Welcome to Standard Chartered Update for the Q1 of 2018. Today's call is being hosted by Andy Halford, Group Chief Financial Officer. Once his opening remarks have finished, there will be an opportunity for questions and answers. At this point, I'd like to hand over to Andy to begin.
Thank you very much, Vivien. Good morning or good afternoon depending upon where you have dialed in from. Hopefully, you will have had a chance to digest our interim management statement given the earlier release time. I will draw out just a few things before opening the line to questions. So overall, the main message you should take away from these Q1 results Is that we are clearly on the path that we laid out in February.
We said that the group should be able to deliver a compound annual growth rate in income of between 5% 7% in the medium term, and we provided evidence of that ability in the Q1 with every segment contributing positively. We also said we will be able to deliver positive operating leverage And we have done that as well with the culture of efficiency that is being embedded into the business, enabling us to generate more income from the franchise whilst absorbing higher investment to further strengthen and improve the business. And finally, we said that this discipline would take Our return on equity passed 8% in the medium term. And although this is only the Q1 and there's no bank levy, as you know, and loan impairment does tend to be lower. At the start of the year, our underlying operating profit before tax improved 20% to $1,300,000,000 which represents an annualized return on equity of 7.6% compared with 6.3% for the same period a year ago.
Our improving profitability also enables us to further improve our resilience, another core objective of plan laid out in 2015. Delivering more profit in the single quarter than we did for the whole of 2016 has helped increase the CET1 ratio to 13.9%. So looking at the numbers in a little bit more So starting with income. Our biggest region, Greater China and North Asia, continues to perform strongly With our businesses in all five markets there, growing income in the period and contributing to 13% top line growth for the region as a whole. I'll briefly mention China since it has been in news a lot since we published Our full year results, particularly in the context of trade tariffs, while we believe a full blown trade war between the U.
S. And China would not be good for anybody, the reality is that the income we generate from financing trade flows on the relatively more competitive routes between the U. S. And China straight Hong Kong It's not significant to the group overall. A much greater proportion of our trade finance business relates to financing China's trade with markets in the rest of the footprint.
So whilst we benefit when Global Trade grows, we benefit in particular when China trades more actively with markets in Asia, Africa and the Middle East. Meanwhile, the team in China continues to remain focused on what it can control, delivering another quarter of improved top line and bottom line. In our 2nd biggest region, ASEAN and South Asia, where income grew 7% year on year, We're seeing encouraging momentum emerging in our largest market there, Singapore, that delivered double digit income growth, driven primarily by retail banking. In India, our Retail Banking performance is improving. It also grew double digit rate year on year, whilst our Corporate and Institutional business remains focused on executing the actions that will enable it to recover sustainably.
So turning now to the income performance is looked at from a client segment perspective. Our Retail Banking business continues to perform very well and is delivering some exciting initiatives in addition to the digital banking project in Cote D'ivoire that Bill mentioned at the full year results, Including introducing real time onboarding in India, this will mean new clients can now open savings accounts remotely Within minutes or days instead of days or even weeks using their national identity number, giving them almost instant access through a full suite of digital capabilities for their transacting, investing and borrowing needs. The CEO of our Global Retail Banking business, Ben Hung, will, at the end of this month, present a seminar to share with you how we are investing and adapting to improve what are already very good returns from our retail business. Our other big segment, Corporate and Institutional Banking, is executing the objectives laid out last November and reiterated in February to continue to enhance its service to existing and new clients and improve the quality of its income and credit portfolio. As we have said before, not every product will develop at the same pace, but overall, CIB income grew in the Q1 at the top of its 5% to 7% medium term target range.
From a product perspective, you may recall back in February that we presented a slide that grouped Our activities into 3 broad categories, reflecting their different stages of development. The first category included products Where we have been focused on leveraging areas of existing and differentiated strength, namely transaction banking, wealth management, mortgages and deposits, Income from those activities make up around half of total group income, which you may recall grew in aggregate 13% In 2017, those businesses have continued to perform very well and grew 18% year on year in the Q1. The 2nd category of our quarter group income included products such as lending and credit cards and personal loans that we are still in the process of optimizing to improve returns. These actions led to suppressed income and aggregate income from those products was down 2% year on year in 2017, Although up by a similar amount year on year in the Q1, broadly stable in other words, but resulting over time in a higher quality book. Stepping back, the 5% to 7% income growth guidance we gave you in February for the group as a whole incorporates the relatively more subdued top line growth potential for these activities whilst returns are being optimized.
