 85 2,448 2,533 before provisions Impairment losses on (53) (266) (319) - (214) (214) loans and advances Other impairment - (50) (50) (67) (1) (68) Operating profit before 227 2,454 2,681 18 2,233 2,251 taxation * See note 5 on page 35. Operating Income and Profit Operating income, including SCFB, increased by 27 per cent to $6,861 million over 2004. Of this increase, SCFB accounted for $859 million. Underlying income growth excluding SCFB and 2004 one-off items was 14 per cent to $6,002 million. Both Consumer Banking and Wholesale Banking delivered double-digit income growth and business momentum remains strong across an increasingly broad range of customer segments and markets. Net interest income grew by 36 per cent to $4,335 million. Underlying growth was 12 per cent. Net interest margin was 2.5 per cent, down from 2.6 per cent in the prior year reflecting the impact of changes in geographic and product mix. Fees and commissions increased by 12 per cent to $1,495 million. Underlying growth was 10 per cent driven mainly by higher volumes in wealth management, cash management and global markets products across most markets. Net trading income grew by 18 per cent to $769 million due to higher volumes of foreign exchange dealing by both Wholesale and Consumer Banking customers. Underlying growth was 15 per cent. Other operating income of $262 million increased by 21 per cent. Excluding one-off items in 2004 from the sale of shares in KorAm and Bank of China (Hong Kong), growth was strong on the back of structured transactions and sales of available-for-sale securities within the asset and liability management (ALM) portfolio. Operating expenses increased from $2,849 million to $3,811 million. Of this increase, $579 million was due to the inclusion of SCFB. Underlying expense growth was 14 per cent, in line with underlying income growth for the full year. The normalised cost income ratio was 54.5 per cent (2004: 54.0 per cent) on a headline basis including SCFB, but on an underlying normalised basis has improved to 53.0 per cent (2004: 54.0 per cent). The Group has continued to invest in both Consumer Banking and Wholesale Banking in order to sustain the double-digit client led income growth. Such investments were directed primarily at new market entry, new products, reinforced capabilities, expanded client coverage, increased distribution and improvements to technology and infrastructure to support new and rapidly growing markets. Impairment losses on loans and advances rose by 49 per cent from $214 million to $319 million, an increase of $105 million of which SCFB accounted for $53 million. The underlying increase in impairment losses was 24 per cent reflecting asset growth in Consumer Banking, a deterioration in the Taiwan consumer credit environment and movements in portfolio provisioning under IFRS. Wholesale Banking continued to benefit from a benign credit environment, the successful conclusion of the Loan Management Agreement in Thailand and strong recoveries. Other impairment includes provisions made in 2005 for exposures in Zimbabwe. CONSUMER BANKING Including the acquisition of SCFB, Consumer Banking grew operating profit by 21 per cent to $1,278 million compared to 2004. Of the $220 million increment in profit, SCFB accounted for $137 million. Underlying growth was eight per cent. Consumer Banking has maintained strong income momentum with income up 41 per cent to $3,807 million. SCFB accounted for $671 million or 61 per cent of Consumer Banking's total income growth of $1,107 million. Underlying income was up 16 per cent to $3,136 million. Underlying income growth was driven by volume and fee income growth across almost all product lines, strong growth in customer balances, particularly deposits and the contribution from business segments such as consumer finance and small and medium enterprises (SME) loans. Businesses acquired in 2004, including Prime Credit and Bank Permata, contributed to income and profit growth. Excluding SCFB, customer liabilities saw double-digit growth year on year while assets grew four per cent. Deposit growth was particularly strong in Hong Kong, Singapore and Other Asia Pacific Region (Other APR). On an underlying basis excluding SCFB, expense growth was broadly in line with income growth at 15 per cent for the year. This expense growth included investment expenditure in new products, extended client coverage, enhanced infrastructure, increased compliance costs and investment in new businesses. Total expenses in Consumer Banking grew by $701 million with SCFB accounting for $486 million. Overall, Consumer Banking's impairment losses on loans and advances rose to $425 million from $242 million in 2004. This reflects the impact of asset growth outside Korea, inclusion of SCFB, movements in portfolio provisions under IFRS and deterioration in the Taiwan consumer credit environment. The underlying impairment charge has risen 20 bps to one per cent of average customer assets largely as a result of changes in portfolio mix and the deteriorating credit environment in Taiwan, where the banking industry as a whole has been significantly affected by a strong increase in consumer default rates. Consumer Banking anticipated this deterioration and took action to mitigate exposure. Nonetheless, the Consumer Banking loan impairment charge in Taiwan increased to $98 million in 2005 from $26 million in 2004. Consumer Banking in Taiwan has customer assets of approximately $1.3 billion as at 31 December 2005. We expect Taiwan to remain challenging through 2006. Hong Kong delivered an increase in operating profit of 17 per cent to $540 million. Income growth was four per cent. Operating expenses were lower than in 2004 as a result of the actions taken to reconfigure the cost base. This resulted in pre-impairment profit growth of seven per cent. Responding to the rising interest rate environment, the business has put greater focus onto wealth management and SME, by successfully launching several new products and achieving growth in customer liabilities. The acquisition of Prime Credit in 2004 has been a great success with performance well ahead of plan. Asset portfolios continue to perform well with a 56 per cent reduction in the loan impairment charge compared to the prior period. In Singapore, income was down two per cent in 2005 with strong growth in wealth management and SME largely offsetting the sharp decline in mortgage margins. Mortgage margins reduced by nearly half on a full year basis. The successful launch of a new on-line savings product, together with good growth in investment services resulted in strong wealth management income growth. Operating profit before provisions was up 28 per cent in Malaysia on the back of a 19 per cent rise in income and moderate expense growth focused on building infrastructure and expanding distribution. Good balance sheet growth, new products, a developing Islamic banking presence and better fee income coupled with productivity improvements all contributed to a strong performance for Consumer Banking. Loan impairment charges rose from $14 million to $37 million primarily due to attributing portfolio provision movements under IFRS. In the eight and a half months since acquisition, the Consumer Banking division of SCFB earned $137 million of operating profit on income of $671 million. With the expansion of the product range since acquisition there has been good volume growth, particularly in wealth management with a significant growth in deposits. The cards and loans portfolios and mortgage portfolio have also enjoyed robust asset growth although moderate mortgage margin contraction has continued during the second half of the year. Expenses were higher in the second half, as anticipated, reflecting integration costs, re-branding