Interim Results 2009 - Part 2

RNS Number : 8070W

Standard Chartered PLC

04 August 2009

 



Standard Chartered PLC - Financial review

Group summary

The Group has delivered another record profit for the six months ended 30 June 2009. Operating profit rose 10 per cent to $2,838 million, with operating income increasing 14 per cent to $7,960 million. Normalised earnings per share decreased by 9.9 per cent to 95.0 cents, as a result of the impact of the rights issue. Further details of basic and diluted earnings per share are provided in note 10 on page 61.

The Group has achieved strong positive jaws of 11 per cent for the first half of 2009, reflecting excellent income momentum in Wholesale Banking and minimal cost growth across the Group. The normalised cost to income ratio was 49.6 per cent compared to 56.4 per cent in the first half of 2008. 

The Group has continued to focus on the foundations of good banking with particular attention on liquidity and capital. The Group continues to maintain a highly liquid balance sheet, with an advances-to-deposit ratio of 78.4 per cent, at similar levels to 2008 year end. The Group continues to be a significant net lender into the interbank market and has further strengthened its Tier 1 and total capital ratios to 10.5 per cent and 15.8 per cent respectively.

The overall quality of the Group's asset portfolios has remained stable compared to the end of 2008. In a difficult economic environment, some of our markets have experienced higher levels of impairment in the second quarter of the year. There has been no significant impairment of private equity or strategic investments so far in 2009, due in part to improved equity market conditions.

The Group has continued to manage expenses tightly in the face of continued economic uncertainty. Group headcount has fallen on a monthly basis since the third quarter of 2008, and is now at levels last seen 18 months ago, before American Express Bank (AEB) was acquired. The Group has been disciplined in its approval of investment expenditure and discretionary spend, both of which have been at lower levels relative to the first half of 2008.  

Operating income and profit

		6 months  ended 30.06.09	6 months  ended 30.06.08	6 months  ended 31.12.08	H1 2009 v H1 2008	H1 2009 v H2 2008
		$million	$million	$million	Better/(worse) %	Better/(worse) %
Net interest income		3,700	3,710	3,677	-	1
Fees and commission income, net		1,685	1,681	1,260	-	34
Net trading income		1,740	1,151	1,254	51	39
Other operating income		835	445	790	88	6
Non-interest income		4,260	3,277	3,304	30	29
Operating income		7,960	6,987	6,981	14	14
Operating expenses		(4,027)	(3,900)	(3,711)	(3)	(9)
Operating profit before impairment  losses and taxation		3,933	3,087	3,270	27	20
Impairment losses on loans and advances and other credit risk provisions		(1,088)	(465)	(856)	(134)	(27)
Other impairment		(15)	(26)	(443)	42	97
Profit/(loss) from associates		8	(10)	11	180	(27)
Operating profit		2,838	2,586	1,982	10	43

Operating income grew by $973 million, or 14 per cent, to $7,960 million. On a constant currency basis, operating income grew $1,578 million or 25 per cent. Consumer Banking income declined 15 per cent, as a result of margin compression and muted Wealth Management product sales. Wholesale Banking income grew 37 per cent, underpinned by disciplined execution of its strategy, market share gains and increased margins. 

Interest income was flat with overall net interest margins broadly stable. In Consumer Banking, net interest income fell 13 per cent, due to margin compression from the low interest rate environment across most markets. Net interest income in Wholesale Banking increased 17 per cent, from higher asset pricing, which more than offset lower volumes particularly in Trade.  

Non-interest income grew $983 million, or 30 per cent, to $4,260 million. 

Net fees and commissions income was flat to 2008 at $1,685 million. The volatility seen across stock markets and exchanges dampened investor sentiment and reduced demand for Wealth Management offerings such as unit trusts, insurance and structured investment products. Fee income in Wholesale Banking increased due to higher Trade finance commission income, primarily benefiting from higher fee margins which offset the impact of declining volumes.

Net trading income increased $589 million, or 51 per cent. Income growth was driven by a mix of increased customer demand for securities and own account trading, with significant gains in trading securities, interest rate and credit and other derivatives partly offset by a decline in foreign exchange income.

Other operating income increased $390 million, to $835 million. Other operating income benefited from $248 million gains on the buy back of Upper Tier 2 debt. Other operating income also benefited from $18 million of recoveries in respect of assets that had been fair valued at acquisition in Taiwan, Korea and Pakistan, down $29 million, from the first half of 2008. 

  Operating income and profit continued 

Operating expenses were up 3 per cent, to $4,027 million. On a constant currency basis, operating expenses increased $465 million or 13 per cent. Headcount has been reduced through natural attrition and selective redundancy programs. Consumer Banking expenses decreased by $181 million or 9 per cent, from reducing headcount and disciplined discretionary spend. Wholesale Banking expenses increased $308 million, or 16 per cent, driven by higher variable compensation, flow through costs from investments made in prior years and continued headcount growth. 

Operating profit before impairment losses and taxation (also referred to as 'working profit') increased $846 million, or 27 per cent, to $3,933 million. On a constant currency basis, working profit grew 39 per cent. 

The charge for loan impairment more than doubled, to $1,088 million. The challenging credit environment in the second half of 2008, continued into the first half of 2009, with significant provisions booked in Wholesale Banking, particularly in Korea and Middle East and Other South Asia (MESA). Consumer Banking loan impairment increased, mainly in Korea, India and UAE, predominantly in the unsecured portfolios.

Other impairment decreased, driven by relatively lower new impairment and recovery of impairment on disposal of equity investments. 

Operating profit was up $252 million, or 10 per cent, to $2,838 million.

The results of the Group have been materially impacted by local currency depreciation against the US dollar. In three geographic areas, Korea, India and Africa, the effect of currency translation materially distorts the view of underlying business performance. 

In Korea, the Korean won average exchange rate depreciated approximately 37 per cent against the US dollar. On a reported basis, income and expenses fell 19 per cent, and 23 per cent, respectively. However, on a constant currency basis, income and expenses grew 10 per cent, and 5 per cent respectively. In India, the Indian rupee average exchange rate depreciated 21 per cent against the US dollar. On a reported basis, income and expenses fell 7 per cent, and 11 per cent, respectively. However, on a constant currency basis, both income and expenses grew 8 per cent and 7 per cent respectively. In Africa, the basket of currencies across the region depreciated over 20 per cent, against the US dollar. On a reported basis income grew 29 per cent, while expenses fell 2 per cent. However, on a constant currency basis, income and expenses grew 60 per cent, and 19 per cent, respectively.  

Acquisitions

On 30 January 2009, the Group completed the acquisition of Cazenove Asia Limited in Hong Kong.

On 30 June 2009, the Group completed the acquisition of the remaining 75 per cent equity shareholding in First Africa, in South Africa.

The effects of the above acquisitions were not material to the Group's results for the six months ended 30 June 2009.

The amalgamation of AEB is now complete. AEB has performed in line with expectations and at 30 June 2009 remains on track to deliver on the performance targets set out at acquisition. 

On 30 June 2009, the assets of the 'good bank' business of Asia Trust and Investment Corporation (ATIC) in Taiwan were amalgamated into Standard Chartered Bank (Taiwan) Limited. The integration of the business is significantly complete.

Geographical areas

Malaysia, which was previously reported as a separate geographical area, is now reported in 'Other Asia Pacific' reflecting the way the Group reviews the performance of its business.      

  Consumer Banking 

The following tables provide an analysis of operating profit by geographic area for Consumer Banking: 

			6 months ended 30.06.09
			Asia Pacific
			Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle  East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Consumer Banking Total  $million
Operating income			545	302	423	612	213	337	168	85	2,685
Operating expenses			(265)	(140)	(318)	(557)	(115)	(196)	(105)	(84)	(1,780)
Loan impairment			(58)	(19)	(116)	(120)	(77)	(143)	(18)	(12)	(563)
Other impairment			5	-	-	-	3	-	-	(2)	6
Operating profit/(loss)			227	143	(11)	(65)	24	(2)	45	(13)	348

*	Other Asia Pacific (Other APR) includes Malaysia: operating income $121 million; operating expenses $(61) million; loan impairment $(27) million; other impairment $nil million; operating profit $33 million.

			6 months ended 30.06.08
			Asia Pacific
			Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle  East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Consumer Banking Total $million
Operating income			628	298	605	744	249	355	172	126	3,177
Operating expenses			(275)	(134)	(437)	(500)	(157)	(215)	(119)	(124)	(1,961)
Loan impairment			(30)	(2)	(81)	(167)	(43)	(76)	(7)	(6)	(412)
Other impairment			-	-	-	-	-	-	-	(2)	(2)
Operating profit/(loss)			323	162	87	77	49	64	46	(6)	802

*	Other APR includes Malaysia: operating income $133 million; operating expenses $(61) million; loan impairment $(22) million; other impairment $nil million; operating profit $50 million.

			6 months ended 31.12.08
			Asia Pacific
			Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle  East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Consumer Banking Total $million
Operating income			535	320	412	649	235	345	172	107	2,775
Operating expenses			(312)	(155)	(289)	(507)	(160)	(195)	(131)	(133)	(1,882)
Loan impairment			(76)	(18)	(80)	(144)	(46)	(102)	(12)	(47)	(525)
Other impairment			(25)	-	-	(2)	(7)	-	-	(20)	(54)
Operating profit/(loss)			122	147	43	(4)	22	48	29	(93)	314

*	Other APR includes Malaysia: operating income $132 million; operating expenses $(67) million; loan impairment $(26) million; other impairment $nil million; operating profit $39 million.

An analysis of Consumer Banking income by product is set out below:

	6 months ended 30.06.09			6 months ended 30.06.08			6 months ended 31.12.08
Operating income by product			$million			$million			$million
Cards, Personal Loans and Unsecured Lending			954			1,089			1,017
Wealth Management and Deposits			1,100			1,500			1,289
Mortgages and Auto Finance			540			515			413
Other			91			73			56
Total operating income			2,685			3,177			2,775

Operating income for the six months ended 30 June 2009 decreased $492 million, or 15 per cent, to $2,685 million. Net interest income fell $276 million, or 13 per cent, reflecting the combined effect of lower interest rates, strong deposit growth and a shift towards a more secured asset portfolio. The Consumer Banking transformation initiative to build customer centric business models, is progressing well.

With the Group firmly focused on balance sheet strength, Consumer Banking has continued its drive to gather deposits. 

  Consumer Banking continued

Total deposit balances registered good growth of 13 per cent, driven by current and savings accounts (CASA) deposits, which now constitute 49 per cent of total deposits, up from 40 per  cent at the end of 2008. Consumer Banking now creates some $46 billion of surplus liquidity for the Group. However, with falling interest rates globally, the increased volume has not been sufficient to offset compressed liability margins. In addition, demand for investment products within Wealth Management remained weak. Overall, asset growth was modest, but the portfolio has been reshaped with a shift from unsecured to secured loans. Secured loans now form over 80 per cent of the portfolio. Asset margins were generally flat compared to the first half of 2008. Margin gains in secured lending were offset by lower asset volumes in unsecured products, as the Group de-emphasised the sale of unsecured products. 

Non-interest income fell $214 million, or 21 per cent, due to continued weakness in Wealth Management product sales as consumer demand remained low. In recent months, geographies such as Hong Kong and Taiwan have seen increased daily sales volumes of Wealth Management products. However, it is too early to tell whether this improvement will be sustained.

Cards, Personal Loans and Unsecured Lending operating income fell $135 million, or 12 per cent, to $954 million. Actions taken by Consumer Banking to move towards more secured asset portfolios has reduced income from credit cards in Korea, Taiwan and Pakistan. Personal loan balances and income also declined in India and UAE. The overall impact on unsecured product margins was mixed as personal loan margins compressed by over 100 basis points, partly offset by a slight improvement in credit card margins. 

Wealth Management and Deposits operating income fell $400 million, or 27 per cent, to $1,100 million. Strong deposit growth was registered in most markets, on the back of successful savings product campaigns. Deposits grew 29 per cent, 27 per cent and 22 per cent, in the key markets of Hong Kong, Singapore and Korea respectively. However, income declined primarily due to margin compression following falling interbank rates. Demand for investment products remained subdued and has shown no sustained improvement since the end of 2008. 

Mortgages and Auto Finance operating income increased $25 million, or 5 per cent, to $540 million, driven by good volume growth, primarily in Hong Kong, Singapore and Taiwan. Improved net interest margins on account of re-pricing initiatives in Hong Kong, Taiwan and India also contributed to the growth in mortgage income.

Operating expenses decreased $181 million, or 9 per cent, to $1,780 million. Expenses include a $170 million charge for the buy back of structured notes issued by PEM Group in Taiwan. Excluding this, expenses were down 18 per cent. These notes were sold by Hsinchu International Bank (HIB) in Taiwan prior to its acquisition by Standard Chartered. The Group has agreed to repurchase the notes at face value less interest, in aggregate $192 million. Expenses were lower as headcount reduced from selective redundancy programs and staff attrition across the network. In Taiwan, some post retirement benefits were restructured leading to a reduction in obligations of $52 million. Through aggressive cost management, Consumer Banking has generated capacity to invest in additional outlets, product capability and other customer centric initiatives. 

With its focus on liability growth, booking quality assets and maintaining cost discipline, Consumer Banking is well positioned for a market recovery.

Working profit decreased $311 million, or 26 per cent, to $905 million.

Loan impairment increased $151 million, or 37 per cent, to $563 million. The asset books are diverse and now over 80 per cent secured by collateral. The portfolio is dominated by secured products, mainly mortgages, which constitute approximately 60 per cent of the portfolio. Following a sharp correction in property prices since the fourth quarter of 2008, the second quarter of 2009 saw some increase in property prices in Asia. The mortgage portfolio has been broadly stable, though the UAE property market remains an area of concern. In the SME segment, unsecured lending has been de-emphasised with more focus placed on government guarantee schemes for new loans and the secured product range. The unsecured portfolio has experienced increased delinquencies and number of overdue accounts. Unemployment and personal bankruptcies in key markets has also affected the performance of the unsecured portfolio. Loan impairment increased in the second quarter of 2009 relative to the first quarter of the year, due to deterioration in credit conditions in Korea, India and the UAE. Loan impairment remained below levels seen in the last quarter of 2008. 

Operating profit fell $454 million, or 57 per cent, to $348 million.

Geographic performance

Hong Kong

In Hong Kong, income was down $83 million, or 13 per cent, to $545 million. Wealth Management income continued to be adversely impacted by weak consumer sentiment with sluggish demand for unit trusts, structured notes and other investment products. This was party offset by strong growth in premium deposits and securities revenue, up 62 per cent and 79 per cent respectively. However, income from deposits was down due to compressed margins. Market share in new mortgage sales grew to 19 per cent, from 13 per cent in the first half of 2008, and margins improved, pushing up mortgage volumes. Operating expenses reduced by $10 million, or 4 per cent, to $265 million. This was mainly due to lower investments together with continued management of discretionary costs. Loan impairment almost doubled to $58 million, driven primarily by unsecured lending products as personal bankruptcies increased in the first quarter of the year. Robust management action helped reduce the impact in later months. Operating profit was down $96 million, or 30 per cent, to $227 million.

