Earnings Call: Q4 2010

Mar 2, 2011

Well, good morning, London, and good afternoon to those of you in Hong Kong and India. I am delighted to report that 2010 was the eighth consecutive year of record income and profits. This performance once again demonstrates our ability to deliver substantial and sustained value for our shareholders. Standard Chartered continues to perform strongly, delivering a 19% increase in profits, an earnings per share rise of 14%, and a return on equity of over 14%. We enter 2011 in excellent shape with strong growth momentum. In a few minutes, Richard will take you through today's results in more detail, and then Peter will outline where we see further opportunities to grow the business in the coming years. First, there are a number of things I would like to highlight, starting with shareholder value. As a board, focus on long-term value creation for our shareholders is a key priority. Our investment in the business for the long term and strengthening of our already strong balance sheet, while simultaneously increasing income and growing earnings, reflects the strong and continued success of our business model. We are again increasing the total amount of dividend paid to shareholders. The board is recommending a final dividend of $0.4665 per share, making a total annual dividend on a post rights basis of $0.6915 per share, which is up 9%. For the many shareholders who participated in last October's rights issue, the total dividend received is up 15% on the 2009 dividend payment. In June, we successfully listed our Indian depository receipts on the Bombay and national stock exchanges in India. Later in the year, our investors helped us to raise over $5 billion on our rights issue, and I would like to thank our investors for their continued support and for the confidence they have shown in our future. Remuneration. Our approach to remuneration is both simple and consistent. At Standard Chartered, we reward our staff for performance and not for failure. Against a profit increase of 19% and an increase in our staff numbers of around 9%, our bonus pool costs have increased modestly on the 2009 levels. We remain satisfied that our remuneration policies encourage long-term performance rather than short-term risk-taking, and we continue to meet the significantly enhanced remuneration codes of both the FSA and FSB whilst ensuring that our rewards remain competitive. The political and regulatory debate on remuneration, principally in the E.U. and to a lesser extent in the U.S., is just one of the many external uncertainties we face today. While we fully support the need for reform of the financial sector, as a board, we are deeply concerned about the amount of regulatory change being thrust upon us and with the prospect of significantly more change still to come. A great deal has been done since the start of the financial crisis to strengthen bank balance sheets and to better manage risk. But if we continue along the path of demanding that banks hold more capital and liquidity, pay more in taxes, and ring-fence some perceived riskier activities without international coordination and alignment, then this could severely limit the banking industry's ability to support economic recovery and create new jobs. Let's not today dwell on regulation. I'm delighted that in summary, 2010 was another year of strong performance for Standard Chartered, despite unprecedented levels of external flux. The bank is in great shape, and we have again demonstrated that we have the right strategy, the right culture, and the right geographical footprint to deliver consistent and sustained value for our shareholders. Let me now ask Richard to walk you through the numbers. Richard. Thank you, John. Good afternoon, Hong Kong and India, and good morning, London. 2010 has been another year of delivery for the group with an unbroken trend of record profit and income growth now stretching back to 2003. This strong performance is built on multiple and diverse income engines, high levels of investment as loan impairment fell, a robust balance sheet with excellent footings growth underpinning strong activity levels. Though we have seen some margin compression and higher competition, we have delivered record levels of profit over previous record levels. This is not a recovery story. Let me draw out some key highlights. Record levels of income, over $16 billion, and of profit as guided of over $6.1 billion. We have continued our record of consistent delivery. Over the past 8 years, income has grown at a compound annual growth rate of 17% and profit at 22%. Income is well diversified, with 23 markets contributing over $100 million of income, up from 19 markets 3 years ago. Costs up 13% as we've deliberately invested in both businesses to underpin future income momentum. This decision to invest was enabled by continued improvement in the risk environment with loan impairment falling sharply in both businesses. Strong operating profit growth of 19%. A significantly strengthened capital position, with Core Tier 1 at 11.8% built from a combination of strong organic equity generation and the recent rights issue. We've also managed risk-weighted assets, or RWA, well, growing by 15% in the year. Our balance sheet remains well diversified. Liquidity and funding. We've attracted an incremental $60 billion of customer deposits during 2010. Our AD ratio remains conservative at 77.9%. Our liquid asset ratio has strengthened further to 26.6%. Our consistent performance and balance sheet resilience have been recognized by both Moody's and Fitch, who upgraded our credit rating to A1 and double A minus respectively during 2010. Let me take you through the numbers. At a group level, income is up 6%. Good growth in consumer banking income up 8% and wholesale banking client income up 17% has been partly offset by weaker own account income following the extraordinary conditions in the early part of 2009. Net interest income is up 11%, reflecting very strong customer loan and customer deposit growth up 22% and 23% respectively, partially offset by margin compression. Non-funded income is broadly flat, with fee income up an excellent 26%, driven by wealth management, corporate finance, and trade, but offset by decreases in trading income and