and investment in product capabilities. Other APR had income growth of 55 per cent driven by strong balance sheet growth in all product segments and continued investment in expanding sales forces, new branches and new products. Bank Permata in Indonesia accounted for $69 million of income and $9 million of profit before tax. China enjoyed very strong organic growth in all major products delivering a threefold increase in income. Thailand continues to perform very well with increasingly diversified income and balance sheet growth. Impairment provisions increased by $100 million, of which $72 million was in Taiwan. India's very strong income growth in wealth management and SME was offset in part by lower growth in mortgages and a small decline in unsecured lending due to eroding margins resulting in an overall income growth of 10 per cent. The Consumer Business has continued to diversify its income streams with double-digit balance sheet growth in all business lines except credit cards. Continued investment spending underpinned a 17 per cent overall increase in expenses directed towards opening five new branches, the launch of six consumer finance business centres, new investment and insurance products and a continued strengthening of the risk and control infrastructure. Whilst there are near term challenges in profitability, Consumer Banking remains focused on building a substantial franchise in this fast growing and highly competitive market. Operating profit in the Middle East and Other South Asia (MESA) increased by 23 per cent to $163 million with income up by 28 per cent to $378 million. This continued strong year on year momentum was led by wealth management, credit cards and SME. Investment in sustaining this growth trajectory resulted in a 26 per cent increase in expenses, with a focus on strengthening distribution, product and people capabilities. The global Consumer Banking business model is now embedded in these rapidly growing markets. CONSUMER BANKING continued In the United Arab Emirates (UAE), Consumer Banking grew income 27 per cent to $158 million driven by wealth management, SME and credit cards. As new products continue to be launched, volume growth on both sides of the balance sheet remains robust. In Africa, operating profit more than doubled as a result of broad based income growth of 18 per cent and expense growth contained to just five per cent, benefiting from productivity gains and prior year investments. Asset growth of 26 per cent reflected an increasing market demand for borrowing. The Americas, UK and Group Head Office saw a decrease in operating profit from $19 million to $9 million largely driven by lower income as a result of the reconfiguration of the Jersey business. The following tables provide an analysis of operating profit by geographic segment for Consumer Banking: 2005 Asia Pacific Korea Other $m Asia Hong Pacific Kong $m $m Singapore Malaysia $m $m Income 989 322 209 695 611 Expenses (415) (126) (95) (505) (342) Loan impairment (34) (30) (37) (56) (166) Other impairment - - - - - Operating profit 540 166 77 134 103 2005 *Middle Americas UK & Consumer Banking East & Group Total India Other Head $m $m S Asia Office $m Africa $m $m Income 285 378 257 61 3,807 Expenses (179) (182) (205) (52) (2,101) Loan impairment (56) (33) (13) - (425) Other impairment - - (3) - (3) Operating profit 50 163 36 9 1,278 2004 Asia Pacific Korea Other Asia Hong $m Pacific Kong $m $m Singapore Malaysia $m $m Income 954 330 175 7 393 Expenses (416) (117) (86) (12) (225) Specific (88) (40) (18) - (69) General 11 6 4 - 3 Loan impairment (77) (34) (14) - (66) Operating profit 461 179 75 (5) 102 2004 *Middle Americas UK & Consumer East & Group Banking Other Head Total S Asia Office $m India $m Africa $m $m $m Income 258 296 218 69 2,700 Expenses (153) (144) (196) (51) (1,400) Specific (29) (21) (6) - (271) General 2 2 - 1 29 Loan impairment (27) (19) (6) 1 (242) Operating profit 78 133 16 19 1,058 * Middle East and Other S Asia includes UAE income of $158 million (2004: $124 million), expenses of $67 million (2004: $51 million), loan impairment of $21 million (2004: $9 million) and operating profit of $70 million (2004: $64 million). An analysis of Consumer Banking income by product is set out below: 2005 2004 Income by product Total SCFB Underlying $m $m $m $m Cards and Loans 1,526 248 1,278 1,117 Wealth Management and Deposits 1,442 212 1,230 891 Mortgages and Auto Finance 764 207 557 638 Other 75 4 71 54 3,807 671 3,136 2,700 CONSUMER BANKING continued Including SCFB, cards and loans have delivered a solid 37 per cent increase in income to $1,526 million. Underlying income and assets have increased 14 per cent and 17 per cent respectively in a highly competitive market environment with lower net interest margins broadly offset by higher fee income. Cards and loans enjoyed strong growth in Malaysia, Other APR, MESA and Africa. In Hong Kong three per cent growth year on year was achieved, reversing the previous declining trend in balances. Growth accelerated in the second half as successful new campaigns were rolled out for the Manhattan brand, cashback and balance building, leveraging the new positive file credit bureau. In wealth management, underlying double-digit deposit growth and improved margins have been the primary drivers of a 62 per cent growth in income to $1,442 million. The primary contributors being Singapore, India, Other APR and MESA. Product innovation, expanded distribution and effective sales and marketing campaigns have boosted both core deposit volumes and fee based investment product sales. Total mortgage and auto finance income is up 20 per cent at $764 million. Underlying income is lower by 13 per cent reflecting significant mortgage margin compression in Hong Kong, Singapore and India. Proactive re-pricing strategies have helped to offset some of this margin compression together with very good volume growth in Other APR. WHOLESALE BANKING In 2005 Wholesale Banking continued to execute its highly successful client-led strategy, driving sustained income momentum in all key client segments and across multiple products and geographies. Including SCFB, operating profit was up 22 per cent to $1,439 million. Underlying profit growth increased 15 per cent to $1,349 million. Total income growth was 19 per cent to $3,054 million. Underlying income growth of 11 per cent to $2,866 million was achieved through client revenue growth of 19 per cent, driven by balanced growth across local corporates and large local corporates, multinationals and financial institutions. Global markets products together with cash and custody were the principal contributors to the continued strong growth in Wholesale Banking client revenues. Own account ALM and trading revenues were adversely affected by a rising interest rate environment and a flat yield curve. Expenses in Wholesale Banking increased by 20 per cent to $1,710 million. Underlying expense growth was 13 per cent. Investment spend focused on enhancing global market product capabilities and client coverage with an emphasis on corporate finance and capital markets and the high growth markets of India, China and the UAE. Higher transaction volumes plus continued upgrading of the technology and operations infrastructure and preparation for Basel II made up the balance. The net loan impairment release in 2005 was $106 million compared to $28 million in the prior period. New provisions increased by three per cent and recoveries were up by 60 per cent. The following tables provide an analysis of operating profit by geographic segment for Wholesale Banking: 2005 Asia Pacific Korea Other $m Hong Asia Kong Pacific $m Singapore Malaysia $m $m $m Income 523 188 124 259 443 Expenses (234) (120) (55) (127) (268) Loan