Good morning, everybody. Thanks for joining us bright and early. You'll notice that in some of our tee-ups for these sessions, we refer to childish themes, whether it's toys or Marvel credit cards or things like that. It's because we're young at heart, and we thought you could use a bit of that first thing in the morning. That despite 160 years of history. That company, Toye ast, it's a great success, right? It's an SME client of ours in Hong Kong. They had their ups and downs as anybody getting into that kind of business does. We stuck with them throughout. They stuck with us throughout. They're now a major exporter of toys around the world, including these cool little model cities. If you're interested, we can probably source you one. Sorry, I got to get rid of this.
Some of these things give me a hard time. How are we starting the year? Pretty good. We're happy with this start to the year. It's a solid start. Strong financial performance as you see, and improving steadily. We will talk a little bit about our key growth agendas, which we think are firmly on track, doing more or less what we would like it to do and what we expected. In particular, we'll focus on the progress we're making on the digital front. There's clear evidence that the risk discipline that we introduced quite strongly three years ago is bearing fruit in much lower loan impairments, but also improving returns. That will be a recurring theme that we come back to through today and in the quarters to come. Capital remains very strong. Liquidity remains very strong.
We think that this is appropriate given the remaining uncertainties, both the geopolitical and regulatory. We're certainly comfortable against that backdrop, reinstating the interim dividend at $0.06 per share. As we've said at the full year, and we'll repeat now, we would hope and expect that that dividend would increase as our earnings increase, and equally, obviously, we hope and expect our earnings to continue to increase. The return on equity is making steady progress towards our medium-term goal of over 8%. As we look to the period to come, we would look to continue to manage each of the lines contributing to equity, i.e. income, cost, capital, and loan impairments or other impairments. All of these things are supportive of the medium to long-term trend that we've set out, and we feel that we're very much on track.
Good indicators of underlying success, thinking about the inputs. Customer satisfaction surveys are indicating that we're steadily improving. When we look at the fact that we've got a top Net Promoter Score in six of the eight major retail markets where we operate, and that's a top, that's not just the top four for our sub-segment. These are clients saying to us that we have a fundamentally differentiated value proposition, and we're delivering it increasingly well. Likewise, on the corporate side, our voice of client work, third-party surveys, assessments of market share all give us the strong sense that we're on the right track with clients. We are driving a hard-driving performance culture. We're not fully there yet by any means but we're taking very concrete steps in the early part of this year. We'll talk about that a bit later. Finally, the economic backdrop is supportive.
Obviously, we're in a cyclical business. We're in a good part of the cycle right now. We feel that this is going to continue for some time. We're investing into our growth markets with a high degree of confidence that there's value in these markets and that the growth will remain. Of course, there are uncertainties. We're also prepared for that. The strong capital position, the strong liquidity prepares us well for the curveballs that could come at us through time. We'll talk a little bit about that, in particular, the trade issues later. You've seen this breakout at the full year. We thought it's worth sticking with this format. We're broadly breaking our business into three types of business.
First, this is now a little bit over half of the income of the bank, is those areas where we focused on extrapolating our key competitive advantages into real growth in our markets. This is the transaction banking business, the wealth management business, the mortgage and auto business, secured lending where we have a differentiated proposition vis-à-vis clients, either because of our brand, because of our existing position, because of the markets where we operate. That part of our business is growing very nicely. 14% year-on-year, 8% half-on-half. These are areas that we focused on. We're generating the growth. Mathematically it will continue to be a bigger part of our bank. That's what one would expect for the areas that are playing to our key competitive strengths. We're very happy with the progress.
That second bucket, the middle bucket, which we call return optimization, is that portion of the bank that we recognized back in 2015, we still recognize today, needs ongoing transformation. That's the legacy lending book in our corporate business. It's parts of the mass market in our retail business. This part of our business is being optimized. Part of optimization is sacrificing some income along the way in order to improve returns and making some investments in order to be able to deliver product more efficiently. We've managed to stay about zero in terms of income growth, 1% up year-on-year, 4% down half-on-half, but we're improving the underlying returns. Of course, that's becoming a smaller proportion of the bank mathematically. In fact, the final bucket, the final quarter of our income, roughly is these very market-sensitive areas.
Financial markets and treasury in particular where we know that the external environment is going to drive the quarter-to-quarter results. We intend to grow that line and grow that through the cycle but expect to have some noise along the way. That's exactly what we've had with 4% year-on-year decrease on the back of the very strong treasury results in the early part of last year. A 23% half-on-half increase on the back of resumed strength in financial markets on the road to recovery. Back up to a more normal level in that market-sensitive area. We've included a measure of risk-adjusted income, which is just income less total impairments. We think we want to convey the sense that, yes, we are growing income, but we're growing higher quality income. We're growing income that has a lower expected loss.
Over time, obviously, that measure of income less loan impairments will give a truer picture of the quality of the income that we are generating. Clearly, we are generating a strong growth rate, especially that 15% half on half on a risk-adjusted basis is encouraging. All that leads to the return on equity of 6.7% in the first half of the year. Andy will drill into the fact that that 7.5% return on tangible equity, which is not the measure that we use most commonly, but obviously, it is one that you use for comparisons in many cases. We think this is a strong indication that we are on the road to hitting our medium-term targets as we set out at the full year. With that, I will hand over to Andy, and I will come back at the end with some more thematic comments, and then time for Q&A.
Good. Thank you very much, Bill. As usual, just pick up one or two of the key financial numbers and then go into those in a little bit more detail. $7.6 top line, $2.4 underlying OP, and 6.7% ROE. Just in terms of high level, 7.6% on the top line is a 6% increase first half on first half. Operating costs up 7%, 5% on the constant FX. Some acceleration of investment spend very deliberately into the first half, which I will come back to. Big change, I guess, on the numbers really in the credit impairment line. A $0.3 billion charge for the half year, evidentially our lowest for quite a long period of time, and massively lower than where we were two or three years ago. Again, I will talk about that in a minute.