in other operating income. Before I talk about expenses, you can see that loan impairment was down 56% on 2009, reflecting the improvement in the risk environment. Operating profit of $6.122 billion is up 19%. Expenses. The year-on-year growth in expenses of 13% has been driven by a number of items. Our investment program, which we accelerated in the second half of 2009 and then took a deliberate decision to continue throughout 2010, accounts for some 40% of the cost increase. An increase in the business-as-usual cost base reflecting, amongst other things, inflation in salaries, accounts for around a third of the cost delta. The impact of FX on the cost base accounts for just over 20% of the increase. The group also incurred incremental direct regulatory and compliance costs of over $150 million, given investment in upgrading capabilities, systems infrastructure, such as rolling out further sophisticated anti-money laundering and trade surveillance systems, new reporting mechanisms required by all the new regulations, for example, liquidity, and significant expenditure incurred in specific reviews, primarily a detailed review of historical sanctions compliance across various geographies. You should also bear in mind that there was an offset to the items I've just mentioned of some $120 million, and this predominantly arose from the non-recurrence of the charge in the prior year relating to the repurchase of structured notes in Taiwan, but was partly offset by a settlement relating to Lehman structured notes of $192 million, which impacts 2010 costs by $95 million. Performance metrics. Following the rights issue, there are some mechanistic changes required to EPS in 2009. For clarity, we have shown here the pre and post-rights numbers reflecting the change in the number of shares. The impact on the average weighted number of shares in 2010 is limited because the shares were only an issue for the final six weeks of the year. Normalized EPS grew 14%. Normalized ROE is 14.1%, partly reflecting the higher level of equity capital we now carry. When reflecting on these metrics for 2011, you should bear in mind that both EPS and ROE will reflect the full dilutive impact of the new shares issued. Balance sheet. The balance sheet continues to strengthen and is a source of competitive advantage. We continue to focus on a strong AD ratio with the AD ratio in all of our major geographies under 100%. The liquid asset ratio is at 26.6%. We have some $137 billion of liquid assets. We have very low levels of refinancing maturing over the next few years, only some $6 billion until the end of 2013. We have already pre-funded most of our requirements for 2011. Both of our businesses are self-funded. Our funding base is diverse and is continuing to grow strongly despite increasing competition. Current accounts and savings accounts, or CASA, grew by 13% or some $21 billion, with time deposits growing 21% or some $29 billion year on year. CASA now comprises 51% of total deposits, up from 43% some two years ago. Overall, we are continuing to attract good levels of deposits across the group, up 17% year on year. Assets. Our loan book continues to be conservatively positioned and well diversified by country and by sector. Let me evidence this. We have low loan-to-value ratios on our mortgage book with an average of 51%. Short maturity profile on our wholesale loan book, with some two-thirds of the book under one year, and much of it significantly less than 12 months, actually between three and four months, reflecting our trade bias. Our ABS carrying value has fallen further to $2.3 billion, less than 0.5% of total group assets. We have low exposure to commercial real estate, to leverage loans, and to level 3 assets. We have no direct exposure to sovereign debt in the more troubled economies in the Eurozone, and our overall exposure to those economies is also low. Overall exposures are diversified by geography and sector with no material concentrations. The balance sheet remains robust and well diversified. Capital. The group's capital position has significantly strengthened during the year. We have generated very good levels of organic equity and delivered $4.3 billion of profit attributable to shareholders in 2010, while also benefiting from the appreciation of currencies against the US dollar. In addition, we raised $5.7 billion through the October rights issue and the earlier listing of Indian depository receipts in Mumbai. Throughout the year, we have had good support from capital markets, having raised over $4 billion of lower Tier 2 and senior funding in transactions that were heavily oversubscribed. Our RWA growth of 15% has been well controlled and is spread between the two businesses. Wholesale up 10% or $17 billion, and consumer up 27% or $14 billion. Core Tier 1 is at 11.8%, Tier 1 is at 14%, and total capital is at 18.4%. We are very strongly capitalized, especially in light of our conservative asset profile, and well-positioned both to meet potential oncoming regulatory changes and at the same time protecting our ability to grow further with our customers. Consumer banking. The repositioning of consumer banking continues to progress well, and we are seeing very good traction across a number of metrics, both financial and non-financial. Income was up 8% and stood at over $6 billion, a record for the business. We have seen good double-digit income growth in our high-value segments of priority banking, private banking, and SME. Expenses increased by 13%, with loan impairment falling 45%. Operating profit before tax is up 51% to $1.31 billion. Balance sheet velocity has been very strong, with loans up 24%, primarily in secured products, and deposits up 15%. Through working closely with wholesale banking, some 32% of new CASA during the year came from payroll accounts. CASA is now 59% of deposits, up from 41% two years ago. Consumer banking remains an important source of liquidity and contributes some $26 billion of surplus liquidity to the group. Looking at consumer banking in more detail. Consumer banking income saw good momentum throughout the year, with each quarter recording successive income growth. Momentum in the second half has been good, with income up 9% on the first half. The business has faced the ongoing