impairment (83) (13) 7 (5) 117 Other impairment (1) - - - - Operating profit 205 55 76 127 292 2005 *Middle East & Americas Wholesale Banking Other Total S Asia UK & $m $m India Africa Group $m $m Head Office $m Income 305 430 294 488 3,054 Expenses (127) (157) (194) (428) (1,710) Loan impairment 6 42 (30) 65 106 Other impairment 1 - (8) (3) (11) Operating profit 185 315 62 122 1,439 2004 Asia Pacific Korea Other Asia Hong $m Pacific Kong $m $m Singapore Malaysia $m $m Income 416 183 95 63 362 Expenses (226) (111) (58) (29) (252) Specific (54) (2) 11 3 19 General 6 3 1 - 4 Loan impairment (48) 1 12 3 23 Other impairment - - - - - Operating profit 142 73 49 37 133 2004 *Middle East & Americas Wholesale Other Banking S Asia UK & Total $m Group $m India Africa Head $m $m Office $m Income 231 352 366 506 2,574 Expenses (98) (125) (164) (363) (1,426) Specific 3 13 (6) 15 2 General 2 4 - 6 26 Loan impairment 5 17 (6) 21 28 Other impairment 2 - - (3) (1) Operating profit 140 244 196 161 1,175 * Middle East and Other S Asia includes UAE income of $173 million (2004: $147 million), expenses of $66 million (2004: $49 million), loan impairment recovery of $1 million (2004: recovery of $8 million) and operating profit of $108 million (2004: $106 million). WHOLESALE BANKING continued When looking at the performance of Wholesale Banking on a geographic basis it is important to note that it is a network business, with about half of client revenues originated in a different geography than where they are booked. This means the geographic segmentation can give a somewhat imperfect view of the performance of different parts of the business. In Hong Kong, income grew by 26 per cent to $523 million as the increased focus on the local corporates segment yielded good results. Global markets and cash products generated strong growth in volumes supported by improved margins. Expenses grew four per cent to $234 million with most of this increase directed towards building the sales force and product capabilities to deepen income generation from existing client relationships. Income in Singapore was up three per cent to $188 million driven by transaction banking together with global markets sales. Double-digit client income growth was offset by a reduction in trading and ALM income. Singapore continues to increase its franchise value, originating significant revenues for other parts of the network. Expenses grew eight per cent to $120 million reflecting increased front office investments to sustain the strong client revenue momentum. In Malaysia, income increased 31 per cent to $124 million with global markets products now contributing 64 per cent of the total. The business achieved strong growth in the large local corporate sector. Expenses were lower by five per cent at $55 million. The Wholesale Banking business in SCFB earned $90 million of operating profit on income of $188 million. Income and volumes of global markets product sales, together with cash management and custody grew in the second half as the significant investment in more sophisticated products, new skills and infrastructure began to deliver benefits. Other APR continued to deliver strong growth in income and profits from all countries with significant contributions from China, Indonesia and Taiwan. Income increased 22 per cent to $443 million and expenses grew six per cent to $268 million. India's income grew 32 per cent to $305 million with client income growing at an even higher rate offset by lower trading and ALM income. Growth was balanced across all target segments with transactional banking and global markets products leading the way. Expenses grew 30 per cent to $127 million, with continued investment in geographic expansion to sustain the momentum amongst local corporates. Operating profit in the Middle East and Other South Asia grew by 29 per cent to $315 million. Income rose 22 per cent to $430 million and expenses 26 per cent to $157 million. Client revenues enjoyed very strong growth in cash, capital markets and corporate finance products. Within this total the Wholesale Banking business in the the UAE grew income by 18 per cent. In Africa, income at $294 million was 20 per cent lower than in the prior year. A marked deterioration in Zimbabwe was the primary contributor to this result. 2005 saw Zimbabwe suffer from high inflation and very rapid currency depreciation, particularly in the fourth quarter. Elsewhere in Africa, Wholesale Banking saw robust income growth in Nigeria, Ghana and Tanzania, driven by cash management, trade, and corporate finance. The Americas, UK and Group Head Office has seen income decline by four per cent to $488 million mainly as a result of lower income from asset and liability management. Expense growth of 18 per cent reflects the full year impact of the project finance business acquired at the end of 2004, which originates revenues largely booked elsewhere, together with significant investment in compliance and control infrastructure. An analysis of Wholesale Banking income by product is set out below: 2005 2004 Income by product Total SCFB Underlying $m $m $m $m Trade and Lending 879 69 810 868 Global Markets 1,434 75 1,359 1,217 Cash Management and Custody 741 44 697 489 3,054 188 2,866 2,574 Trade and lending income increased one per cent overall to $879 million and decreased by seven per cent on an underlying basis due to lower lending income. Trade finance income grew three per cent reflecting the increased competitiveness in pricing and a shift to integrated supply chain financing to support strong intra-Asian trade flows. Global markets income grew strongly at 18 per cent overall to $1,434 million and 12 per cent on an underlying basis. The enhanced product set, including FX options, fixed income and project and export finance, has made a significant contribution to this growth. Income from ALM has fallen due to the flat yield curves and rising interest rates prevalent in most markets, particularly in the second half. Cash management and custody income was up by 52 per cent at $741 million. Underlying growth was also very strong at 43 per cent driven by volume and margin growth. ACQUISITION OF SC FIRST BANK (formerly Korea First Bank) On 15 April 2005 the Group acquired 100 per cent of SCFB. The post-acquisition profit has been included in the Group results within the Korea geographic segment. The following tables provides an analysis of SCFB's post acquisition results by business segment: Consumer Banking 2005 2004 Total SCFB Underlying $m $m $m $m Income 3,807 671 3,136 2,700 Expenses (2,101) (486) (1,615) (1,400) Loan impairment (425) (48) (377) (242) Other impairment (3) - (3) - Operating profit 1,278 137 1,141 1,058 SCFB Consumer Banking income was broadly based with margin, volume and fee income growth in wealth management and SME banking. Mortgage and unsecured lending volumes have continued to grow but margin compression impacted income growth. Wholesale Banking 2005 2004 Total SCFB Underlying $m $m $m $m Income 3,054 188 2,866 2,574 Expenses (1,710) (93) (1,617) (1,426) Loan impairment 106 (5) 111 28 Other impairment (11) - (11) (1) Operating profit 1,439 90 1,349 1,175 SCFB Wholesale Banking income is being generated by a broader product set and client base. New global markets products and cash management are now driving growth while balance sheet reshaping continues in lending. Korea segment - Total 2005 2004 Total SCFB Underlying $m $m $m $m Income 954 859 95 70 Expenses (632) (579) (53) (41) Loan impairment (61) (53) (8) 3 Operating profit 261 227 34 32 Operating profit from SCFB for the eight and a half months since taking control on 15 April 2005 was $227 million. Operating income for the period was $859 million, expenses were $579 million and loan impairment was $53 million. RISK