Singapore

In Singapore, income was broadly flat. Wealth Management income fell 5 per cent and was adversely impacted by a sharp fall in the sale of unit trusts and equity linked notes, and liability margin compression. SME income fell 13 per cent as trade flows slowed and margins compressed following the introduction of a government guarantee schemes. Mortgage income increased on the back of good volume growth with market share gains. Operating expenses grew 4 per cent to $140 million, as the business invested in branch optimisation. Loan impairment was up $17 million, over the first half of 2008, mainly from the SME segment. The SME portfolio continues to be de-risked as the proportion of the portfolio that is secured increased. There is strong participation in SME government schemes. Operating profit was down $19 million, or 12 per cent, to $143 million.

  Consumer Banking continued

Korea

In Korea, income was down $182 million, or 30 per cent, to $423 million. On a constant currency basis income declined 5 per cent, driven by lower Wealth Management income, resulting from a sharp fall in the sale of investment services products. Strong deposit growth of over 22 per cent, 52 per cent on a constant currency basis, was driven by the successful campaign of the Do-Dream savings account. Mortgage volumes increased by 17 per cent in local currency, while margins remained broadly flat. SME income was impacted by actions taken to reduce risk in the portfolio by increasing the proportion of secured loans. Income benefited from recoveries of $2 million on assets that had been fair valued at acquisition, down $10 million from 2008. Operating expenses were down $119 million, or 27 per cent, to $318 million. On a constant currency basis expenses were flat. Expenses were tightly controlled with reductions in staff costs and discretionary spend such as travel. This created capacity for investment in a net eight new branches. Loan impairment was up by $35 million, or 43 per cent, to $116 million. The loan impairment increase was mainly due to a spike in new filings for bankruptcy in the government sponsored Personal Debtor Rehabilitation System. New filings trebled in quarter one 2009 as compared with quarter three 2008, but have stabilised. The operating loss of $11 million compared to an operating profit of $87 million in the first half of 2008.

Other Asia Pacific

In Other Asia Pacific, income was down $132 million, or 18 per cent, to $612 million. In China, income at $77 million, was flat on first half 2008, as increased volumes offset margin compression. In Malaysia, income was down 9 per cent to $121 million, mainly from a decline in Wealth Management income reflecting a lack of consumer confidence in equity markets. Income in Taiwan benefited from recoveries of $11 million on assets that had been fair valued at acquisition, down $10 million from 2008. Operating expenses in Other Asia Pacific were up $57 million, or 11 per cent, to $557 million. Expenses were distorted by the PEM Group charge of $170 million and a reduction in retirement benefits obligation of $52 million in Taiwan. Excluding these, expenses were down $61 million or 12 per cent. In China, expenses at $114 million, were flat on first half of last year, as management exerted tight control on costs. This created capacity to invest in 3 new outlets, taking the total number of outlets to 54. Strong cost discipline has been exercised in all the countries. Loan impairment in Other Asia Pacific decreased $47 million, or 28 per cent, to $120 million, following improved delinquency rates in Taiwan, Thailand and China, offset by slightly higher impairment in Malaysia. Other Asia Pacific delivered an operating loss of $65 million, compared to an operating profit of $77 million, for the first half of last year. China recorded an operating loss of $36 million, compared to an operating loss of $46 million for the first half of last year. Operating profit in Malaysia was down $17 million, or 34 per cent, to $33 million.

India

In India, income was down $36 million, or 14 per cent, to $213 million. On a constant currency basis income grew 2 per cent. This is primarily due to strong volume growth in SME and mortgages. Income from deposit growth was partly offset by lower margins in a low interest rate environment. Cards and personal loan income fell as volumes were reduced as management actively de-risked the books. Operating expenses decreased $42 million, or 27 per cent, to $115 million. On a constant currency basis, operating expenses decreased 12 per cent. Loan impairment was up $34 million, or 79 per cent, to $77 million, primarily from increased delinquencies in the unsecured portfolio. Operating profit was down $25 million, or 51 per cent, to $24 million.

MESA

In MESA, income was down $18 million, or 5 per cent, to $337 million. In UAE, income at $144 million, was flat on the first half of last year, with good growth in SME offset by lower revenues from unsecured products as the impact of the economic downturn and actions taken by management to de-risk the portfolio, resulted in declining volumes for unsecured products. In Pakistan income was impacted by lower asset volumes resulting from difficult trading conditions and actions taken to de-risk the portfolio. Operating expenses in MESA were down $19 million, or 9 per cent, to $196 million. In UAE effective cost control and headcount reduction from restructuring resulted in a 4 per cent decline in expenses. Expenses in Pakistan were driven down from headcount reduction and good cost control. Loan impairment in MESA was up $67 million, or 88 per cent, to $143 million. The principal increase was in UAE where deteriorating economic conditions have put the quality of the loan book under stress across all products, increasing loan impairment by $53 million. Operating loss for MESA was $2 million, compared to an operating profit of $64 million in the first half of last year.  

Africa

In Africa, income at $168 million was broadly flat on the first half of last year. On a constant currency basis, income was up 23 per cent, driven by strong growth in SME and deposits, especially in Nigeria, Ghana, Kenya and Uganda. Liability growth was achieved through deposit campaigns and new product launches. Operating expenses in Africa fell $14 million, or 12 per cent, to $105 million. On a constant currency basis, operating expenses were up 9 per cent, reflecting investment in new channels primarily in Nigeria, Kenya and Zambia. Good cost control was achieved in all markets. Loan impairment increased from $7 million, in the first half of 2008, to $18 million in the first half of 2009, primarily as a result of the impact of retrenchment in the mining sector in Botswana and Zambia. Operating profit in Africa of $45 million was broadly flat on the first half of last year.

Americas, UK and Europe

In Americas, UK and Europe, income was down $41 million, or 33 per cent, to $85 million. Income was driven lower by compression in liability margins, and subdued demand for Wealth Management products. This was partly offset by good deposits growth and increased customer AUM. Operating expenses were down $40 million, or 32 per cent, to $84 million, resulting from effective cost control and reduction in AEB integration expenses as compared to the first half of last year. Loan impairment increased to $12 million, driven by increased provision for client exposures. Operating loss in Americas, UK and Europe was $13 million compared to a loss of $6 million in the first half of 2008.

   Wholesale Banking 

The following tables provide an analysis of operating profit by geographic area for Wholesale Banking:

			6 months ended 30.06.09
			Asia Pacific
			Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle  East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Wholesale Banking Total $million
Operating income			678	581	282	902	691	806	390	697	5,027
Operating expenses			(302)	(290)	(121)	(375)	(172)	(267)	(164)	(556)	(2,247)
Loan impairment			(30)	(4)	(69)	(71)	(20)	(317)	(6)	(8)	(525)
Other impairment			5	-	-	14	3	-	-	(28)	(6)
Operating profit			351	287	92	470	502	222	220	105	2,249

*	Other APR includes Malaysia: operating income $149 million; operating expenses $(43) million; loan impairment $(1) million; other impairment $nil million; operating profit $105 million.

			6 months ended 30.06.08
			Asia Pacific
			Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle  East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Wholesale Banking Total $million
Operating income			591	348	262	789	580	533	262	299	3,664
Operating expenses			(223)	(190)	(131)	(328)	(165)	(207)	(155)	(540)	(1,939)
Loan impairment			(25)	(3)	(9)	(16)	(4)	(4)	5	3	(53)
Other impairment			-	-	-	(18)	-	-	(1)	(5)	(24)
Operating profit/(loss)			343	155	122	427	411	322	111	(243)	1,648

*	Other APR includes Malaysia: operating income $145 million; operating expenses $(43) million; loan impairment $nil million; other impairment $nil million; operating profit $102 million.

			6 months ended 31.12.08
			Asia Pacific
			Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle  East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Wholesale Banking Total $million
Operating income			513	460	297	771	536	501	303	444	3,825
Operating expenses			(207)	(158)	(98)	(386)	(164)	(196)	(159)	(461)	(1,829)
Loan impairment			(52)	8	(93)	(109)	(40)	(3)	(19)	(23)	(331)
Other impairment			(27)	(30)	-	(82)	(17)	-	1	(157)	(312)
Operating profit/(loss)			227	280	106	194	315	302	126	(197)	1,353

*	Other APR includes Malaysia: operating income $105 million; operating expenses $(41) million; loan impairment release $1 million; other impairment $(21) million; operating profit $44 million.

  Wholesale Banking continued

An analysis of Wholesale Banking income by product is set out below:

	6 months ended 30.06.09			6 months ended 30.06.08			6 months ended 31.12.08
Operating income by product			$million			$million			$million
Lending and Portfolio Management			412			246			305
Transaction Banking			1,272			1,249			1,414
Global Markets*
Financial Markets			2,036			1,213			1,152
Asset and Liability Management (ALM)			557			514			398
Corporate Finance			615			365			380
Principal Finance			135			77			176
Total Global Markets			3,343			2,169			2,106
Total operating income			5,027			3,664			3,825

*

Global Markets comprises the following businesses: Financial Markets (foreign exchange, interest rate and other derivatives, debt capital markets and syndications); ALM; Corporate Finance (corporate advisory, structured trade finance, structured finance and project and export finance); and Principal Finance (corporate private equity, real estate, infrastructure and alternative investments).

	6 months ended 30.06.09			6 months ended 30.06.08			6 months ended 31.12.08
Financial Markets income by desk			$million			$million			$million
Foreign Exchange			831			716			478
Rates			573			334			414
Commodities and Equities			236			48			93
Capital Markets			226			118			116
Credit and Other			170			(3)			51
Total Financial Markets operating income			2,036			1,213			1,152

Wholesale Banking delivered a record financial performance with operating profit for the first half of 2009 almost equalling operating profit for the full year 2007. Wholesale Banking benefited from the market dislocation and volatility leading to market share gains and increased asset margins; whilst own account income registered excellent growth. Sustained strong income growth has been underpinned by focused execution of its strategy, which has resulted in the deepening of client relationships and continued client income momentum. 

Operating income grew $1,363 million, or 37 per cent, to $5,027 million. Net interest income was up $266 million, or 17 per cent, to $1,798 million, while non-interest income grew $1,095 million, or 52 per cent, to $3,196 million. Client income represented 69 per cent of total income and increased 24 per cent over the first half of 2008.

Lending and Portfolio Management income increased by $166 million, or 67 per cent, to $412 million. Lending income benefitted from re-pricing initiatives and one-off fees from several significant transactions, particularly in the first quarter.

Transaction Banking income of $1,272 million was broadly flat, due to Cash margin compression, partially offset by healthy liability growth. Trade income benefitted from re-pricing and market share gains, which compensated for trade volume contraction in key markets.

Global Markets income increased by $1,174 million, or 54 per cent, to $3,343 million. 

Financial Markets, which is primarily driven by client income, grew income $823 million, or 68 per cent, to $2,036 million. Financial Markets delivered record income growth across all products through the delivery of innovative solutions and deepening client relationships. Income growth was supplemented by strong trading income on the back of strong client flows. 

Asset and Liability Management income grew 8 per cent from $514 million to $557 million, benefitting from strong accrual income as a result of strategic positioning in late 2008, steepening yield curves and gains from the sale of securities. 

Corporate Finance income grew $250 million, or 68 per cent, to $615 million, reflecting the closure of a number of large deals. Equity capabilities were strengthened by the acquisition of Cazenove Asia.

Principal Finance income was up $58 million, or 75 per cent, to $135 million, as realised divestment gains for the period were partly offset by a decline in the estimated market value of some of our investments. Uplift in Asian equity markets and strong growth in alternative investments also contributed to income growth.

Operating expenses grew $308 million, or 16 per cent, to $2,247 million. Expense growth was mainly driven by higher variable compensation in line with risk adjusted revenue growth, flow through costs from investments made in prior years and continued headcount growth. A moderate increase in business as usual costs was achieved through effective cost control. New investment was directed at expanding client coverage through key senior hires especially in Financial Markets and Corporate Finance, and with focus on key growth markets, such as China.

Working profit increased $1,055 million, or 61 per cent, to $2,780 million. 

Loan impairment increased $472 million to $525 million, primarily due to certain large exposures in the Middle East and increased provision for foreign exchange derivative related transactions in Korea. Other impairment decreased by $18 million, to $6 million, and primarily related to impairment charges for asset backed securities (ABS).

Operating profit increased $601 million, or 36 per cent, to $2,249 million. 

  Wholesale Banking continued

Geographic performance

Hong Kong

In Hong Kong, income was up $87 million, or 15 per cent, to $678 million. Client income was broadly flat due to margin compression on cash and corporate time deposits. Trade income was up 12 per cent from re-pricing and increased market share. Custody revenues fell 42 per cent, reflecting margin compression. Lending income was up by 59 per cent resulting from growth in average balances and re-pricing. Own account income was up 94 per cent primarily due to ALM. Operating expenses grew $79 million, or 35 per cent, to $302 million. Expenses were driven higher by increased variable compensation for Global Markets staff in line with risk adjusted revenue growth. Investment expenditure also increased on account of integration costs in connection with Cazenove Asia. Loan impairment grew 20 per cent to $30 million, reflecting the deterioration in the local credit environment, which has stabilised in the second quarter. Operating profit was up $8 million, or 2 per cent, to $351 million. 

Singapore

In Singapore, income grew $233 million, or 67 per cent, to $581 million. Client revenue growth of over 40 per cent was primarily driven by strong growth in Corporate Finance, Trade and Fixed Income. All client segments had positive growth except Local Corporates which was most impacted by the recession in the local market. Operating expenses grew $100 million, or 53 per cent, to $290 million. The main driver of the increase was staff expenses relating to variable compensation in line with revenue growth and headcount growth especially in Global Markets. Loan impairment was flat as compared to the first half of 2008 and reflects strong risk management processes. Operating profit was up $132 million, or 85 per cent, to $287 million.

Korea

In Korea, income was up $20 million, or 8 per cent, to $282 million. On a constant currency basis income rose 45 per cent. Client income grew 51 per cent, with good growth across all product lines, particularly in Transaction Banking, Lending and Financial Markets where income grew 18 per cent, 98 per cent and 99 per cent respectively. Own account income was adversely impacted by lower ALM accrual income as a result of the declining interest rate environment. Operating expenses fell 8 per cent to $121 million. On a constant currency basis, expenses fell by 24 per cent, resulting from good cost control, which created capacity for continued investment in product capabilities. Loan impairment was up $60 million, to $69 million. Operating profit was down 25 per cent to $92 million on a headline basis, but grew 2 per cent on a constant currency basis.