headwind in 2010 of continued liability margin compression, which has resulted in year-on-year income drag of some $270 million. Against 2009, liability margins were down by 16 basis points on average to 70 basis points, but since the half year have stabilized. In addition, asset margins have come under some pressure throughout the year as competition has increased. Asset margins were down 24 basis points year-on-year, principally in mortgages, credit cards, and SME, falling overall to 285 basis points on average. Expenses have increased by 13%. We have maintained cost discipline with business as usual costs up only 4% year-on-year. We also consciously took the decision to invest at pace through 2010 to drive future income momentum. We have added over 4,000 staff. Within this, we have added 800 relationship managers, primarily in the priority banking segment, but also in SME and in private banking. We have also added another 1,200 sales staff. These headcount increases have been particularly focused on Singapore, Indonesia, China, and Malaysia. We have significantly increased marketing spend, up 27%. We have added 70 branches in markets including Korea, Indonesia, China, Malaysia, Bangladesh, and Taiwan, and also 23 priority banking hubs. We have added over 300 ATMs, upgraded 500 ATMs, installed 80 Express Banking centers, and expanded online and mobile banking to 29 and 32 markets respectively. As to risk, we have continued to focus on secured assets, whilst also selectively growing the unsecured loan book by $2.4 billion. 85% of the loan book is either fully or partially secured, and only 15% is unsecured. Partially reflecting this profile, the consumer banking loan impairment charge has decreased to $578 million, down 45% on 2009. Looking at income in more detail. When looking at these slides, it is important to note that overall margins for the group have reduced only slightly year-on-year, and what these slides give you is a sense of some of the moving parts in the group margin position. Mortgage income was up 22% against 2009, with a strong increase in loans of 23%. This more than offset margin compression of 13 basis points to 132 basis points on average in the retail mortgage book. Market shares remain strong in our large mortgage markets. We have seen continued good growth in deposits, especially CASA, but the ongoing low interest rate environment has resulted in deposit income falling 8% on 2009. Liability margins stabilized in the second half of the year, and income in the second half was therefore up 11% on the first half, reflecting deposit growth. Wealth management fee income, led by funds and treasury products, was up 24% year-on-year and has now grown for four halves in succession. Wealth management income in the fourth quarter of 2010 was at record levels, with fund sales in Hong Kong, Taiwan, and Singapore particularly strong. This momentum has continued into 2011. Moving to credit cards. Income in credit cards and personal loans, or CCPL, was up 3% and balance is up 17% on 2009, driven by selective asset growth in markets such as Hong Kong, Korea, Singapore, and Malaysia. We continue to position our product offering towards customers in our target segments with a bias to transactors, resulting in lower overall margins. SME income is up 14% year-on-year to some $1.2 billion and up 6% in the second half on the first half, driven by particularly good growth in trade products, associated FX transactions, and in cash management. Both sides of the balance sheet have grown well, with SME loans up 32% and SME deposits up 23% in 2010. This business has strong momentum as we continue to increase lending to our SME customers. Impairment. Loan impairment has shown significant improvement with the portfolio loss rate well under half of the rate seen in the prior year. Looking by product, you will see that this is a consistent picture. In mortgages, loan impairment has fallen significantly, and the loss rate in 2010 was 7 basis points across the portfolio. Within SME, loan impairment has roughly halved year-on-year, with loss rates sharply down. We have de-risked the SME book and are still benefiting from some $2.7 billion of loans under government guarantee schemes. Cards and personal loans contribute some $16 billion of the total $29 billion of other loans, with the balance being secured private bank and wealth management lending. The vast majority of the $425 million loan impairment in other loans was driven by the CCPL portfolio. Loss rates are down by around a half since 2009, reflecting a stronger risk profile, but also improving macroeconomic conditions across our markets. The total loss rate across all products was 53 basis points, the lowest loss rate we have seen for a decade. Our forward indicators are steady and showing no signs of deterioration. Loan impairment is sharply down, and we have a robust cover ratio of 82%. When thinking about the outlook for impairment, there are two factors to bear in mind. Firstly, we intend to continue growing unsecured in a disciplined manner in selected markets, so a mix change. Secondly, we are positioned to continue to see good overall loan growth, albeit probably at lower levels than in 2010. To summarize for consumer banking overall, continuing steady income momentum built on excellent balance sheet growth and activity levels. Assets continue to show a bias towards secured and liabilities continue to grow. We have invested further in our distribution network, in the sales force, and in the brand, and this positions us very well for 2011. Wholesale Banking. Wholesale Banking has delivered a strong performance during 2010 and has continued to focus on deepening client relationships. Wholesale Banking income was up 7%, with good double-digit client income growth up 17%, partially offset by moderating own account income down 19%. Through whichever lens you look, client income remains strong. Corporate finance up 32%, trade up 14%, financial markets up 18%, capital markets up 32%. We continue to be disciplined in managing the relationship between RWA and client income growth. Client income grew 17% on 2009, whereas RWA grew by 10%. Loan impairment has fallen sharply, down 68% on 2009. Expenses rose 16%, driven by a number of factors. A little over 