Through its risk management structure the Group seeks to manage efficiently the core risks: credit, market, country and liquidity risk. These arise directly through the Group's commercial activities whilst compliance and regulatory risk, operational risk and reputational risks are normal consequences of any business undertaking. The basic principles of risk management followed by the Group include: â€¢ 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. Acting with authority delegated by the Board, the Audit and Risk Committee (ARC), whose members are all Non-Executive Directors of the Company, reviews specific risk areas and monitors the activities of the Group Risk Committee (GRC) and the Group Asset and Liability Committee (GALCO). GRC, through authority delegated by the Board, is responsible for credit risk, market risk, operational risk, compliance and regulatory risk, legal risk and reputational risk. GALCO, through authority delegated by the Board, is responsible for liquidity risk, for structural interest rate and foreign exchange exposures and for capital ratios. All the Group Executive Directors (GEDs) of Standard Chartered PLC, members of the Standard Chartered Bank Court and the Group Head of Risk and Group Special Asset Management (Group Head of Risk) are members of the GRC. This Committee is chaired by the Group Head of Risk and Group Special Assets Management (GSAM). The GRC is responsible for agreeing Group standards for risk measurement and management, and also delegating authorities and responsibilities to risk committees and the Group and Regional Credit Committees and Risk Officers. The committee process ensures that standards and policy are cascaded down through the organisation from the Board through the GRC and the GALCO to the functional, regional and country level committees. Key information is communicated through the country, regional and functional committees to Group so as to provide assurance that standards and policies are being followed. The Group Finance Director and the Group Head of Risk manage 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; â€¢ validates risk models; and â€¢ recommends risk appetite and strategy. Individual GEDs are accountable for risk management in their businesses and support functions and for countries where they have governance responsibilities. This includes: â€¢ implementing the policies and standards as agreed by the GRC across all business activity; â€¢ managing risk in line with appetite levels agreed by the GRC; and â€¢ developing and maintaining appropriate risk management infrastructure and systems to facilitate compliance with risk policy. The Group's Risk Management Framework identifies 18 risk types which are managed by designated Risk Type Owners (RTOs) who are all approved persons under the FSA regulatory framework and have responsibility for setting minimum standards and governance and assurance processes. The RTOs report up through specialist risk committees to the GRC, or in the case of Liquidity Risk, to the GALCO. The Group Finance Director and the Group Head of 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 Management 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 in the banking and trading books. Clear responsibility for credit risk is delegated from the Board through to the GRC. Standards are approved by the GRC which also delegates credit authorities through the Group Finance Director to the Group Head of Risk, the Group and Regional Credit Committees and 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 Group Head of Risk. The businesses working with the Risk Officer, take responsibility for managing pricing for risk, portfolio diversification and overall asset quality within the requirements of Group standards, policies and business strategy. RISK continued Wholesale Banking Within the Wholesale Banking business, a numerical grading system is used for quantifying the risk associated with a counterparty. The grading is based on a probability of default measure with customers analysed against a range of quantitative and qualitative measures. There is a clear segregation of duties with loan applications being prepared separately from the approval chain. Significant exposures are reviewed and approved centrally through a Group or Regional level Credit Committee. These Committees receive their authority and delegated responsibilities from the GRC. Consumer Banking 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 55 per cent during the year to $112.2 billion. Of this increase, SCFB accounts for $31.2 billion (28 per cent). The Wholesale Banking portfolio is well diversified across both geography and industry, with no significant concentration to sub-industry classification levels under manufacturing, financing, insurance and business services, commerce or transport, storage and communication. 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Loans to individuals Mortgages 12,051 4,129 2,532 22,522 996 Other 2,154 1,043 663 3,954 3,145 Small and medium enterprises 791 1,673 794 4,727 989 Consumer Banking 14,996 6,845 3,989 31,203 5,130 Agriculture, forestry 24 - 44 9 110 and fishing Construction 91 48 11 90 64 Commerce 2,004 958 325 237 598 Electricity, gas and water 290 1 65 17 284 Financing, insurance and 1,425 925 589 1,135 1,065 business services Loans to governments - 2,323 1,976 66 101 Mining and quarrying 24 11 8 19 140 Manufacturing 1,223 302 344 1,702 2,955 Commercial real estate 1,194 834 3 797 555 Transport, storage 320 235 240 80 304 and communication Other 50 85 49 750 11 Wholesale Banking 6,645 5,722 3,654 4,902 6,187 Portfolio impairment provision (57) (26) (30) (68) (107) Total loans and advances 21,584 12,541 7,613 36,037 11,210 to customers Total loans and advances 5,688 2,431 173 3,222 2,213 to banks 2005 India *Middle Africa Americas Total $m East & $m UK & Group $m Other Head S Asia Office $m $m Loans to individuals Mortgages 1,469 132 88 152 44,071 Other 947 2,001 525 158 14,590 Small and medium enterprises 332 78 107 - 9,491 Consumer Banking 2,748 2,211 720 310 68,152 Agriculture, forestry 17 25 183 234 646 and fishing Construction 139 223 41 6 713 Commerce 392 1,324 420 819 7,077 Electricity, gas and water 49 180 12 664 1,562 Financing, insurance and 502 1,235 168 1,842 8,886 business services Loans to governments - 70 7 331 4,874 Mining and quarrying 10 185 75 656 1,128 Manufacturing 1,019 1,210 402 2,186 11,343 Commercial real estate 61 5 13 18 3,480 Transport, storage 108 452 174 1,477 3,390 and communication Other 5 257 46 40 1,293 Wholesale Banking 2,302 5,166 1,541 8,273 44,392 Portfolio impairment provision (33) (29) (10) (7) (367) Total loans and advances 5,017 7,348 2,251 8,576 112,177 to customers Total loans and advances 238 1,255 313 7,426 22,959 to banks * Middle East and Other S Asia includes the following amounts relating to the UAE: Consumer Banking, $915 million (2004, $832 million) Wholesale Banking $2,448 (2004, $2,300 million), total loans and advances to customers, $3,363 million (2004, $3,132 million), and total loans and advances to banks, $391 million (2004: $237 million). RISK continued 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Loans to individuals Mortgages 12,189 5,064 2,422 - 737 Other 2,097 651 488 194 2,909 Small and medium enterprises 731 1,622 578 - 200 Consumer Banking 15,017 7,337 3,488 194 3,846 Agriculture, forestry and fishing - 26 55 - 56 Construction 154 27 6 - 34 Commerce 1,560 804 136 31 864 Electricity, gas and water 387 40 71 78 193 Financing, insurance and 1,914 1,608 554 41 721 business services Loans to governments - 306 1,551 - - Mining and quarrying - 65 63 - 122 Manufacturing 1,343 423 269 316 2,196 Commercial real estate 984 721 2 - 388 Transport, storage and 366 280 128 134 187 communication