Charted. Diego's been Group CFO for Standard Chartered since January 2024. Previously, across his 30 or more year career in financial services, he spent 18 years at Goldman Sachs running our European FIG banking business. Diego, I guess, welcome back. Thirty-five minutes, we've got some Q & A to do on stage, then we'll jump into audience Q & A towards the end. First, let's start with the most recent event. You hosted an investor seminar on your corporate and investment banking business in May. Maybe if you could just start by summarizing some of the key highlights and some of the drivers for the improve you expect to see in CIB.
Yep. It came. As many of you, I recognize a lot of the faces in the room. As many of you know, this was on the heels of the other seminar that we held for our other very distinctive business, our wealth management for affluent customers. We really wanted to give the market full view of what are our key secular and cyclical engines of growth. I think in terms of CIB, our objective was clear. We wanted to explain that we have a top tier business in the markets where we operate, that we compete at the highest level for everything that we do, that we exploit our very powerful network effect. Our diversified and resilient network comes to our help when we serve our corporate customers.
The agility that comes from that network makes it perfect to be put at the service of people in relatively discombobulated times like the ones that we are living through in terms of where we are going and how we are competing. It is a carnivorous market out there. We compete principally by deepening our wallet share. We are big believers that we are. We exist to serve very different type of clients, but we particularly exist to serve the very largest multinational corporations and financial institutions like yourselves around the world. In order to do that, we need to constantly innovate, constantly expand our product suite and constantly digitize it so that we deliver it at a lower cost, faster speed, better results. That is the story of our franchise in CIB. That is what positions us well to take advantage of these difficult times.
On the topic of difficult times, maybe in light of the recent trade uncertainty and considering the footprint that you know you have, which is relatively unique, how do you see the macro backdrop across the various regions in which you operate and how have clients been responding and I guess how is the business currently performing?
Let's start with what we are seeing from our clients because it's very interesting. We are present in 53 different countries, actually many more. We touch many more than those. Obviously we are present with our subsidiaries and our branches across a broad swath of the world. We are a truly global bank in the way that we operate. The level of activity is, I hate to use a word that I have heard has been used a lot in these halls in the past two days, but the level of activity is fundamentally unprecedented because people are trying to understand what do they want to do. As they think about the strategic actions that they are going to put in place, they have a lot of tactical work to do.
They have a lot of risk management, they have a lot of hedging that they need to take care of while the world continues to evolve very fast. As you can imagine, being executives at Standard Chartered, we spend a lot of time on the road, whether it is in China, in India, in ASEAN, in the Middle East. It is very clear that the flows of capital, of wealth, of goods, although you all know at this point, because we have been saying it many times, that trade is just a part of our arsenal and it is less than 5% of our revenues. End of services continue to shift.
I think one of the most interesting slides and one that I am particularly proud that our powerful IR team has engineered is our ribbon chart that shows where our flows come from and go to. In the CIB seminar you will have seen an animated version of that, which I think gives you a sense of how fast some of those things change within very large, very secular trends. These days the constant rethinking of where the supply chains are coming from and where the end markets are going to be for everyone, whether you are an American importer, a Chinese exporter, an Indian electronics manufacturer, a Singaporean customer, or a commodity player across the world, is at an all time high. Now how's the business doing in that.
In the way that you would expect in the sense that the markets business is doing very, very well. It is clearly taking advantage of everything that is happening around our footprint and it is taking advantage of the fact that about, I always like reminding you that the vast majority of our business in markets is a business of managing risk for our customers. 50% of our customers in markets are corporates, 30% are banks and broker dealers, and about 20% are investors. That level of flow business is constantly humming. Now it is flow, but as we have pointed out in the past, it is flow that grows at almost 10% per annum. Right. It has grown at 9% CAGR for the past five years and a bit more. It is clear that that business is doing particularly well.
The banking business is also doing well and we keep a keen eye on it. Remember that our banking, although we have our fair share. I am a baseball aficionado for those of you who do not know it. I tend to think of it in terms of baseball terminology. We do hit a homer every now and then, but we are fundamentally a game of singles and doubles. Hitting singles and doubles, it is easier. Our banking business has been hitting them consistently as clients continue to think about what they want to do with the big strategic moves. Now, is it possible that going forward we are going to see a little bit of a slowdown in terms of the pipeline?