40% of the increase in expenses relates to BAU costs, including the modest impact of increased variable pay. 15% relates to the impact of FX, and we have also seen the impact of higher regulatory and compliance spend. Just under a quarter of the increase relates to investments, both the flow-through from 2009 and incremental investment made in 2010. We have focused investment in 2010 on three themes. Firstly, the build-out of product capability in financial markets and transaction banking, which accounted for half of the 2010 investment spend. We have added headcount and invested in particular in e-commerce, cash equities, integrating our custody business in Africa, and the further build-out of our trade finance system, Magellan, across the bank. Secondly, in enhancing sales coverage with a focus on SCCG, adding almost 200 people. Strategic Client Coverage Group is particularly important for our strategic and value-add products and is a key driver of the wholesale business, with income up 27% year-on-year. Third, infrastructure and people investment, accounting for a quarter of 2010 investment spend, covering operations, support and control functions, and risk management, where we have added over 300 headcount. As a result, jaws were a negative 9% in 2010, although on a two-year basis, jaws are 2% positive. Income. Income by client segment remains well spread, with three out of four of the client segments generating income in excess of $2 billion. By product, lending and portfolio management income grew 2%, and transaction banking income was up 9%. Global markets was up 7%. Looking at income in more detail, lending income was up from $849 million to $868 million as average assets increased 8% and margins fell slightly. In trade, income was up 14%, driven by assets and contingents up 28%. Activity levels are sharply higher, with the number of trade LCs issued up 20% year-on-year. Margins at an average of 135 basis points were down some 37 basis points year-on-year. Cash saw a very strong increase in average balances, up 21% as transaction levels rose strongly. Despite average margins falling some 15 basis points on 2009, cash management income was up 4% year-on-year. The compression in margins has resulted in year-on-year income drag of some $120 million. I will touch on financial markets on the next slide. ALM income, as we indicated, was down 5% year-on-year and down as expected 13% half-on-half, as maturing positions have been reinvested at lower rates. Corporate finance income of $1.7 billion was up 32%, reflecting steady investment in products and people over recent years. In 2010, we closed 65% more deals than in 2009. Income is increasingly well diversified by geography, and pipelines are strong as we enter 2011. Principal finance income of $416 million is up 23% year-on-year. This is a business where we continue to invest selectively and one where we also continue to see good levels of realizations. Wholesale Banking continues to be a client income-led business. Year-on-year, client income has increased its share of total income from 74% to 80% and has shown good double-digit growth. We continue to see client income momentum up 3% on the preceding quarter, and we finished the year strongly. Fourth quarter was up marginally on the third quarter. Looking at financial markets in more detail. Income in financial markets of $3.3 billion was flat on 2009, albeit within that total, client income grew strongly at 18%. Own account income was down 40%, reflecting tighter spreads despite higher numbers of transactions as volatility trended lower during the year. In FX and rates, the impact of spread compression more than offset good volume growth, resulting in income falling 11% in FX and 5% in rates. Capital markets, where income increased 32% to $541 million, saw excellent deal flow in 2010 and continuing strong league table positions. Loan impairment. Wholesale Bank loan impairment was $305 million, down 68% on 2009. The overall quality of the portfolio has continued to show steady improvement throughout the year, and the number and quantum of early alerts have continued to improve throughout 2010 and are not showing any particular industry or geographic concentration. The Wholesale banking cover ratio has reduced to 50%. This results from the inclusion of a small number of accounts in the Middle East, which have been classified as non-performing and which are subject to either existing or near-completed restructuring agreements. Excluding the impact of these accounts and including the impact of collateral, the cover ratio is in excess of 70%, well within our historic recovery rates of well over 40%. Let me summarize the overall Wholesale banking picture. Wholesale banking has delivered another strong set of results, with record levels of client income arising from multiple engines. It has invested for the future. Its forward risk indicators are stable at improved levels. It enters 2011 with strong transaction pipelines, significantly higher activity levels, and with good growth in customer assets and cash balances. Geographic performance. Let me touch just on a couple of these geographies, and Peter will pick up some of the others. Korea's profit was up 20% year-on-year on a headline basis, driven as guided by a materially stronger second half performance, with second half profit up 60% on the first half. Despite this, margin pressure persists. Competition is increasing, and our cost-income ratio remains too high. There is much we still need to do to improve returns in Korea. Within other APR, profit was up $313 million, with the main driver being Taiwan. Profits in Taiwan increased to $238 million from a loss of $11 million in 2009, driven by a significant fall in expenses, given the non-recurrence of the $117 million charge associated with the buyback of some structured notes in 2009. This is a strong business, which has now been effectively repositioned, its cost base addressed, its asset portfolio de-risked, and is well-placed to become an increasingly important source of steady growth for the group. Profit in MESA more than doubled year-on-year, benefiting from a significant reduction of $509 million in loan impairment. The U.A.E. is the largest geography in MESA, contributing around half of