Other 19 128 51 - 354 Wholesale Banking 6,727 4,428 2,886 600 5,115 General Provision Total loans and advances 21,744 11,765 6,374 794 8,961 to customers Total loans and advances 2,852 2,072 349 1,646 1,705 to banks 2004 India #*Middle Africa Americas #Total $m East & $m UK & Group $m Other Head S Asia Office $m $m Loans to individuals Mortgages 1,194 87 63 262 22,018 Other 1,201 1,928 431 102 10,001 Small and medium enterprises 230 42 76 - 3,479 Consumer Banking 2,625 2,057 570 364 35,498 Agriculture, forestry and fishing 15 19 171 314 656 Construction 105 239 46 4 615 Commerce 262 1,202 353 1,113 6,325 Electricity, gas and water 104 119 102 300 1,394 Financing, insurance and 497 1,362 47 2,268 9,012 business services Loans to governments - 16 7 225 2,105 Mining and quarrying 1 149 95 1,032 1,527 Manufacturing 814 1,267 404 2,294 9,326 Commercial real estate - - 29 2 2,126 Transport, storage and 226 299 165 1,177 2,962 communication Other 43 243 24 86 948 Wholesale Banking 2,067 4,915 1,443 8,815 36,996 General Provision (335) (335) Total loans and advances 4,692 6,972 2,013 8,844 72,159 to customers Total loans and advances 171 892 374 7,321 17,382 to banks * Middle East and Other S Asia includes the following amounts relating to the UAE: Consumer Banking $915 million (2004: $832 million) Wholesale Banking $2,448 (2004: $2,300 million), total loans and advances to customers, $3,363 million (2004: $3,132 million), and total loans and advances to banks, $391 million (2004: $237 million). # A reclassification of $997 million from Other to Small and medium enterprises that was made at 30 June 2005 (31 December 2004: $951 million) has been reversed. Maturity analysis Approximately 47 per cent of the Group's loans and advances are short term having a contractual maturity of one year or less. The Wholesale Banking portfolio is predominately short term, with 75 per cent of loans and advances having a contractual maturity of one year or less. In Consumer Banking, 65 per cent of the portfolio is in the mortgage book, traditionally longer term in nature. Whilst the Other and SME loans in Consumer Banking have short contractual maturities, in the normal course of business they may be renewed and repaid over longer terms 2005 2004 One year One to Over five Total One year One to Over five Total or less five years $m or less five years $m $m years $m $m years $m $m $m Consumer Banking Mortgages 4,756 9,598 29,717 44,071 1,877 4,156 15,985 22,018 Other 8,352 4,666 1,572 14,590 5,718 3,880 403 10,001 SME 5,883 1,687 1,921 9,491 989 440 2,050 3,479 Total 18,991 15,951 33,210 68,152 8,584 8,476 18,438 35,498 Wholesale Banking 33,450 7,246 3,696 44,392 27,670 5,227 4,099 36,996 Portfolio impairment provision (367) (335) Loans and advances to customers 52,441 23,197 36,906 112,177 36,254 13,703 22,537 72,159 RISK continued Problem Credit Management and Provisioning Consumer Banking An account is considered to be in default when payment is not received on the due date. Accounts that are overdue by more than 30 days (60 days for mortgages) are considered delinquent. These accounts are closely monitored and subject to a special collections process. Accounts that are overdue by more than 90 days are considered non-performing. The process used for raising provisions is dependant on the product. For mortgages, individual provisions are generally raised at 150 days past due and for other secured products at 90 days past due based on the difference between the outstanding amount of the loan and the present value of the estimated future cash flows. For unsecured products individual provisions are raised, and loans are charged off at 150 days past due. A portfolio impairment provision is held to cover the inherent risk of losses, which, although not identified, are known by experience to be present in the loan portfolio including performing loans and loans overdue. The provision is set with reference to past experience using flow rate methodology as well as taking account of judgemental factors such as the economic and business environment in our core markets, and the trends in a range of portfolio indicators. The 2005 coverage ratio includes the Consumer Banking portfolio provisions upon adoption of IAS 39, whereas 2004 comparatives exclude the UK GAAP general provision. 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Loans and advances 81 117 171 856 101 Gross non-performing Individual impairment provision (22) (31) (63) (310) (61) Non-performing loans net of 59 86 108 546 40 individual impairment provision Portfolio impairment provision Net non-performing loans and advances Cover ratio 2005 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $m Loans and advances 53 22 17 29 1,447 Gross non-performing Individual impairment provision (13) (16) (9) (3) (528) Non-performing loans net of 40 6 8 26 919 individual impairment provision Portfolio impairment provision (278) Net non-performing loans 641 and advances Cover ratio 56% 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Loans and advances 72 146 181 - 94 Gross non-performing Impairment provision (32) (24) (28) - (47) Interest in suspense (1) (4) (24) - (7) Net non-performing 39 118 129 - 40 loans and advances Cover ratio 2004 India Middle Africa Americas Total $m East & $m UK & Group $m Other Head S Asia Office $m $m Loans and advances 42 42 24 46 647 Gross non-performing Impairment provision (12) (22) (9) (5) (179) Interest in suspense (8) (15) (8) (7) (74) Net non-performing 22 5 7 34 394 loans and advances Cover ratio 39% * Middle East and other S Asia includes net non performing loans and advances net of individual impairment provision relating to the UAE of $nil (2004: $1 million). RISK continued Wholesale Banking In Wholesale Banking, accounts or portfolios are placed on Early Alert when they display signs of weakness. Such accounts and portfolios are subject to a dedicated process with oversight involving senior Risk Officers and GSAM. Account plans are re-evaluated and remedial actions are agreed and monitored until complete. Remedial actions include, but are not limited to, exposure reduction, security enhancement, exit of the account or immediate movement of the account into the control of GSAM, the specialist recovery unit. Loans are designated as impaired and considered non-performing as soon as payment of interest or principal is 90 days or more overdue or where recognised weakness implies that full payment of either interest or principal becomes questionable. Impaired accounts are managed by GSAM, which is independent of the main businesses of the Group. Where the principal, or a portion thereof, is considered uncollectible, an individual impairment provision is raised being the difference between the loan carrying amount and the present value of estimated future cash flows. In any decision relating to the raising of provisions, the Group attempts to balance economic conditions, local knowledge and experience and the results of independent asset reviews. Where it is considered that there is no realistic prospect of recovering an element of an account against which an impairment provision has been raised, then that amount will be written off. A portfolio impairment provision is held to cover the inherent risk of losses, which, although not identified, are known by experience to be present in any loan portfolio. The provision is not held to cover losses arising from future events. In Wholesale Banking, the portfolio impairment provision is set with reference to past experience using expected loss and judgemental factors such as the economic environment and the trends in key portfolio indicators. The following tables set out the total non-performing portfolio in Wholesale Banking: 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Loans