The rest of the group's income is generated by activities such as financial markets and treasury, where the performance is heavily influenced by market conditions. The plan here is over time to deliver higher returning income that is less dependent on market volatility. So to conclude on income, strong and increasingly high quality growth in some of our segments, Regions and Products is offsetting the impact of the steps we are taking to fundamentally improve the others, meaning that overall, We feel confident in delivering returns accretive growth this year within the 5% to 7% medium term target range. Moving to expenses, which in total, including regulatory costs, were up 4% year on year or 1% On a constant currency basis, given U. S.
Dollar depreciation, we continue to make good progress here, Having essentially absorbed both inflation and a roughly similar quantum of increased investment project expenses over the last couple of years whilst at the same time fundamentally repositioning the business. Looking ahead, absorbing the incremental costs of the recent dollar depreciation may prove somewhat challenging, meaning overall cost year may be slightly higher than last year, but our focus, as you know, is on returns. And with FX movements having a broadly neutral impact on operating Profit, we will not shy away from spending in areas that will give us the greater confidence in delivering on our return on equity targets. We have seen more and more examples where those investments are resulting in tangible improvements, take our investment into enhancing our capabilities and client experience Trade Finance, for instance, where we have a top three position globally, a recent independent survey showed that we now rank number 1 for client satisfaction in Asia, which is helping us to gain market share. And on the digital front, We have launched the digital bank in Cote de Beauvoir, as I mentioned earlier, and are excited at the prospect of building on the lessons we learned there to help build better digital capabilities is in our other markets.
Internal teams are now tackling efficiency projects with heightened energy and urgency Of the many new operational effects in this project that are underway, I just want to highlight a couple to give you a sense of how we're executing on our commitments to never settle and improve client experience. So in Commercial Banking, a significantly simplified client onboarding process has been rolled out 17 markets and has led to a 30% reduction in documentation turnaround time, drawing positive feedback from clients. And in Pakistan, the team has been targeting improvements to make it easier to attract higher quality deposits. They have reduced the On boarding turnaround time by onethree already and are cutting down the length of application process to onefive of the previous size. So turning back to the results themselves and moving on to credit quality, where as you know, we have made considerable progress over the last Few years.
Loan impairment charges are often lower than the Q1, and this year, they were around the same level as they were in Q1 2017. As usual, I'll resist forecasting loan impairment, particularly in the light of the new IFRS 9 I can't understand it. All I would caution is that last year, the total was more than 4x Q1. And whilst economic conditions continue to improve, we do have a large balance sheet, And we operate in some of the most done out markets in the world. But nonetheless, I think loan impairment is behaving well.
Credit quality overall has improved year on year. Gross credit impaired loans in the ongoing business or Stage 3 exposures, as they're now called in the IFRS 9 parlance, We're up 2% quarter on quarter, largely relating to the downgrade of some credit grade 12 exposures. Color ratios have remained broadly unchanged. So just a couple of observations on the balance sheet Before I conclude with capital. Customer loans, I.
3% in the Q1 or 9% year on year, spread broadly across the regions with about onethree in Corporate Finance, A third in Retail Banking and Treasury and a third in reverse repos within the Financial Markets business. Customer deposits, meanwhile, were up 1% in the 1st quarter, 5% year on year, again with all regions contributing. About 2 thirds of the growth was in our cash management and custody businesses and retail banking deposits. This is a result of our focus on attracting higher quality sources of liquidity and has delivered a small but encouraging uptick in net interest margin compared to this time last year. The other third relates to repurchase agreements as we helped our clients manage their own liquidity positions.
Risk weighted assets were broadly flat year to date with increases in credit risk weighted assets offset by lower operational risk RWAs. And finally, in terms of capital, as I mentioned earlier, the group CET1 ratio was 13.9% at the end of the Q1, above our target range and 26 basis points higher than at the end of 2017. Please do bear in mind, however, the outstanding loss given default issue that I flagged at the Q3 last year was still in discussions with the PRA. And although the exact timing nature of the expected changes to LGD floors in our internal operating space models relating to certain corporate exposures are unclear, We don't expect the impact to be material from a CET1 ratio perspective. So I'll conclude just with 2 points before I hand back to the operator to open the line for questions.