income and accounting for around 60% of the loan book. In the U.A.E., we have de-risked our consumer banking loan book, and our wholesale loan book remains short tenor and well spread. Profit in Africa was up 16% on income up 14%. Africa is an increasingly diverse region, with six markets delivering over $100 million of income. In 2010, our 26-branch network in Nigeria delivered over $200 million of income for the first time. Profit in the Americas, U.K., and Europe region was down 38%. This reflects the impact of the gain on the buyback of some of our Tier 2 paper, which was booked in 2009 and did not recur in 2010, and also falling loan impairment. This geographical segment remains a key origination center for the group. Turning then to outlook. We start 2011 strongly, with the balance sheet in excellent shape. This robust platform provides a foundation for further well-controlled growth in both assets and liabilities, and we enter the year with good momentum and with volume growth in both businesses. We have had a record January, both in terms of income and profit, and you will recall that we started quickly in 2010. In Wholesale banking, client income remains strong, ahead of last January and in line with the general trend of it contributing around three-quarters of total income. Our deal pipelines remain very good. In Consumer banking, the balance sheet has good velocity, and we have invested for growth. We are seeing continued steady income progress in the first month and start 2011 without the significant drag of liability margin pressure. Our forward-looking risk indicators remain steady. However, we are watchful of asset and consumer price inflation and the policy implications this may trigger. We expect continued competitive pressures as the attractiveness of our markets has not gone unnoticed by our peers. Regulatory change will continue to be the biggest external risk to our performance. With this in mind, what should you expect for 2011? Given the markets we are in and the momentum of our businesses, we believe we can continue to deliver double-digit growth in income in 2011 and beyond. Excluding the impact of the bank levy, we are also managing the business to bring income and cost growth back in line for the full year 2011. We are keeping a firm grip on expenses in both businesses and look forward to seeing further income benefit on the investments made in 2009 and 2010. For earnings and return on equity, you should consider both the full year impact of the rights issue, and secondly, you should consider the significant impact of the bank levy. Similar to past years, we will remain focused on the fundamentals of the group, which are in excellent shape. We have a very strong liquid and conservative balance sheet. We are very strongly capitalized. We are well-positioned in growth markets. We continue to take market share in multiple products and across multiple geographies. Thank you. I will hand over to Peter. Thank you. Thank you, Richard. Good morning, and good afternoon to those of you in Hong Kong and India. These results represent our eighth consecutive year of record income and profits. This is not a story of a bounce back or a recovery, but one of consistent delivery of diverse and sustained growth. 23 of our markets now deliver over $100 million of income, 15 over $100 million in profit. We are extraordinarily well-placed in the world's most attractive markets. We are investing in both our businesses, wholesale and consumer, winning market share, growing income and profits, creating value for our shareholders. Much of what drives the Standard Chartered story remains constant. We have refreshed our one-page statement of strategic intent, but actually, our strategic aspiration remains unchanged. We want to be the world's best international bank, leading the way in Asia, Africa, and the Middle East. We are putting even greater focus on our clients and customers, on building deep, long-standing relationships, on the quality of our service and solutions. We continue to be obsessed with the basics of banking, balancing the pursuit of growth with disciplined management of costs and risks, keeping a firm grip on liquidity and capital. We continue to focus on culture and values on the way we work together across multiple geographies, products, and segments, combining deep local knowledge with global capability. These fundamentals underscore everything the bank does and everything we as a bank stand for. I have no doubt that the clarity and consistency of our strategy, our discipline in sticking to it, and our distinctive culture and values have been crucial to our continued success. It would be a mistake to think this means we haven't changed at all. Standard Chartered today is very different from the bank I joined in early 2002. We entered that year having made a little over $1 billion in pre-tax profits the year before with a share price of £6.92, some 28,000 staff, and under constant threat of takeover. Now, in 2010, we had two individual markets, India and Hong Kong, delivering profits equal to what the entire group made in 2001. Around 85,000 staff, and our shareholders have seen a total shareholder return of over 230% from the end of 2001 to the end of 2010. While our story remains consistent, the bank has continued to evolve rapidly during 2010. One of the most visible changes was the launch of Here for Good, our brand promise, in April. Here for Good is not just a catchy phrase. It captures the essence of who we are. We're a bank that sticks by its clients and customers through good times and bad. We're a bank that always strives to do the right thing. Our job is to create value for our shareholders, but we're also committed to having a positive impact on the broader economy and on the communities in which we live and work. Here for Good has resonated with staff, with clients and customers, and with other stakeholders because it's true, because it's simple, and because it's powerful. We know we've set a benchmark that people will hold us to, but that's the point. One example of where we are hitting the sweet spot of delivering for our shareholders and making a positive impact on the broader economy is SME banking. We continued to increase our lending to SMEs throughout the