and advances 355 125 36 156 133 Gross non-performing Individual Impairment provision (257) (109) (33) (51) (118) Non-performing loans and 98 16 3 105 15 advances net of individual impairment provision Portfolio impairment provision Net non-performing loans and advances 2005 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $m Loans and advances 83 60 89 210 1,247 Gross non-performing Individual Impairment provision (27) (48) (51) (164) (858) Non-performing loans and 56 12 38 46 389 advances net of individual impairment provision Portfolio impairment provision (90) Net non-performing loans and advances 299 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Loans and advances 409 185 117 1 557 Gross non-performing Impairment provision (257) (89) (68) (1) (255) Interest in suspense (92) (56) (35) - (54) Net non-performing loans and advances 2004 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $m Loans and advances 68 175 104 674 2,290 Gross non-performing Impairment provision (29) (100) (46) (435) (1,280) Interest in suspense (26) (68) (42) (127) (500) Net non-performing loans 510 and advances * Middle East and other S Asia includes net non performing loans and advances net of individual impairment provision relating to the UAE of $nil (2004: $5 million). RISK continued Wholesale Banking Cover Ratio At 76 per cent, the Wholesale Banking non-performing portfolio is well covered. The balance uncovered by impairment provision represents the value of collateral held and/or the Group's estimate of the net value of any work-out strategy. The cover ratio as at December 2004 shown below was calculated on a UK GAAP basis which included interest in suspense as part of the cover. The non-performing loans recorded below under Standard Chartered Nakornthon Bank (SCNB) are excluded from the cover ratio calculation as they were the subject of a Loan Management Agreement (LMA) with a Thai Government Agency. Claims under the LMA were settled in the first half of 2005 and accordingly the balances reported under SCNB have reduced to nil in the 2005 table below. 2005 Total SCNB Total excl $m (LMA) LMA $m $m Loans and advances - Gross non-performing 1,247 - 1,247 Impairment provision (948) - (948) Net non-performing loans and advances 299 - 299 Cover ratio 76% 2004 Total SCNB Total excl $m (LMA) LMA $m $m Loans and advances - Gross non-performing 2,290 351 1,939 Impairment provision (1,280) (115) (1,165) Interest in suspense (500) - (500) Net non-performing loans and advances 510 236 274 Cover ratio 86% Movement in Group Individual Impairment Provision The following tables set out the movements in the Group's total individual impairment provisions against loans and advances: 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Provisions held at 1 January 2005 289 113 96 1 302 Adjusted for adoption of IAS 39 5 6 31 - 17 Restated provision held at 294 119 127 1 319 1 January 2005 Exchange translation differences (7) (2) 1 4 (8) Amounts written off (156) (30) (58) (21) (204) Recoveries of amounts previously 49 6 11 5 36 written off Acquisitions - - - 352 - Discount unwind (3) (3) (4) (28) (2) Other 1 - - - 19 New provisions 165 92 62 57 153 Recoveries/provisions (64) (42) (43) (9) (134) no longer required Net charge against/(credit) to profit 101 50 19 48 19 Provisions held at 279 140 96 361 179 31 December 2005 2005 India Africa Americas Total $m *Middle $ m $m East & UK & Other S Asia Group $m Head Office $m Provisions held at 1 January 2005 41 122 55 440 1,459 Adjusted for adoption of IAS 39 2 3 9 17 90 Restated provision held at 43 125 64 457 1,549 1 January 2005 Exchange translation differences (1) 5 (4) (13) (25) Amounts written off (66) (70) (43) (223) (871) Recoveries of amounts previously 21 14 4 7 153 written off Acquisitions - - - - 352 Discount unwind (1) - (2) (5) (48) Other (1) 1 (2) 3 21 New provisions 105 48 60 12 754 Recoveries/provisions (60) (59) (17) (71) (499) no longer required Net charge against/(credit) to profit 45 (11) 43 (59) 255 Provisions held at 40 64 60 167 1,386 31 December 2005 * Middle East and Other S Asia provisions at 31 December 2005 includes $26 million (2004: $42 million) relating to the UAE. RISK continued 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $m Provisions held at 1 January 2004 268 123 144 - 390 Exchange translation differences - 3 - - 2 Acquisitions - - - - 36 Amounts written off (154) (62) (63) - (142) Recoveries of amounts 29 7 10 - 12 previously written off Other 4 - (2) - (42) New provision 207 60 36 1 94 Recoveries/provisions (65) (18) (29) - (48) no longer required Net charge against/(credit) to profit 142 42 7 1 46 Provisions held at 289 113 96 1 302 31 December 2004 2004 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $m Provisions held at 1 January 2004 55 158 58 465 1,661 Exchange translation differences 2 (4) 2 8 13 Acquisitions - - - - 36 Amounts written off (65) (42) (21) (58) (607) Recoveries of amounts 24 7 4 2 95 previously written off Other (1) (5) - 38 (8) New provision 106 43 27 35 609 Recoveries/provisions (80) (35) (15) (50) (340) no longer required Net charge against/(credit) to profit 26 8 12 (15) 269 Provisions held at 41 122 55 440 1,459 31 December 2004 Country Risk Country Risk is the risk that a counterparty is unable to meet its contractual obligations as a result of adverse economic conditions or actions taken by governments in the relevant country. The GRC approves country risk and delegates the setting and management of country limits to the Group Head, Credit and Country Risk. The business and country Chief Executive Officers manage exposures within these limits and policies. Countries designated as higher risk are subject to increased central monitoring. Cross border assets comprise loans and advances, interest bearing deposits with other banks, trade and other bills, acceptances, amounts receivable under finance leases, certificates of deposit and other negotiable paper and investment securities where the counterparty is resident in a country other than that where the cross border assets are recorded. Cross border assets also include exposures to local residents denominated in currencies other than the local currency. 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. 2005 2004 Public Public sector sector $m Banks Other Total $m Banks Other Total $m $m $m $m $m $m USA 1,227 555 2,505 4,287 824 745 2,660 4,229 Korea 13 1,476 2,006 3,495 47 1,258 698 2,003 Hong Kong 1 311 2,776 3,088 4 199 2,719 2,922 France 159 2,550 155 2,864 149 1,243 183 1,575 China 63 982 1,405 2,450 101 686 902 1,689 India 1 949 1,456 2,406 74 1,132 867 2,073 Singapore - 326 1,945 2,271 - 325 1,939 2,264 Netherlands - - - - - 2,639 406 3,045 RISK continued Market Risk The Group recognises market risk as the exposure created by potential changes in market prices and rates. The Group is exposed to market risk arising principally from customer driven transactions. Market Risk is governed by the GRC, which agrees policies and levels of risk appetite in terms of Value at Risk (VaR). The Group Market Risk Committee (GMR) provides market risk oversight and guidance on policy setting. Policies cover the trading book of the Group and also market risks within the banking book. Trading and Banking books are defined as per the Financial Services Authority (FSA) Handbook IPRU (Bank). Limits by location and portfolio are proposed by the businesses within the terms of agreed policy. GMR approves the limits within delegated authorities and monitors exposures against these limits. GMR complements the VaR measurement by regularly stress testing market risk exposures to highlight potential risk that may arise from extreme market events that are rare but plausible. 