Good morning. Good afternoon, everybody. Thanks very much for joining us. I know it's a very busy morning, so for those of you that have made it here, we really appreciate that, and I think we probably have an unusually high number of people on the phone. We'll try to keep our messages crisp. We always try to show an advert that's a little bit relevant to what we're doing at Standard Chartered Bank, and I think that the story of the entrepreneur saying that you really basically have to stick to your guns feels appropriate for us right now. Because we have been sticking to our guns, and we're really happy that in the first half of this year, we've seen a continuation of progress against all of the strategic objectives that we set out, really all of them.
I'll say just a couple of things up front, and then turn it over to Andy to go through all the details of our first half results. I'll have a few more things to say at the end, and then we'll have plenty of time for Q&A. Good progress across the board. Income up 4%, profits up 18% on a constant currency basis. The income growth is being driven overwhelmingly by those things that we've been investing in and calling out for some time. The focus on our unique global network, and our focus on our affluent client proposition. That's something that we'll drill in on in some detail as we go through. We are on track to hit the financial targets that we set out back in February, so to exceed this 10% return on tangible equity by 2021.
The sentiments on our markets are clearly mixed right now. We feel that we've had to navigate some challenging times and some challenging situations in the markets where we operate with a changing interest rate environment. Obviously, we saw that crystallize last night with the Fed move, together with the ongoing escalation or at least presence of U.S.-China trade tensions and the more recent protests in Hong Kong. All of which are clearly impacting sentiment, some of which are impacting the economic environment in which we operate and impacting our results. Despite that, we have put up a good set of numbers in the first half of this year. We are convinced that we can navigate this sort of turbulence in quarters to come. Obviously, we watch it very carefully.
We're confident that we can hit this financial target that we set out back in February in 2021 to exceed 10% return on tangible equity. By the same token, there are some headwinds out there. We're going to watch them carefully. We're going to manage our business around the environment that we are experiencing, and we're going to continue to invest for the long term in our business. That's key, both to generate the kind of income growth with contained cost position that we've had over the past six months and further back. Also to give us optionality for different environments in the future as they will inevitably arise. A quick repeat of the approach that we have taken in terms of setting out our strategic priorities, copied from our February presentation. We're going to deliver the network. I'll be talking about that.
Focus on our affluent clients. We're optimizing low-returning markets. Good progress across the board on that front. We're going to continue to improve our productivity, and we're going to transform through digital as well as engaging in ongoing digital business as usual improvement. All of this anchored in our purpose and our people, which as an organization, we take most seriously. Driving this 10% return on tangible equity by 2021 and above by growing income at 5%-7% compound over the three-year period by keeping expenses below inflation, so substantial positive jaws as we posted in the first half of this year. Capital ratios between 13% and 14% in CET1. We're smack in the middle of that range right now.
If we do all this, we will be able to continue to invest heavily in our business while having surplus capital to return to shareholders, possibly doubling the dividend, if we can hit these plans, as we've seen, buyback stock if that's the right way to return capital to shareholders. With that, I will hand over to Andy, and I'll come back up in a few moments.
Good. Thank you very much, Bill, and good morning to everybody. I'll just start with an overview slide that will give a sense for the shape of the numbers overall, and then we'll go into some of these in a little bit more detail. $7.7 billion of income for the period. As Bill has mentioned, that on a reported basis is 1% up, but on a constant currency basis is a 4% increase. Fractionally below the 5%-7% medium-term guidance range, albeit, as I'll come on to actually Q2, we were within that range. Operating expenses on a reported basis, 3% lower than last year. On a constant currency basis, they are flat on last year. Overall, a 4 percentage point opening on the jaws during the period. That gives a pre-provision operating profit that is up 8% during the half year.
Credit impairment continues to behave extremely well. When you put that into the mix, the underlying operating profit that we published is up 7% reported and 13% up on a constant currency basis. Below the line, we then took the final part of the U.S. settlement. Risk-weighted assets are 5% up since the end of December, which I'll come onto later. They are flat compared with this time last year. Underlying earnings per share up 9%. The statutory earnings per share down slightly. That's two things affecting that. One, provision for regulatory matters. The second in the tax line, we have taken a charge of $179 million to enable some of our legal entity restructuring that I will come onto later, which is going to give us a significant P&L boost over the next two or three years. Dividends per share at $0.07. That is formulae.
That is one third of last year's full year dividend, as we committed to do going forward back in February. The CET1 ratio at 13.5%. Key thing to appreciate here is that is stated after deducting 40 basis points impact of the full share buyback program. Even though we'd only done half of it at the end of June, the regulatory requirement is that we cut the whole amount. That is net of that 40 basis points. Finally, and importantly, the underlying ROAE are now at 8.4%, further increase in that. I think each first half since 2015, that has been on an improving track. Let me then go into a little bit more detail on a number of them, and I will start with the return on tangible equity.
7.5% for the first half a year ago, now 8.4%, up 0.9%. The big driver there is the net interest income, strong performance across most of the interest related products. The fee and other income is down, this is in part that DVA moved against us. That can ebb and flow over a period of time. That is year-on-year about $17 million adverse, that is a large part of that. Also wealth management fees. Obviously the first quarter last year was very buoyant and that's made the comparisons a little bit more tricky, albeit I'll come on to what's happening more recently on that in a minute. Expenses, as I said earlier, are behaving well. Those are well controlled, 64.5% by memory cost income ratio, the lowest that we've had since back in 2015.
That enabling the funding of investments for the future, again, which I'll come on to. Impairments, mentioned those. That is giving us benefit. Tax, slightly adverse. This is not the point I mentioned earlier. This is more that the mix of the profit have gone into slightly higher tax cost regimes rather than lower. That is a slight drag in the period. Equity finally makes an appearance on the ROAE walk for the bank, courtesy of the impact of the share buybacks that did occur before the end of June. We are, as of today, about three quarters of the way through the overall program and would expect therefore the remainder of the program to basically be completed over the coming weeks.