Other Asia Pacific

In Other Asia Pacific, income grew $113 million, or 14 per cent, to $902 million. In China, income was up 29 per cent, to $295 million, driven by increased private equity realisations. Excluding private equity realisations, income in China was broadly flat. Income in Malaysia at $149 million, was also broadly flat. Across the Asia Pacific region, income was impacted by margin compression, lower transaction volumes in trade and intensified competition from local banks. Operating expenses in Other Asia Pacific were up $47 million, or 14 per cent, to $375 million. Expenses in the region were driven higher by staff and premises costs and investments. In China operating expenses were up 22 per cent, to $131 million. In Malaysia, operating expenses were flat at $43 million. Loan impairment in Other Asia Pacific increased by $55 million, to $71 million, arising from higher provisions in Japan and Indonesia. In China, loan impairment was up $4 million to $6 million. Loan impairment was down in Taiwan and stable in all other locations across the region. Operating profit in Other Asia Pacific was up 10 per cent, to $470 million, of which $172 million and $105 million came from China and Malaysia respectively.

India

In India, income was up $111 million, or 19 per cent, to $691 million. On a constant currency basis, income was up 43 per cent. Client revenues drove income growth, as deepening of client relationships led to increased large Corporate Finance deals booked in the period. Trade and lending benefitted from re-pricing with higher income growth, more than offsetting liabilities margin compression. Operating expenses were broadly flat. Loan impairment was up $16 million, to $20 million. The increase in loan impairment was largely restricted to Middle Market segment. Operating profit was up $91 million, or 22 per cent, to $502 million. On a constant currency basis, operating profit was up 47 per cent.

MESA

In MESA, income was up $273 million, or 51 per cent, to $806 million. Client revenues increased by 37 per cent and own account revenues also grew strongly, up 114 per cent on first half last year. UAE led income growth in MESA with an overall increase of 79 per cent, mainly from Financial Markets, Corporate Advisory, Lending and Project and Structured Trade Finance. In Pakistan and South Asia, income was impacted by falling interest rates and lower trade volumes from lower prices of commodities and raw materials. Operating expenses in MESA were up $60 million, or 29 per cent, to $267 million driven by increased variable compensation, headcount growth and investment in product capabilities. Loan impairment was up significantly by $313 million, to $317 million, driven by certain local corporate exposures in the Middle East. Operating profit in MESA was down 31 per cent to $222 million. 

Africa

In Africa, income was up $128 million, or 49 per cent, to $390 million. Operating income growth was client led, up 48 per cent on first half last year. On a constant currency basis, income was up 85 per cent, with strong growth in South Africa and Zambia, driven by exceptional Corporate Finance and Capital Markets performance. Commercial Banking products and ALM contributed well. Operating expenses in Africa were up 6 per cent, to $164 million. On a constant currency basis, expenses grew 26 per cent, primarily driven by higher variable compensation in line with risk adjusted revenue growth, increased headcount and investment in product capabilities. Loan impairment was up $11 million, from a net recovery of $5 million in the first half of 2008, to a net charge of $6 million. Operating profit almost doubled, to $220 million.

Americas, UK and Europe

In Americas, UK and Europe, income more than doubled to $697 million, from $299 million in the first half of 2008. Income growth was primarily driven by significant increase in trading income across all products. Client income also grew strongly led by Trade, Lending and Financial Markets. Operating expenses were broadly flat. Loan impairment increased $11 million, from a net recovery of $3 million in the first half of last year, to a net charge of $8 million. Other impairment increased $23 million, primarily relating to the ABS portfolio. Operating profit increased by $348 million, to $105 million, from a loss of $243 million in the first half of 2008.    

  Standard Chartered PLC - Risk review

Risk

Risk overview

The pace of macroeconomic deterioration has slowed significantly over the first half of 2009 and there have been tentative signs of improving economic conditions in some of our markets. Nevertheless, the overall macroeconomic environment remains weak and it is unclear when a sustained recovery will begin or how robust it will be. In spite of the uncertainty, the Group's balance sheet and liquidity position remain strong and Standard Chartered is prepared to deal with the challenges arising from global recessionary conditions.

Throughout 2008, the Group took pre-emptive action to reshape the portfolio, tighten underwriting standards and increase the frequency of risk monitoring and stress testing. The Group has maintained its cautious stance in the first half of 2009, selectively adjusting its position in line with local market conditions. These actions do not immunise the Group from the effects of a cyclical downturn in its core markets, but should continue to mitigate their impact.

The Group's position at the end of June 2009 is marked by several key factors. The Group continues to have low exposure to higher-risk asset classes, and has maintained vigilance and discipline in responding to the challenging environment. It also has a diversified portfolio across countries, products and customer segments; disciplined liquidity management; a well-established risk governance structure; and an experienced senior team.

As a result of its focused strategy, Standard Chartered has low exposure to asset classes and segments outside of its core markets and target customer base. The Group has no mass market business in the US, UK and Europe. Exposure to securitised assets, leveraged loans, commercial real estate and hedge funds is low. 

Standard Chartered has been disciplined in its management of risk. The Group has increased its focus on the inter-relationships between risk types and, where deemed appropriate, underwriting standards have been tightened. It has also conducted periodic reviews of risk exposure limits and risk control disciplines in anticipation of a global economic downturn. In the face of continued financial market turbulence, exposures to financial institutions have been subject to close and continuous review. To ensure the Group is prepared for a higher level of market volatility and economic uncertainty the Group regularly subjects its exposures to a range of stress tests across a wide range of products and customer segments at country, business and Group level. The stress testing exercises address different types of risk and cover the impact of specific shocks as well as a downturn in macroeconomic factors. 

The Group's lending portfolio is diversified across a wide range of products, industries and customer segments, which serves to mitigate risk. The Group operates in over 70 countries and there is no single country which accounts for more than 20 per cent of loans and advances to customers or to operating income.

The Group continues to have a strong advances-to-deposit ratio. Liquidity will continue to be deployed to support growth opportunities in Standard Chartered's chosen markets. The Group manages its liquidity prudently in all geographical locations and for all currencies and continues to be a net provider of liquidity to the interbank money markets. 

The Group benefits from a well established risk governance structure and an experienced senior team. Senior level membership of risk committees ensures that risk oversight is a critical focus for all of the Group's directors, while substantial common membership between risk committees helps the Group to address the inter-relationships between risk types. 

The Group invested considerable effort preparing for the introduction of the Basel II capital adequacy framework by refining analytical tools, ensuring data quality, improving data infrastructure and strengthening processes. These enhanced capabilities and the resultant management information are being leveraged to inform further the Group's business, risk and capital management decisions. 

Risk performance review

The Group's portfolio has continued to perform well given underlying economic conditions. Some of our customers are experiencing increased financial pressure owing to the deterioration in the economic environment, and this has translated into higher levels of impairment. However, given the growth in the size of the portfolio, the impairment levels are considerably lower than those experienced by the Group during the Asian crisis in 1998-99. 

In Consumer Banking there has been a moderate increase in loan impairment relative to the second half of 2008, as trends that became evident during the fourth quarter of 2008 continued into 2009. This was primarily driven by rising unemployment and the impact of slower economic growth on order volumes for SME businesses. The unsecured portfolios in Korea, India and UAE have been most affected due respectively to an increase in the number of bankruptcy and debt restructuring programme filings, particularly high levels of consumer leverage and a dramatic fall in property values.  The Consumer Banking portfolio continues to benefit from a proactive approach to risk, a focus on secured assets and conservative Loan to Value ratios in the mortgage book.  

In Wholesale Banking there has been an increase in loan impairment since the second half of 2008. This has arisen primarily in the Local Corporates portfolio, where the effects of the deteriorating economic environment have been most acutely felt. A large proportion of Wholesale Banking impairment in the first half of 2009 is concentrated on a small number of accounts. Elsewhere, the portfolio has remained resilient with only moderate signs of stress.

There have been minimal levels of impairment on the ABS portfolio during the first half of 2009. The carrying value of the ABS portfolio has reduced, primarily as a result of redemptions, and the overall quality of the ABS book remains good with no direct US sub-prime, and minimal Alt-A, exposures. The net exposure to ABS represents less than one per cent of total Group assets and has had limited impact on the Group's performance. Due to improved equity market conditions, there has also been no significant impairment of private equity or strategic investments in the first half of 2009.  

Market risk is tightly monitored using Value at Risk (VaR) methodologies complemented by sensitivity measures, gross nominal limits and management action triggers at a detailed portfolio level. This is supplemented with extensive stress testing which takes account of more extreme price movements. Average total VaR increased in the first half of 2009 compared to 2008. This is due to the increase in the Banking book VaR, which reflects sharp increases in the volatility of credit spreads that were characteristic of the market following the collapse of Lehman Brothers in September 2008.  Average trading book VaR has slightly declined in the first half of 2009, on account of reductions in interest rate and foreign exchange VaR, which were only partially offset by increases in commodity and equity VaR driven by continued expansion of these businesses.     

  Risk performance review continued

The integration of American Express Bank into the Group's risk control frameworks and processes is now complete.

Since 1 January 2008, for the purposes of reporting to the Financial Services Authority (FSA), the Group has been using the advanced Internal Ratings Based (IRB) approach under the Basel II regulatory framework to calculate credit risk capital for the vast majority of its assets globally. Although the FSA's approval covers the Group's global operations, in several jurisdictions the Group is required to apply separately to adopt advanced IRB approaches for local reporting. Wherever the Group has chosen to do this to date (most recently in Korea) the application has been successful.

Principal risks and uncertainties

Standard Chartered is in the business of taking risk and the Group seeks to contain and mitigate those risks to ensure they remain within the Group's risk appetite and are adequately compensated. However, risks are by their nature uncertain and the management of risk relies on judgements and predictions about the future.

The key risks and uncertainties faced by the Group in the coming year are set out below. This should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties that the Group may experience. 

Macroeconomic conditions in footprint countries

The Group's principal risks and uncertainties arise from slower economic growth in the major countries in its footprint and the various uncertainties surrounding global financial markets in 2009. The Group operates in many countries and is affected by the prevailing economic conditions in each.

Macroeconomic conditions have an impact on personal expenditure and consumption; demand for business products and services; the debt service burden of consumers and businesses; the general availability of credit for retail and corporate borrowers; and the availability of capital and liquidity funding for the Group. All these factors may impact the performance of the Group.

One of the principal uncertainties is the extent to which the Group's major Asian and Middle-Eastern markets will continue to be affected by the global economic downturn. The linkages between economic activity in different markets are complex and depend not only on factors such as the balance of trade and investment between countries, but also on domestic monetary, fiscal and other policy responses to address macroeconomic conditions.

The Group monitors economic trends in its markets very closely and continuously reviews the suitability of its risk policies and controls.

Changes in government and regulatory policy

A key uncertainty for the Group relates to the way in which governments and regulators will adjust their economic policies, laws and regulations in response to macroeconomic and other systemic conditions. Such changes may be wide-ranging and influence the volatility and liquidity of financial markets, as well as the ability and willingness of customers to repay their loans.

These effects may directly or indirectly impact the Group's financial performance. For example, history has shown that changes in bankruptcy laws may affect customers' willingness to repay. Standard Chartered plays an active role, through its participation in industry forums, in the development of relevant laws and regulatory policies in its key markets.

Financial markets dislocation

Continued volatility and dislocation affecting financial markets and asset classes may also affect the Group's performance over the coming months. These factors may have an impact on the mark-to-market valuations of assets in the Group's available-for-sale and trading portfolios; while any further deterioration in the performance of the assets underlying the Group's ABS portfolio could lead to additional impairment. The continued market volatility may also negatively impact certain customers exposed to derivative contracts. While the Group has a robust customer suitability and appropriateness process in place, the potential losses incurred by certain customers as a result of derivative contracts could lead to an increase in customer disputes and corporate defaults.

Instability in the financial services industry

The availability of liquidity and capital to financial institutions represents a material counterparty risk. Availability depends on the underlying strength and performance of each institution and, just as importantly, on the market perception of that institution at any given point in time. It remains possible that some institutions will experience tighter liquidity conditions.

Government action has reduced the systemic risk, and market liquidity conditions have improved over the first half of 2009, but the impact on the financial services industry of ongoing uncertainty in the broader economic environment means that the risk nevertheless remains. The Group continues to monitor closely the performance of its financial institutions customers and counterparties, taking action to mitigate risks as appropriate.

Reduced access to funding

Liquidity risk is the risk that the Group either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can access funding only at excessive cost. Exceptional market events can impact the Group adversely, thereby affecting the Group's ability to fulfil its obligations as they fall due. The principal uncertainties for liquidity risk are that customers withdraw their deposits at a substantially faster rate than expected, or that asset repayments are not received on the intended maturity date. The Group manages its liquidity prudently in all geographical locations and for all currencies. Standard Chartered has a customer deposit base diversified both by type and maturity, and a low dependence on wholesale funding. It also holds a portfolio of liquid assets which can be realised if a liquidity stress event occurs.

Exchange rates

Changes in exchange rates affect, among other things, the value of the Group's assets and liabilities denominated in foreign currencies, as well as the earnings reported by the Group's non-US dollar denominated branches and subsidiaries. The effect of exchange rate movements on the capital adequacy ratio is mitigated by corresponding movements in risk weighted assets. Under certain circumstances, the Group may take the decision to hedge its foreign exchange exposures in order to protect the Group's capital ratios from the effects of changes in exchange rates.

There have been significant movements in currency exchange rates in some of the Group's key markets over the past periods and Standard Chartered expects to continue to be exposed to such fluctuations in the coming year. The following table sets out the period end and average currency exchange rates per US dollar for India, Korea and Singapore for the six months ended 30 June 2009, 31 December 2008 and 30 June 2008.

Exchange rates continued

	Six months ended 30.06.09	Six months ended 30.06.08	Six months ended 31.12.08
Indian rupee
Average	49.22	40.71	46.23
Period end	47.89	42.98	48.65
Korean won
Average	1,352.04	986.65	1,215.10
Period end	1,274.09	1,045.96	1,259.91
Singapore dollar
Average	1.49	1.39	1.44
Period end	1.45	1.36	1.44

As a result of its normal business operations, Standard Chartered is exposed to a broader range of risks than those principal risks mentioned above. The Group's approach to managing risk is detailed on the following pages.

Risk management 

The management of risk lies at the heart of Standard Chartered's business. One of the main risks the Group incurs arises from extending credit to customers through its trading and lending operations. Beyond credit risk, it is also exposed to a range of other risk types such as country, market, liquidity, operational, regulatory, pension and reputational risks which are inherent to Standard Chartered's strategy, product range and geographical coverage.