crisis, up 14% in 2009 and by 32%, or just over $4 billion, in 2010. In fact, we have increased total lending to our clients and customers by $90 billion, some 60% since the start of the crisis in mid-2007. To give you a sense of how we're changing the bank without altering the fundamentals, I want to talk a bit about some of our key markets and also about how we're using technology to change the way we run the bank and interact with our clients and customers. You'll recall that in 2009, Hong Kong just pipped India to be our most profitable market. This time last year, I suggested there was a bit of a race between the two as to which would become our most profitable market in 2010. Well, India won. A great achievement and a great story of investing in organic growth. Building on the platform we created with the acquisition of Grindlays, we have grown profits from a combined figure of 110 million in 2000 to 1.2 billion in 2010. A CAGR, cumulative average growth rate, of 27%. Last year, income in India was over $2 billion for the first time, up 12% on 2009. We can't expect India to grow at quite the same pace it has in recent years, given the sheer scale of the business, but it's still going to be one of the group's big growth engines. We're continuing to invest in new product capabilities such as equities, new segments such as private banking, and expanded infrastructure, such as our Express Banking centers. The launch of our IDR in Mumbai, the first listing by an international company in India, was a powerful statement of our commitment. It also proved a very effective way to build a brand. Brand awareness among our target segments has registered sharp increases during 2010. Looking forward, the Indian economy continues to grow apace, and we continue to see huge opportunities. Extending our distribution reach beyond our current total of 94 branches is a key priority, particularly for consumer banking. In this context, we are considering carefully the potential benefits from subsidiarization suggested in the RBI's recent consultation paper. But our India team can't rest on their laurels, not least because we are seeing an acceleration of growth in Hong Kong as the economic dynamics of Greater China become ever more powerful. Whilst mainland China, Hong Kong, and Taiwan are very different as markets, given distinct regulatory systems and very different competitive dynamics, the links between these economies are developing extraordinarily rapidly, and this is having a profound impact on trade and capital flows. We want to ensure we don't just seize the opportunities the individual markets present, but grab the Greater China opportunity, helping companies and individuals across the region to trade and invest, find partners, do deals. One fact illustrates the pace of these developments. Direct flights between China and Taiwan were first permitted in July 2008. I was on one of those first flights. Today, there are nearly 400 direct flights per week. Whilst we have made great progress in Taiwan, as Richard has already described, we've only just begun to scratch the cross-straits opportunity. The Greater China dynamic is also having a powerful impact on Hong Kong. This is a market which it might be tempting to write off as ex-growth or at least mature for us. But this would be a mistake. We think Hong Kong offers significant opportunities for growth as its role evolves as China's international financial center. Take, for example, what's happening with the internationalization of the renminbi. In 2009, virtually none of China's trade transactions were settled in renminbi. In 2010, it was over $75 billion worth, mostly in Hong Kong. Settling trade transactions in renminbi is generating offshore renminbi deposits, which grew five-fold during 2010 to around $48 billion equivalent, and another $10 billion in January alone. This, in turn, is enabling the creation of an offshore renminbi bond market, the dim sum market. We foresaw those developments and anticipate further exponential growth. We were the first bank to facilitate a domestic renminbi trade settlement, the first to launch a renminbi-denominated bond for a foreign corporate, and the first to offer retail renminbi structured products. Our renminbi deposits in Hong Kong grew tenfold in 2010. This is just one example of how dramatically China is impacting Hong Kong. Every aspect of the business, including consumer banking, is feeling the effects of China's transformation. Our Hong Kong business accelerated in the second half of 2010, with income up 13% on the first half and with a record fourth quarter. Our India team cannot afford to be at all complacent. Singapore is another market that is sometimes seen as one of our more mature businesses, but it is also one where we see significant growth opportunities. Singapore is successfully building its position as an international financial center, and we are playing a significant role in this development. We run both our businesses from Singapore, and many of our key functions, such as technology and operations, are centered there. in January, we opened our new office in the Marina Bay Financial Center development, the first company to move in. This building, which accommodates about 4,500 people, houses a trading floor with 790 positions across 65,000 square feet. We believe it is the largest trading floor in Asia. Singapore is also the main hub of our private banking business. From a greenfield start in 2006 and with the benefit of the AEB acquisition in 2007, private banking now has 46 billion AUM, up 31% on 2009. It has been less than five years since we opened for business, and we are already the sixth-largest private bank in Asia. Singapore is also a good example of a market where we have carried out selected acquisitions to boost our product capability. Last year, we acquired a factoring business to support our SME clients, and earlier this year, we acquired an auto finance business. Just next door to Singapore is a market which we believe is too often underestimated, Indonesia. The largest economy in Southeast Asia, the fourth-largest population in the world, a country rich in resources, underpinned by a stable political environment, good fiscal policy, and a strong currency. We regard Indonesia as one of