Put all of that together, 8.4%, clearly a period without the bank levy, but nonetheless 8.4%, the highest we've had in the first half for a good while. Let's move then on to income. This is a walk of the first half last year to the first half this year. We published at $7.6 billion a year ago. If you normalize that to the exchange rates that we had prevailing during the first half of this year, the equivalent number is $7.4 billion. You can see there that essentially the story is one of most of the product groups contributing and slight downside, which I'll come on to from treasury. Transaction banking up 6% during the period when that has been a continuing sort of engine for us.
What I think is actually most noteworthy in this period is financial markets, which has had a great first half. Reported numbers are up 7%. On a constant FX basis, that is 10%. Actually, if one reverses out the DVA adjustment, we are more 15%, 16%. Very strong performance in financial markets. Retail up a little bit. The other three first half and first half, fairly flat. Treasury markets is down. That is the increased payments that treasury markets are making to our liability businesses because of rating raises. You put that all together and you get to the $7.7 billion number for the whole of the first half. If one does the same walk on the second quarter numbers, this is second quarter of this year compared with second quarter of last year. A similar shape to this.
The FX adjustment rebasing things slightly. Most of the areas that were green on the last are green on here. I think the one that I would call out as being a little bit different between the two charts is that wealth management, first-quarter on first-quarter, our income was down $70 million because of how strong the first quarter was last year. Whereas actually second-quarter on second-quarter, underlying wealth management is $20 million ahead. Also because we have hit some of our bonus targets early, we have also booked a $28 million acceleration of our bonuses that we would normally take later in the year. You put those two together, probably the biggest swing factor in terms of the second quarter performance is sitting in the wealth management area.
Overall that gives us the quarter shape that you can see there. Our highest second quarter that we've had for a while. In fact, the highest quarter that we have had for quite a while. One chart just painting a picture in terms of client segments. The four client segments all have done well. Remember in the center, which I'll come to later, Central and Other was a little bit of a drag. Overall, Corporate & Institutional Banking starting on the top left, a really, really good first half to the year. Income up 5%, cost down 4%, draws opening up to 9%, and that's resulted in the profit being about a quarter higher. That has also resulted in the ROAE being in double digits. That is the first time for quite a while we have been able to say that.
To talk about going round clockwise, Retail Banking, flatter on the top line. Partly that's because of the wealth management high start to the year ago. Good cost control. Draws 2% higher and return on tangible equity continues to be the strongest of all of our client groups at around 14.5%. Commercial Banking also has had a good half year. Their top line up 6%, and their costs down 8%. Overall, 14% opening up of jaws there. That has resulted in a pretty commendable doubling of the operating profit and a near doubling of the return on tangible equity. Not quite at 10% point, but certainly at 9%, way higher than we were at a while ago. Private Banking, also a good story, 13% up on the top line. Now, the $100 million of profit there will be open.
There is GBP 48 million benefit from the release of a previous provision, which we included in our first quarter numbers. Even if you take that out, the return on tangible equity there noticeably higher than we've had in that business. I think this is really good evidence of the work that's been going on over the last two or three years to reposition, replatform that business. Good news on all of those fronts. If I now look at this in terms of which regions have contributed what, we have got here Greater China and North Asia on the top left. That is a 1% reduction in year-on-year. That is slightly up if one takes it on a constant currency basis. The overall story here, I think Hong Kong flat on top line, but 5% up on profit.
That is its highest first half profit for five years. Very good cost control there. We probably also call out our business in China, where on a constant currency local basis, the income was up 12%. We continue to do extremely well. We were double-digit growth there last year, and that continues through into this year. The ASEAN region, top right here, 3% up on a reported basis. That is 6% up on a local currency basis. Profit up 29%. Now that's got the benefit of the provision release and it's a little bit lower when one reverses that out. Nonetheless, overall, pretty strong performance here. Particularly call out India, where we've got 11% growth in constant currency income. Singapore operating profit, even reversing the reserve release out, is 20% up. Good performance in the ASEAN region.
Africa and Middle East, currency affected quite considerably. Top line on a U.S. dollar basis, reported basis, down 3%. Actually, locally on a constant currency basis, that's up by 3%. Profit before tax, you can see, which is up 14% over the period. Less currency impacted, but nonetheless, good double-digit growth there. Particularly call out Nigeria and Pakistan, both of whom, on a constant currency basis, have increased both income and profits 10%-20%, which is good. Europe and Americas, a slightly tougher period. Quite a lot of this is about the DVA adjustment, which disproportionately hits this region, and XVA as well. The vast majority of the income reduction is those two factors. Origination income is actually up by 5%. I think in the period, things that are noteworthy, we are hopefully Brexit prepared.
Our business in Germany is now formally established, licensed, and we have increased the staff levels in that and are fully, we hope, prepared for whatever may happen next. We've also opened up a shared service environment center in Poland as well, which is now manned and is now starting to take activity from other parts of the world. I'll move on then from that to Central and Other. If you recall, the central management of the balance sheet, et cetera, resides in the center, as do some of the corporate costs. I think the story here is on the left-hand side, on the client segment basis, we have gone backwards on income about GBP 150 million and on profit GBP 250. The largest single part of that is the higher rates that the treasury markets team business is paying to our liability businesses.