Maybe because people, by the way, have brought forward a number of decisions in the relatively more certain times now and then they will decide to slow down. It is possible. Right now we are not particularly seeing it. Our wealth management business has proven to be exactly what we always say it is. Our wealth management business, you know, we serve all constituencies all the way to the private bank. Our laser focus is on the affluent business, which we define with people that have assets under management with us of between $500,000 and $5 million. That affluent business is a business of long term savers.
These are people that have with us one or two anchor products, whether it is life insurance, whether it is a mortgage, whether it is some large investment, and then they have a portfolio of wealth solutions where increasingly we offer them from our open architecture approach, both any product that they would like plus some foundational products that we curate for them. Those clients have continued to be active. They have clearly skewed a little bit more defensively in the early part of this quarter. Having said that, there is not a different level of marginality, if you wish, Chris, between the defensive and the more offensive products. They are all offered in open architecture, and the flows have continued strongly during the past two months. All seems to be going well as we watch the news every morning.
Maybe shifting gears to NII, you've highlighted that 2025 NII will be challenging to grow. How are you thinking about some of the key moving parts within that line item?
Yeah, so no difference. We do still think that it's challenging to grow. We do think that it's challenging to grow primarily because of two impacts. One is obviously the absolute level of rates. We will give you a further update on our currency weighted forward curves, which I always say it's your business as investors to decide where do you think the Fed is going to go. It's our business as a bank and my business as a CFO to look at the forwards and put in place the best thing that we can do based on what the forwards are telling us. The forwards are telling us that the headwind has certainly increased from last year. Although we do not know for sure when it's going to happen, the trajectory is clearly a trajectory in which the headwind increases. That's what.
That is the first influence. The second influence is the management of pass- through rates. We flagged at the end of last year that we had been particularly assertive in managing those pass- through rates and we continue. Our committee that handles the pricing of our liabilities and of our assets is one of the most enjoyable parts of my activity. It is where you truly turn the dials and regulate the flows within the system to a large extent directly through the relationship with clients and obviously through our internal transfer pricing. What we see in terms of PTRs is that we continue to manage them well. As rates continue to decrease, our ability to manage, while we manage well what we can manage, the portion of those rates that we can manage shrinks. By the way, the convexity increases as rates go down.
That is the second big impact. Now within that, in any normal circumstances, a decreasing rates environment ought to come with a big silver lining, which is volume growth and client enthusiasm for doing business, et cetera. Are we seeing a lot of that? We saw more of that in the first quarter than we would have thought we would see. We grew customer loans and advances at low single digits, which is what we guide for the full year. It is clear that this is a peculiar situation of why rates are where they are, and as a consequence, that loan growth remains in question.
Last thing I would say probably on the net interest income thing that I think is relevant is that you know very well that we have long had as an objective managing the volatility of our net interest income. We have been increasing substantially our structural hedge fund. We have indicated that we want to increase it towards $75 billion during the course of this year. The environment for debt activity is actually good because rates in many of the currencies where we can access hedges, particularly on a swap basis, have remained relatively more elevated and therefore we can put on hedges. Having said that, the combination of the moves in interest rates and the peculiar situation in Hong Kong that I am sure is of some interest to the audience.
We will figure out a way of talking about that such that it's entirely possible that the IRBB exposure for imperfect a tool. It is a decent tool to look at interest rate exposure. The IRBB exposure might be higher in this kind of environment than it was before, but it will come with a strong silver lining that we can continue to accelerate in putting forward our structural hedge.
Maybe let's just touch on that point you just referenced. There's been a pretty significant move in HIBOR since you reported Q1 results at the start. How would you guide us to think about the sensitivity on those moves?
It's the new, after watching what happens coming from the U.S. administration, the new game in town is watching what happens with HIBOR every morning and what happens with the Hong Kong dollar. Some of the moves are peculiar in the sense that these are arbitrages that we have all lived with for a lifetime and that normally result in a closing of the arbitrage at a faster speed. The reason why that is not happening today is manifold and I'm happy to touch upon it. Let's start from the impacts, the impacts on us. A decrease in HIBOR is obviously not a positive for us. Is it a big negative? Not particularly big in the sense that we have indicated in our IRBB disclosure that the impact of 100 basis points shift is about $50 million.
Within that it is clear that as HIBOR continues to trend down, the convexity effect also piles on and that we have already discussed it in discussing about the net interest income that to a certain extent exacerbates the problem. The good news is that as that happens, there is a lot of activity in Hong Kong of two types. One, the activity that we capture in markets. Part of the very good time that we are having in markets is also due to the gyrations happening in Hong Kong. The second is that the impact of lower rates in Hong Kong is undoubtedly a fillip to the Hong Kong economy. Although it is easy to say and probably relatively fair to say that it's not enough that rates stay low for a month or two for the economy to feel better.