the fast growth 7% club countries over the next 20 years, likely to become the fifth-largest economy in the world by 2030. We are in a strong position to take advantage of Indonesia's potential, both through our own business and via our 45% stake in Permata Bank. Standard Chartered in Indonesia has 26 branches. Permata has 280. With different strengths and distinct target segments, these complementary franchises enable us to seize the multiple growth opportunities the country's economic momentum presents. Indonesia contributed just under USD 200 million to group pretax profits in 2010, and we see significant potential for further growth over the medium term. By telling you a bit about some of our key markets, I hope I have given you a flavor of what we have been doing and what lies ahead. I also want to highlight the way we are using technology to enhance efficiency and improve our service. We have fundamentally transformed the infrastructure of the bank over the last few years, giving us far greater scalability and resilience, and a much stronger platform for innovation. By standardizing systems platforms, re-engineering processes, and hubbing activity into our principal shared service centers in Chennai, KL, and Tianjin, we have been able to drive down technology and operations running costs as a percentage of income from just over 12% in 2004 to just under 8% last year. Platforms like Magellan, our trade finance system, are enabling us to achieve continuous improvement in unit transaction costs. Given the pace of underlying volume growth across so many of our businesses, for example, trade LCs up 20% year-on-year, FX transactions up 14%, commodities transactions up 66%, such scalability is absolutely vital. We are now also much more innovative in our use of technology to interact with clients. Last year, we launched Breeze, an innovative iPhone banking app in Singapore and Malaysia that allows you to access your accounts, pay bills, transfer money, find ATMs, and credit card offers in an intuitive and easy way. In October, we launched Straight2Bank for the iPad, the world's first app for trade finance, enabling clients to authorize payments, make transactions, and approve or revise documents on the go. Banking is intrinsically digital, and like other digital industries, it can be transformed through technology. We can turn siloed products into integrated solutions. We can empower our clients and customers by putting tools and information into their hands. We can achieve radical improvements in processing times and costs. What about the challenges? Where do I see the potential obstacles for things that could knock us off course? Within the bank, the main challenge is execution. I think we have got the strategy. We know what we have got to do as a group and within the two businesses. But making it happen at pace is a big complex agenda, and there are lots of external distractions. We need to keep very focused on the key priorities. These are very clear. We must maintain our track record of delivery, sustaining the momentum in wholesale banking, and completing the transformation of consumer banking. We must deepen our relationships with our clients and customers. We must keep focused on the basics of banking, liquidity, capital, risk, and cost discipline, and we must continue to reinforce our brand. Clearly, we need to continue managing costs very tightly, prioritizing investment and delivering continuous improvement in productivity. The trick here is to strike the right balance, investing to ensure we grasp the longer term opportunities while ensuring we keep delivering in the near term. Jam today and jam tomorrow. But the biggest challenges we face are external, and the biggest of these is regulation. Put bluntly, changes in regulation, policy, and tax represent the biggest tax we as a bank face, particularly because so much is uncoordinated or unilateral. To give you one example, the recent announcement that the U.K. bank levy will be implemented in full in 2011 means that the levy will cost us around $180 million post-tax this year. I am not going to bore you by talking about regulation and taxes. I think I have already made my views clear on most of these issues anyway. We also face challenges in some markets from political dislocation, most obviously in the Middle East and Africa, and most recently in Côte d'Ivoire, where we have temporarily suspended operations. But the challenges here are more about protecting our staff and customers rather than primarily financial, given that our businesses in the most affected countries tend to be rather small. Perhaps more fundamentally, we remain relatively cautious about the outlook for the world economy this year. We are certainly in a global recovery, but it is a very polarized recovery and vulnerable to shocks. Our markets, and particularly Asia, are growing strongly, and we are very positive about the longer-term outlook. However, the West still faces a deleveraging challenge, and there hasn't been that much progress on tackling global imbalances. The specter of inflation is very real in Asia and in the West. Asia is no longer dependent on the West to drive economic growth, but neither is it decoupled. Currencies, capital flows, and trade mean there are powerful interdependencies. Finally, I should mention competition. After a couple of years in which many of our competitors were in some disarray, we are seeing more competition across our markets, both from increasingly capable local banks and from international banks returning to the fray. This has had an impact on margins in some markets, but overall, we are still winning market share in many markets, products, and segments. In fact, the aspect of competition that most concerns me is the war for talent. We need to be competitive in the way we reward and recognize people. We need to be able to provide them with opportunities to grow and develop, and we need to be somewhere people want to work. That's where our values and culture are a powerful source of competitive advantage and where Here for Good sets us apart. Delivering eight years of record income and growth, sustaining our momentum throughout the crisis has taken a lot of hard work, professionalism, and discipline. I would like to take this