We have also got a smaller effect from IFRS 16 and an India tax refund the previous year, which is not recurring. Those are lesser issues in that, and there is an offset with hedge ineffectiveness being better year-on-year. On the right-hand side is the same, but done on a regional basis. A slightly different mix of what is in there. The simple story there is we are about 100 better on both the top and the bottom line, and that is primarily the hedge ineffectiveness improvement. Let us move then on to costs and investment. As I mentioned earlier, costs well controlled. I think the culture of the business on the cost side is now markedly changed. GBP 5 billion for the first half. That is on a constant basis, flat year-on-year.
At the same time as the income growing 4% on the same basis. We would expect costs to be slightly higher in the second half, which is the usual pattern. Nonetheless, would be confident that the full year costs will be below the rate of inflation, which is what we committed to doing. On the bottom left, you can see the tech investment. We're continuing absolutely to spend on digitizing the business. I think some of the benefits of things we've been doing the last two or three years, Bill's going to talk about in a minute. Definitely helping to now really move forward some of the productivity metrics within the business.
$700 million spend there year to date, expectation will be around the $1.6 billion level for the full year, as was the case last year, broadly as was the case the year before. Credit quality. Two years ago, some of us may remember, credit quality was a bit of a problem. P&L charge on the top was near on $600 million two years ago, first half, $300 million last year, and now $254 million. We have the benefit of the reversal of provision in that. Nonetheless, we're running at, in the first half, about the $300 million level for a half year. You can see on the bottom left the various indicators of the more difficult accounts, the stage 3 non-performers, the early alerts, et cetera, and pretty much across the board, those are on an improving trend.
That having been said, clearly, we are very watchful of what is going on in the macro environment at this stage. We do not sit around. This is going to be something we'll keep a close eye on. At this point in time, the credit book is behaving well, and hence that is giving us a pretty low P&L charge by historic standards. Balance sheet. Top part here is the asset side of the balance sheet. In the dark blue, you can see the customer lending, and in the middle blue, the other lending to other institutions. Overall story here on the balance sheet side in volume terms is 5%-6% of volume growth over the last 12 months. That is good.
What you can see on the very top right is the yield that we're getting on those assets on the average is up 40 basis points compared with the same half year a year ago. On the bottom left, we've got the liabilities. Two-part story here. The accounts we have with customers that are not interest-paying have reduced slightly in the period, so that's down 4%. The accounts that we are paying interest on are up 5%. When you put those two together and go to the chart on the top right, we are paying on the average 47 basis points more for liabilities than we were this time last year, and that obviously is a larger number than the 40 basis points on the asset side. Because the assets are bigger than the liabilities, the overall NIM is static at the 1.59% level.
An area we're very focused upon and a lot of things that are underway, and particularly the legal entity restructuring that we are now a large way through. That should be giving us about a $300 million benefit in 2021 or thereabout. Things that we are actively doing to make sure that we can move this forwards. We've done an update on interest rate sensitivity, so that's in the back, but ± $200 million for every 50 basis points for the banking book. That sort of remains fairly similar to where we saw the picture when we last reported out. Capital risk-weighted assets. As I mentioned earlier, capital still strong. Just to walk on this chart, 14.2% is where we're at at the end of December.
We have taken off the 40 basis points for the full buyback program, as I mentioned earlier. There's the cost of the final U.S. resolution and the one-off tax charge, which takes it down by 20 basis points to 13.6%. Essentially in the first half, what we've seen is underlying profit boosting it by 0.7% and the RWAs and the dividends coming off by 0.7%, 0.8%. Hence the 13.5% that we're there. On the bottom part, we've got the risk-weighted assets. As I mentioned earlier, if you take December-end as the point of comparison, which is what this chart is showing, we're up by $12 billion or thereabouts. If you go back to this time last year, we're actually flat. In the first half, the $12 billion that's on this chart is very much about the first column credit.
We have got the balance sheet growing, which is good. Business momentum. Overall, the others net out to not a lot. This is something we're very focused upon. There are a number of efficiencies that are in the first half. There are some that are still to come in the second half, and hence we're very comfortable with the previous statement that we'd expect over time to see the risk-weighted asset growth being below that of the rate of income growth. Final slide, just back to the framework that Bill had earlier on in terms of the pursuit of the 10% return on tangible equity. We are another 90 basis points heading in the right direction. Income at 4% constant currency against 5%-7%, so fractionally lower. Interesting, the DVA adjustment, which does swing around.
If we hadn't had that, we would have been at 5%, so at the bottom of the range. I think in the second half it will be very FX dependent. We may be a fraction below the 5%-7% depending upon the FX, but not too far away. Expenses, as I said, behaving well. Those will be slightly higher in the second half, but overall for the year below inflation as we had indicated previously. Capital at the 13.5% mid-point of the range after the GBP 1 billion buyback impact has been deducted is, I think, a very good place to be as we go into the second half of the year. With that, back to Bill.
Great. Thanks very much, Andy. I'm going to canter through just a selection of our observations about the key strategic priorities that we called out in February. Again, consistent with those that we have been harping on since 2015. The punchline is we've made very good progress on all of them. It's obviously driving the financial results, but some of these are leading indicators, so it's good to get in front of a few of them. First, digging into some detail on that key objective of ours, which is to grow our network business within our corporate and commercial and institutional banking business. We've got a measure of clients. New clients, speaks for itself. Next clients are those clients that we identified for targeted deepening. Corporates that we thought we could be doing much more with because we had some relevance to them.
A steady increase over three years, 24% in this period. Network income as overall increasing 9% year-on-year. That's what's driving the overall strength of the CIB income line. The network income is now 69% of our total CIB income. Again, further improvement. A slightly different measure of a similar trend, which is capital-light income, so that the percentage of income that is coming from services and fees and things of that nature that are much less consumptive of capital, up to 60% of the total. These trends are clearly what's driving the improvement in ROTE for the Corporate and Institutional Bank at 10% overall, given that the net income portion of that is generating much higher returns at closer to 18%. We're being recognized for some of the things that we have focused on, like the ongoing opening up of China.