That has contributed to the $2.4 of underlying operating profit, which itself is a 23% increase year-on-year. Restructuring and other items broadly net neutral, and hence statutory profit of $2.3. Below the line, dividend per share, 6, as Bill has referred to, the reinstatement of the interim. The CET1 at 14.2% strong, up 60 basis points in the six-month period. Return on equity, 6.7% on the pure return on equity measure. If you do it on a tangible equity basis, the equivalent number is 7.5%. Both of those up about 1.5% year-on-year. Just a little bit more detail then on the income. A year ago, $7.2 billion. In the first half this year, $7.6, about $400 million increase in income.
You can see in the green blocks on the left-hand side here, the things that have contributed to that, and on the right-hand side, the things that have detracted from it. The biggest contributors have been transaction banking and wealth management. Both of those up 15%, 16% year-on-year, particularly within transaction banking. The cash side of transaction banking up about 25% year-on-year. Then other contributions from retail, financial markets, et cetera. On the right-hand side, treasury down a little bit, and that was primarily the non-recurrence of the big boost we got in January of the previous year. Otherwise, we are fairly similar to prior year. In terms of the second quarter, that was about $100 lower than in the first quarter of this year.
Primarily wealth management, very buoyant first quarter, slightly less buoyant but at more normalized levels in the second quarter, and a little bit financial markets. Broadly speaking, those aside, fairly similar levels of activity. Two charts, one of them just doing the breakdown of the key numbers between the main client segments, and then the following one on the major geographic regions. On here, I think actually probably focus particularly on the top line here, the Corporate & Institutional Banking business. 7% income growth, but actually, this percentage isn't on here. Profit growth 70%, very significant improvement, particularly loan impairments, et cetera. Now seeing the ROE print at 6.9%, the highest that we have had in that business for quite some period of time. Retail Banking, 13% ROE on the right-hand side there.
By far the most high returning of our businesses, very consistent with the session that Ben and the team did at the Investor Day recently. Good growth there, 9% on the top line and a high ROE. Commercial Banking, 7% growth on the top line, went slightly back on the bottom line, primarily because a year ago, we had an exceptionally low for the commercial business, low loan impairment, and that normalized more in the period. Then Private Banking, still not the significant profit contributor, but at least seeing some top-line growth there at 12%. That's the sort of broad composition of where we're at with the overall business, about half the profit coming from corporate and half coming from consumer and the center. Equivalent numbers this time done on the regional basis.
Greater China and North Asia, as we all know, about 40% of the group by way of income has had a very strong first half to the year across really all countries. The region up 11% on income. Hong Kong itself, the biggest business, up 11%, profits up 25%, and I think the highest operating profit we've had in Hong Kong in a half year since 2013. Very strong there, but also really across the piece. China, 24% increase in income, some of that FX related, but nonetheless, a very strong performance there. Korea, 6% increase in income and now actually regularly making a profit, which is really good after the challenges there a while ago. I think really across that whole region, a good performance and across pretty much all client segments as well. ASEAN there, 6% up.
We had a very strong performance, particularly in Singapore, 15% up on income, 77% up on profit. The whole of the region has performed nicely. Africa and Middle East, a little bit more muted. Africa probably a little bit more so than the Middle East, fairly flat on profits. Then Europe and Americas continues to be the big hub for the corporate activity in the CIB business. Change of topic, onto expenses. November 15, we said that one of the strands of the strategy then was to take $2.9 billion out of the gross costs over the four-year period to the end of 2018. We have achieved that six months ahead of schedule at the end of June, good focus there, and I think a big change in the culture and the mindset towards costs.
On the bottom left, we have got the cost for the first half. You can see at GBP 5.1 we are up 7%. As I said earlier, 2% of that is FX. GBP 5.1 is up on the first half of last year, but is very similar to the second half of last year. Within that, very important to note, we have very deliberately accelerated some of the investment spend and therefore have expensed that in the first half, whereas normally it would go into the second half, and I'll come onto that on the next slide. That really being an endeavor to get some of the systems upgraded more quickly so that we can improve the client experience.
Overall, we're saying we'd anticipate the second half expenses to be similar to the first half at ex bank levy, and that's assuming the FX stays roughly where it is at the moment. On the investment spend, the chart here on the left has got the first half investment spend for each of the last four years, and you can see hopefully fairly clearly that we have been increasing that progressively throughout that period. Two observations. One, it is very much increasing. The second, which I think is also really important, is the top slice there, strategic, as you can see, is just under half the total spend. In the past, we were spending almost everything on regulatory and obsolescence and had very little to spend on actually improving the fabric of the business.
A significant shift in terms of what we're doing to actually improve the physical infrastructure of the IT, et cetera, going forwards. Right-hand side of the chart gives one or two proof points as to what we are now seeing, and particularly what customers are seeing as a consequence of that. The retail banking there, the number of digitally active clients has increased now to pretty much one in two of our clients, whereas it was one in three a while ago. Commercial bank number of clients who are actually just going straight through, as in straight through electronic processing, 57%. That was 50%. Possibly most significantly, Corporate & Institutional Banking average time to onboard a client, which used to be 40 days plus, now down to eight. Really helping, and the customer feedback on many fronts is really positive here.
I'm very determined to continue to spend and unashamedly accelerating some of that into the first half. Now, credit impairment. There's a good chart. Probably three years ago, we wouldn't have envisaged seeing one looking like that. GBP 300 million of charge in the first half, which is roughly half where we were in the immediate two preceding half years. Two reasons for that. One, the gross provisioning is lower than we have had before. Secondly, the level of recovery that we're actually getting is higher than we've had before. Now, that can move around between periods, but nonetheless, roughly of that halving, a third relates to lower gross provisioning, and two thirds relates to higher recoveries. Although we're on IFRS 9, that really hasn't influenced, I don't think, the general shape of this at all.