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 instruments and currency concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. Option risks are controlled through revaluation limits on currency and volatility shifts, limits on volatility risk by currency pair and other 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 banking books combined at 31 December 2005 was $10.8 million (31 December 2004: $15.4 million). Interest rate related VaR was $10.3 million (31 December 2004: $15.6 million) and foreign exchange related VaR was $1.1 million (31 December 2004: $3.0 million). The average total VaR for trading and banking books during the year to 31 December 2005 was $12.4 million (31 December 2004: $15.8 million) with a maximum exposure of $20.6 million. VaR for interest rate risk in the banking books of the Group totalled $9.2 million at 31 December 2005 (31 December 2004: $16.7 million). The Group has no significant trading exposure to equity or commodity price risk. The average daily income earned from market risk related activities was $4.1 million, compared with $3.8 million during 2004. SHAPE /* MERGEFORMAT Foreign Exchange Exposure The Group's foreign exchange exposures comprise trading and banking foreign currency translation exposures and structural currency exposures in net investments in non US dollar units. Foreign exchange trading exposures are principally derived from customer driven transactions. The average daily income from foreign exchange trading businesses during 2005 was $2.0 million (2004: $1.6 million). Interest Rate Exposure The Group's interest rate exposures comprise trading exposures and non-trading interest rate exposures. Structural interest rate risk arises from the differing re-pricing characteristics of commercial banking assets and liabilities. The average daily income from interest rate trading businesses during 2005 was $2.1million (2004: $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, credit and interest rate markets. Derivatives are an important risk management tool for banks and their customers because they can be used to manage the risk of price, interest rate and exchange rate movements. The Group's derivative transactions are principally in instruments where the mark-to-market values are readily determinable by reference to independent prices and valuation quotes or by using standard industry pricing models. The Group enters into derivative contracts in the normal course of business to meet customer requirements and to manage its own exposure to fluctuations in interest, credit and exchange rates. Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Recognition of fair value gains and losses depends on whether the derivatives are classified as trading or for hedging purposes. The Group applies a future exposure methodology to manage counterparty credit exposure associated with derivative transactions. RISK continued Hedging In accounting terms, hedges are classified into three typical types: fair value hedges, where fixed rates of interest or foreign exchange are exchanged for floating rates; cash flow hedges, where variable rates of interest or foreign exchange are exchanged for fixed rates, and hedges of net investments in overseas operations translated to the parent company's functional currency, US dollars. The Group uses futures, forwards, swaps and options transactions in the foreign exchange and interest rate markets to hedge risk. The Group occasionally hedges the value of its foreign currency denominated investments in subsidiaries and branches. Hedges may be taken where there is a risk of a significant exchange rate movement but, in general, management believes that the Group's reserves are sufficient to absorb any foreseeable adverse currency depreciation. The effect of exchange rate movements on the capital risk asset ratio is mitigated by the fact that both the net asset value of these investments and the risk weighted value of assets and contingent liabilities follow substantially the same exchange rate movements. Liquidity Risk The Group defines liquidity risk as the risk that the bank either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can access them only at excessive cost. It is the policy of the Group to maintain adequate liquidity at all times, in all geographical locations and for all currencies. Hence the Group 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 GALCO, which is chaired by the Group Finance Director and with authority derived from the Board. GALCO is responsible for both statutory and prudential liquidity. These responsibilities are managed through the provision of authorities, policies and procedures that are co-ordinated by the Liquidity Management Committee (LMC) with 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 and Group policy and maintaining a Country Liquidity Crisis Contingency Plan. A substantial portion of the Group's assets are funded by customer deposits made up of current and savings accounts and other deposits. These customer deposits, which are widely diversified by type and maturity, represent a stable source of funds. Lending is normally funded by liabilities in the same currency. The Group also maintains significant levels of marketable securities either for compliance with local statutory requirements or as prudential investments of surplus funds. The GALCO also oversees the structural foreign exchange and interest rate exposures that arise within the Group. These responsibilities are managed through the provision of authorities, policies and procedures that are co-ordinated by the Capital Management Committee. Policies and guidelines for the maintenance of capital ratio levels are approved by GALCO. Compliance with Group ratios are monitored centrally by Group Corporate Treasury while local requirements are monitored by the local ALCO. 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. 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. RISK continued Reputational Risk Reputational Risk is the risk of failing to meet the standards of performance or behaviour required or expected by stakeholders in commercial activities or the way in which business is conducted. Reputational Risks arise as a result of poor management of problems occurring in one or more of the primary banking risk areas (Credit, Market, Operational risk areas) and/or from Social, Ethical or Environmental Risk issues. All members of staff have a responsibility for maintaining the Group's reputation. The Group manages reputational risk through the Group Reputational Risk Committee, which reports to the GRC, and through Country Management Committees. Wholesale Banking has a specialised Reputational Risk Committee which reviews individual transactions. In Consumer Banking, potential reputational risks resulting from transactions or products are reviewed by the Product and Reputational Risk Committee. Independent Monitoring Group Internal Audit is an independent Group function that reports to the Group Chief Executive and the ARC. Group Internal Audit provides independent confirmation that Group and business standards, policies and procedures are being complied with. Where necessary, corrective action is recommended. CAPITAL The Group Asset and Liability Committee targets Tier 1 and Total capital ratios of 7-9 per cent and 12-14 per cent respectively. 