Andy mentioned the strength in underlying China income. It's because we focus on being the best RMB bank, the best cross-border payments bank, the best bank at bringing international money into China, and of course, moving Chinese money out to the extent that that's what's happening. We're being recognized in awards like the best global RMB bank, something that is not an accident, something we've been very focused on and will continue to focus on. Our affluent client business has continued to be strong. As Andy mentioned, the wealth management income has been subdued, certainly relative to a very strong first half of last year. The underlying drivers of the value of this business is how many clients you have, how much of their money are they leaving with us. By that metric, we've made very good progress.
14% increase in the number of our priority clients year-on-year. The subset of our overall affluent population, which is private banking, as Andy said, reposition that business, made some investments and those investments are paying off. We saw the financial results. They come through in the measure of net new money as well. We look at the higher returning business lines for us, wealth management and deposits as a percentage of overall retail up to 65%. Steady improvement. The income coming from our affluent client base and the AUM for that affluent client base continuing to improve. Overall percentages are increasing. Again, just calling out what we mentioned in February, the return for this affluent client segment is much higher for us, in part because it's much less capital consumptive, in part because we've got a real competitive advantage there.
That's driving the overall improvement in retail and private banking return on tangible equity at 15%. Next strategic objective that we set out was improving these four markets that have been underperforming, and have been material drags on our return on tangible equity. What we said back in February was that if we get all four of these markets right, i.e. bring them up to the level of the rest of the bank, that's 150 basis points improvement in ROTE. After the first half of this year, we are on track with that progress, and we're on track in all four countries. Slightly different stories, as you'd expect in each case. India, it's clearly a strong growth in operating profit, coming from good income growth, very substantial cost management activities, and a real leveraging of the value of our network.
We've had a big focus on subsidiaries of international corporations operating in India, and that's been a key driver of the value of our Indian franchise. Not all of that shows up in the India numbers, but certainly that's the way we're looking at that business. Korea, as Andy mentioned, a little bit more challenged on the income line. Some ongoing focus on expenses, but real focus on capital management. We were able to return about $600 million of capital from our Korean subsidiary back to the group. That's driving an improvement in ROTE, despite the small drag on profit. UAE, strong C&IB business, substantial and ongoing focus on productivity and efficiency. This is combined with some good underlying focus on growth in our markets, good focus on our priority client segment, driving an overall 34% increase in operating profit there.
Indonesia, it's a C&IB driven story, although we've had good improvement in our priority client segment there, driving a 26% increase in operating profit, and a substantial increase in ROTE. The focus that we mentioned back in February around better penetration of the mass market, in the context of having identified Permata as a non-core investment for us. Using partnerships or digital means is progressing apace. We're very excited about the prospects and look forward to sharing more of those details with you as time goes by. Next strategic priority that we mentioned was a focus on productivity and efficiency. Just a few metrics here. When we look at our percentage of our retail marketing that's going through digital channels now, we're up to 25%. The onboarding time, both across our retail and Corporate and Institutional Banking business, down to six days from 16.
This is just chipping away at the underlying operational inefficiencies that we've had. There's more that we can do, but we're making good progress. Look at a couple of productivity measures, income per full-time equivalent employee or risk-adjusted income, per full-time equivalent. Both are going the right direction, 4% and 13% respectively. We actually prefer the risk-adjusted measure, because that's giving us a real indication how productive our frontline RMs are. We also recognize that that measure will be volatile from period to period as loan impairments swing from period to period. We'll look at both. Clearly with the constrained loan impairments, we're seeing good improvement in both those measures. That will drive the improvement in cost income ratio down to 65%.
We remain convinced that there's further to go, and it's a key area of focus for us. Next strategic priority that we called out was focus on digital. What we said, and what we'll continue to say, is that there's really two types of digital investment. There's ongoing improvements in our business as usual, so just doing what we're doing today a little bit better, a little bit better customer experience, better cost, et cetera. Plenty of initiatives in that regard, and that's part of what's driving the productivity improvements that we've seen. Second is the focus on business model innovation. Targeting new client segments or new markets or fundamentally different market shares or different products and services based on brand-new offerings. We've got some made, and we'll continue to make good progress on that front as well.
Just a couple of the metrics that we look at, mobile adoption rates going up, digital adoption going up, financial markets straight-through volume going up. Our Straight2Bank utilization, which is our proprietary treasury portal in our commercial banking business. Now, over 2/3 of our clients are accessing our proprietary portal to execute their financial needs. On the more business model innovation side, one of the first banks to get the digital virtual banking license in Hong Kong, building that out at pace and looking forward to launching something that's really differentiated in the Hong Kong market when that comes out over the next couple of quarters. An SME platform in India that's giving our SME clients and other SMEs access to an open platform to connect to our larger CIB clients, other product services connect to each other.
We're now up to eight markets where we've launched our digital bank in Africa, with a couple more to go between now and the end of the year. This is very exciting, and it's exceeding our expectations in terms of customer acquisition and average deposit size, something that we can continue to grow on for years to come. We talked about our purpose and, on page 24 for those on the phone. Our purpose and our focus on both our contributions to society, but the way that we want to live our own lives within Standard Chartered Bank. These four areas that I've outlined across the top continue to remain key areas of focus for us. I want to drill down for just a moment on the second, which is our focus on sustainability. We were early adopters of the UN Sustainable Development Goals, we were early sponsors.
We have developed our sustainability framework across all of the SDGs, and will continue to. We try to be thought leaders, and we try to take concrete actions that make a difference. Thought leadership comes in the form of things like the sustainability white paper that we launched earlier this year. Where we talked about the ways that we could usefully measure, monitor, and then ultimately reduce the greenhouse gas emissions, not just at Standard Chartered Bank, but of all of our clients. So we put a thoughtful exposition out. It's been extremely well received by NGOs, by our colleague banks, peer banks, where we've had extensive consultations with each other. With governments and with the clients and with our own staff.