Importantly, some of the underlying metrics in the text on the right, the ongoing Stage 3 is a new sort of euphemism for non-performing loans. Those have reduced half on half by 6%. The early alerts are the ones where we're sort of watching more broad indicators, 21% lower. The Category 12, which is the one below non-performing loans, is 30% lower. Really significant improvement in the quality of the book, and hence why we're getting that through. I know everybody wants to know where we're going to end up at the full year on loan impairments. It's always a very difficult one. I think they have consensus of about $1 billion. It'd be nice to think that we might break that, but we will see. Anyway, good progress on the credit side of the business. Moving on to balance sheet and margins.
Encouragingly, we saw net interest margin continue to move ahead a little bit. We've had quite a number of quarters where that's been the case. 1.59%. Obviously, some of that benefiting from interest rate increases with, again, higher margins on liability products offsetting some reduction on the asset side. Net interest income has risen over the first half to first half by 10%. It's pretty much the whole of the increase in the income, but that is, I think, a strong performance there. Bottom left, you can see the customer accounts, deposits from customers, et cetera, $412, $435, up 6% since the end of last year. The loans advances to customers up about 4% since the end of last year as well. Just gently ticking forwards on both fronts. Quality of book on the top right-hand side.
In the solid bars, the proportion of the book that is investment grade is just progressively rising. 54%, 57%, 61%, and the proportion of our total Tier 1 capital that is relating to our top 20 corporate exposures around the 50% level. We are, per the bottom right, very liquid, and we have got a good loan advance-to-deposit ratio. Let me show one or two stats there. The focus we've had on the operating accounts within the corporate business to make sure we're getting as many of those, which has been very key to the 25% growth in the cash transaction banking income. That has nudged up during the period. Surplus liquidity being generated by the retail bank, also up quite nicely in the period. Slight reduction in CASA in the retail side, slight move to term deposits in one or two markets, but not hugely.
Despite that, the overall NIM, as I said, up by four basis points. CT1 and risk-weighted assets. CT1, as I said, up by 60 basis points to 14.2%. That is primarily driven by profits. It does help to have more of those. Offset on dividends, the RWAs being a small extra there. The RWAs on the bottom is partly FX. That has helped. One or two model changes. Operational risk, which is formulaic on a three-year trailing basis. You put all of those together, and we're down at $272 billion on the RWAs. Relative to the increase in the loan exposures, more RWA efficiency, which is again, something we've been very focused upon. In summary, bang in the middle of the medium-term guidance range on the top line.
Where we have been investing money, we are seeing growth, which is very encouraging, and hence why we have accelerated some of the spend. We continue to target keeping the annual expense growth below the rate of inflation. The credit book behaving well is also another plus. Dividend being resumed and more confidence, I think as each quarter goes on, that the 8%, and hopefully more later, is perfectly achievable on the ROE. With that, back to you, Bill.
Thanks, Andy. Just a couple more comments from me. Dig in a little bit on the ROE guidance that we've given and the progress that we're making. Some of the things that we're looking at to give us confidence that we will exceed our 8% target, so hit that 8% plus ROE target in the medium term, and obviously continue beyond then to cover cost of capital and generate some incremental value for our shareholders. Just quickly running through the indicators that are encouraging for us. On the C&IB business, as Andy said, the network income as a percentage of the total has continued to increase, so up to 67%. Non-financing income, similar but somewhat separate, up to 52%. Clearly focusing on those value-added services for our clients, corporate clients in this case, leveraging our core strengths.
On the retail side, with the ROA at 13%, the wealth and deposit income as a percentage of the total up to 60%. This is clearly the capital-light version of the retail business playing to our core strength with affluent customers. As Andy mentioned, again, digitally active clients up to 47% of our total, and we would expect that to continue to grow as we roll out the digital initiatives that we mentioned earlier and that I'll spend just a moment on in a couple of minutes. Commercial banking. New-to-bank clients are growing healthily. This is an area where we contracted substantially on the back of earlier credit losses. Seeing new clients come in who themselves are doing a higher and higher proportion of their business with us in non-financing income are good positive indicators.
On the private banking side, we'll be watching ongoing net new money flows and AUM. We've had a significant period of consolidation in that business, including an element of de-risking. We're fully ready to start growing that business, and we are growing the top line. We should see that flowing through, in terms of net new money and AUM, in the periods that follow. Just a couple of comments on the digital side. The objectives, I think, are relatively straightforward and familiar to you. Likewise, the impact, it being a combination of better customer service and lower cost for us. A more efficient process. Worth calling out the degree to which we're balancing our investment portfolio between things that we're developing in-house and things that we're developing with partners. We've had some great successes that have manifested themselves in the early part of this year that are purely in-house.
Our digital bank in Ivory Coast, Cote d'Ivoire, which we will roll out across Africa over the next 18 months through the Middle East and South Asia, is entirely developed in-house. This is 100% Standard Chartered technology. It is our mobile banking app, it is our core banking systems, it is everything in between those. It works. It is highly effective, it is cost efficient, and it is being extremely well-received in the Ivory Coast. We do not have a retail business in the Ivory Coast, this is it for Standard Chartered. It is a pure standalone digital bank. When we roll out in other markets, Ghana, Nigeria, Kenya, et cetera, we do have a retail business, and this will be a digital offering side by side. In India, we rolled out a real-time onboarding, purely digital account suite. Full banking services, layering in those services over the course of this year.