Risk management framework 

Effective risk management is fundamental to being able to generate profits consistently and sustainably and is thus a central part of the financial and operational management of the Group.

Through its risk management framework the Group manages enterprise-wide risks, with the objective of maximising risk-adjusted returns while remaining within its risk appetite.

As part of this framework, the Group uses a set of principles that describe the risk management culture the Group wishes to sustain:

•	Balancing risk and reward: risk is taken in support of the requirements of the Group's stakeholders, in line with the Group's strategy and within its risk appetite;
•	Responsibility: it is the responsibility of all employees to ensure that risk-taking is disciplined and focused. The Group takes account of its social, environmental and ethical responsibilities in taking risk to produce a return;
•	Accountability: risk is taken only within agreed authorities and where there is appropriate infrastructure and resource. All risk-taking must be transparent, controlled and reported;
•	Anticipation: the Group looks to anticipate future risks and maximise awareness of all risks; and
•	Competitive advantage: the Group seeks competitive advantage through efficient and effective risk management and control.

Risk governance

Ultimate responsibility for setting the Group's risk appetite and for the effective management of risk rests with the board of Standard Chartered PLC (the board). Executive responsibility for risk management is delegated to the Standard Chartered Bank court (the court) which comprises the Group executive directors and other directors of Standard Chartered Bank.

The Group Asset and Liability Committee (GALCO), through its authority delegated by the court, is responsible for the management of capital ratios and the establishment of, and compliance with, policies relating to balance sheet management, including management of the Group's liquidity, capital adequacy and structural foreign exchange rate risk. 

The Group Pensions Executive Committee, through its authority delegated by the court, is responsible for the management of pension risk.

The Group Risk Committee (GRC), through its authority delegated by the court, is responsible for the management of all other risks, including the establishment of, and compliance with, policies relating to credit risk, country risk, market risk, operational risk, regulatory risk and reputational risk. The GRC is also responsible for defining the Group's overall risk management framework.

Members of the court are also members of both the GRC and GALCO. The GRC is chaired by the Group chief risk officer (GCRO). The GALCO is chaired by the Group finance director.

Acting within an authority delegated by the board, the Audit and Risk Committee (ARC), whose members are all non executive directors of the Company, reviews specific risk areas and monitors the activities of the GRC and GALCO. The ARC receives regular reports on risk management, including the Group's portfolio trends; policies and standards; adherence with internal controls; regulatory compliance; liquidity and capital adequacy; and is authorised to investigate or seek any information relating to an activity within its terms of reference.

The committee governance structure ensures that risk-taking authority and risk management policies are cascaded down through the organisation from the board through to the appropriate functional, divisional and country-level committees. Information regarding material risk issues and compliance with policies and standards is communicated through the country, business and functional committees up to the Group-level committees.

Risk limits and risk exposure approval authority frameworks are set by the GRC in respect of credit risk, country risk and market risk. The GALCO sets the approval authority framework in respect of liquidity risk. Risk approval authorities may be exercised by risk committees or authorised individuals.

Business governance and functional heads are accountable for risk management in their businesses and functions, and for countries where they have governance responsibilities.

This includes:

•	implementing across all business activities the policies and standards as agreed by the Group-level risk committees;
•	managing risk in line with appetite levels agreed by the Group-level risk committees; and
•	developing and maintaining appropriate risk management infrastructure and systems to facilitate compliance with risk policies.

The GCRO chairs the GRC and is a member of the Group Management Committee. The GCRO directly manages a risk function which is separate from the origination, trading and sales functions of the businesses. Chief risk officers for both the Wholesale and Consumer Banking businesses have their primary reporting lines into the GCRO. Country chief risk officers take overall responsibility for risk within the Group's principal countries. 

  Risk governance continued

The Risk function performs the following core activities: 

•	informs and challenges business strategy in order to encourage rigour, quality, optimisation and transparency in relation to the deployment of risk capital;
•	controls risk management processes separately from the businesses and seeks to ensure discipline and consistency with risk standards, policy and appetite;
•	advises on risk management frameworks, the structuring of products and transactions and on the assessment and measurement of risk;
•	facilitates and manages risk processes and seeks to ensure operational efficiency, effectiveness and best practice; and
•	communicates with stakeholders to demonstrate compliance with requirements in relation to risk management.

The Group's Risk Management Framework (RMF) identifies the risk types to which the Group is exposed, each of which is controlled by a designated risk type owner (RTO). The major risk types are described individually in the sections below. The RTOs have responsibility for establishing minimum standards and for implementing governance and assurance processes. The RTOs report up through specialist risk committees to the GRC or GALCO.

Group Internal Audit is a separate Group function that reports to the chairman of the ARC and to the Group chief executive officer. It provides independent confirmation of compliance with Group and business standards, policies and procedures. Where necessary, it will recommend corrective action to restore or maintain such standards.

Risk appetite

Risk appetite is an expression of the amount of risk the Group is willing to take in pursuit of its strategic objectives. Risk appetite reflects the Group's capacity to sustain potential losses arising from a range of potential outcomes under different stress scenarios.

The Group defines its risk appetite in terms of both volatility of earnings and the maintenance of minimum regulatory capital requirements under stress scenarios.  

The Group's risk profile is assessed through a 'bottom-up' analytical approach covering all of the Group's major businesses, countries and products. The risk appetite is approved by the board and forms the basis for establishing the risk parameters within which the businesses must operate, including policies, concentration limits and business mix.

The GRC is responsible for ensuring that the Group's risk profile is managed in compliance with the risk appetite set by the board.

Stress testing

Stress testing and scenario analysis are used to assess the financial and management capability of the Group to continue operating effectively under extreme but plausible trading conditions. Such conditions may arise from economic, legal, political, environmental and social factors.

The Group has a stress testing framework designed to:

•	contribute to the setting and monitoring of risk appetite;
•	identify key risks to the Group's strategy, financial position, and reputation;
•	examine the nature and dynamics of the risk profile and assess the impact of stresses on the Group's profitability and business plans;
•	ensure effective governance, processes and systems are in place to co-ordinate and integrate stress testing;
•	inform senior management; and
•	ensure adherence to regulatory requirements.

A stress testing forum is led by the Risk function with participation from the businesses, Group Finance and Group Treasury. Its primary objective is to ensure that the Group understands the earnings and capital implications of specific stress scenarios.

The stress testing forum generates and considers pertinent and plausible scenarios that have the potential to affect the Group adversely.

In view of recent market turbulence, stress testing activity has been intensified at country, business and Group levels, with specific focus on certain asset classes, customer segments and the potential impact of macroeconomic factors. Stress tests have taken into consideration possible future scenarios that could arise as a result of the development of prevailing market conditions.

Business stress testing themes such as high inflation, low inflation or declines in asset values are co-ordinated by the stress testing forum to ensure consistency of impacts on different risk types or countries. Specific stress tests for country or risk type are also performed. Examples of risk type stress testing are covered in the section on Market risk.

Credit risk 

Credit risk is the risk that the counterparty to a financial transaction will fail to discharge an obligation, resulting in financial loss to the Group. Credit exposures may arise from both the banking book and the trading book.

Credit risk is managed through a framework which sets out policies and procedures covering the measurement and management of credit risk. There is a clear segregation of duties between transaction originators in the businesses and approvers in the Risk function. All credit exposure limits are approved within a defined credit approval authority framework.

Credit policies

Group-wide credit policies and standards are considered and approved by the GRC, which also oversees the delegation of credit approval and loan impairment provisioning authorities. 

Policies and procedures that are specific to each business are established by authorised risk committees within Wholesale and Consumer Banking. These are consistent with the Group-wide credit policies, but are more detailed and adapted to reflect the different risk environments and portfolio characteristics.

Credit rating and measurement

Risk measurement plays a central role, along with judgement and experience, in informing risk-taking and portfolio management decisions. It is a primary target for sustained investment and senior management attention.

A standard alphanumeric credit risk-grading system is used in both Wholesale and Consumer Banking. The grading is based on the Group's internal estimate of probability of default, with customers or portfolios assessed against a range of quantitative and qualitative factors. The numeric grades run from 1 to 14 and each grade is sub-classified A, B or C. 

Lower credit grades are indicative of a lower probability of default. Credit grades 1A to 12C are assigned to performing customers or accounts, while credit grades 13 and 14 are assigned to non-performing or defaulted customers.

  Credit rating and measurement continued

There is no direct relationship between the Group's internal credit grades and those used by external rating agencies. The Group's credit grades are not intended to replicate external credit grades although, as the factors used to grade a borrower may be similar, a borrower rated poorly by an external rating agency is typically also rated in the lower rank of the Group's internal credit grades. 

Credit grades for the majority of consumer accounts are based on a probability of default calculated using advanced IRB models. These models are based on application and behavioural scorecards which make use of credit bureau information as well as the Group's own data. For Consumer Banking portfolios where IRB models have not yet been developed, the probability of default is calculated by the Risk function using historical portfolio delinquency flow rates and judgement, where applicable.

Advanced IRB models cover a substantial majority of the Group's exposures and are used extensively in assessing risks at customer and portfolio level, setting strategy and optimising the Group's risk-return decisions. 

Risk measurement models are approved by the responsible business risk committee, on the recommendation of the Group Model Assessment Committee (MAC). The MAC supports risk committees in ensuring risk identification and measurement capabilities are objective and consistent, so that risk control and risk origination decisions are properly informed. Prior to review by the MAC, all IRB models are validated in detail by a model validation team, which is separate from the teams which develop and maintain the models. Models undergo a detailed review at least annually. Such reviews are also triggered if the performance of a model deteriorates materially.

Credit approval

Major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures are reviewed and approved by the Group Credit Committee (GCC). The GCC derives its authority from the GRC.

All other credit approval authorities are delegated by the GRC to individuals based on their judgement and experience, and are based on a risk-adjusted scale which takes account of the estimated maximum potential loss from a given customer or portfolio. Credit origination and approval roles are segregated in all but a very few authorised cases. In those very few exceptions where they are not, originators can only approve limited exposures within defined risk parameters. 

Concentration risk

Credit concentration risk is managed within concentration caps set by counterparty or groups of connected counterparties, industry sector and country in Wholesale Banking; and by product and country in Consumer Banking. Additional targets are set and monitored for concentrations by credit rating.

Credit concentrations are monitored by the responsible risk committees in each of the businesses and concentration limits that are material to the Group are reviewed and approved at least annually by the GCC.

Credit monitoring

The Group regularly monitors credit exposures and external trends which may impact risk management outcomes.

Internal risk management reports are presented to risk committees containing information on key environmental, political and economic trends across major portfolios and countries; 

portfolio delinquency and loan impairment performance; as well as IRB portfolio metrics including migration across credit grades.

In Wholesale Banking, accounts or portfolios are placed on Early Alert when they display signs of weakness or financial deterioration, for example where there is a decline in the customer's position within the industry, a breach of covenants, non-performance of an obligation, or there are issues relating to ownership or management. 

Such accounts and portfolios are subjected to a dedicated process overseen by Group Special Assets Management (GSAM), the specialist recovery unit. Account plans are re-evaluated and remedial actions are agreed and monitored. 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.

In Consumer Banking, portfolio delinquency trends are monitored continuously at a detailed level. Individual customer behaviour is also tracked and informs lending decisions. 

Accounts which are past due are subject to a collections process, managed independently by the Risk function. Charged-off accounts are managed by a specialist recovery team. In some countries, aspects of collections and recovery functions are outsourced. Medium Enterprise and Private Banking past due accounts are managed by GSAM.

The SME business is managed within Consumer Banking in two distinct segments: Small Businesses, and Medium Enterprises, differentiated by the annual turnover of the counterparty. Medium Enterprise accounts are monitored in line with Wholesale Banking procedures, while Small Business accounts are monitored in line with other Consumer Banking accounts.

Credit mitigation

Potential credit losses from any given account, customer or portfolio are mitigated using a range of tools such as collateral, credit insurance, credit derivatives and other guarantees. The reliance that can be placed on these mitigants is carefully assessed in light of issues such as legal enforceability, market value and counterparty risk of the guarantor.

Collateral types which are eligible for risk mitigation include: cash; residential, commercial and industrial property; fixed assets such as motor vehicles, aircraft, plant and machinery; marketable securities; commodities; bank guarantees; and letters of credit. The Group also enters into collateralised reverse repurchase agreements. Risk mitigation policies control the approval of collateral types.

Collateral is valued in accordance with the Group's risk mitigation policy, which prescribes the frequency of valuation for different collateral types. The valuation frequency is driven by the level of price volatility of each type of collateral and the nature of the underlying product or risk exposure. Collateral held against impaired loans is maintained at fair value. 

Certain credit exposures are mitigated using credit default insurance.

Where appropriate, credit derivatives are used to reduce credit risks in the portfolio. Due to their potential impact on income volatility, such derivatives are used in a controlled manner with reference to their expected volatility.

  Traded products

Credit risk from traded products is managed within the overall credit risk appetite for corporates and financial institutions. The credit risk exposure from traded products is derived from the positive mark-to-market value of the underlying instruments, and an additional component to cater for potential market movements.

For derivative contracts, the Group limits its exposure to credit losses in the event of default by entering into master netting agreements with certain counterparties. As required by IAS 32, exposures are not presented net in the financial statements as in the ordinary course of business they are not intended to be settled net.

In addition, the Group enters into Credit Support Annexes (CSA) with counterparties where collateral is deemed a necessary or desirable mitigant to the exposure. Under a variation margin process, additional collateral is called from the counterparty if total uncollateralised mark-to-market exposure exceeds the threshold and minimum transfer amount specified in the CSA. With certain counterparties, the CSA is bilateral and requires the Group to post collateral if the overall mark-to-market value of positions is in the counterparty's favour and exceeds an agreed threshold.

Securities 

Within Wholesale Banking, the Underwriting Committee approves the portfolio limits and parameters by business unit for the underwriting and purchase of all pre-defined securities assets to be held for sale. The Underwriting Committee is established under the authority of the GRC. The business operates within set limits, which include country, single issuer, holding period and credit grade limits. 

Day-to-day credit risk management activities for traded securities are carried out by Traded Credit Risk Management whose activities include oversight and approval of temporary excesses within the levels delegated by the Underwriting Committee. Issuer credit risk, including settlement and pre-settlement risk, is controlled by Wholesale Banking Credit Risk, while price risk is controlled by Group Market Risk. 

The Underwriting Committee approves individual proposals for the underwriting of new corporate security issues. Where an underwritten security is held for a period longer than the target sell-down period, decision making authority on the sale price moves to the Risk function. 

  Loan portfolio 

Loans and advances to customers have grown by $7.7 billion since June 2008 and $6.4 billion since December 2008 to $185 billion as at 30 June 2009.