A high level of engagement that we think will advance all of our ability to hit the Paris Agreement that most countries in the world are striving for right now, and we want to make sure we play our part in that. We're doing concrete things as well. We have the first sustainable deposits that have been launched. We're raising quite a bit of money into this. Basically, you get deposits in, it only be on lent for sustainable underlying projects, properly audited, et cetera. Sustainability bonds, where the interest rate or the yield fluctuates as a function of the degree to which the issuer has met its sustainability objectives that they've set out. These are the kinds of things that we will do on an ongoing basis. Green bonds, blue bonds to protect the maritime waters around the Seychelles, those sorts of things.
I dwell on it because it's exciting, and it's a core part of our purpose. I can tell you, to generate the kind of financial results that we are consistently generating now, this steady improvement, yes, I know we have further to go. You need to have employees and clients that really want you to win. This kind of thing makes me and our colleagues really want to win, which is why I take your time this morning to go through something like that. Just to wrap it up. Really happy with the start to the year. We are steadily accomplishing the strategic objectives, and ticking off the strategic objectives that we set out. It's showing through in the financial results. We're fully aware that we're operating in a tricky environment right now.
I'll say that our first half results were despite of some challenging market environments, not because of or accidental. We know that things could get choppy for sure. We're keeping a close eye on the evolution of interest rates. The rate cut last night, and then the prospect of future rate cuts is an incremental headwind. We think we can navigate around that and continue to hit the financial targets that we've set. The ongoing tension between U.S. and China, both trade and security, presents the prospective headwinds, is already having an impact on economic sentiment. Keep a very close eye on that. To the extent that bits or pieces of our business model need to adjust, we will be most comfortable doing that, and of course, we're thinking about it a lot.
In some of this volatility or some of this challenge also comes some opportunity. To the extent that supply chains are being reconfigured, they are reconfiguring into the markets where we have a very strong presence. We would expect to get some benefit from that sort of activity as is ongoing, as we have. All in all, we feel good about where we are today. We feel comfortable maintaining this strong pace of investment. We look forward to continuing to produce the progress that we have the first half of this year. Thanks very much, and Andy and I will now take some questions. Please.
[audio distortion] , just have one microphone this time. I will definitely get around to all of you. Martin, start with you.
Okay.
Yes, good morning. Martin Leitgeb from Goldman Sachs. If I could ask maybe three. The first one on Hong Kong and just what's happening there. How would you assume that, I mean, obviously GDP growth was a touch lower.
Just in terms of wealth management confidence, business confidence, what did you expect the impact to be on the Hong Kong business if the situation as of now were to continue unchanged? How big a concern is that? The second question, just in terms of revenue progression, to understand better revenue progression from here, the $300 million impact arising from legal entity restructuring, which I think you mentioned is largely complete now. How is that phased over the next three years? Would you expect a material contribution already for the second half of this year, or is this more to come through in a gradual way? The third question is a bit more broader, just in terms of the digital bank rollout you have in Africa.
If you were to compare the capabilities of the digital bank to the capability of one of your branch-based representations, how similar are the products and the offering you have? Is it broadly comparable, or does the digital bank offer a significantly reduced product offering? Thank you.
Okay. I'll take a stab at the first and third. Andy will add color and deal with the second. We're watching the events in Hong Kong very closely. It's concerning for sure. I was there last week. Hong Kong's a tremendously resilient place, but this is really preoccupying the population because it's material, and what's going on is material, and it's uncertain how it's going to be resolved. The direct impact on our business has been very limited so far. We've had some branch closures around the site of protests, not material in terms of impact on our business. I'd say that there's a subdued sentiment in the market, which could have contributed to the slowdown in growth and wealth management, as we've seen at other times of uncertainty, be it market or, in this case, specific to Hong Kong. We're watching it closely.
It's not material as yet. Nor do we think that the protests are done as yet. I think that this will carry on for some time. We're obviously standing behind our clients and our colleagues in Hong Kong very firmly. I think business is carrying on for sure. There's an element of heaviness in the market, which is inevitable, I think, given the magnitude of what's going on. If you just look through history at the obstacles that Hong Kong as an economy and as a society have overcome pretty much every five years, if you think of financial crisis, SARS, et cetera. Hong Kong copes well with stress and recovers well after stress. We have absolutely no concern about the way that Hong Kong will recover. We watch with concern as we see the events unfolding day to day.
The digital bank question. The short story is, once fully rolled out, we've been rolling this out over 18 months. It started in Côte d'Ivoire. Most recent was in Zambia and Botswana. We'll have Nigeria between now and the end of the year. Once fully rolled out, the functionality is everything you could do in a branch other than the physical movement of cash, the physical handling of cash. It's a full-service bank on your mobile phone. There are some incremental products and services, lifestyle options or connections through to reward programs or travel opportunities or entertainment opportunities that you wouldn't normally do in a branch. It's the branch plus. I say there's a phasing period. Things like the full range of wealth management products will be available on the mobile banking app over time.
It's well flagged, and we've got clear plans in each case, but it's not all there on day one. The intention is to be able to do anything you could do in a branch on the phone and to do most of it self-directed, rather than getting on the phone and then accessing a contact center or something like that. The virtual bank that we're building in Hong Kong is intended to be all that plus a lot more. It's because we've got two very strong partners, Hong Kong Telecom, and PCCW, and Ctrip, which is the largest online travel service in the world. We want to make sure that we're not just leveraging our banking services and the banking services that we're building, but also the products and services available from our partners in an integrated way.