Everything that you can do in a branch other than move money, you can do on your mobile phone. Obviously based in India off the national identification system, the Aadhaar number, which has been highly effective and very impactful in terms of generating new accounts for us in India. We expect that to accelerate. Again, entirely Standard Chartered technology. The robo-advisor that we built in Singapore, which is award-winning in many regards, entirely developed by Standard Chartered. Andy mentioned the Straight2Bank system that is our treasury portal for corporate clients, developed by Standard Chartered years ago. Updated new release in the early part of this year. Super high impact with our corporate clients and driving our leading market share with corporate clients in transaction banking and financial markets in our markets.
Likewise, the EQ and FI Connect are our online trading platforms that we have rolled out for our private bank clients, which we will roll out across the world, developed by Standard Chartered. It is not all about Standard Chartered. We are a midsize bank. We cannot do everything ourselves. We do not have the tech budget of the largest banks in the world. We do have access to the best technology in the world through our fintech partners. We have got over 50 partners around the world. That number will grow. As we continue to expand, we have become very good at managing these partnerships, whether they are partnerships with giants like Ant Financial, who chose us over anybody that they might have worked with, to build a remittance service as a pilot, obviously between Hong Kong and Philippines. It is working.
Highly effective, short-term, low-cost remittance platform to allow expatriate workers in Hong Kong to return their money to their families or whatever in the Philippines. Obviously, completely financial crime compliant, et cetera, which is a critical part of any remittance platform. On maybe the other end of the spectrum, Ripple, which is a company that we have partnered with for several years now. We have built a leading cross-border payment system that is actually functioning with blockchain-based payments, initially between Singapore and India. Similar to the Ant Financial remittance platform, this is something that we developed in partnership with a world leader. In fact, our participation with them has helped make them a world leader.
soCash is developing a way for us to expand our physical footprint in Singapore into 400 retail and other consumer outlets, to offset the fact that we are restricted in the number of branches that we can have or even the number of ATMs that we can have in Singapore. So on. We are very happy working with partners. We are very happy working on our own. The combination of these two things is positioning Standard Chartered as a leading digital bank in the world. Of course, our aspiration is to be the leading digital bank with our customers. This is all part of a much broader cultural agenda that we are driving very hard. Listed on the bottom left here, the three valued behaviors of Standard Chartered. This is an internal thing. We use this internally. It is on the back of our ID cards.
Importantly, it came from within the organization. We spent a couple of years now refocusing our organization on what it means to have a strong performance culture, what it means to recognize that we can be best-in-class at the things that we set out to achieve. Not in everything, but the things that we know we can do well. We never settle. Continuous improvement. We will leverage the capabilities of our bank across borders and across divisions better together. Do the right thing obviously speaks to conduct, but it also speaks to the way that we engage with our clients and the way that we engage with each other. These valued behaviors are making a big difference in Standard Chartered.
It is part and parcel of a much broader program, but one that is transforming our culture into what we will need to be to operate successfully in the digital economy, in the fastest-growing markets in the world, in a disciplined way. Talking a little bit about our foundations of risk control and conduct. I just mentioned the focus on culture. We will drill in a bit on cyber. Very focused on managing our financial crime risks. We have made good progress that has been recognized by regulators, prosecutors. You will have seen that we did extend, or the prosecutors extended our DPA, until the end of this year, while they complete their investigation of the historical issues related to sanctions and other financial crime controls pre-2012.
The good news is that they continue to recognize the progress Standard Chartered has made, and we will continue to work openly and cooperatively with them until they are finished with their investigation. The encouraging signs along the way are the progress that we recognize, but also the progress that they recognize on our behalf. Cyber is an issue that has become, and will continue to become, increasingly important. We have a program to make sure that we either close any gaps that we identify or get to the best practice in the market, focused on protecting, enabling, engaging, and responding. This is something that you will be asking about and something you should expect to hear from us about because it is a big area of focus for us. We do not take this lightly in any way. It is taking an increasing proportion of our investment and OpEx budget.
We think that our program is on track. We recognize that there's more that we can do. I think you'll probably hear that from everybody. The macro environment in which we're operating is broadly strong. The economic growth is good. The slight tempering of growth in China is not particularly concerning to us. We think it's the natural consequence of the Chinese focus on cleaning up the financial system and streamlining the way that finance is delivered in China. Of course, it's something that we watch and would watch, in particular, the extent to which trade fears or trade war fears impact the pace of investment in or around China. No concerning signs of any materiality at this point, but clearly, people are watching carefully. When we talk about uncertainties in the future, trade is an important consideration for us.
We're not ringing any alarm bells at this point. Otherwise, the backdrop is broadly supportive. Just call out on the upper right of this chart, our exposure to direct trade between China and the U.S., which obviously is at the epicenter of these concerns about trade wars. Our trade income directly related to China-U.S. trade as a proportion of our total income is around 1%. If we look at the companies and countries whose supply chains who are in the Chinese supply chain that would be affected by a significant ratcheting up of tariffs or other trade restrictions, you get to another 1% or 2%. 2% to 3% in total. Not material in the overall scheme of things. Of course, that trade, even with 25% tariffs, isn't going to zero, but it could be impacted on the margin.
The bigger concern, of course, would be outright disruptions in trade. Outright limitations on exports of particular technology or imports of particular goods, which could have a more dramatic impact on supply chains. It could reach further beyond China into the rest of Asia, South Asia, other clients of ours that are dependent on Chinese intermediate manufacturing or ultimate exports. There's no sign of that. In the short term, we can't ignore the possibility that the trade war could escalate to the point where that could become a material impact. I think that the bigger impact would be on global GDP, because that would likely trigger a much broader range of fears. The markets would be quite unhappy about that eventuality, we could expect to see that reflected, which would then have second-order effects on things like our wealth management business.