Firstly, We said at the full year results in February that the path to sustainably higher return is now clearer. Our Q1 performance shows that we are firmly on And heading in the right direction. There are no shortcuts, but we are gathering momentum and with that, gaining in confidence. Secondly, we spoke a lot at the full year results about the work we're doing around culture. This will take time, of course, but we are already behaving differently an organization, and we are working hard to hone the edges further so that we can compete more and more effectively in the areas where we are differentiated.
Our clients are telling us they are noticing a positive difference, and I suspect our competitors are starting to see that as well. So with that, if I can hand back to Vivien, and very happy to take any questions you have got.
Thank Your first question comes from the line of Chris Manners from Barclays.
Good morning, Andy.
Good morning, Chris.
So yes, and looking forward to seeing you this afternoon. So just a couple of questions, if I may. The first one was on the revenue line. So Year on year, plus 10%, nice performance. I just thought I'd ask maybe about the sustainability of Couple of the lines.
When I look quarter on quarter, Wealth Management has done really, really well, up over 30%. And I thought I'd just maybe ask a little bit about what's going on there. And if we can if that's true annuity, we can sort of drag across. That looks really good. And the second question was, yes, I sort of noticed your comments at the beginning of the call about costs.
I suppose that I noticed you didn't reiterate your cost guidance of 2018 being below 2015 levels. How much cost inflation should we Thinking about this year, and I know, obviously, part of that's going to have some FX in there, but it would be great if you could just elaborate on that a little bit. Thank you.
Yes. Okay. Let me do that. Wealth Management clearly has been very, very strong for us. So 28% up 1st quarter on Q1, which is really good.
Forward forecasting always tricky. If it remains as high as 28 I think we'd be absolutely delighted. But obviously, that is a high rate of growth. I think some of that has come off The back of generally rising equity prices and a fairly buoyant market, That we saw in the early part of the quarter seems to be taken more as a buying opportunity by clients rather than the opposite. I think so.
So I think some of the benefits coming from the market, some of it is definitely coming from the fact that I think we are now presenting ourselves better to our customers. And we talked back in 2015 about the investment we needed to make into sort of improved platforms, Improved growth of product. And whilst that is a process which is running out over a period of time, I think we are seeing some of the early stages All benefit coming through from that. So hopefully, we'll see good growth going forward. Whether it's quite at the same rates as we've got at the moment, I don't know.
But certainly, a part of the business that is running well and strongly. On the expenses, I think sort of three things really. One is that we have been jumping our way through Inflation headwinds, as you'd expect in the business. And if on the average, those have been sort of 3% or thereabouts over the last couple of years, 3%, 0.5%. That's a sort of €300,000,000 €350,000,000 sort of headwind that we have worked our way through.
Secondly, With the increased level of investment in improving systems that comes with that both an increased in year Outright expensing of that increase plus some depreciation of what we capitalized. And you put those 2 together, And they're probably in the P and L since is another number of the order of sort of 300, which we have also basically been working our way through against a reasonably flat profile. The point I was making is that the depreciation of the dollar, obviously, has moved around quite a lot over the last few weeks. It's quite difficult to swallow certainly in full further depreciation of that on top of working through The inflation and the investment spend sort of expensing. And my comment is purely that At the end of the day, we will do what is right for the business.
And if it means that the number is a fraction higher than it was last year, then so be it. Mean, I'm not talking big numbers here, but it could be a little bit higher. But it does depend upon where the FX rates go, and they've moved around quite a lot even since we last talked in February. So that is the context there. Remember, FX overall is pretty neutral on the operating profit level.
So you get the Offsetting impacts at the income and expense level, but fairly neutral at operating profit level. And at the end of the day, our big focus Really is on doing things that are going to get that return on equity up as fast as we possibly can do.
Okay. So it might be a few percent, but nothing drastic.
I think that would be a fair summary.
Perfect. Thank you.
Thank you. Your next question comes from the line of Manus Costello from Autonomous. Please ask your question.
Thanks. I just I had a couple of questions, please. Following up on costs and also on NII. I'm just I'm still a little bit Andy, about exactly what you're saying on costs. Are you saying that you think 2018 costs if FX remains where it is now, are you saying you think 2018 costs will be slightly Higher than the €10,100,000,000 that you delivered in 2017 because consensus is at €10,300,000,000 I think including The levies, are you saying that, that consensus number will be consistent with what you're saying?
Or should it be drifting slightly higher?
I think we printed at 9.9 actually last year. I'm saying it could be a little bit higher than 9.9%.