It becomes much more of a platform for consumers than a mobile banking app. Obviously, we have to build it and roll it out, and then we can declare victory. We're very excited about what we're doing right now.
On the legal entity stuff, it sort of sounds a bit boring, but it's quite profound. I think our legal structure has been very U.K.-centric over multiple decades, and yet our liquidity pools are clearly based in Northern Asia and Southern Asia and in the U.K. What we have been doing is starting to reorientate our legal structures around where the major trading activities are. The first major impact of that is our Singapore business, which used to operate in part out of that Singaporean legal entity and in part as a branch of our U.K. business, is now wholly operating as one legal entity in Singapore. That means we don't have to comply with two different sets of liquidity rules. We can now look at things in the aggregate, and that gives us a liquidity flexibility.
Secondly, our Hong Kong business, we've repositioned it and our China business so that the two are sort of subsets of each other. That has only just happened. Again, over a period of time, that gives us considerable opportunity to look at liquidity in a more flexible way. We would intend that particularly, I think next year and going into 2021, we would see the benefits of that $300 million a year of interest cost reduction happening. Small amount this year, but this will be much more next year and the year after.
Okay.
Thank you. Jenny [audio distortion] . Can I just first ask on income trajectory and the kind of balancing act you're playing between the benefit you're expecting from previous interest rate rises and your sensitivity going forwards, because if I look at your sensitivity, it's come down a little bit. How are you expecting that to play through now? Secondly, if I look at consensus on costs, they've got H2 up on H1 by around 7%. Is that consistent with your view of costs up slightly, H on H? Thanks.
It's always difficult to go and sort of X out pre-existing interest rate in the system and the roll-on effect from new changes across 60 markets and so on. It's complicated. Our estimate of the approximate impact of 50 basis point movement in either direction is not too dissimilar to where we've been before. We've said about 180 on reductions and 210, I think, on increases. As we move forwards now, back in February, clearly there was more expectation interest rates would be slightly up over a period of time. Clearly, the view at the moment is that that probably is slightly optimistic and that we would expect more to see interest rate reduction over a period of time. I think what we've seen the first half is a steady NIM. What we've seen the first half is volumes going up 5%-6%.
Given that the business, I think for the reasons we've just shown, is now starting to get that together. Our market shares are quite low in many of the markets which we're in. I think we should be able to see that NIM staying reasonably constant. The $300 million we just talked about should be helpful in that regard, and actually making sure we keep the balance sheet momentum going as we move forwards. On the cost front, I won't comment on whether it's six or seven or five or whatever. I think that we have had a good first half on costs. The control there is good, it is effective. What we're saying is second half typically will be a little bit higher, partly because the investment spend, approximately half of which we expense through the P&L, the half we capitalize, is second half higher than first half.
That has been the pattern for many years. Therefore, we'd expect a little bit more cost there. Second half has got the full year impact of payroll changes which happen at the end of the first quarter. That also is a reason why the second half would understandably be a little bit higher. Overall, we'd be comfortable standing here today that the full year, the cost increase would be below the rate of inflation, which is what we said back in February is our intent over the next several years. I think important to understand, even within that, there's a considerable amount of investing for the future and the absorbing of the cost of that that is going on. That is not new.
We've been doing that the last two or three years, but we have been eking out a lot of underlying cost in order to be able to fund that future investment for the digital things that Bill was talking about.
Yes, thank you. It's Tom Rayner from Numis. Sort of a couple, please. First on RWAs. Andy, I've noticed you tend to mention now RWA growth below revenue growth. I just wanted to ask you about the commitment to the 2% per annum over time, because clearly we're running a little bit ahead of that in the first half. I just wondered if you could-
Yeah
sort of reconcile us to how we go from the last six months to that sort of average growth over the next year or two. The second is just on the NIM, obviously stable half-year on half-year. If you look at the Q1, Q2 breakdown, there's quite a bit of volatility in there. I think it was 1.6 jumped up to 1.62 because of the trading related stuff, which I think other banks might actually strip out of their NIM. I just wondered, is your comment about the stability on the half-on-half, is that taking any such sort of market related volatility into account as well? That is a genuinely stable trend that we're seeing? Thank you.
Yeah. Two good questions. In February on the RWAs, we said sort of think of the story in two parts. We do believe that we can grow the balance sheet, and that will produce a level of increase in RWAs over a period of time. Secondly, there are some things that we can do which will help to take some of the pressure off that. A specific example, yesterday, we've announced the Principal Finance business that we have been negotiating for a long period of time is finally legally completed, and that takes a chunk of RWAs off the books in the second half. We said that we have put the Permata business in non-core, and over a period of time, we'll see where we go with that, but that's a significant amount of RWAs.
I think the way I look at it at the moment is that the growth in line roughly with income is what we've seen in the first half, but there are efficiency opportunities, the exact timing of which may not have been the first half, but we do still see happening over the next several quarters going forward. Hence that sort of 2% number is one that we are definitely comfortable with. NIM story, you are quite right, is a little bit more complicated. In the period, the trading book assets had a good return. We had some cross-currency swap costs actually in our other income line, not in our net interest income line. If you take that into account, then the overall NIM stayed in the 1.59 type range.
We are going to have a look at it, as your question says, other banks might have X'd that out. It's something we'll have a look at over a period of time. I think it is right to X it out because it is associated with what has given us a little bit of a kicker. We need to look at the two on a net basis. On a net basis, I'm sort of saying that that sort of 1.58, 1.59, which we've had now for a number of quarters, seems to be a reasonably settled pattern.