We are very focused on this trade question. I don't think we have any blinding insights relative to what you might have. We do know our own business, and I think that barring a really exceptional escalation, we should be fine. Just to sum it up quickly, we have had a solid start to the year. We set out a plan three years ago. We're broadly on track. We described the things we were going to focus on. We focus on those things. They're working. The top line is growing. It's growing in the areas that we called out, growing consistently. Some of that is cyclical. Of course, the wealth management business is cyclical. We know that. We've been in relatively benign markets. Stripping out the cyclicality, the structural improvement in the quality of our business and the quality of our growth is undeniable.
We feel like we're on the right track, we're going to stick with that track. We are making great strides to establish ourselves as a leading digital player in our markets and also globally. We're going to retain a strong capital position, as Andy mentioned. It's the right thing to do as we come out the back end of our period of transition. As we look forward to a period where there are some potential bumps in the road, we always want to be sure that we can weather a storm relatively well. That will be the time when we can take advantage of the most opportunities. The ROE, the migration is in line with our hopes and expectations. Clients are increasingly recognizing the value of Standard Chartered, and we are driving a strong underlying culture at the bank, which will accrue benefits for years to come.
With that, I will be joined by Andy up here, and we'll take any questions that you'd like to throw at us.
Martin, first one up.
Yes, good morning. It's Martin Leitgeb from Goldman Sachs. Two questions, please, the first one is, just to come back to your comments earlier on capital and then also to extend that to dividends. I was wondering if you could shed a bit of light on what kind of quarter one level we should think of Standard Chartered running going forward. I think in the comments earlier, you characterized the current status as appropriate, given the number of risks out there. Should we think about 14 as the threshold going forward? The second question, is with regards to dividend. Obviously looking at the significant increase in profitability you have shown, how should we think about prospects for capital return going forward?
Will there be an update or when do you think you can give us an update with regards to potential payout ratio or dividend policy from here? Thank you.
Our public statements around capital have been that we would expect to operate in a 12%-13% range. We're obviously well above that at this point. We've reintroduced the dividend at the full year and obviously reintroduced an interim dividend now. That's a clear indication that we think that we have an ability to sustain that dividend through earnings currently and then prospectively. We've also said that we expect to increase the dividend as our earnings increase. There's as much guidance as I think we're going to give on the dividend specifically. As to capital, I think as the uncertainties that we face recede, and some have receded already, we'll be able to provide some greater clarity as to what we think the appropriate end state is for capital.
The most obvious remaining uncertainty from a regulatory perspective is the national discretion that may or may not be applied to various areas of the Basel III framework that was rolled out last year. That could be a little while in coming before that's perfectly clear. Of course, we still have the open investigations in the U.S., which we would hope and expect will close out at some point in our lifetime as well.
We seem to have a congregation at the top. I don't know.
Hi. Thanks for taking the question. Just a couple of questions. The first one's on revenue. Just looking at the quarter-on-quarter progression, if I strip out the obvious liquidity sensitive balances like deposits and cash management and custody, where things were quite good. I think on the whole, QoQ are down pretty much across the board. I'm trying to square that with the fact that loan growth was decent. What caused those revenues to be weak? I guess specifically wealth management, did you see effects of Chinese deleveraging coming through there? On the retail side of things, you talk about asset price competition. Was that from local regional players or was that from Western banks? Thanks.
If you strip out all the positives, I suppose ultimately what's left will be quite negative. Across the piece, we had, what, $130 reduction, I think in income overall between the quarters. About $80 of that was wealth management, about $40 or so was in financial markets. Wealth management, I think I'd probably look at as being a particularly strong first quarter. The markets generally were very strong, and where we're at in the second quarter was actually good compared with many quarters prior to that. It was not as if the second quarter there was a big problem. Financial markets, it moves around. We have some quarters a bit stronger, some that are less so. I wouldn't really read too much into the one quarter. We had balance sheet growth on the half year of 4% or thereabouts.
I just think each quarter will have slightly different dynamics. It is evidentially slightly weaker. I think wealth is the primary reason for that. I don't think it does anything to deter us from the view that the full year should be in that 5%-7% range.
Thanks. Just the second question is on how to think about jaws. Year-on-year, 1H18 and 1H17, I think is about -1% jaws. If I look at consensus, they're expecting around 4% jaws or we're expecting around 4% jaws. Your income range is 5%-7%. You're below cost inflation, suggest a range of anywhere between 3% and 7%. Considering how much investment has been increasing, which I guess is a positive thing, how should we think about that jaws going forward? Thanks.
I think to your simple math, we should be thinking about those improving over a period of time. Evidently, unless inflation was a lot higher than we've got at the moment, which hopefully it won't be, then that 5% top line inflation or below on the cost side, it should be starting to improve the jaws over a period of time. Just to make one point, because I know it's got some comment. We have spent a bit more in the first half on expenses. Some of that is decidedly moving some investment spend forwards from what would last year have been the second half. We've tended to be a bit second half loaded on investment spend and actually questioning why that would be. If we know these programs need to take place, why should there not be a more even distribution through the year?
That will take a little bit of cost that would have been in the second half of the year out. I think to your question, the intent would certainly be that over the next two, three, four years, we do need to get the jaws moving in a positive direction.
Thank you.
Morning. Guy Stebbings, Exane BNP Paribas. On impairments, clearly very low in the first half of the year. A lot of write-backs and very difficult to forecast, I'm sure. CG12 exposure's down, early indicators down, and you've highlighted risk-adjusted revenues for the first time. Presumably, you wouldn't want to see that come down, having just highlighted it. Does that give us a sign of conviction that lease gross impairment shouldn't be jumping up significantly from here, albeit from a low base?