Consumer Banking assets have remained flat since June 2008 at $84.5 billion but have grown by 5 per cent since December 2008. There has been significant growth since June 2008 in both Hong Kong, driven largely by mortgages, and Singapore, driven by mortgages and other loans to individuals. Consumer Banking balances in Korea have decreased by $3.3 billion since June 2008, driven by the depreciation in the Korean won, but have increased by $0.5 billion since December 2008.  

Growth in the Wholesale Banking customer portfolio was $7.8 billion, or 8 per cent, since June 2008. Growth was spread across several regions, with Middle East and Other South Asia growing particularly strongly by $3.2 billion. The growth in Americas, UK & Europe is driven by an increase in credit facilities extended to customers to support the business they do elsewhere in the Group's network. 

Loans and advances to banks have reduced by $7 billion since June 2008, or 13 per cent, and by $1.7 billion since December 2008. 

Single borrower concentration risk has been mitigated by active distribution of assets to banks and institutional investors, some of which is achieved through credit-default swaps and synthetic risk transfer structures.

The Wholesale Banking portfolio remains well diversified across both geography and industry, with no significant geographic concentration within the major industry classifications of Manufacturing; Financing, insurance and business services; or Commerce.  

The following tables analyse the loan portfolio by industry and geographic area, classified by booking location:

		30.06.09
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans to individuals
Mortgages		13,496	6,687	17,629	9,837	1,538	994	205	145	50,531
Other		2,785	4,886	4,419	4,785	829	2,469	597	831	21,601
Small and medium enterprises		1,333	2,036	3,564	2,651	1,159	671	121	806	12,341
Consumer Banking		17,614	13,609	25,612	17,273	3,526	4,134	923	1,782	84,473
Agriculture, forestry  and fishing		20	72	32	305	71	83	498	600	1,681
Construction		243	119	295	385	335	728	108	219	2,432
Commerce		2,557	3,738	692	3,040	787	4,721	703	2,258	18,496
Electricity, gas and water		444	14	52	538	34	253	66	1,373	2,774
Financing, insurance and  business services		3,349	2,622	328	3,569	453	2,834	299	9,739	23,193
Governments		-	1,165	331	3,305	-	941	12	426	6,180
Mining and quarrying		-	402	12	254	123	309	279	5,095	6,474
Manufacturing		2,616	1,177	2,914	7,256	2,429	1,914	657	5,505	24,468
Commercial real estate		1,473	2,226	781	889	324	680	6	426	6,805
Transport, storage and communication		594	725	381	835	208	1,376	218	2,704	7,041
Other		357	467	198	281	5	290	17	70	1,685
Wholesale Banking		11,653	12,727	6,016	20,657	4,769	14,129	2,863	28,415	101,229
Portfolio impairment provision		(64)	(42)	(123)	(199)	(78)	(150)	(43)	(51)	(750)
Total loans and advances  to customers		29,203	26,294	31,505	37,731	8,217	18,113	3,743	30,146	184,952
Total loans and advances  to banks		18,288	7,115	2,665	5,830	323	1,774	637	9,644	46,276

*	Other APR includes Malaysia: Consumer Banking $4,003 million; Wholesale Banking $4,620 million; Portfolio impairment provision $(33) million; Total loans and advances to customers $8,590 million; Total loans and advances to banks $183 million.

Total loans and advances to customers include $2,204 million held at fair value through profit or loss. Total loans and advances to banks include $910 million held at fair value through profit or loss account.

  Loan portfolio continued

		30.06.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans to individuals
Mortgages		12,306	5,420	19,596	9,595	1,539	679	224	220	49,579
Other		2,246	1,797	4,455	4,870	1,144	2,846	659	4,215	22,232
Small and medium enterprises		1,286	1,790	4,869	2,674	1,079	750	167	3	12,618
Consumer Banking		15,838	9,007	28,920	17,139	3,762	4,275	1,050	4,438	84,429
Agriculture, forestry and fishing		28	43	26	306	63	95	345	704	1,610
Construction		138	41	271	364	298	704	47	105	1,968
Commerce		2,168	3,397	468	3,966	904	3,938	861	2,671	18,373
Electricity, gas and water		292	35	181	501	42	355	199	1,093	2,698
Financing, insurance and  business services		3,311	2,522	538	3,004	801	1,856	335	7,282	19,649
Governments		1	862	-	4,129	-	262	39	516	5,809
Mining and quarrying		-	162	28	204	105	271	92	4,411	5,273
Manufacturing		2,787	1,301	3,259	8,103	2,239	1,704	421	4,706	24,520
Commercial real estate		1,244	1,196	915	1,207	384	53	6	512	5,517
Transport, storage and communication		373	293	320	917	188	899	251	2,320	5,561
Other		132	406	280	559	12	821	95	103	2,408
Wholesale Banking		10,474	10,258	6,286	23,260	5,036	10,958	2,691	24,423	93,386
Portfolio impairment provision		(45)	(44)	(90)	(223)	(60)	(73)	(19)	(41)	(595)
Total loans and advances  to customers		26,267	19,221	35,116	40,176	8,738	15,160	3,722	28,820	177,220
Total loans and advances  to banks		11,728	4,689	3,312	5,977	376	2,839	560	23,745	53,226

*	Other APR includes Malaysia: Consumer Banking $4,251 million; Wholesale Banking $5,977 million; Portfolio impairment provision $(29) million; Total loans and advances to customers $10,199 million; Total loans and advances to banks $844 million.

Total loans and advances to customers include $2,485 million held at fair value through profit or loss. Total loans and advances to banks include $4,051 million held at fair value through profit or loss account.

  Loan portfolio continued

		31.12.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans to individuals
Mortgages		12,977	6,044	17,120	8,786	1,447	891	171	131	47,567
Other		2,826	3,529	4,383	5,389	910	2,742	564	1,106	21,449
Small and medium enterprises		1,288	1,754	3,603	2,660	1,093	710	170	370	11,648
Consumer Banking		17,091	11,327	25,106	16,835	3,450	4,343	905	1,607	80,664
Agriculture, forestry and fishing		27	65	34	193	34	106	383	562	1,404
Construction		142	81	367	424	305	823	40	143	2,325
Commerce		2,150	2,685	964	3,533	749	4,150	725	2,395	17,351
Electricity, gas and water		453	15	93	532	34	242	71	1,246	2,686
Financing, insurance and  business services		3,455	2,303	427	2,988	533	3,329	453	12,075	25,563
Governments		-	366	-	3,480	-	383	26	427	4,682
Mining and quarrying		-	355	26	174	104	257	194	4,710	5,820
Manufacturing		2,756	1,153	3,475	7,866	2,255	1,864	598	4,892	24,859
Commercial real estate		1,353	1,265	787	1,245	332	526	10	839	6,357
Transport, storage and communication		470	366	356	921	121	1,218	220	2,113	5,785
Other		168	415	217	403	12	319	48	85	1,667
Wholesale Banking		10,974	9,069	6,746	21,759	4,479	13,217	2,768	29,487	98,499
Portfolio impairment provision		(61)	(47)	(89)	(228)	(66)	(84)	(31)	(45)	(651)
Total loans and advances  to customers		28,004	20,349	31,763	38,366	7,863	17,476	3,642	31,049	178,512
Total loans and advances  to banks		18,963	9,283	1,594	5,201	291	1,504	587	10,523	47,946

*	Other APR includes Malaysia: Consumer Banking $4,033 million; Wholesale Banking $3,952 million; Portfolio impairment provision $(30) million; Total loans and advances to customers $7,955 million; Total loans and advances to banks $411 million.

Total loans and advances to customers include $4,334 million held at fair value through profit or loss. Total loans and advances to banks include $1,363 million held at fair value through profit or loss account. 

  Maturity analysis 

Approximately 50 per cent of the Group's loans and advances to customers are short term, having a contractual maturity of one year or less. The Wholesale Banking portfolio is predominantly short term, with 70 per cent of loans and advances having a contractual maturity of one year or less. In Consumer Banking, 60 per cent of the portfolio is in the mortgage book, traditionally longer term in nature and well secured. Whilst the Other and SME loans in Consumer Banking have short contractual maturities, typically they may be renewed and repaid over longer terms in the normal course of business.

The following tables show the maturity of loans and advances to customers:

					30.06.09
					One year or less $million	One to five years $million	Over five years $million	Total $million
Consumer Banking
Mortgages					2,339	7,403	40,789	50,531
Other					12,448	6,915	2,238	21,601
SME					7,193	2,629	2,519	12,341
Total					21,980	16,947	45,546	84,473
Wholesale Banking					70,736	24,071	6,422	101,229
Portfolio impairment provision								(750)
Loans and advances to customers								184,952

					30.06.08
					One year or less $million	One to five years $million	Over five years $million	Total $million
Consumer Banking
Mortgages					2,948	7,609	39,022	49,579
Other					12,517	7,715	2,000	22,232
SME					7,256	3,198	2,164	12,618
Total					22,721	18,522	43,186	84,429
Wholesale Banking					73,183	15,078	5,125	93,386
Portfolio impairment provision								(595)
Loans and advances to customers								177,220

					31.12.08
					One year or less $million	One to five years $million	Over five years $million	Total $million
Consumer Banking
Mortgages					2,357	6,883	38,327	47,567
Other					11,575	7,118	2,756	21,449
SME					6,780	2,653	2,215	11,648
Total					20,712	16,654	43,298	80,664
Wholesale Banking					71,307	21,392	5,800	98,499
Portfolio impairment provision								(651)
Loans and advances to customers								178,512

  Problem credit management and provisioning 

Consumer Banking

Within Consumer Banking, an account is considered to be delinquent when payment is not received on the due date. For delinquency reporting purposes, the Group follows industry standards, measuring delinquency as of 1, 30, 60, 90, 120, and 150 days past due. Accounts that are overdue by more than 30 days are more closely monitored and subject to specific collections processes. 

The process used for raising individual impairment provisions (IIP) is dependent on the product. For unsecured products and loans secured by automobiles, individual provisions are raised for the entire outstanding amount at 150 days past due. For mortgages, IIP are generally raised at 150 days past due based on the difference between the outstanding amount of the loan, and the present value of the estimated future cash flows which includes the realisation of collateral. For other secured loans (excluding those secured by mortgage and automobiles), IIP are raised at 90 days past due based on the forced sale value of the collateral without further discounting, as the collateral value is typically realised in less than 12 months. For all products there are certain situations where the individual impairment provisioning process is accelerated, such as in cases involving bankruptcy, fraud and death.

A portfolio impairment provision (PIP) is held to cover the inherent risk of losses which, although not specifically identified, are known through experience to be present in the loan portfolio. PIP is set using expected loss rates, based on past experience, supplemented by an assessment of specific factors affecting the portfolio. These include an assessment of the impact of economic conditions, regulatory changes and portfolio characteristics such as credit grade migration, delinquency trends, flow rates and early alert trends. 

The procedures for managing problem credit in the SME segment of Consumer Banking are similar to those adopted in Wholesale Banking, described on page 30.

For unsecured loans to small businesses within the SME segment, the problem credit management process is similar to that of other unsecured products in Consumer Banking.

Non-performing loans are loans past due by more than 90 days or that are otherwise individually impaired. The cover ratio reflects the extent to which the gross non-performing loans are covered by the individual and portfolio impairment provisions.

The tables below set out the total non-performing loans in Consumer Banking. 

		30.06.09
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans and advances Gross non-performing		90	59	315	589	65	225	39	171	1,553
Individual impairment provision		(56)	(21)	(70)	(243)	(13)	(92)	(14)	(104)	(613)
Non-performing loans net of individual impairment provision		34	38	245	346	52	133	25	67	940
Portfolio impairment provision										(500)
Net non-performing loans  and advances										440
Cover ratio										72%

*	Other APR includes Malaysia: loans and advances gross non-performing $164 million; individual impairment provision $(43) million; non-performing loans net of individual impairment provision $121 million.

		30.06.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans and advances Gross non-performing		63	58	309	644	56	145	41	5	1,321
Individual impairment provision		(25)	(22)	(95)	(333)	(18)	(74)	(12)	-	(579)
Non-performing loans net of individual impairment provision		38	36	214	311	38	71	29	5	742
Portfolio impairment provision										(449)
Net non-performing loans  and advances										293
Cover ratio										78%

*	Other APR includes Malaysia: loans and advances gross non-performing $169 million; individual impairment provision $(41) million; non-performing loans net of individual impairment provision $128 million.

  Consumer Banking continued

		31.12.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans and advances Gross non-performing		85	65	287	601	49	170	35	95	1,387
Individual impairment provision		(39)	(18)	(76)	(291)	(10)	(71)	(12)	(26)	(543)
Non-performing loans net of individual impairment provision		46	47	211	310	39	99	23	69	844
Portfolio impairment provision										(449)
Net non-performing loans and advances										395
Cover ratio										72%

*	Other APR includes Malaysia: loans and advances gross non-performing $164 million; individual impairment provision $(41) million; non-performing loans net of individual impairment provision $123 million.

The tables below set out the net impairment charge by geographic area:

		30.06.09
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Gross impairment charge		76	35	102	223	77	115	15	14	657
Recoveries/provisions no longer required		(16)	(10)	(8)	(70)	(11)	(20)	(5)	(2)	(142)
Net impairment charge		60	25	94	153	66	95	10	12	515
Portfolio impairment provision charge										48
Net impairment charge										563

*	Other APR includes Malaysia: gross impairment charge $45 million; recoveries/provisions no longer required $(21) million; net individual impairment charge $24 million.

		30.06.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Gross impairment charge		54	15	83	229	57	98	13	11	560
Recoveries/provisions no longer required		(20)	(13)	(5)	(66)	(13)	(16)	(8)	(3)	(144)
Net impairment charge		34	2	78	163	44	82	5	8	416
Portfolio impairment provision release										(4)
Net impairment charge										412

*	Other APR includes Malaysia: gross impairment charge $44 million; recoveries/provisions no longer required $(24) million; net individual impairment charge $20 million.

  Consumer Banking continued

		31.12.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea  $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Gross impairment charge		81	24	82	213	53	99	14	53	619
Recoveries/provisions no longer required		(17)	(13)	(11)	(64)	(15)	(9)	(3)	(5)	(137)
Net impairment charge		64	11	71	149	38	90	11	48	482
Portfolio impairment provision charge										43
Net impairment charge										525

*	Other APR includes Malaysia: gross impairment charge $41 million; recoveries/provisions no longer required $(19) million; net individual impairment charge $22 million.

Wholesale Banking

Loans are classified as impaired and considered non-performing where analysis and review indicates that full payment of either interest or principal is questionable, or as soon as payment of interest or principal is 90 days overdue. Impaired accounts are managed by GSAM, which is separate from the main businesses of the Group. Where any amount is considered irrecoverable, an individual impairment provision is raised, being the difference between the loan carrying amount and the present value of estimated future cash flows.