Right. Okay. And on the NII, was can you give us some color around what happened in NII and NIM in the quarter? And in particular, I noticed in Q2, there seems to be quite some interesting hikes in deposit rates going on in Hong Kong. Can you give us some color on what's going on there and how that's going to impact you?
Yes. So overall, the NIM for the business nudged ahead a little bit further. So quarter on quarter, not huge, but another couple of basis points. That's a not dissimilar rate of Progression and progress that we have seen over the preceding 3 or 4 quarters, and that is Pretty good. It is in a positive direction, whereas you can go back several years prior to that when the opposite was happening.
Thematically, it is pretty similar in sort of root cause to what we said before With improved margins on the deposit side and slightly weakening margins, and I'm generalizing it, but slightly weakening margins On the lending side, but the net of the 2 coming out positive. A lot of focus On quality of deposits and where we can get the best balance of lowest cost versus stickiness, We know the cost of funding, we said this before, is a little bit high compared with some of our competitors. Part of that is because we will have a smaller A mix of retail maybe in our business than some of them do, which is just sort of a fact of life. But nonetheless, with the treasury teams and businesses Putting a lot of time into looking at the quality of the deposits, looking at how much from a regulatory point of view we're having to hold In sort of the Central Bank, etcetera, making sure that we are optimizing those 2. The interest rate movements In Hong Kong, it has been sort of interesting.
And obviously, that has been something which has moved around during the quarter. We've had A little bit of benefit from that in the Hong Kong numbers. And I guess all eyes are on that as we move forward to see what The LIBOR, LIBOR gap is as we move forward. But the Hong Kong business, I think the region was 13% up and actually Hong Kong business Very similar in its growth during that period. So I think overall, now to sort of take away the direction of travel is A positive one.
It is bit by bit. It is not changing massively overnight. But with the focus we are putting on, particularly the quality of Funds and the cost of the funds, I'd hope that we can be keeping up that momentum and seeing some improvement as we continue to move forward.
And you're not worried about recent hikes in deposit rates then? I mean, they seem to be quite sharp from what I can see from headline numbers.
Yes. I mean, certainly, we have seen more increase recently than we have done before. We At the moment, reasonably comfortable with sort of passing that on and that, that is not hitting us too much. But you are quite right, there has been more competition and more And more pricing, and everybody obviously is looking for good sources of funding.
Thank you. Your next question comes from the line of Ronit Ghose from Citi. Please ask your question.
Great. Thank you. It's Ronit from Citi. Just to follow-up, Andy, on the margin trend and the NII trend. So you're saying it's up Quarter on quarter, a couple of basis points.
But to pick up on Manus' question, do you think that trend is sustainable going forward? Or are we seeing a break in the series in Q2? Are you seeing a material pickup in deposit competition So that we shouldn't assume that this kind of gentle pickup in margins continues. Linked to that, can I have Please on the cash management revenues? Those look like they're up 25% year on year.
There's obviously been strong volume increase, but could you just talk a little bit around volumes versus margins and the corporate cash management business? And my final Question on revenues is on wealth. The wealth management revenues that are up 28% year on year, can I just you just sort of break out a little bit more with color in terms of how much of that is market moves, just generally Hong Kong, Other markets being strong versus how much of that's organic, say, stand specific, so the alpha versus beta component, if you like? Thank you.
Yes. Okay. So we are sort of too early really in the 2nd quarter to be able to confidently give a view as to where the Q2 is going to come out on the NIMs. I mean, all I would say is that we are now in, I don't know, the 4th or 5th quarter where we have seen just gently A slight improvement on the NIMs. And therefore, we are clearly wanting Whatever we can do to maintain that momentum.
The increased interest rates is clearly a feature in this, but it was a feature During the Q1 as well, and we still have managed to get the 2 NIMs through that. So I'd be hopeful we can maintain. I would hope that we can Slightly continued to improve, but obviously, it's one that we have to tread our way through as we go forward. On the cash management side, it has been a mixture of increase in overall deposit levels, Customer account balances, which has gone up fairly strongly in the period. So we have seen that go up, I think nearly 20% over that period of time.
And then some of it is the margin improvement that we've seen there as well. So that clearly has been very, very helpful to the business. On Wealth Management, we have got Assets under management up about EUR 8,000,000,000 year on year and about EUR 2,000,000,000 since the end of December. So clearly, improved sort of volumes coming through from that. Part of that is clearly markets increasing, But I think a reasonable part of it also is better productivity from our own team.