I think the loan impairment line is one of the more unpredictable lines in the P&L because it can be lumpy, and we can tomorrow find there is an issue with a client that we didn't know about. Yes, it would be lovely to think it will stay at those levels. I suspect we pretty much had everything aligning. The recoveries have been really strong, been unusually so, and the gross provisions have been low. As I said earlier, if we can break the GBP 1 billion barrier, that would be fantastic. We were GBP two and a half billion only 2 years previous to that. It's just genuinely quite a difficult one to forecast, but it is certainly an encouraging start to the year, evidently.
I would just add, I know you're looking for guidance on the next three large single name defaults, but more broadly, we've fundamentally changed our underwriting standards. We've significantly upgraded the overall quality of the portfolio. While, of course, what Andy says is completely correct, there's going to be lumpiness in that number. Through the cycle, expected credit loss is substantially lower now than any time in the bank's recent history, by design. I just note that comes at a cost. There's an income cost to that, both because of the way that we're managing the portfolio and because of the lower returning assets that we're putting on the books. It has an opposite effect on returns, which is we're doing higher quality, higher returning business that should smooth out our loan impairments over time.
I know you're going in a different direction, couldn't resist the opportunity to give the editorial on the broader trend here.
Thank you. Just a quick one on capital and RWA movements. Seeing the first half come down quite significantly, some one-off things going through there in terms of op risk, market related FX. How should we think about that going into the second half, excluding model changes which could have a negative impact? The underlying trajectory should start to increase from here?
You'll form your own views on the FX movement, obviously. I think that the focus we have got and have had for a period of time of improving the productivity of the RWAs, taking the lower returners out, should be directionally heading us in a more efficient direction. The real issue, I think, given that we have a lot of liquidity, is are there opportunities to lend more? If there are, with the right returns, we will be very happy to go and grab them. I wouldn't be so focused upon guiding to an RWA number. So long as it is conducive to getting that ROE up, we'll be doing it.
It's Robert Sage from Macquarie. I've got two questions, please, if I may. The first one's on the margin, which seems to be up about four basis points. I think you said that the second quarter was up. Was it a couple of basis points or a handful of basis points? It seems a sort of a fairly progressive moved up. I know that the HIBOR's gone up and you've had another U.S. interest rate rise in June or whenever. Is this the sort of a fairly steady build in margin that we should look forward to, do you think? The second question was on the associates line, which stepped up very smartly in the second quarter. I know you've been talking about matter sort of moving around, and I was wondering whether that was the primary driver here.
I also note that you're calling out China. This is probably a slightly naive question. Is that Bohai that's sort of particularly doing that? Should we see the sort of the second quarter numbers being something that sort of provides a basis for our sort of future extrapolation?
Okay. Second one first. The predominant increase in the associates line is Bohai. If you look at the regional splits, you can see that split out. I would say they probably had a slightly unusually good second quarter. I'd probably not quite extrapolate that going forwards, but somewhere between the first and second quarters probably would be a proxy for that. On the NIM, we have had a number of quarters now where we have seen the NIM nudge forward a little bit by a little bit. That is good because after several years prior to that when we have seen the opposite happening. Second quarter, first quarter, fairly similar. Not a huge amount of difference. Obviously we did have movements in sort of HIBOR and other rates actually in the second quarter, which will have influenced it a little bit.
Notwithstanding that, a very strong performance from Hong Kong. I'd say, if we can sort of flat top a little bit, that is clearly where we are focused. There are many moving parts that contribute to that. Generally the same theme as before, that liability margins slightly improving offsetting a little bit of weakness on some of the asset margins.
Hi, it's David Lock from Deutsche. I've just got one really, which is on slide 10 on your scale of investment pickup. Obviously completely understand the rationale behind the step up in systems enhancements and strategic spend, the regulatory spend sort of continues to be this slug of investment that is continuing to step up. I just wondered if you could give any more color on when you expect that investment pace to sort of slow down. I imagine a lot of it must be building systems to track things and taking out manual processes. Could you just give any color on where you expect that to trend and if that mix between the kind of cash investments actually can become more strategic and less regulatory?
Well, the good news is it's the first half year we have been here, and it has actually come down slightly. We are on a slightly better track than previously. We said in February that we closed some quite big program deliveries at the back end of last year, and therefore we were hopeful that we were sort of at or round of the peak, and that in the first half would suggest that's probably the case. I'd hope over a four or five-year period that we'd see a little bit of moderation in that. Bearing in mind there is quite a lot of sort of compliance and other almost business as usual type cost in it, and that clearly is going to be part of the fabric for the business going forward. It should decline a little bit, but I wouldn't have huge declines in there.
Jenny Cook from Mediobanca. Just one which is kind of a bit of a follow-up on your investment spend, and specifically kind of the strategic spend. I was just wondering, in the context of a close competitor of yours recently announcing that they're going to invest up to probably about two thirds of your market cap in technology and growth initiatives over the next few years, to what extent could that create upwards pressure on your investment spend? I'm just going to kind of try and get a sense of where that investment spend could need to go to, and to what extent that strategic investment spend is more perhaps defensive driven. Thank you.
Maybe a little bit to the point that I tried to make in my earlier comments. The existence of the, you call it the fintech universe, broadly defined, effectively gives us an option of making investments that show up on page 10 or investments that show up in OpEx through partnerships of one form or other. We've done both. We've done both to good effect. The things that we're investing in ourselves are things that we think are either mission critical, where we need to have our own capability or where we have some particular differentiated position or structural advantage that means we're a better investor in that particular area. When it comes to building digital banking applications for relatively underdeveloped or under-penetrated emerging markets, we think that's a core strength of ours. We want to make sure that we have that capability ourselves.