Future cash flows are estimated by taking into account the individual circumstances of each customer and can arise from operations, sales of assets or subsidiaries, realisation of collateral, or payments under guarantees. Cash flows from all available sources are considered. 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 exposure against which an impairment provision has been raised, then that amount will be written off.

As with Consumer Banking, a PIP is held to cover the inherent risk of losses which, although not identified, are known through experience to be present in any loan portfolio. In Wholesale Banking, the PIP is set with reference to past experience using loss rates, and judgemental factors such as the economic environment and the trends in key portfolio indicators.

The cover ratio reflects the extent to which gross non-performing loans are covered by individual and portfolio impairment provisions. The cover ratio is impacted by a number of large downgrades where recovery of principal is expected and so a low level of provision has been raised, in accordance with IAS 39. The balance uncovered by individual impairment provision represents the value of collateral held and/or the Group's estimate of the net value of any work-out strategy.

The following tables set out the total non-performing portfolio in Wholesale Banking.  

  Wholesale Banking continued

		30.06.09
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans and advances Gross non-performing		248	22	348	723	112	756	124	202	2,535
Individual impairment provision		(133)	(5)	(141)	(385)	(50)	(389)	(44)	(99)	(1,246)
Non-performing loans net of individual impairment provision		115	17	207	338	62	367	80	103	1,289
Portfolio impairment provision										(255)
Net non-performing loans and advances										1,034
Cover ratio										59%

*	Other APR includes Malaysia: loans and advances gross non-performing $25 million; individual impairment provision $(15) million; non-performing loans net of individual impairment provision $10 million.

		30.06.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans and advances Gross non-performing		110	12	27	347	23	148	92	210	969
Individual impairment provision		(78)	(10)	(12)	(284)	(20)	(106)	(51)	(91)	(652)
Non-performing loans net of individual impairment provision		32	2	15	63	3	42	41	119	317
Portfolio impairment provision										(164)
Net non-performing loans and advances										153
Cover ratio										84%

*	Other APR includes Malaysia: loans and advances gross non-performing $22 million; individual impairment provision $(20) million; non-performing loans net of individual impairment provision $2 million.

		31.12.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Loans and advances Gross non-performing		201	3	193	533	61	241	80	308	1,620
Individual impairment provision		(125)	(2)	(78)	(314)	(34)	(99)	(42)	(87)	(781)
Non-performing loans net of individual impairment provision		76	1	115	219	27	142	38	221	839
Portfolio impairment provision										(208)
Net non-performing loans and advances										631
Cover ratio										61%

*	Other APR includes Malaysia: loans and advances gross non-performing $16 million; individual impairment provision $(16) million; non-performing loans net of individual impairment provision $nil million.

  Wholesale Banking continued

The following tables set out the net impairment charge by geographic area:

		30.06.09
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Gross impairment charge		31	1	62	75	22	298	2	7	498
Recoveries/provisions no longer required		(3)	-	-	(6)	(2)	(2)	(1)	(5)	(19)
Net impairment charge		28	1	62	69	20	296	1	2	479
Portfolio impairment provision charge										46
Net impairment charge										525

*	Other APR includes Malaysia: gross impairment charge $2 million; recoveries/provisions no longer required $(2) million; net individual impairment charge $nil million.

		30.06.08
		Asia Pacific
		Hong Kong $million	Singapore  $million	Korea  $million	Other  Asia  Pacific* $million	India  $million	Middle East & Other  S Asia $million	Africa  $million	Americas UK & Europe $million	Total  $million
Gross impairment charge		26	-	7	17	3	4	2	3	62
Recoveries/provisions no longer required		(1)	(2)	-	(6)	(4)	(3)	(3)	(13)	(32)
Net impairment charge/(credit)		25	(2)	7	11	(1)	1	(1)	(10)	30
Portfolio impairment provision charge										22
Net impairment charge										52

*	Other APR includes Malaysia: gross impairment charge $nil million; recoveries/provisions no longer required $(1) million; net individual impairment (credit) $(1) million.

		31.12.08
		Asia Pacific
		Hong Kong  $million	Singapore  $million	Korea  $million	Other  Asia  Pacific* $million	India  $million	Middle East & Other  S Asia $million	Africa  $million	Americas UK & Europe $million	Total  $million
Gross impairment charge		68	-	82	101	32	2	6	41	332
Recoveries/provisions no longer required		(19)	(1)	-	(10)	(1)	(4)	(6)	(16)	(57)
Net impairment charge/(credit)		49	(1)	82	91	31	(2)	-	25	275
Portfolio impairment provision charge										57
Net impairment charge										332

*	Other APR includes Malaysia: gross impairment charge $nil million; recoveries/provisions no longer required $(1) million; net individual impairment (credit) $(1) million.

  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:

		30.06.09
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $million	Americas UK & Europe $million	Total $million
Provisions held at 1 January 2009		164	20	154	605	44	170	54	113	1,324
Exchange translation differences		-	-	2	5	1	-	2	10	20
Amounts written off		(74)	(26)	(88)	(222)	(76)	(87)	(10)	(7)	(590)
Recoveries of acquisition fair values		-	-	(2)	(11)	-	(1)	-	-	(14)
Recoveries of amounts previously written off		14	7	(2)	44	9	11	1	1	85
Discount unwind		(3)	(1)	(6)	(14)	(1)	-	-	(5)	(30)
Other		-	-	(3)	-	-	(1)	-	77	73
New provisions		107	36	164	297	99	411	17	21	1,152
Recoveries/provisions no longer required		(19)	(10)	(8)	(76)	(13)	(22)	(6)	(7)	(161)
Net charge against profit		88	26	156	221	86	389	11	14	991
Provisions held at 30 June 2009		189	26	211	628	63	481	58	203	1,859

*	Other APR includes Malaysia: provisions held at 1 January 2009 $57 million; new provisions $47 million; recoveries/provisions no longer required $(23) million; net charge to profit $24 million; provisions held at 30 June 2009 $58 million.

		30.06.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific*  $million	India $million	Middle  East &  Other  S Asia  $million	Africa $million	Americas UK & Europe $million	Total $million
Provisions held at 1 January 2008		74	44	137	623	44	197	66	88	1,273
Exchange translation differences		-	2	(14)	31	(4)	(12)	(3)	-	-
Amounts written off		(43)	(20)	(94)	(205)	(55)	(96)	(4)	(11)	(528)
Acquisitions		-	-	8	-	-	-	-	14	22
Recoveries of acquisition fair values		-	-	(13)	(32)	-	(2)	-	-	(47)
Recoveries of amounts previously written off		17	7	2	41	11	13	-	1	92
Discount unwind		(2)	(1)	(4)	(14)	-	(1)	(1)	(1)	(24)
Other		-	-	1	-	(1)	(1)	-	-	(1)
New provisions		78	15	89	246	60	101	15	14	618
Recoveries/provisions no longer required		(21)	(15)	(5)	(72)	(17)	(19)	(10)	(15)	(174)
Net charge against/(credit to) profit		57	-	84	174	43	82	5	(1)	444
Provisions held at 30 June 2008		103	32	107	618	38	180	63	90	1,231

*	Other APR includes Malaysia: provisions held at 1 January 2008 $59 million; new provisions $44 million; recoveries/provisions no longer required $(25) million; net charge against/(credit) to profit $19 million; provisions held at 30 June 2008 $61 million.

  Movement in Group individual impairment provision continued

		31.12.08
		Asia Pacific
		Hong Kong $million	Singapore $million	Korea $million	Other  Asia  Pacific* $million	India $million	Middle East & Other S Asia $million	Africa $ million	Americas UK & Europe $million	Total $million
Provisions held at 1 July 2008		103	32	107	618	38	180	63	90	1,231
Exchange translation differences		1	(2)	(29)	(55)	(6)	(16)	(6)	(3)	(116)
Amounts written off		(51)	(28)	(62)	(245)	(59)	(82)	(13)	(51)	(591)
Acquisitions		-	-	(5)	28	-	-	-	1	24
Recoveries of acquisition fair values		-	-	(6)	(23)	-	(2)	-	-	(31)
Recoveries of amounts previously written off		14	8	-	47	12	(1)	-	8	88
Discount unwind		(1)	-	(5)	(10)	(1)	-	-	1	(16)
Other		-	-	9	5	-	2	-	(5)	11
New provisions		135	24	156	314	76	102	18	95	920
Recoveries/provisions no longer required		(37)	(14)	(11)	(74)	(16)	(13)	(8)	(23)	(196)
Net charge against profit		98	10	145	240	60	89	10	72	724
Provisions held at 31 December 2008		164	20	154	605	44	170	54	113	1,324

*	Other APR includes Malaysia: provisions held at 1 July 2008 $61 million; new provisions $41 million; recoveries/provisions no longer required $(20) million; net charge to profit $21 million; provisions held at 31 December 2008 $57 million.

  Total exposures to asset backed securities 

The Group had the following exposures to asset backed securities:

		30.06.09				30.06.08
		Percentage of notional value of Portfolio	Notional $million	Carrying  values $million	Fair value* $million	Percentage of notional value of Portfolio	Notional $million	Carrying/ fair values $million
Residential Mortgage Backed Securities (RMBS)
- US Alt-A		2%	79	49	25	2%	89	59
- US Prime		-	1	1	1	-	2	2
- Other		23%	823	758	607	28%	1,562	1,499
Collateralised Debt Obligations (CDOs)
- Asset Backed Securities		4%	159	20	17	5%	264	79
- Other CDOs		10%	367	292	233	7%	394	335
Commercial Mortgage Backed Securities (CMBS)
- US CMBS		4%	142	125	84	3%	150	132
- Other		19%	686	485	339	16%	904	796
Other Asset Backed Securities (Other ABS)		38%	1,388	1,268	1,185	39%	2,221	2,059
		100%	3,645	2,998	2,491	100%	5,586	4,961

					31.12.08
					Percentage of notional  value of  Portfolio	Notional $million	Carrying  values $million	Fair value* $million
Residential Mortgage Backed Securities (RMBS)
- US Alt-A					2%	84	57	35
- US Prime					-	2	1	-
- Other					23%	1,024	969	858
Collateralised Debt Obligations (CDOs)
- Asset Backed Securities					5%	208	32	30
- Other CDOs					9%	379	306	225
Commercial Mortgage Backed Securities (CMBS)
- US CMBS					3%	147	129	92
- Other					15%	671	525	466
Other Asset Backed Securities (Other ABS)					43%	1,935	1,740	1,551
					100%	4,450	3,759	3,257

*	Fair value reflects the value of the entire portfolio, including those assets reclassified in 2008 to loans and receivables.

The carrying value of asset backed securities represents 0.7 per cent (30 June 2008: 1.3 per cent, 31 December 2008: 0.9 per cent) of the Group's total assets.

The credit quality of the asset backed securities portfolio remains strong. With the exception of those securities which have been subject to an impairment charge, 81 per cent of the overall portfolio is rated A, or better, and 63 per cent of the overall portfolio is rated as AAA. The portfolio is broadly diversified across asset classes and geographies, and there is no direct exposure to the US sub-prime market. 

25 per cent of the overall portfolio is invested in RMBS, with a weighted average credit rating of AA+. 54 per cent of the residential mortgage exposures were originated in 2005 or earlier.

14 per cent of the overall portfolio is in CDOs. This includes $159 million of exposures to Mezzanine and High Grade CDOs of ABS, of which $127 million have been impaired. The remainder of the CDOs have a weighted average credit rating of AA-.

23 per cent of the overall portfolio is in CMBS, of which $142 million is in respect of US CMBS with a weighted average credit grade of AAA. The weighted average credit rating of the Other CMBS is A+. 

38 per cent of the overall portfolio is in Other ABS, which includes securities backed by credit card receivables, bank collateralised loan obligations, future flows and student loans, with a weighted credit rating of AA.

The Group reclassified some of its asset backed securities from trading and available-for-sale to loans and receivables with effect from 1 July 2008. The securities were reclassified at their fair value on the date of reclassification. Note 11 on page 62 provides details of the remaining balance of those assets reclassified in 2008. No assets were reclassified in the six months to 30 June 2009. 

  Writedowns of asset backed securities 

		Trading $million	Available- for-sale $million	Total $million
Six months to 30 June 2009:
Charge to available-for-sale reserves		-	(34)	(34)
Charge to the income statement		-	(23)	(23)
Six months to 31 December 2008:
Charge to available-for-sale reserves		-	(123)	(123)
Charge to the income statement		6	(40)	(34)
Six months to 30 June 2008:
Charge to available-for-sale reserves		-	(186)	(186)
Charge to the income statement		(80)	(50)	(130)

Country risk

Country risk is the risk that the Group will be unable to obtain payment from its customers or third parties on their contractual obligations as a result of certain actions taken by foreign governments, chiefly relating to convertibility and transferability of foreign currency.

The GRC is responsible for the Group's country risk limits and delegates the setting and management of the country limits to the Group Country Risk function.

The business and country chief executive officers manage exposures within these limits and policies. Countries designated as higher risk are subject to increased central monitoring.

Cross border assets comprise loans and advances, interest- bearing deposits with other banks, trade and other bills, acceptances, amounts receivable under finance leases, certificates of deposit and other negotiable paper and investment securities where the counterparty is resident in a country other than that where the assets are recorded. Cross border assets also include exposures to local residents denominated in currencies other than the local currency. 

Cross border exposure to India and Hong Kong has risen significantly and business continues to grow in Singapore, South Korea and UAE. This reflects the Group's focus and continued expansion in its core countries and the execution of underlying business strategies in these key markets.

Cross border exposure to the US has increased since June 2008 as overnight positions have grown in support of the Group's enhanced clearing capabilities following the acquisition of American Express Bank. Medium term exposures to China continue to grow in line with strategy, however overall exposures have decreased primarily due to a reduction in demand for short dated money market business by Chinese banks.

Cross border exposure to countries in which the Group does not have a significant presence predominantly relates to short-dated money market and some global corporate activity. This business is originated in the Group's key markets, but is conducted with counterparties domiciled in the country against which the exposure is reported, as indicated by the increased positions on France, Netherlands and Australia

The following table, based on the Group's internal country risk reporting requirements, shows cross border outstandings where they exceed one per cent of the Group's total assets. 