Yeah. Robert Sage from Macquarie. Two questions, quite different. The first one of which I was just very impressed by the jaws performance under a slightly weaker revenue print in the first half. My question really is just one in principle, which is that if you were to actually find that your revenue growth is, say, below five, a little bit below five over the next three years on average, do you still think that the ROE goal of 10% in 2021 would be still deliverable potentially under that scenario? The second very minor question, you mentioned Permata as a big knock. I was just wondering whether you could give any update at all in terms of what may or may not be happening on that situation.
Yeah. Let me pick those up. There are several moving parts, as you know, to the ROTE income cost, and RWA is being probably the third one not in your question. I think if we were to find the top line was tougher, then it isn't all about cost. There is quite a lot that we can and are doing on the RWA front as well. Bill gave some examples of the proportion of what we call capital light activity. It's a big focus in the CIB business to be doing more that is not so capital intensive. Our history has been one of being relatively capital intensive compared with other banks, and that is something we're trying to move away from. I think there are different levers that we can move. Within the cost, there is a degree of investment, which to some extent is discretionary.
As ever, that is a short-term, long-term sort of balance as to what is the right thing to do there. We are spending much more on investment now than was the case four years ago and prior. We'd prefer to be able to keep that pace up because we believe that is the right thing to do to position the bank. Therefore, the more that we can do sensibly keeping the balance sheet growth to make sure that the top line is moving as we would intend it to be, we will do that. We can pull RWA levers as well. Permata, there is no news. We will update if there was a change in the next stages.
We have some questions on the line, so I'm just going to hand it to my colleague, who's going to read one of them out.
Hello. These are people. There's a few that sell-side that are joining, plus we've got Barclays announced today as well. Some people have taken the opportunity to join via the website. There's a question from, it's been asked by a number of people. I'll attribute it to Ronit because he's been very active on this. Ronit Ghose at Citi. 13.5%, middle of your 13%-14% CET1 range. You're most of the way through your $1 billion buyback. What are the plans for further buybacks? Is that now a next year event? Are they now more dependent on inorganic things like disposals?
We've said 13%-14% is where we want to sit over the medium term. I think it's important to know that actually we do mean that being in that range is where we want to be. Prior to February, we had actually sat above our target range for the previous three years consistently. That isn't what we're saying now. We're saying 13%-14% to us seems good, and being in that range is fine. At the end of the first half, evidentially, we have landed spot on the button in the middle of that range, and that is after we have done the buyback. As we move forward, this will be very much about three things. One, what is the natural profit progression of the business and how much that moves forwards and creates capacity?
Second is what business opportunities there are out there that we would actually prefer to invest that in so that we can grow the business. Thirdly, to the extent that both of those have been satisfied and we are still potentially outside of that range, then we would look at that point in time at doing further buybacks at points in time. Won't be pinned down on particular dates, whatever, but we're well aware that part of getting the ROTE is going to be pulling the E lever as well as the returns lever, and we'll do that thoughtfully over a period of time when we see it is appropriate.
Hi, it's Fahed Kunwar from Redburn. Just one quick factual question. The 6% Q on Q constant currency. If I strip out the DVA, is the DVA all in the second quarter? Would that be higher, quite materially higher if the DVA got that wrong? On the funding cost side, I would find it strange if funding costs are so high considering your loans deposit ratio is particularly versus your peers. I assume your funding costs now come down to $300 million. Does that mean you can optimize your risk weights organically more as well because you can go after lower risk weighted balance sheet kind of assets? Does that allow you to go after more balance sheet-like assets? Is that the right way of thinking about it? I have the double benefit to that reduction in your funding costs. Just falling U.S. rates.
I think in your appendix, you mentioned dovish central banks as a tailwind. You talked about it as a headwind. I always slightly struggle whether it's a negative or positive for you guys because obviously dollar liquidity doesn't get sucked out of Asia if rates are rising in the U.S., but you do get a margin hit. Kind of taking both things into consideration, is a more dovish Fed positive or negative for you guys in the round? Thanks.
Let me take the first two maybe. The DVA was a slight hit in the first quarter and a slight benefit in the second quarter. It is part of the reason why the first quarter to second quarter improvement happened. However, that having been said, as I mentioned earlier, we're about $70 million higher, I think, on second quarter income than first quarter. If you actually look at it by product line, the biggest increase is in wealth management. Which is about $50 million. 30 of the $50 million is the bonus that we have taken early, which is good. We've hit the targets there. The rest is sort of $20 million of underlying improvement in wealth management. You can see the $20 million improvements in retail and transaction banking. It's fairly well spread across the piece.
I'd say you're right that DVA has had an impact in there, but it's sort of one of several moving parts between the two quarters.
Including the year-on-year benefit to the CGA.
Yes. It does. Your second point, clearly the lower the cost of our funds, the more competitive we can be on the pricing. So long as we've got a given level of risk, it does enable us to be more competitive on pricing. There is a double benefit, and that is in part clearly why we are doing what we are doing, try to get the cost of funds down to levels that actually will enable us to be more competitive at margin. To the extent we can do that, hopefully there's a bit of marginal business that we can get without affecting the riskiness of the book, which we will not show and produce. Yes, it should give us a little bit of opportunity.
Yeah, this question is a dovish Fed a good or a bad thing for us? On balance, it's a headwind. It's a negative. Our margins and economics are directly affected by lower rates. Obviously, that's the U.S. dollars, and amongst other things, it's very important to see how Hong Kong rates are responding to U.S. rates. As we've seen over the past couple of years, they don't move in lockstep. That's a separate variable. We have a number of other currencies that we're exposed to that aren't directly related to dollars at all to varying degrees. The sensitivities we give are for a 50 basis point across the board change in rates, not a specific change just in U.S. dollars. On balance, we have to think of it as a headwind that we will incrementally have to overcome at this point.