That said, we've also launched that we're intending to build a digital bank in Hong Kong, not an underdeveloped emerging market by any means. On the assumption that the Hong Kong process led by the HKMA ultimately culminates in our getting the license that we are applying for, we would expect to use a healthy combination of our own technology and third parties, with a bias to third parties. Why? Because we think that in a market that's as developed as Hong Kong, you've got to make sure that you have the best in class for each step of the value chain for customers. Our job will be to pull that together into a single offering. That would likely be a mix of things that show up on page 10, i.e.
strategic investments, and things that show up in OpEx as a practical matter, because we're either in a partnership or we're acquiring a service under license from somebody else. I'm not sure if I'm getting straight to your question, but I think in aggregate, the investment spend that we're making independent of the accounting line that it happens to show up on, will continue to grow. It'll continue to grow because we're in fast growth markets, with earnings that are growing, with customer preferences that are changing, and with opportunities that are great. We're not at all shy about continuing to step up our investment spend. What we're quite comforted by is that the investments that we've made over the past three years, which were a substantial increase on previous years, are paying off.
They're paying off evidenced by the income growth that we're getting and the market share gains that we're getting in our key focus areas.
Thanks. It's Manus Costello from Autonomous. Can I ask about the corporate finance income line, please, which I find particularly hard to forecast. You've called out some asset margin pressure there. You also put it in your slides on the optimized returns. Can you give us some idea of what we should be expecting out of growth underlying in terms of the assets, but also in terms of revenue if margins are coming under pressure there?
Yeah. Corporate finance does move around. It obviously depends upon a little bit the timing of the closing of deals. What we have seen is, I think year to date, the volume of transactions we've done are slightly higher, 5% or so, I think, higher than a year ago. The margin per deal has been a little bit lower. Consequently, we've seen slightly lower corporate finance income now than in the previous half year. The order book is strong. It remains at and above levels we have seen recently. Obviously, it depends upon conversion, and it depends upon timing. Overall, I think the health of that business is good, but it does move around a little bit between quarters.
You had a very strong second half last year.
Yeah.
Do you think that's something you can cycle successfully, or should we expect the second half of last year to be an aberration?
It's quite event-driven. It just depends upon how much client activity we have got. We did have a buoyant second half of last year with the clients. The fact the order book is looking good at the moment should bode well. We'll have to see how much of that does come through.
Maybe you could just comment, Manus, on why we put it in the optimization bucket. There's currently two components of a single deal in Corporate Finance. Part is the money that we make for arranging a deal, fees on advising various parties, and any skim we're able to take in terms of our underwriting price versus where we distribute it. That's upfront for the most part, and in and of itself, it's a capital light part of the business. With that often comes a retained position, which in the past, the way we reported Corporate Finance, the vast majority of the income has actually been NII on retained positions. We shifted a big chunk of the lending book out of the Corporate Finance business line and into the lending business a year and a half ago, I guess.
That's addressed substantially. There's still a meaningful component of the Corporate Finance business, which is NII, and which is specifically relating to those deals where we played an active role in structuring and distributing. As we build up our distribution capabilities, which we are, I think, successfully, although we started from way behind, I think best in class certainly. We've caught up very quickly, much more actively securitizing. It has undertaken several securitization transactions in the early part of this year designed to optimize the portfolio. Some of those have been Corporate Finance deal packages, that we bundled and sold to investors, which themselves are just getting up to speed with the kind of assets that a bank like Standard Chartered originates.
As we optimize the portfolio with much more active portfolio management, we should shift the balance increasingly from NII to fee income effectively or spreads on buy versus sell. That business will graduate out of the optimization bucket into the high growth, because the underlying opportunities for Corporate Finance deal origination remain robust. Our pipeline is good. Our market share is strong. Our technical skills are good and differentiated relative to other people in the market. It's not an area where we face anywhere near the same amount of local competition for the kinds of deals that we do, because they're cross-border by their nature. We are optimizing that business, and it's a good opportunity to make clear that optimization doesn't mean exit. Optimization means reposition business model and underlying portfolio. We're pretty advanced in that regard in Corporate Finance.
We'll just move to Claire, and then we'll come to Chris.
Hi, it's Claire Kane from Credit Suisse. Two questions, please. The first on the treasury income. That line has come back up to the H1 2017 run rate. I think in Q3 last year, you said $250 was a more normal level. Could you just maybe explain what gains are in the Q2 number, or what you see as the ongoing run rate for that line, please? My second question is on the DPA. Given the investigations continuing, what do you see as the range of outcomes at the conclusion of that, and can you confirm there's no balance sheet provision for any financial penalty there? Thanks.
On the latter, confirmed. On the former, the treasury area, it does move around. We've got various component parts in there, the performance of the treasury markets business. We've got the charges we make to our businesses for the equity that is provided by the group, and as interest rates rise, we increase the charge there. That is slightly higher now than it was before. We offset against that the external debt cost. We've retired some debt at the back end of the period. There's nothing particularly abnormal in there. I'd say slightly higher interest rates and the charges into the businesses for the equity they're tying up is the primary contributor.
Were you confirming the DPA question, or were you confirming something else?
I was confirming the back end of the question.
Which is the DPA part.
Which is the DPA U.S. part.
Yeah. Good.
No balance sheet provision, could you give us a sense of the outcomes you're expecting?
I wish we could.
Thanks.
From Barclays.
Good morning. It's Chris Manners from Barclays. Two questions, if I may. The first one was maybe you could give us a little bit of an update on what's happening in India. I see the revenue's down 14% year-on-year. I'm assuming there might be some effects in there. PBT of only $100 million in the first half. I remember you used to do $1 billion of PBT there. Maybe a little bit of update. The second one was to bring it back to capital and capital management. You are running 200 basis points above your sort of 12%-13% guidance range. When we look at the dividend, is it fair to assume a one-third, two-third split of the dividend like a normal U.K. PLC now? Is that what you're trying to indicate?
If so, you'll probably end up with surplus capital. Will we be talking about buybacks to manage that, or maybe just a bit more clarity on the thinking? Thanks.