	30.06.09			30.06.08			31.12.08
	One year or less $million	Over  one year $million	Total $million	One year or less $million	Over  one year $million	Total $million	One year or less $million	Over  one year $million	Total $million
USA	12,047	6,157	18,204	11,200	5,527	16,727	12,839	5,449	18,288
India	9,517	8,008	17,525	10,562	4,874	15,436	8,806	6,862	15,668
South Korea	9,032	6,952	15,984	10,666	5,408	16,074	8,803	7,040	15,843
Hong Kong	11,103	4,629	15,732	9,282	4,065	13,347	9,481	4,136	13,617
Singapore	9,824	3,142	12,966	11,999	2,482	14,481	9,715	3,003	12,718
UAE	5,549	6,808	12,357	7,764	3,185	10,949	5,989	4,546	10,535
China	4,277	2,937	7,214	6,326	2,568	8,894	4,480	3,292	7,772
France	3,108	2,333	5,441	3,702	1,408	5,110	3,071	1,835	4,906
Netherlands	2,591	2,241	4,832	1,690	1,324	3,014	2,445	1,648	4,093
Australia	2,755	1,999	4,754	2,102	1,404	3,506	2,000	1,552	3,552

  Market risk

Standard Chartered recognises market risk as the risk of loss resulting from changes in market prices and rates. The Group is exposed to market risk arising principally from customer-driven transactions. The objective of the Group's market risk policies and processes is to obtain the best balance of risk and return whilst meeting customers' requirements.

The primary categories of market risk for Standard Chartered are:

•	Interest rate risk: arising from changes in yield curves, credit spreads and implied volatilities on interest rate options;
•	Currency exchange rate risk: arising from changes in exchange rates and implied volatilities on foreign exchange options;
•	Commodity price risk: arising from changes in commodity prices and commodity option implied volatilities; covering energy, precious metals, base metals and agriculture; and
•	Equity price risk: arising from changes in the prices of equities, equity indices, equity baskets and implied volatilities on related options.

Market risk governance

The Group Market Risk Committee (GMRC), under authority delegated by the GRC, is responsible for setting Value at Risk (VaR) and stress loss limits for market risk within the Group's risk appetite. The GMRC is also responsible for policies and other standards for the control of market risk and overseeing their effective implementation. These policies cover both trading and non-trading books of the Group, the trading book being defined as per the FSA Handbook. This is more restrictive than the broader definition within IAS 39 'Financial Instruments: Recognition and Measurement', as the FSA only permits certain types of financial instruments or arrangements to be included within the trading book. Limits by location and portfolio are proposed by the businesses within the terms of agreed policy. 

Group Market Risk (GMR) approves the limits within delegated authorities and monitors exposures against these limits. Additional limits are placed on specific instruments and position concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. For example, interest rate sensitivity is measured in terms of exposure to a one basis point increase in yields, whereas foreign exchange, commodity and equity sensitivities are measured in terms of the underlying values or amounts involved. Option risks are controlled through revaluation limits on underlying price and volatility shifts, limits on volatility risk and other variables that determine the options' value.

Value at Risk (VaR)

The Group measures the risk of losses arising from future potential adverse movements in market rates, prices and volatilities using a VaR methodology. VaR, in general, is a quantitative measure of market risk which applies recent historic market conditions to estimate the potential future loss in market value that will not be exceeded in a set time period at a set statistical confidence level. VaR provides a consistent measure that can be applied across trading businesses and products over time and can be set against actual daily trading profit and loss outcome.

VaR is calculated for expected movements over a minimum of one business day and to a confidence level of 97.5 per cent. This confidence level suggests that potential daily losses, in excess of the VaR measure, are likely to be experienced six times per year. 

The Group uses historic simulation as its VaR methodology with an observation period of one year. Historic simulation involves the revaluation of all unmatured contracts to reflect the effect of historically observed changes in market risk factors on the valuation of the current portfolio.

VaR is calculated as the Group's exposure as at the close of business, generally London time. Intra-day risk levels may vary from those reported at the end of the day.

Back testing

To assess their predictive power, VaR models are back tested against actual results. In the past year there have been only three exceptions in the regulatory back testing. This is well within the 'green zone' applied internationally to internal models by bank supervisors, and implies that model reliability is statistically greater than 95 per cent.

Stress testing

Losses beyond the confidence interval are not captured by a VaR calculation, which therefore gives no indication of the size of unexpected losses in these situations. 

GMR complements the VaR measurement by regularly stress testing market risk exposures to highlight potential risk that may arise from extreme market events that are rare but plausible. 

Stress testing is an integral part of the market risk management framework and considers both historical market events and forward looking scenarios. A consistent stress testing methodology is applied to trading and non-trading books. 

Stress scenarios are regularly updated to reflect changes in risk profile and economic events. The GMRC has responsibility for reviewing stress exposures and, where necessary, enforcing reductions in overall market risk exposure. The GRC considers stress testing results as part of its supervision of risk appetite.

The stress testing methodology assumes that scope for management action would be limited during a stress event, reflecting the decrease in market liquidity that often occurs.

Regular stress test scenarios are applied to interest rates, credit spreads, exchange rates, commodity prices and equity prices. This covers all asset classes in the Financial Markets banking and trading books.

Ad hoc scenarios are also prepared reflecting specific market conditions and for particular concentrations of risk that arise within the businesses.

Market risk changes

Average total VaR has increased in the first half of 2009 compared to 2008. This is due to the increase in the banking book VaR, which reflects sharp increases in the volatility of credit spreads that were characteristic of the market following the collapse of Lehman Brothers in September 2008. The one year historic data window applied as an input to the VaR model continues to reflect this period of particularly high credit spread volatility in to 2009. Average trading book VaR has slightly declined in the first half of 2009, on account of reductions in interest rate VaR, which was only partially offset by increases in commodity and equity VaR driven by continued expansion of these businesses. 

Securities classed as loans and receivables or held to maturity were removed from VaR in June 2009. These non-traded securities are accounted for on an amortised cost basis, so market price movements have no effect on either profit and loss or reserves. This alignment of VaR with accounting treatment resulted in an $8.6 million reduction in total VaR at the time of implementation.

  Market risk continued

Trading and non-trading (VaR at 97.5 per cent, 1 day) 

	6 months to 30.06.09				6 months to 30.06.08
Daily value at risk	Average $million	High  $million	Low  $million	Actual^ $million	Average $million	High  $million	Low  $million	Actual^ $million
Interest rate risk*	41.6	46.7	35.3	35.6	23.9	33.3	16.3	28.0
Foreign exchange risk	8.2	16.1	4.5	6.5	5.6	8.4	3.3	5.0
Commodity risk	3.2	5.5	1.3	4.2	1.2	2.8	0.6	1.5
Equity risk	1.7	2.8	1.0	2.1	1.3	1.9	0.8	1.9
Total**	42.9	47.9	36.1	36.8	28.0	38.3	17.8	33.6

					6 months to 31.12.08
Daily value at risk					Average $million	High  $million	Low  $million	Actual^ $million
Interest rate risk*					27.8	37.6	22.8	36.7
Foreign exchange risk					6.4	8.7	3.9	4.8
Commodity risk					1.4	2.4	0.9	2.1
Equity risk					1.4	2.4	0.5	0.8
Total**					34.7^	42.5^	28.3	41.7

Trading (VaR at 97.5 per cent, 1 day)

	6 months to 30.06.09				6 months to 30.06.08
Daily value at risk	Average $million	High $million	Low $million	Actual^ $million	Average $million	High $million	Low $million	Actual^ $million
Interest rate risk*	10.9	14.2	8.7	10.5	12.6	16.0	9.9	12.0
Foreign exchange risk	8.2	16.1	4.5	6.5	5.6	8.4	3.3	5.0
Commodity risk	3.2	5.5	1.3	4.2	1.2	2.8	0.6	1.5
Equity risk	1.7	2.8	1.0	2.1	1.3	1.9	0.8	1.9
Total**	13.7	18.0	9.9	16.6	14.6	20.6	10.0	12.8

					6 months to 31.12.08
Daily value at risk					Average $million	High  $million	Low $million	Actual^ $million
Interest rate risk*					11.5	14.2	8.5	9.3
Foreign exchange risk					6.4	8.7	3.9	4.8
Commodity risk					1.4	2.4	0.9	2.1
Equity risk					1.4	2.4	0.5	0.8
Total**					13.9	19.2	9.2	9.8

*	Interest rate risk VaR includes credit spread risk.
**	The total VaR shown in the tables above is not a sum of the component risks due to offsets between them.
^	This represents the actual one day VaR as at the period end.

The highest and lowest VaR are independent and could have occurred on different days.

The average daily income earned from market risk related activities is as follows:

	6 months to 30.06.09 $million	6 months to 30.06.08 $million	6 months to 31.12.08 $million
Interest rate risk	7.7	3.0	3.7
Foreign exchange risk	6.4	6.4	3.9
Commodity risk	1.3	0.3	0.9
Equity risk	0.6	0.1	(0.1)
Total	16.0	9.8	8.4

  Market risk continued

Non-trading (VaR at 97.5 per cent, 1 day)

	6 months to 30.06.09				6 months to 30.06.08
Daily value at risk	Average $million	High $million	Low  $million	Actual^ $million	Average $million	High $million	Low $million	Actual^ $million
Interest rate risk	36.3	41.0	31.4	31.4	14.2	21.9	10.6	21.9

					6 months to 31.12.08
Daily value at risk					Average $million	High $million	Low $million	Actual^ $million
Interest rate risk*					24.2	39.6	18.3	38.8

*	Interest rate VaR includes credit spread risk.
^	This represents the actual one day VaR as at the period end.

The highest and lowest VaR are independent and could have occurred on different days.

The average daily income earned from non-trading market risk related activities is as follows:

	6 months to 30.06.09 $million	6 months to 30.06.08 $million	6 months to 31.12.08 $million
Interest rate risk	5.6	3.8	2.6

Market risk coverage 

Interest rate risk from across the non-trading book portfolios is transferred to Financial Markets where it is managed by local Asset and Liability Management (ALM) desks under the supervision of local Asset and Liability Committees (ALCO). The ALM desks deal in the market in approved financial instruments in order to manage the net interest rate risk, subject to approved VaR and risk limits. 

VaR and stress tests are applied to non-trading book exposures in the same way as for the trading book. 

The interest rate risk on securities issued by Group Treasury is hedged to floating rate and is not included within Group VaR. The issued securities and related hedges and placements are managed separately under the Group's Capital Management Committee (CMC) by Group Treasury.

Foreign exchange risk on the non-trading book portfolios is minimised by match funding assets and liabilities in the same currency. 

Structural foreign exchange risks are not included within VaR and arise from net investments in non-US dollar currency entities. These are managed separately under the CMC by Group Treasury. 

Equity risk relating to private equity and strategic investments is not included within the VaR. It is separately managed through delegated limits for both investment and divestment, and is also subject to regular review by an investment committee. Equity share holdings are detailed in note 16.

Market risk regulatory capital

At Group level, the FSA specifies minimum capital requirements against market risk. The FSA has granted the Group CAD2 internal model approval covering the majority of interest rate and foreign exchange risk in the trading book. In 2008 the scope was extended to include precious and base metals market risk. Positions outside the CAD2 scope are assessed according to standard FSA rules. At 30 June 2009 the Group's market risk regulatory capital requirement was $1,421.3 million (30 June 2008: $969.6 million; 31 December 2008: $735.2 million). The year-on-year regulatory capital increase to June 2009 is mainly due to commodities positions that are subject to the FSA standard rules. Despite the increase in market risk capital, market risk in the trading book as measured by our internal VaR methodology has decreased year on year.

Derivatives

Derivatives are contracts with characteristics and value derived from underlying financial instruments, interest and exchange rates or indices. They include futures, forwards, swaps and options transactions. Derivatives are an important risk management tool for banks and their customers because they can be used to manage market price risk. The market risk of derivatives is managed in essentially the same way as other traded products.

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.

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 market price movements.

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 held for hedging purposes. 

The credit risk arising from all financial derivatives is managed as part of the overall lending limits to financial institutions and corporate customers. This is covered in more detail in the credit risk section on page 21.

Hedging

The Group uses futures, forwards, swaps and options transactions in the foreign exchange and interest rate markets to hedge risk.

The Group has investments in foreign operations (subsidiaries and branches) in currencies other than its functional currency, US dollars. Foreign exchange movements on those net investments in foreign currencies are taken to the Group's reserves; these reserves form part of the capital base. The effect of exchange rate movements on the capital ratio is partially mitigated by the fact that both the value of these investments and the risk weighted assets in those currencies follow broadly the same exchange rate movements. The Group hedges the net investments in limited circumstances if the capital ratio is expected to be materially affected by exchange rate movements. 

  Hedging continued

In accounting terms under IAS 39, hedges are classified into three types: fair value hedges, predominantly where fixed rates of interest or foreign exchange are exchanged for floating rates; cash flow hedges, predominantly 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. 

The Group may also, under certain individually approved circumstances, enter into 'economic hedges' which do not qualify for IAS 39 hedge accounting treatment, and which are accordingly marked to market through the profit and loss account, thereby creating an accounting asymmetry. These are entered into primarily to ensure that residual interest rate and foreign exchange risks are being effectively managed.

Liquidity risk 

Liquidity risk is the risk that the Group either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can only access these financial resources at excessive cost.

It is the policy of the Group to maintain adequate liquidity at all times, in all geographic locations and for all currencies, and hence to be in a position to meet all obligations as they fall due. The Group manages liquidity risk both on a short-term and medium-term basis. In the short-term, the focus is on ensuring that the cash flow demands can be met through asset maturities, customer deposits and wholesale funding where required. In the medium-term, the focus is on ensuring the balance sheet remains structurally sound.

The GALCO is the responsible governing body that approves the Group's liquidity management policies. The Liquidity Management Committee (LMC) receives authority from the GALCO and is responsible for setting liquidity limits, and proposing liquidity risk policies and practices. Liquidity in each country is managed by the Country ALCO within the pre-defined liquidity limits set by the LMC and in compliance with Group liquidity policies and local regulatory requirements. The Group Treasury and Group Market Risk functions propose and control the implementation of policies and other controls relating to the above risks. 

The Group seeks to manage its liquidity prudently in all geographical locations and for all currencies. Exceptional market events can impact the Group adversely, thereby affecting the Group's ability to fulfill its obligations as they fall due. The principal uncertainties for liquidity risk are that customer depositors withdraw their funds at a substantially faster rate than expected, or that repayment for asset maturities is not received on the intended day. To mitigate these uncertainties, the Group has a customer deposit base diversified by type and maturity. In addition it has ready access to wholesale funds - if required - under normal market conditions, and has a portfolio of liquid assets which can be realised if a liquidity stress occurs.

Policies and procedures

Due to the diversified nature of Standard Chartered's business, the Group's policy is that liquidity is more effectively managed locally, in-country. Each ALCO is responsible for ensuring that the country is self-sufficient, is able to meet all its obligations to make payments as they fall due, and operates within the local regulations and liquidity limits set for the country.