The truth is the economy feels better relatively quickly and at the margin. Whether it's the activity in particular, think about the activity of corporate refinancings. It's pretty obvious that treasurers are getting pretty busy in Hong Kong these days. Think about refinancing linked to real estate of various types. Think about the fact that we have restarted. We have already restarted about a quarter ago, but clearly the machine of mortgages is restarting. All of those things are relative positives coming from HIBOR and come at our, to our help. Net net, if I conclude with a framing point of view. Remember that we give you the impact of the main currencies in our interest rate sensitivity. And although Hong Kong and HIBOR is important, it's 13% of our interest rate sensitivity.
Looking past NII, you guide towards the upper end of the 5%-7% CAGR for 2023 through to 2026, that's for total income. For 2025 you expect to be below this range. Maybe if you could just give an update on current trading in that.
I continue to believe that that is the case mainly based on the uncertainty surrounding the speed of deterioration of the NII picture. Not necessarily the NII number, but of the NII picture. It's true that we take a lot of comfort from the fact that our engines of non NII growth are continuing to do well. We know that our business is made of two components. One is a motorboat and the other is a sailboat. We manoeuvre the sailboat as well as we can and the motorboat is powering ahead. In the near term I think it's prudent to continue to think that way.
As you have already outlined actually on stage, the particular focus on affluence within the WRB business, which I think you aim to take up to around three quarters of income there and you are targeting I think around $200 billion of net new money over 2025 through to 2029. What are the key levers you see in sort of unlocking that strategic evolution? How would you measure progress and how would you assess your progress so far?
The levers are the ones. Let's talk about two things. One, the ones that are completely in our control and the second is how do we exploit both the structural and the cyclical trends? The ones that are in our control of course are the amount of our investments. We've told you we are going to be doubling down and we're going to be investing $1.5 billion in our wealth management for affluent. We are progressing with it. The investments span the gamut from obviously people, digital approaches, infrastructure. We have opened our second global Indian center in Chennai, we have opened our sixth wealth center. In Hong Kong we've opened the first expatriate-focused wealth center in Dubai that I'm going to be visiting next week. It's clear that the investments are how we go.
How we go about is a very, as everyone knows, it is a very competitive space. We are very specifically positioned by all means in certain areas and in certain geographies and in certain segments we compete with everyone, we compete with other people's private banks, although we continue to invest in the private bank and it's bringing us very good results. This relentless focus on the affluent area, on the real long term savers that are lower cost to acquire, they are lower cost to serve because they're very happy. I have left my phone there in order not to be distracted, but they are very happy to be served through the phone. They are very loyal. It's not an environment, it's an environment.
Even the affluent environment is an environment in which relationship manager velocity of change is relatively elevated, particularly in Asia, but they do not move with their clients. The relationship manager of the private bank kinda owns the relationship with the client. The relationship manager of the affluent part of the bank is the steward of the relationship of the client with the bank. Once the client has a life insurance, a mortgage and a lot of investments, they do not move easily. Those are the things that we do. This is the way that we compete. We are very disciplined. We put our money where we have true competitive advantages and we exploit them as much as possible, taking advantage of some of the cyclical events.
I mean, think about how this is something that comes very much across when we talk to our clients in the private bank and in the affluent bank, think about how discombobulating the current events. We tend to think of people like us in this room and we tend to think about people that are treasurers, CFOs, et cetera. Think about how difficult it is for an expatriate that is living in a place where the tax rules are changing, where it is unclear whether his contract is going to be renewed. He has to manage his finances across three different geographies. I mean those are clients that benefit hugely from the truly global network that we offer at a price point where many other people just simply do not compete.
If we shift gears maybe and think about costs within that broader cost trajectory, you're executing a Fit for Growth program targeting expense saves in the region of $1.5 billion. Can you talk us through how it supports your guidance for performance over the next three to four years?
Yeah, so very important program. We continue. It continues nicely apace. We have $400 million of annualized savings coming into this year. We continue to spend. We continue to spend wisely. I always make this caveat, which is when we spend, we want to spend money on a transformation program like Fit for Growth, we want to spend money strategically. The phasing of the spend is far from linear as we think very carefully about where we put our money. We are helped by the diversification. I love diversification, whether it's our business, our clients, our geographies. I even love the diversification effect in our transformation program. The fact that we have a lot of different strands, that there are very few very big rocks within that program allow us to be nimble and phase the spending in the right way. We will continue.