We have spent a lot of time, particularly in the private bank, with looking at sort of client interface and how we can improve the product range. So it's good to see that Level of improvement coming through. We obviously will see how we go forward with equity markets and the buoyancy or not of those over the balance of the year, But I think the collective of the things we're doing there has clearly been pretty impactful within the quarter.
Thanks for that, Andy. Can I just have a quick follow-up on the capital point, please? You mentioned that operational risk RWAs went down, if I heard you correctly. Could you just tell us a little bit more what that was and why what drove that? And on the LGD floors, before, I think we were We guided about 30 basis points impact on the higher LGD floors.
Should we assume like close to sort of 0 to 5 basis points or like Very little now? Or just anything more on that would be great as well. Thank you.
Right. Questions 45. Ops Risk is done on a sort of trailing average revenue linked basis. So it's a sort of mathematical consequence of the way that So it is put into the numbers, obviously, with the agreement with the regulators, it's the standard way of doing it. So there's nothing particular to read into that.
Loss and default, yes, I mean, we indicated that the previous changes there had been sort of 30 bps or so. I would be hopeful that what we are still discussing would be lower than that, but it's still a little bit difficult to know. We haven't got Final numbers agreed, but our sense is that this should be a little bit more modest maybe than The changes that we booked in the latter part of last year.
Okay. Thank you.
Thank you. Your next question comes from the line of Jason Napier from UBS. Please ask your question.
Good morning. Thank you for taking my questions. Three, please. Andy, just starting with Corporate Finance. From distant past disclosures, it was a business that I think was quite Heavy, in terms of net interest income and lending.
And I think you flagged that about onethree of year to date loan growth was in this business. But it's really far more volatile than I guess we would have expected within that context. What does a normal quarter for Corporate Finance look like? And Any color you might provide on where you think that's going to pan out in future periods will be helpful if you can. Secondly, Financial Markets, When you produced full year results were up double digit and ended sort of up 2% year on year in the final analysis.
So I was just wondering if there's anything to flag as Perhaps depressing the results in March despite volatility was down and the like. So I just wonder what the prospects were For the business producing flat Financial Markets revenues for the quarters that remain. And then lastly, gratifying to see sort of progress on regulatory expenses in the quarter. I wonder whether there's sort of any Prospect for that number remaining around these levels or perhaps improving further. There's obviously no shortage of things to deal with, although I do appreciate there were some big projects in 2017?
Thank you.
Yes. Okay. Thanks, Jason. So take those in turn. Corporate Finance It does tend to be a little bit lumpy when M and A occurs and when people actually sort of pull the trigger on things It does move around a little bit.
What is a normal level of income? I guess, if you look back over several quarters, We sort of have a 3.50 ish, 3.75 ish of the type income level, and the Q1 was a little bit lower than That, I think the sort of volatility that was in the equity markets on some of the deal flow there did Some people just to sort of pause a little bit and think a bit about timing. The order book actually remains strong. We have got a good pipeline there. So it's not one that I am sort of concerned by.
But equally, as we disclosed at the back of the IMS, If you look back over a number of quarters, we have been as low as 320, we've been as high as 470, so it does move around over a period of time. I think the key is that the order book remains very strong and certainly, the relationships with clients on the corporate finance side Remains very good. Financial Markets, there's nothing particular to call out. There was more volatility self evidently in the first Part of the quarter than in the latter part of the quarter and as we move forward, but this is nothing new. I think performance of that business, to some extent, will be influenced by just sort of how volatile markets are or are not over a period of time.
We did make some leadership changes there a year ago. We have been focused upon a number of initiatives to improve that part of business. We remain focused On those, we would like it's in terms of return on capital, it's a good business. The volatility, Obviously, it's something which in part is outside our control, but a focus over a period of time to try to make it slightly less volatile And make sure that the returns focus is very much continuing. So we'll sort of see how that goes.
Regulatory expenses, yes. Having them down slightly is a novel concept. Obviously, it was only slightly. And last year, as we did call out at the year end, we had a number of quite big regulatory programs, which landed in the back end of last year. So I think, as I said in February, I'd sort of be hopeful that in the certainly in the near term that we're sort of around the peak on the regulatory expenses.
Clearly, everything we can do to get this down, we will do. But we need to do the right thing and make sure that All these programs are operating to the levels and standards which we would expect.