Always important to ask the question, why is the Fed dovish? Is it because economic growth is slowing? That's clearly an incremental negative if that's the case. Not so much evidence of that. Obviously, there's been some slowing, what's preoccupying the Fed is that inflation is stubbornly low. The low inflation in and of itself doesn't have an impact on us, certainly not to the same extent as slower economic growth does. On balance, we see this as a manageable headwind, but a headwind.
Good morning. It's Chris Manners from Barclays. Just a couple of questions if I may. The first one was on your greater than 10% ROTCE target. As I remember, when you constructed that was actually based on a 40 basis points cost of risk. 25 basis points cost of risk in the quarter's pretty low. If we do have more dovish central banks, maybe that's going to help your customers and their debt servicing. Is there any chance or any sensitivity you could give us if you were to have a lower cost of risk? You've done a lot of work restructuring how you lend and taking the risk down. Maybe we're getting more fruit with that as well. The second question was just on Basel 3.1. I guess you're still expecting 5%-10% RWA inflation, fully loaded.
Will that actually allow you to bring down your capital range once that RWA inflation comes through for 13%-14%?
I'll take the first one. We weren't explicit about 40 basis points. That's the guide that we can give. We don't know what the through-the-cycle credit cost is going to be for Standard Chartered. It felt lower than the guidance that the bank has given in the past and much lower than our experience in the past for the reasons that you mentioned, which is we've had a fundamentally different approach to underwriting credit risk and managing that risk. Of course, we're encouraged by the increasingly lower and lower credit cost. There's nothing that we've seen, and certainly not directly the result of a 25 or 50 or 100 basis points of U.S. dollar rates that makes us think, yeah, we're structurally lower in terms of credit impairments. It may turn out that that's the case, and we're happy if it is.
I think we've been cautious in terms of assessing the sensitivity to interest rates on the part of our clients. But we wouldn't change our guidance in terms of what we think feels like an appropriate through-the-cycle credit cost.
For the rest of the year. No, sure.
Sorry. I was going to say for the rest of this year and how we think about the phasing, I remember in the past, Standard Chartered used to talk about long quarters and short quarters and things like this. Obviously Q1 was a short quarter and had a 10 basis point charge. Should we be expecting sort of a longer quarter in Q4 or?
Yeah, I'm not sure about the long quarter, If what you're talking about is that.
I know they'll have more time.
we have more time to review the book for the full year results.
Yeah.
Yeah.
We typically have had, because of the longer period of review before we close books, a slightly higher charge in the fourth quarter, and the flip of that tends to be the first quarter tends to be a bit lower. It's not as you know, because the quarter is longer, it's just because the period of review is a bit longer, just to be clear. Basel, is it 3.1 or is it 4 or is it 3 and a half? I don't know. Our estimate remains 5%-10% uplift, as you have said. That will be effective 2022, so it is just outside of the sort of core period that we are guiding to. Albeit, obviously, we'll manage our capital to make sure that we are in the right space at that point in time.
Assuming that there isn't Basel 3.3.7, and 4.2 in the making at that point in time, once we have got the higher level, obviously we will be working from that. As we generate more returns, hopefully we can work it down. I think our guidance takes into account that the expectation that is the sort of uplift that we would see in that time period.
Hi, good morning. It's James Invine here from SocGen. Can I ask a question about your four target markets, please? You've already mentioned some of the capital you've taken out of Korea. How much capital can you take out of those markets? If I look at the local legal entity accounts, they've all got pretty generous core Tier 1s.
Does the amount of capital that you can take out of their markets reflect where you may choose to land within your Group 13%-14% target?
The short answer on the second part of the question is not so much. There's an element of excess, call it surplus capital requirements in a local market that contributes to the buffer that we need above what would otherwise land for our CET1. It's not enormously material. Look, what we would love to be able to do is to deploy that capital that we've got in each of the markets. There, certainly in markets like Indonesia or India, there are opportunities to deploy that capital. We have been, and we want to continue to. Korea was substantially excessively capitalized, and returning a substantial amount was a real step in the direction in terms of getting that right size.
I would say the UAE is someplace in between, but broadly, we'd like to use the capital that we've got in these markets, and then not have any back through to our group ratios. It'll take some time to be able to get there.
Thanks.
Okay. More questions in the room. We've got one on the line. Okay, last question, I think unless anyone has a burning desire afterwards. We'll go to the line.
Okay, this is the final question. This is from Manus Costello at Autonomous. You said markets had a great first half. Obviously, we've heard from Berto about that business in May. Do you think this is a run rate that you can maintain, or are there any exceptional conditions that you want to call out?
I don't think there's anything exceptional in the first half. We know it's a volatile business, and of our business lines, it will remain volatile. It's been volatile to the upside. What's important is the structural improvements that we've made to that business over the past two or three years. A substantially new team, a clear focus on those things that differentiate Standard Chartered, which is our extraordinary local market access, in 40 markets around the world, where in some cases we are enjoying a very substantial market share. At the same time, we've invested heavily in G10 currencies for automation, digitization, algorithmic trading, things of that nature. We're able to hold our own vis-a-vis any of the bigger financial markets or FICC shops in G10 markets.
We absolutely excel in local markets, and we've really shifted our focus into those areas where we can make a big difference. We've also fundamentally repositioned the credit trading business, to be consistent with our much more substantial focus on originating and distributing credit risk more broadly. That's seen an improvement in financial results. It's also strategically much more valuable for us and for our clients because we're accessed in credit markets and credit products that they would find difficult to access otherwise. I think there is some structural improvement, but we can't be blinded to the fact that there's an element of market sentiment and risk management that will be volatile.
Okay, that's it from the room. I think that's it for those questions. Thank you, Ash.
Thank you very much.
Thank you.
Thank you.
Thank you. That does conclude the conference for today. Thank you for participating. You may all disconnect.