I'll take the first part about India. You're right, that in years gone by, the bank earned a lot more money in India. You skipped the period in between where we lost a boatload. They're not unrelated. What we're building in India is a really healthy business. We've invested heavily in automating the retail business and invested in building our share back up, where we had lost share pretty steadily during those go-go days of $1 billion of pre-tax. We allowed the core business to deteriorate. We've been investing to build that back up, but both with technology and with feet on the street. It is paying off in terms of share, and we're beginning to see the traction on retail income. Commercial banking business remains strong. The large corporate business has been pretty subdued on the back of the Indian bank rehabilitation process.
We took our pain a couple of years ago in India. It's not to say we won't take any more pain ever, but we are thoroughly cleaned up, I would say, in India. The Indian banking system is not. That bankruptcy/liquidation process is underway, and it's put some serious grist in the mill for large corporate activity in India. Our share of good, healthy business is increasing. We're comfortable that we're making steady progress. We clearly have a long way to go with these current return numbers relative to the capital that we've committed to that country. We're very focused on that.
On the capital front, well, the first thing is it's quite nice to have questions on excess capital. That hasn't always been the case in the past. As Bill said, we're running a little bit higher. We've got some Basel III things yet to become clear, U.S., et cetera. Our sense is it's probably better to be a little bit higher just at the moment. $0.06 interim dividend, we haven't formally gone through a, is it one-third, is it two-thirds, whatever. At the end of the year, obviously, we'll have the more substantive discussion on what we should do with the final dividend. Eventually, the more we can get that profit growth going up, then the better it's got to be for the dividend. We are very well aware of the issue, and it's a nice issue to have on the table.
Thanks.
Looks like.
We've got one more.
No.
Thank you. It's Jason Napier from UBS. The first one on the interest rate sensitivity slide number 27, just note that there's a fairly modest fall in implied sensitivity. I just wondered whether you could talk specifically about the competitive dynamics in Hong Kong and the extent to which the lower measured rate sensitivity is driven by competition as opposed to just the level of rates and how that's performing. Secondly, on the private bank, obviously modestly loss-making at the moment. What are the sort of yardsticks that you're using other than assets under management to tell whether you're on track? Because I know the revenue per customer is nearly $70,000. The average AUM on the number you disclosed was already $8 million. I just wonder how much money should this thing make in the near term, or is it really a longer-term strategic bet?
Thank you.
Interest rate sensitivity, the 330 revised to 300. This is not an exact science. We are having to make a lot of assumptions about competitive pricing, about customer behavior, et cetera. Our core in the numbers, the primary reason for the change is just that as the interest rates do get higher, there is slightly more predisposition of clients to be a bit more choosy about where they're going to put their money and what sort of interest rates they're expecting from it. Obviously, a reasonable proportion of our book is in Hong Kong, and we have seen HIBOR rise through the period of the first half of the year, and therefore, that is factored into those equations. We have done this across quite a number of countries, and it is not just one thematic assumption.
We have tried to take a view as to what's going to happen market by market, and the consequence of that is just a slightly lower number.
On the private bank, our intention is to build a healthy business from a period of pretty significant retrenchment. We dropped in aggregate close to a third of our client base as we went through a combination of compliance-related reviews, but also looking at those clients and the types of activities they wanted to engage with Standard Chartered. We were a little bit over-concentrated with clients that were borrowing against single stocks, typically stocks in their own company, where we were a banker to the company. We're shifting that to, obviously, a completely compliant client base that is also focused on managing a portfolio of wealth, which can be provided by us. We manufacture very little. Basically, we manufacture deposits, and the rest we source from third parties. That's an advantage for us.
We're a preferred distributor for the world's great investment product providers, including, obviously, Prudential on the insurance side. A little bit less relevant for private banking than for our broader wealth category. We've completed that transition at this point. I think we've got a client base that we're broadly comfortable with. We're demonstrating that clients wanted to participate in this platform, so we are adding clients. We are generating some good top-line growth. We still have an active margining capability, but against a different nature of portfolio than has been the case in the past. We're hovering around breakeven at this inflection point. We're quite comfortable that as we grow this business that Of course, there is an element of cyclicality as well, which we just, as a health warning, we have to note.
That structurally, we're building a business that should generate strong growth for the foreseeable future with relatively modest expense increases in a relatively capital-light version that should be accretive to the bank's earnings and accretive to our ROE materially over time. That's beginning to pay off now.
Thank you, Tom Rayner from Exane. Obviously, it's very clear, Bill, you can't really say anything about the U.S. settlement or certainly not much. Is it possible, though, you can give us any color on what aspects of the program needs improving, which has led to the DPA extension? Can we read anything into the fact that the dividend has been resumed, the PRA, I guess, are fairly relaxed about the potential outcome? Is that, again, reading too much?
Well, I couldn't comment on the PRA's thinking on anything. We obviously feel comfortable that our bank can sustain a dividend that we would expect to increase as earnings increase. On the DPA, the only thing I can say is that we've had a program that was set out with regulators and prosecutors back in 2012 and 2014. We've made good progress. We think that we're on track. As I've called out each time I've set up here, it's a long-term play, and we will never be completely done. There will always be more that we can do. We feel that we have a very good understanding of where our gaps are. We've got a very good program for closing those gaps.
Absolutely encouraged that the prosecutors, when they extend the DPA, make the observation that we made steady progress, they've now made that observation a second time. Of course, that's not normal. They have the opportunity not to say that or to say worse, to say that things simply aren't up to snuff. That's as much as we can say. We're encouraged. It will close out eventually. We're confident. I wish I could call the timing or the particular implications.
Thank you.
Two more questions. Okay. Thank you very much. No more questions.
Thanks.
Thank you, Bill. Thank you, Andy.
Thank you.