It's obviously an important component of our unending and unerring commitment to delivering under $12.3 billion costs by the end of 2026 and positive jaws every year, which we have reiterated by the way recently. In that particular case, even though I hate breaking down jaws too much because if you break them down too much by month, by quarter, by business, et cetera, it starts to lose a little bit its meaning. It's really important at the group level. Having said that, in what is the biggest part of our business, which is the Corporate and Investment Banking business, we've made very clear that the CIB business will also operate with positive jaws.
On cost of risk, you guide to a through cycle 30-35 basis point range. How would you assess the quality of the loan book today? I guess how far away are we here from the 30-35 through cycle number?
We're still quite far away. The question of how do we get there continues to be a question we all together and in particular me and the Chief Risk Officer ask each other on a recurrent basis. Look, we exited 2024 with under 20 basis points of cost of risk. We are a bit over 20 BPS 2024 cost of risk in Q1. We for the first time in many quarters have actually had some allies from the CIB business after many quarters of releases, which is just an unrealistic target to have. Actually, probably not just an unrealistic, it's probably not a good target to have because you have to question where you are on the risk reward spectrum if you are perennially in that place.
Not expecting to continue to see CIB releases even though I do not see any flashing hot point, and the flashing hot points of the past are firmly in the past. Some of those that people continue to be focused on, like commercial real estate in Hong Kong, et cetera, we have long explained are very small components of our portfolio and, by the way, very peculiar to us in terms of exposure to very large players and therefore to a much stronger type of portfolio. It is difficult to see where that comes from. I also take, and I know that I am talking against my book because I say that I continue to believe that we end up at 30 - 35.
I like looking at positives and one of the things that I like is that as we continue the migration of our wealth and retail business toward more and more wealth management and more and more wealth management for affluent, that also strengthens, by the way, and reduces the loan impairments on the wealth and retail side because clearly affluent customers are better quality customers. We have said very clearly that a large portion of how we will finance the $1.5 billion we will spend in wealth management for affluent will come from a reduction of our credit card and personal loans lines, which should lead also to lower allies. The answer is I do not know how do we get there. We need to be prepared to get there.
We are happy that we have 74% of our balance sheet in investment grade and 83% collateralized, and it is all looking good. Sorry, one thing, Chris, that is not exactly directly to your question, but I think it is something that I keep hearing from investors. It is something that is on their mind, which is the second degree impact of everything that is happening in the world on the credit book. One of the things that I always want you to have in mind is that if you think about it, there are two constituencies that are particularly endangered by the redefinition of the supply chains, by changes in the end markets, et cetera, around the possible client constituencies of a big bank. The first is SMEs.
SMEs do not have the wherewithal to change their supply chain to pivot to find a new market quickly enough in order not to suffer. Exposure to SMEs is potentially more problematic than exposure to large multinational corporations. Our exposure to SMEs is a small fraction of our exposure, is 80% collateralized. SMEs are something that we do in a few places because it is good, it brings very good liabilities, and because it has got a good cross sell with wealth management. The second is in personal loans. Personal loans into clients that are either directly affected, in industries that are directly affected by the geopolitical generations, or in geographies that are directly affected.
What I just said, the decrease in credit cards and personal loans in terms of importance in our business also goes in the direction of reducing our exposure to those kind of risks in this particular kind of market.
Very clear. My final question before opening it up more broadly for the audience, looking at capital deployment, you have this plan to return $8 billion to shareholders across 2024 through to 2026. In that, obviously, you are going to operate dynamically within that 13%-14% CET1 corridor. I guess, how are you prioritizing the different ways in which you can utilize that capital? You have the asks for the business on the one hand, you have inorganic growth opportunities, and then obviously you have further returns.
Before I get crucified against the wall by someone, it is over $8 billion and we always underscore the word over just in case anyone has any doubts. Yes, that is our target and it remains our target, our capital. Our capital allocation hierarchy is very clear. The first thing we do is we invest everything that we need to invest in order to achieve sustainably higher levels of profitability. That is vital because this bank is a growth bank and a growth bank has to come with strong profitability. The two things cannot be dissociated. We want to deliver strong top line growth and we want to deliver continued improvement in our profitability. That is where we invest in.