If I might, just coming back to Corporate Finance, my sense in the past was that sort of structured lending and in some cases longer duration lending was a chunk of that. Would you be comfortable giving a broad sense as to how much of revenues is net interest income versus other or kind of annuity versus other?
I haven't got that split in front of me, and it's not the Split that we sort of typically provide.
Okay. Thank you.
Thank you. Your next question comes from the line of Martin Clive from Goldman Sachs. Please ask your question.
Yes, good morning. I have one clarification, please, on earlier comments on cash management and your And then two questions tied to capital. And the first question is, I just wanted to whether you could comment on How you're performing in terms of market shares both in cash management and trade finance, whether you have seen any shift or any regaining of market Shares in some of your core markets, and that's contributing to your strong performance, in particular within cash management. My second question is on capital and you reported a quarter one ratio of 13.9%, which I believe already includes some form of accrual for dividend for the year. You also alluded, I think, the impact from LGD floors on covered institutions, if I read it right, is Potentially somewhat less than you initially forked.
And I was just wondering, if I compare that to your last capital guidance of a 12% to 13% CET1 target range, Where do you think do you need to be over the next couple of years in terms of core Tier 1 ratio? Does that target range still hold? Or could you potentially foresee a scenario under which Maybe stress test driven or similar, you would need to be somewhat above that level. And my last question is on dividend and And obviously, with full year results, you indicated a wish to pay out an increasing portion of your Earnings to shareholder going forward. And I was just wondering, given your progress on capital and
some
of your peers Comment on the aim for distributions, whether you could give a little bit more color on how we should think of scope for dividend, potential share buybacks, interim dividend and so forth.
Yes. Good questions. So Martin, let me just take those again in order. Cash management market share is a little bit difficult to determine partly because The sort of data we have on others is either time lagged or not necessarily hugely precise. What we do believe is that in terms of bidding to put cash management platforms into new clients That we do have a well above average success rate on those bids, which suggests that we must be doing quite a lot of things right.
We are very focused with our clients on whether we have got All of the operating accounts in the group or there's a greater share that we can take and the collective of that Clearly has had a good and a favorable impact upon the outcome. So our sense is that we are probably slightly gaining share, But empirical evidence to absolutely prove it is probably a little bit more difficult to come by. On the capital, yes, you're right. The 13.9 Estimate of a dividend accrual in there. That is done at the half year and the full year on the actual dividend basis and on the Q1 and Q3 On a sort of proxy basis, which is the way that we've normally done it and the way we agree it with the regulators.
I think that We're happy operating at a bit above the range just because things like Basel 3, 4, whatever it's called. Whilst out there, there is still quite a lot of detail yet to be filled in on those. And although there is some time before it gets implanted, the rate of progress on clarifying national discretion is pretty glacial. So just a little bit mindful that there are things in that domain that we need to factor into our thinking and therefore running a little bit cautious makes some sense. As you say, we'll have another stress test over the balance of this year.
And whilst we did okay on that last year, It would be good to get the comfort that the steps we're taking at the moment are continuing to head us in a good direction on that. So I think for the moment, we'll leave the ranges where they are. And if we're running a bit higher than them, then so be it. That is just cautious. Thirdly, dividend.
Clearly, as you know, we'll look at that at the half year, not at the quarter stage. The fact that profitability is improving, the fact It is improving. The fact CET1 ratio is improving. I guess, will be helpful ingredients as the board gets its mind around what To do for the interim dividend, which we'll announce late July when we do the half year results.
Thank you.
Thank you. Your next question comes from the line of Tom Rayner from Exane. Please ask your question.
Good morning, Andy. Just on the sort of currency effects in the Q1, obviously, in terms of The impact on the growth rate is having a bigger impact on your costs than revenue. I guess that's because of the dollar sterling move and the mix of where Your costs sit. I'm not sure if that's the correct interpretation, but just trying to get a sense that when you sort of adjust for that and look at some of the one offs Such as the large treasury gain in Q1 last year, which is sort of suggesting we strip out. I mean the jaws, the headline Level looked about 2%, but you could adjust them all the way to maybe positive 6%, 7% ex currency, ex that one off.
Trying to get a sense what you think the real sort of underlying momentum is at the moment, taking all these issues into account, how confident are you So as you move through the year on the jaws or into next year maybe more importantly?