The Group liquidity risk management framework requires limits to be set for prudent liquidity management. There are limits on:

•	the mismatch in local and foreign currency behavioural cashflows;
•	the level of wholesale borrowing to ensure that the size of this funding is proportionate to the local market and the Group's local operations;
•	commitments, both on and off balance sheet, to ensure there are sufficient funds available in the event of drawdown on these commitments;
•	the advances to deposits ratio to ensure that commercial advances are funded by stable sources and that customer lending is funded by customer deposits;
•	the amount of medium-term funding to support the medium-term asset portfolio; and
•	the amount of local currency funding sourced from foreign currency sources.

In addition, the Group prescribes a liquidity stress scenario that assumes accelerated withdrawal of deposits over a period of time. Each country has to ensure that cash inflows exceed outflows under such a scenario.

All limits are reviewed at least annually, and more frequently if required, to ensure that they are relevant given market conditions and business strategy. Compliance with limits is monitored independently on a regular basis by Group Market Risk. Limit excesses are escalated and approved under a delegated authority structure and reviewed by ALCO. Excesses are also reported monthly to the LMC and GALCO which provide further oversight. 

In addition, regular reports to the ALCO include the following:

•	information on the concentration and profile of debt maturities; and
•	depositor concentration report to monitor reliance on large individual depositors.

The Group has significant levels of marketable securities, principally government securities and bank paper, which can be realised, repo'd or used as collateral in the event that there is a need for liquidity in a crisis. In addition, each country and the Group maintain a liquidity crisis management plan which is reviewed and approved annually. The liquidity crisis management plan lays out trigger points and actions in the event of a liquidity crisis to ensure that there is an effective response by senior management in case of such an event.

Primary sources of funding

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. Country ALCO monitors trends in the balance sheet and ensures that any concerns that might impact the stability of these deposits are addressed effectively. ALCO also reviews balance sheet plans to ensure that projected asset growth is matched by growth in the stable funding base. 

The Group maintains access to the interbank wholesale funding markets in all major financial centres and countries in which it operates. This seeks to ensure that the Group has flexibility around maturity transformation, has market intelligence, maintains stable funding lines and is a price-maker when it performs its interest rate risk management activities. 

Liquidity metrics

The Group monitors key liquidity metrics on a regular basis. Liquidity is managed on a country basis and in aggregate across the Group. The key metrics are: 

Advances-to-deposits ratio

This is defined as the ratio of loans and advances to customers relative to customer deposits. A low advances-to-deposits ratio demonstrates that customer deposits exceed customer loans resulting from emphasis placed on generating a high level of stable funding from customers.

	30.06.09 $million	30.06.08 $million	31.12.08 $million
Loans and advances to customers*	184,952	177,220	178,512
Customer accounts*	235,972	210,760	238,591
	%	%	%
Advances-to-deposits ratio	78.4	84.1	74.8

*	See note 11 on page 62.

Liquid asset ratio

This is the ratio of liquid assets to total assets. The level of holdings of liquid assets in the balance sheet reflects the prudent approach of the Group's liquidity policies and practices. The following table shows the ratio of liquid assets to total assets: 

	30.06.09 %	30.06.08 %	31.12.08 %
Liquid assets* to total assets ratio	24.1	22.8	23.1

*	Liquid assets are the total of Cash (less restricted balances), net interbank, treasury bills and debt securities less illiquid securities.

Operational risk

Operational risk is the risk of direct or indirect loss due to an event or action resulting from the failure of internal processes, people and systems, or from external events. Any of these risks could result in an adverse impact on the Group's financial condition and results of operations. 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) oversees the management and assurance of operational risks across the Group. The 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.

Group Operational Risk is responsible for setting the operational risk policy and defining standards for operational risk management and measurement.  An independent assurance function, separate from the business and other functions, is responsible for assuring operational risk policies and procedures.

Regulatory risk 

Regulatory risk includes the risk of loss arising from a failure to comply with the laws, regulations or codes applicable to the financial services industry. 

The Regulatory Risk function within Group Compliance & Assurance is responsible for establishing and maintaining an appropriate framework of regulatory compliance policies and procedures. Compliance with such policies and procedures is the responsibility of all employees and is monitored by the Compliance and Assurance function. 

The Group Compliance and Regulatory Risk Committee reviews and approves the Group's Regulatory Compliance standards and monitors key regulatory risks across the Group.

Reputational risk

Reputational risk arises from the failure to act as a responsible business, and thereby failing to meet the standards of performance or behavioural standards mandated by the Group and expected by its key stakeholders. It is the Group's policy that the protection of the Group's reputation should take priority over all other activities at all times, including revenue generation. 

Reputational risk may arise from the failure to effectively mitigate one or more of country, credit, liquidity, market, legal, regulatory and operational risk, or failing to comply with social, environmental and ethical standards. Reputational risk may also occur independently of other risk types. It is a priority to ensure that responsible business practices continue to be embedded across the Group, and all staff are required to be vigilant in the day-to-day identification and management of reputational risk.

From an organisational perspective the Group manages reputational risk through the Group Reputational Risk and Responsibility Committee (GRRRC) and at country level through country management committees. 

The GRRRC is responsible for ensuring a 'one bank' approach to the identification, mitigation and management of reputational risk, and to ensure that any emerging or thematic reputational risks are recognised and reported to the Group. 

At country level, it is the responsibility of the country chief executive officer to protect the Group's reputation in their market. To achieve this, the country chief executive officer and country management committee must actively:

•	ensure the Bank's commitment to being a responsible business is successfully entrenched in their country;
•	promote awareness and application of the Group's policy and procedures regarding reputational risk;
•	encourage business and functions to take account of the Group's reputation in all decision-making, including dealings with customers and suppliers;
•	implement effective in-country reporting systems to ensure they are aware of all potential issues; and
•	promote effective, proactive stakeholder management.

Pension risk  

Pension risk is the risk to the Group caused by its obligations to provide pension benefits to its employees. Pension risk exposure is not concerned with the financial performance of the Group's pension schemes themselves, rather the focus is upon the risk to the Group's financial position which arises from the Group's need to meet its pension scheme funding obligations. The risk assessment is focused on the Group's obligations towards its major pension schemes, ensuring that its funding obligations to these schemes is comfortably within the financial capacity of the Group. Pension risk is monitored on a quarterly basis, taking account of the actual variations in asset values and updated expectations regarding the progression of the pension fund assets and liabilities.

The Pensions Executive Committee is the body responsible for governance of pension risk and it receives its authority directly from the Court.

Tax risk 

Tax risk is any uncertainty of outcome regarding the Group's tax position.

The Group manages tax risk through the Tax Management Committee (TMC), which receives its authority from the GALCO. Tax risks are identified at both a country and a Group level; significant tax risks identified in this way, and mitigating action both planned and taken, are reported to the TMC, GALCO and GORC on a quarterly basis.      

  Standard Chartered PLC - Capital 

Capital management

The Group's capital management approach is driven by its desire to maintain a strong capital base to support the development of its business, to meet regulatory capital requirements at all times and to maintain good credit ratings.

Strategic business and capital plans are drawn up annually covering a three year horizon and approved by the board. The plan ensures that adequate levels of capital and an optimum mix of the different components of capital are maintained by the Group to support the strategy. This is integrated with the Group's annual planning process that takes into consideration business growth assumptions across products and geographies and the related impact on capital. 

The capital plan takes the following into account:

•	regulatory capital requirements;
•	forecast demand for capital to support the credit ratings;
•	increases in demand for capital due to business growth, market shocks or stresses;
•	available supply of capital and capital raising options; and
•	internal controls and governance for managing the Group's risk, performance and capital.

The Group uses a capital model to assess the capital demand for material risks, and support its internal capital adequacy assessment. Each material risk is assessed, relevant mitigants considered, and appropriate levels of capital determined. The capital model is a key part of the Group's management disciplines. 

A strong governance and process framework is embedded in the capital planning and assessment methodology. Overall responsibility for the effective management of risk rests with the Group's Board. The ARC reviews specific risk areas and reviews the issues discussed at the key capital management committees. The GALCO has set internal triggers and target ranges for capital management and oversees adherence with these.

Current compliance with Capital Adequacy Regulations

The Group's lead supervisor is the FSA. The capital that the Group is required to hold by the FSA is determined by its balance sheet, off-balance sheet and market risk positions, weighted according to the type of counterparty instrument and collateral held. Further detail on counterparty and market risk positions is included in the Risk Review on pages 37 to 39.

Capital in branches and subsidairies is maintained on the basis of host regulator's requirements. Processes are in place to ensure compliance with local regulatory ratios in all Group entities. The Group has put in place processes and controls in place to monitor and manage capital adequacy, and no breaches were reported during the period. 

The table on page 43 summarises the capital position of the Group. The principal forms of capital are included in the following items on the consolidated balance sheet: share capital and reserves (called-up ordinary share capital and preference shares, and eligible reserves), subordinated liabilities (innovative Tier 1 securities and qualifying subordinated liabilities), and loans to banks and customers (portfolio impairment provision).

Movement in capital

On a Basel II basis, total capital has increased by $2,053 million compared to 30 June 2008 to $32,324 million. The increase has been driven primarily by increased ordinary and preference share capital, up by $2,939 million, largely from the rights issue in December 2008, which increased ordinary share capital by $2,680 million; a net increase in Innovative Tier 1 securities of $1,187 million; lower deductions of $911 million; and a decrease in qualifying subordinated liabilities, net of amortisation and related deductions, of $2,993 million.

Basel II

The Basel Committee on Banking Supervision published a framework for the International Convergence of Capital Measurement and Capital Standards (commonly referred to as 'Basel II'), which replaced the original 1988 Basel I Accord. Basel II is structured around three 'pillars': 

•	Pillar 1 sets out minimum regulatory capital requirements - the minimum amount of regulatory capital banks must hold against the risks they assume;
•	Pillar 2 sets out the key principles for the supervisory review of a bank's risk management framework and its capital adequacy. It sets out specific oversight responsibilities for the Board and senior management, thus reinforcing principles of internal control and other corporate governance practices; and
•	Pillar 3 aims to bolster market discipline through enhanced disclosure by banks.

Basel II provides three approaches of increasing sophistication for the calculation of credit risk capital; the Standardised Approach, the Foundation Internal Ratings Based Approach and the Advanced Internal Ratings Based Approach. Basel II also introduces capital requirements for operational risk for the first time.

The EU Capital Requirements Directive (CRD) is the means by which Basel II has been implemented in the EU. EU Member States were required to bring implementing provisions into force by 1 January 2007. In the case of the provisions relating to the advanced approaches for credit risk and operational risk, implementation commenced from 1 January 2008. In the UK the CRD is implemented by the FSA through its General Prudential Sourcebook (GENPRU) and its Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU).

From 1 January 2008, the Group has been using the Advanced Internal Ratings Based approach for the measurement of credit risk capital. This approach builds on the Group's risk management practices and is the result of a significant investment in data warehouse and risk models.

The Group applies a VaR model for the measurement of market risk capital in accordance with the scope of the permission to use such a model granted by the FSA. Where the Group's market risk exposures are not approved for inclusion in its VaR model, capital requirements are based on standard rules provided by the regulator which are less risk sensitive. 

The Group applied the Standardised Approach for determining the capital requirements for operational risk. 

During the initial years of Basel II implementation, the minimum capital requirements must not be less than 90 per cent of the Basel I capital requirements in 2008 reducing to 80 per cent in 2009.     

  The GALCO targets Tier 1 and total capital ratios within a range of 7 to 9 per cent and 12 to 14 per cent respectively.  Although the ratios are higher than the target ranges, the Group sees advantages in being strongly capitalised in the current uncertain economic environment.

		Basel II
		30.06.09 $million	30.06.08(1), (2) $million	31.12.08(1) $million
Tier 1 capital
Called up ordinary share capital and preference shares		12,556	9,617	12,478
Eligible reserves*		12,465	11,792	11,062
Minority interests		238	264	228
Innovative Tier 1 securities		3,579	2,392	1,974
Less: restriction on Innovative Tier 1 securities		(275)	-	-
Less: excess expected losses**		(517)	(95)	(483)
Less: material holdings and securitisations		(304)	(204)	(301)
Goodwill and other intangible assets		(6,404)	(6,738)	(6,361)
Tax on excess expected loss*		154	26	130
Other regulatory adjustments		22	112	5
Total Tier 1 capital		21,514	17,166	18,732
Tier 2 capital
Eligible revaluation reserves		210	275	107
Portfolio impairment provision		262	178	251
Less: excess expected losses**		(517)	(95)	(483)
Qualifying subordinated liabilities:
Perpetual subordinated debt		1,558	3,397	1,823
Other eligible subordinated debt		9,404	11,788	10,520
Less: amortisation of qualifying subordinated liabilities		-	(1,230)	(1,126)
Less: material holdings and securitisations		(304)	(204)	(301)
Restricted Innovative Tier 1 securities		275	-	-
Restriction on Tier 2 capital		-	(1,886)	-
Total Tier 2 capital		10,888	12,223	10,791
Other deductions		(78)	(93)	(81)
Total deductions from Tier 1 and Tier 2 capital		(78)	(93)	(81)
Tier 3 capital
Restricted Tier 2 capital		-	1,886	-
Deductions		-	(911)	-
Total Tier 3 capital		-	975	-
Total capital base		32,324	30,271	29,442
Risk weighted assets+
Credit risk		166,554	170,531	161,276
Operational risk		20,696	18,340	18,340
Market risk		17,766	12,190	9,205
Total risk weighted assets		205,016	201,061	188,821

*	The tax benefit on excess expected losses is included 50 per cent in eligible reserves and 50 per cent in tax on excess expected losses.
**	Excess expected losses are shown gross.
+	Risk weighted assets by business and geographic area is set out on page 88.
Notes
1.	The capital for June 2008 and December 2008 has been restated in accordance with the definitions of core Tier 1 capital as advised by the FSA on 1 May 2009.
2.	As permitted by GENPRU 2.2.237 in June 2008 securitisation positions of $264 million which received a risk weight of 1250 per cent under BIPRU 9 (Securitisation) were risk weighted. In the restatement under the FSA's definition of core Tier 1 capital these have been deducted from capital and a corresponding reduction in risk weighted assets of $3.3 billion have been made. The risk weighted assets by business segment and geographic area have not been restated.

		Basel II
		30.06.09 $million	30.06.08 $million	31.12.08 $million
Capital ratios
Core Tier 1 capital		7.6%	6.1%	7.5%
Tier 1 capital		10.5%	8.5%	9.9%
Total capital ratio		15.8%	15.1%	15.6%
Core Tier 1 capital
Total Tier 1 capital		21,514	17,166	18,732
Less:
Innovative Tier 1 securities		(3,304)	(2,392)	(1,974)
Preference shares		(2,699)	(2,511)	(2,664)
Tax on excess expected losses		(154)	(26)	(130)
Others		229	72	216
Total core Tier 1		15,586	12,309	14,180

 

END

 

 

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