Is it the case that in today's world with the opportunities that come from people rethinking their networks, rethinking the way that they do business and with us at this point, are we happy about where we are? No, but you know, it's better to be trading very close to tangible book than to be trading at half of tangible book. Is it true that at this point we would look at opportunities? Yeah, probably, yes. As time evolves, I think when we put forward our next three year plan, next year, definitely in the capital allocation hierarchy, inorganic growth that is at a level of return on investment, return on tangible equity and strategic importance that is commensurate to the investment that you're making ought to be a part of it. Fundamentally, investing in the business is the first part of our capital allocation.
We are blessed by the fact that we have strong engines of profit generation, and therefore we continue to be in a position where we can return capital to our shareholders. How do we think of this?
It.
We think of it in the sense that we have a 13%-14% CET1 range target and we intend to continue to use it. We routinely go above that during the course of our business because we continue to generate good earnings and we will continue to return capital to our shareholders. Although I would caveat that we do not target either a specific point within the continuum of 13%-14%, nor a specific point amount of money. It is dynamic. It is based on the other investment opportunity. It is also based a little bit, of course, on the nature of the environment and what is happening around us. There is absolutely no deviation from the over $8 billion of returns 2024 to 2026 to our shareholders and the basic principles of our capital allocation hierarchy.
Super clear. Okay with that. Let's see if we have any questions from the audience. No. Otherwise, I'm going to ask you a question on U.S. tax. U.S. tax. With the recent development, with the recent development in taxes, section 899, it's what everyone's been talking about for the last week or so. How does that impact your business?
The first part of that answer is it's very early to understand. I mean, this is something that has to go through House, Senate, lots of negotiations, title on the FT, lobbyists descend on Washington. I mean, there's lots to be said. I will not say what I said a few months ago about tariffs, which is, oh, but no one cuts off their nose to spite their face because that didn't prove to be particularly precious. We will see what happens. Exactly. I will say it's probably safe to think that maintaining the U.S. as a very interesting destination for investment will be one of the important considerations in the mind of the administration, of the legislators, and of everyone that touches these kind of things. We will see where does it evolve to.
It might lead to an impact on our tax bill. Everyone will take out their best guess of where this thing will land. We disclose very clearly in our numbers what our numbers for the U.S. are in terms of net income and taxes paid. They are $370 million of net income and $170 million of taxes paid. Take your pick about what happens to those numbers. Thank God it is again, like everything in our life at Standard Chartered, part of a very diversified network and patchwork with a lot of different influences coming into it. We will try to compensate as much as we can.
The last question from me, to the businesses that I find most fascinating, Mox and Trust, you know, I think you're guiding for both of those businesses to be profitable in 2026. The nature of those businesses, there is always a trade off between the point at which you get to profitability versus the growth dynamic in the business. How do you manage that trade off, and I guess how do you see, you know, the key milestones for those two businesses going forward?
Two great businesses growing very nicely, achieving a clear place in the ecosystem because digital banks, and there are very many different ways that you can think about a digital bank, but you really need to find your place in the ecosystem, and both of them have done that. I mean, Mox, through good partnerships and good work, and the Cathay link has achieved 10% penetration of the client base in Hong Kong, and Trust even more than that. I mean, we're talking about 18% of the bankable population in Singapore, over a million customers they have developed into. I'm also fascinated by them, and I've been fascinated by the development of digital banks for many years now, and Billy is even more so. It's interesting that they are developing in ways that we weren't expecting.
We were expecting them to be fundamentally a way of expanding our clientele into lower levels, younger generations, et cetera. While that has worked in both cases, and in particular in Trust, we have actually captured much higher segments, much richer, wealthier segments that are better for cross selling, which is why we have accelerated the development of more product lines for these banks and in particular, of course, of wealth management, because we have seen that there is clear demand for it. We do ask ourselves the question of how do we balance the growth and the profitability. We do believe that achieving profitability during 2026, and I would raise the point that for Mox what is happening with HIBOR, if it was to extend for a very long time, it might have an impact. Let's park that because it is early innings in that case.
For those two banks, we will be continuing to think about how do we bring them forward. We do believe that achieving profitability in 2026 is absolutely our objective and it's doable while still continuing to invest. They are very valuable both as properties. They are also very valuable as investments in their technology stack. I mean, these are things, tech stacks that have the ability to travel the world, whether under our ownership, under someone else's ownership, with our participation in one way or the other. The element of optionality around Mox and Trust remains very strong while they continue to be very helpful businesses for us.
Super clear. Okay. I think it's a great note on which to end. Diego, thank you so much for sharing your insights with us today.
Thank you, Chris. Thank you, everyone. Thank you.