Gosh, sort of complicated question. So let's take the first part of it. The income line is, to some extent, slightly less affected by the translation effect of FX Because some of the lending is done in dollars in different countries and some of the countries have got currencies that are fixed to the dollar as well. And therefore, there is a degree of cushioning that happens on the bigger top line in terms of FX effects, Whereas the expenses line doesn't have so much of the dollar denomination or the dollar linkages, But it does have a slightly higher proportion of cost, for instance, that are, to take an example, in the UK and therefore, once translated back into dollars, We see a proportionately bigger impact upon the expenses. However, the expenses are evidentially a lesser number than income.
And when you put the income and the expense effect together, actually at the OP level, it does not make a lot of difference. So that I don't know whether I explained it, but That's sort of the very high level on the FX.
I might ask Morin just in the growth rates, It's having a differential effect on the growth rate. So it's slowing your revenue growth down by 2%, but your cost down by 4%. So I appreciate cost is cost is a smaller number, but I was sort of thinking more of the
It's dollar linked than the case of the expenses. So that is sort of why the math to that happens.
If you
back that
out, then the underlying would look better.
That's my point. That's Would look better, that's my point, as whether you think that underlying ex or that currency effect is actually 6 or 7?
Well, what I was going to say was that
Sorry, stop interrupting, sorry.
No, no, no, no. What I was going to go and say was that there are different mixes of income and expense level, got it, that's always been the case. The fact is relatively neutral at the OP level, I think, is probably the more important thing. I could go and do a deep diagnostic on individual components, but probably come back to saying at OP level, it actually doesn't make a lot of difference. I think if you take what's underlying here, There are not many one offs in here.
We had the benefit that you have referred to, which we put in the IMS In the early part of last year, on Treasury Markets income in the early part of Q1 last year, that Clearly helped last year and therefore, has slightly depressed the percentage growth rates in this period. The Q1 this year hasn't got anything particular that I'd call out as particularly unusual. But we did say that our confidence that the 5% to 7% range on the top line Should hold good for this year is what we reiterate. And we've got a Q1 that's there with One particular mix of FX versus underlying. No doubt the mix will change a little bit over time.
But I think in that sort of corridor is Clearly, the art of the possible as we move into the Q2.
Thank you. Your next question comes from the line of Robin Down from HSBC. Please ask your question. Hi.
I've got a couple of questions. Firstly, just to come back to the sort of guidance, I guess, you're giving and consensus. So the 5% to 7% revenue growth, just to be clear, that was a medium term target. But you're saying that should also apply For this year, because I think consensus at the moment has something like 8.3% revenue growth penciled in. And likewise, on the cost Slide.
If I look at consensus for cost this year, ex bank levy, it's up a little under 1% versus 2017. Are you effectively saying that could be a little bit low? So that's kind of sort of question 1. And then question 2, just really coming back to what Manus was talking about in terms of deposit mark Hong Kong, that does appear to have become very interesting since the end of March, I think, when you and Bank of China moved your rates higher. I guess you had certain assumptions built into your interest rate sensitivity back then.
I think you said 50 basis points was worth $330,000,000 And I'm just wondering, given the so much stronger pass through that seems to be taking place in Hong Kong to deposits, whether that sensitivity has changed whether the 50 basis points translates into $330,000,000 still kind of holds? And then just the final thing, we gone through virtually every revenue line, so might as well complete it. The treasury looked quite strong in the Q1. I guess that's partly kind of interest rate benefits coming through. But can you just confirm that there aren't any gains going in there again this quarter?
Thank you.
Right. I'm not sure if that is a 2 or a 3 or a 4 part question, but let me have a go. Sorry. 5%. Okay.
All right. So the 5% to 7% was and remains medium term guidance. And implicit within that is that will move around a bit over time. It will have different mix effects of currency and underlying. But on the average, that's sort of where we're trying to get to.
And I think what I'm trying to say here is that we've got off to a good start this year and there is no reason to believe that we shouldn't be in that territory. If we can be above it, that'd be great. But certainly, the start would be very supportive of that being consistent with that medium term aspiration. On the cost side, I'm just saying that absorbing the inflationary costs and the extra project expense is something we can do. And that Additionally, absorbing FX depreciation going against us on top of that becomes more difficult.
And hence, I would expect That we could be slightly higher than last year's numbers if we continue to see sort of current FX dollar FX rates applying. On the currency effects sorry, interest rate effects, 50 bps 330, We update that from time to time. There's nothing we've seen in the Q1 that would cause us to significantly change that. And in fact, we've had that Sort of direction of number out there for over a year. Obviously, as we go through a full quarter, having seen a bit more what's happening in Hong Kong, We will be updating our own internal sort of calculations to see whether it is behaving roughly as we expected or not.