2005 *2004 $m $m Tier 1 capital: Called up ordinary share capital and preference shares 5,982 3,818 Eligible reserves 6,151 4,617 Minority interests 115 111 Innovative Tier 1 securities 1,542 1,246 Less: Restriction on innovative Tier 1 securities (83) (68) Goodwill and other intangible assets (4,321) (1,900) Unconsolidated associated companies 186 30 Other regulatory adjustments 153 110 Total Tier 1 capital 9,725 7,964 Tier 2 capital: Eligible revaluation reserves 195 - Portfolio impairment provision (2004, general provision) 368 335 Qualifying subordinated liabilities: Perpetual subordinated debt 3,128 1,961 Other eligible subordinated debt 4,169 3,525 Less: Amortisation of qualifying subordinated liabilities (229) - Restricted innovative Tier 1 securities 83 68 Total Tier 2 capital 7,714 5,889 Investments in other banks (148) (33) Other deductions (173) (34) Total capital base 17,118 13,786 Banking book: Risk weighted assets 99,378 69,438 Risk weighted contingents 16,274 14,847 115,652 84,285 Trading book: Market risks 6,701 4,608 Counterparty/settlement risk 3,571 3,231 Total risk weighted assets and contingents 125,924 92,124 Capital ratios: Tier 1 capital 7.7% 8.6% Total capital 13.6% 15.0% * As previously reported under UK GAAP Consolidated Income Statement For the year ended 31 December 2005 Notes Excluding SCFB 2005 2004 SCFB acquisition $million $million $million $million Interest income 6,938 1,812 8,750 5,312 Interest expense (3,384) (1,031) (4,415) (2,130) Net interest income 3,554 781 4,335 3,182 Fees and commission income 1,724 116 1,840 1,614 Fees and commission expense (258) (87) (345) (282) Net trading income 746 23 769 651 Other operating income 236 26 262 217 2,448 78 2,526 2,200 Operating income 6,002 859 6,861 5,382 Staff costs (1,834) (311) (2,145) (1,559) Premises costs (321) (42) (363) (321) General administrative expenses (861) (159) (1,020) (731) Depreciation and amortisation (216) (67) (283) (238) Operating expenses (3,232) (579) (3,811) (2,849) Operating profit before impairment losses and 2,770 280 taxation 3,050 2,533 Impairment losses on loans and advances and (266) other credit risk provisions (53) (319) (214) Other impairment (50) - (50) (68) Profit before taxation 2,454 227 2,681 2,251 Taxation 3 (657) (53) (710) (630) Profit for the year 1,797 174 1,971 1,621 Profit attributable to: Minority interests 25 43 Parent company's shareholders 1,946 1,578 Profit for the year 1,971 1,621 Basic earnings per ordinary share 5 148.5c 129.6c Diluted earnings per ordinary share 5 146.9c 127.4c Paid and proposed dividends per ordinary share: Cents Cents Interim paid 18.94 17.06 Final proposed* 45.06 40.44 64.00 57.50 $million $million Interim dividend 248 201 Final proposed dividend* 595 524 843 725 * The final dividend will be accounted for in 2006 as explained in note 4. As more fully explained in note 12, financial instrument accounting is determined on different bases in 2005 and 2004 due to the transitional provisions of IAS 32 and 39. Consolidated Balance Sheet As at 31 December 2005 Notes 2005 2004 $million $million Assets Cash and balances at central banks 8,012 3,960 Financial assets held at fair value through profit or loss 10,333 4,744 Derivative financial instruments 9,370 - Loans and advances to banks 21,701 16,687 Loans and advances to customers 111,791 72,019 Investment securities 37,863 33,611 Interests in associates 128 - Goodwill and intangible assets 4,321 2,353 Property, plant and equipment 1,644 555 Deferred tax assets 498 318 Other assets 7,163 11,597 Prepayments and accrued income 2,272 1,280 Total assets 215,096 147,124 Liabilities Deposits by banks 18,834 15,162 Customer accounts 119,931 85,093 Financial liabilities at fair value through profit or loss 6,293 2,392 Derivative financial instruments 9,864 - Debt securities in issue 25,913 11,005 Current tax liabilities 283 295 Other liabilities 8,446 14,789 Accruals and deferred income 2,319 1,321 Provisions for liabilities and charges 55 61 Retirement benefit obligations 476 169 Subordinated liabilities and other borrowed funds 10,349 6,768 Total liabilities 202,763 137,055 Equity Share capital and share premium 5,638 3,802 Reserves and retained earnings 6,244 5,303 Total parent company shareholders' equity 11,882 9,105 Minority interests 451 964 Total equity 12,333 10,069 Total equity and liabilities 215,096 147,124 As more fully explained in note 12, financial instrument accounting is determined on different bases in 2005 and 2004 due to the transitional provisions of IAS 32 and 39. Consolidated Statement of Recognised Income and Expenses For the year ended 31 December 2005 2005 2004 $million $million Notes Exchange differences on translation of foreign operations (90) 96 Actuarial losses on retirement benefits (150) (5) Available for sale investments: Valuation gains taken to equity 7 - Transferred to income on disposal/redemption (107) - Cash flow hedges: Losses taken to equity (65) - Gains transferred to income for the year (20) - Deferred tax on items recognised directly in equity 141 1 Other 1 23 (283) 115 Profit for the year 1,971 1,621 Total recognised income and expenses for the year 1,688 1,736 Effect of change in accounting policy Effect of adopting IAS 32 and 39 on 1 January 2005: Available for sale reserve 73 Cash flow hedge reserve 42 Retained earnings (36) 151 1,839 Attributable to: Parent company shareholders 1,814 1,693 Minority interests 25 43 1,839 1,736 As more fully explained in note 12, financial instrument accounting is determined on different bases in 2005 and 2004 due to the transitional provisions of IAS 32 and 39. Consolidated Cash Flow Statement For the year ended 31 December 2005 2005 2004 $million $million Cash flow from operating activities Profit before taxation 2,681 2,251 Adjustment for items not involving cash flow or shown separately Depreciation and amortisation of premises, plant and equipment 250 238 Gain on disposal of property plant and equipment 1 (4) Gain on disposal of investment securities (107) (164) Amortisation of investments 18 (41) Loan impairment losses 319 214 Other impairment 50 68 Assets written off, net of recoveries (718) (504) Increase in accruals and deferred income 952 80 Increase in prepayments and accrued income (1,248) (164) Net increase/(decrease) in mark to market adjustment 939 (259) Interest paid on subordinated loan capital 274 338 UK and overseas taxes paid (611) (573) Net increase in treasury bills and other eligible bills (686) (78) Net increase in loans and advances to banks and customers (5,730) (11,999) Net increase in deposits from banks, customer accounts/debt securities in issue 18,996 15,004 Net increase in dealing securities (1,494) (2,118) Net (decrease)/increase in other accounts (4,082) 2,730 Net cash from operating activities 9,804 5,019 Net cash flows from investing activities Purchase of property plant and equipment (135) (240) Acquisition of investment in subsidiaries, net of cash acquired (1,093) (333) Acquisition of treasury bills (13,443) (9,188) Acquisition of debt securities (33,655) (75,353) Acquisition of equity shares (658) (121) Disposal of subsidiaries, associated undertakings and branches - 6 Disposal of property plant and equipment 8 51 Disposal and maturity of treasury bills 12,599 10,778 Disposal and maturity of debt securities 35,748 71,482 Disposal of equity shares 351 356 Net cash used in investing activities (278) (2,562) Net cash (outflow)/inflow from financing activities Issue of ordinary share capital 2,000 17 Purchase of own shares, net of exercise, for share option awards 150 (95) Interest paid on subordinated loan capital (274) (338) Gross proceeds from issue of subordinated loan capital 3,874 499 Repayment of subordinated liabilities (1,026) (25) Dividends and payments to minority interests and preference shareholders (173) (75) Dividends paid to ordinary shareholders (685) (587) Net cash from/(used in) financing activities 3,866 (604) Net increase in cash and cash equivalents 13,392 1,853 Cash and cash equivalents at beginning of year 22,112 20,202 Effect of exchange rate changed on cash and cash equivalents (278) 57 Cash and cash equivalents at end of year (note 6) 35,226 22,112 MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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