And I'm sure at the half year, we'll provide a bit more update on it, but it's not something at the moment that seems to me to be significantly outside of that range. And then on treasury, you're right, interest rate increases have slightly helped there. There is nothing else in there that is unusual or inflating those numbers that I would have any reason to call out.
Great. Thank you.
Thank you. Your next question comes from the line of Anil Agarwal from Morgan Stanley. Please ask your question.
I just had a question on funding environment in Asia. I know there have been a few questions on Hong Kong dollar side. But if I look at U. S. Dollar deposits, they're actually contracting and Savings account in U.
S. Dollars contracting seems to be contracting quite meaningfully. I think even Standard Chartered is offering 2.5% on a 1 year U. S. Dollar deposit.
So When does this start becoming a problem for the corporates in Asia? Are they showing any incipient signs of issues because funding costs for the corporate Should be going up quite meaningfully or margin should be coming under pressure?
Not seen any huge effects There as we said earlier, there has been some competitiveness on sort of interest rates and Banks probably nudging up to slightly what they are offering to attract deposits, but not withstanding that We've managed to slightly improve margin overall. So I wouldn't call out anything sort of outside the normal cut and thrust, albeit The rate price is a little bit more than we've seen in previous quarters.
Thank you.
Thank you. Your next question comes from the line of Edward Firth from KBW. Please ask your question.
Yes, good morning all. I just had a well, I guess one question, to do profitability and your profitability targets because you're talking about 8% in the medium term. But you're delivering, what, 7.6% in the Q1. So I mean, are you basically saying that there'll be pluses and minuses going forward, but This is with there or thereabouts now that sort of restructuring program is pretty much done. I guess that's the first question.
Then just slightly related to that, just coming back to Martin's questions about dividends. I mean, if you're looking at 5% to 7% of revenue growth, it sounds like it's not going to be much upside on the margin. So if you're only delivering 8% return, it seems to me that you got 5% to 7% growth, you're not going to have a lot of upside or a lot of free cash, if you like, for dividends. Is that fair?
Well, let me start with the ROE one. This is a quarter Which will be higher than the average for the year, which was the case last year because there's no bank levy charge And loan impairments are typically lighter in the Q1. So if you think to last year, we had a 6% plus ROE for the quarter. The overall year ROE was just below 4%. So I think you just need to Reflects upon the fact that a good first quarter is helpful, but the year average is likely to be lower than that.
Secondly, it is the average that we are after improving, and that is still not at the 8% level. And we know that we need it to the 8% level and later above it, and therefore, there is still some way to go. So I think we're trying to say that there is good evidence But we are on the right track that we should be able to get there over a not too long period, but we are not there yet. And the other thing I'd probably take away, Paret, in the Q1 is that we do have the ability to put more income through this Business of its current cost base and therefore, the ability as we get the top line moving to do that in a well leveraged way, I think there's good evidence from the Q1 numbers that we can do that. On the dividends, It is a mixture of how much capital do we want to hold above the sorts of minimum levels that we have set ourselves and also regulators Happy with, we are very focused upon getting the ROE up, and we are very clear That investors have been patient with us, indeed, having dipped their hands into the pockets a couple of years ago, that they would now like to see some of that money coming back.
And the board are clear that to the extent we can do, then we will be increasing the dividend, as we said we would do earlier. The fact that profits are up 20% does help in that regard. The fact that profits are up 20% and the CET1 ratio is strong also helps.
Sorry, just coming back. I mean, if your steady state is, broadly speaking, 8% returns and you're growing at 5% to 7%, then just self evidently, the math tells me there's not much available for dividend. Is that fair?
No, it depends on the cost efficiency. You're picking a top line and the bottom line without the bid in the middle. If we can leverage the cost effectively, and we believe we can do, and if you look at most of the consensus, that is sort of saying that we should be able to Get more margin or operational leverage through the business. And secondly, it is not that we are going to say when we get the On a fully basis, the job is done. We do note that we need to be nudging it up over and above that over a period of time, but 8% won't be the end of stopping ground.
Okay. Thanks so much.
All right. I think with that, we have concluded the questions. So thank you very much for joining the call. I would hope you will take away that this is bang on plan. It's what we said we're going to do.
We're getting on and doing it. It's a nice start to the year, but obviously, we still have another 9 months ahead of us. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may all now disconnect.