opportunity to thank all of our staff for once again showing what we can achieve as a team. I'd also like to thank you, our shareholders, for your support. We were delighted by the way you backed us with the rights issue last October, with 98.5% taking up your rights. We now have the capital to absorb the regulatory requirements and to continue to grow at pace. Indeed, the strength of our capital position, combined with the depth of our liquidity and the diversity of our assets, gives us a balance sheet that is a powerful source of competitive advantage. We start 2011 confident but far from complacent. We are excited by the multitude of opportunities in our markets, but we are alert to the near-term risks. We've been investing to take advantage of the opportunities, but we will flex our costs and balance sheet as events unfold. The bank enters 2011 in great shape. We have a clear strategy, which we will stick to. We have an increasingly powerful brand. We have an exceptionally strong balance sheet. Both our businesses have good momentum and have begun the year well. Jaspal, Ben, and Julian will now take your questions in Hong Kong. John, Richard, and I will answer them here. Thank you. Yeah. Okay, if you want to ask a question, can you raise your hand, wait for a mic to come to you, and then say who you are and what institution you are from. If we start right up front here. Morning, it's Ian Gordon from Exane BNP Paribas. If I could have two, please, one on jaws, one on return on equity. I guess, looking at jaws, the arithmetic correction of your revenue growth into 2011 is well understood. I think the main area of skepticism I certainly encountered over the past few weeks has been on costs. Despite your consistent guidance on the subject, it hasn't been believed. So if I look at the buckets of growth you gave us on Slide 9 for 2010 expenses growth, would it be reasonable to assume that the bucket for business as usual growth in 2011 will be greater than the incremental investment spend in 2011, especially given the wage inflationary pressures you alluded to in your presentation? Then secondly, on return on equity, I thought the comments in Peter's statement were quite measured, albeit usefully differentiated from those of your peers who have had a rather rough week. Just to better understand why your return on equity is, albeit under pressure from margins spreads, is more resilient, I wonder if you could perhaps provide some color. Things I look at, obviously, the growth in fees and commissions at Standard Chartered isn't on a scale that I see elsewhere. When I look at your Core Tier 1 ratio, which is now double where it was five years ago, my view today is that looks too high. So I'm assuming part of the story is that ratio will be taken lower, hence improving the return number. I guess relative to peers, your geographic spread of deposits ought to provide you with some earlier interest rate relief on the liability side. But what else should I add to that list? Thanks. Next. Well, it's a good thing none of the rest of you wanted to ask any questions. Why don't we start actually with the ROE one, and then we can come back to the cost one. Let me start at a very high level on the ROE, and then Richard can expand. I mean, essentially, if he wants to. Yes. Essentially, look, we're repeating the guidance we gave at the time of the rights issue, which is we think that this is the business, that there are an awful lot of moving parts out there, but this is a business that we still believe can deliver a mid-teens ROE. In the near term, i.e., 2011, that will come under a bit of pressure just simply because the fact that we've raised a lot of new equity through the rights issue, and we're absorbing the impact of the bank levy. But we see no particular reason at this point to move from a mid-teens guidance on sustainable ROE. I don't know if you want to. But there are a lot of moving parts. I mean, you've highlighted a lot of them, and frankly, some of them we don't know quite which way they're all going to go because they're not all in our control. Some of them are a function of competitive dynamics, and some of them are going to be a function of what happens in the regulatory environment. I think in your, I'm not sure if I heard in your excellent list of answers to your question, there's, I mean, I think mix change is really important. I do think that the build-out of the wholesale business and the multiple income streams is particularly focused on strategic products and value-add products. As we get better market share and client And build into client relationships. I think we are going to get better fee income, and potentially higher margin business. On the wealth management picture, we alluded, I think, to very good, steady momentum. In fact, strong momentum coming back in our wealth management business, particularly true in a number of key markets, some of our larger markets. I think that gives benefit. Then I think that whilst we're alluding to some asset margin pressures, the fact that liability margins seem to have stabilized, going into the second half, I think will also give some underpin. We haven't changed our guidance on return on equity. At the time of the rights, we said that you should think about around 150 basis points of immediate drag from essentially the equity in issue. We haven't invested that equity. We're holding it to protect, if you like, against whatever regulatory evolution emerges, whilst therefore giving us the ability to continue to support our clients' growth through our RWA. Our return on equity we feel is perfectly reasonable, perfectly achievable through the medium term at the mid-teens. In some ways, it's a bridge between the two questions, the cost dynamics and the ROE, because some of what we've been doing that has been investment through the cost line is building businesses that have attractive ROE dynamics in the new world. A good example of that is private banking. Private banking as a sustainable business has very attractive ROEs. Yeah. It's a P&L intensive business to build, and it takes time to build it. I'll let Richard go into the more detailed stuff around the balance between investment and BAU and all that sort of stuff. I think it's helpful to have a slightly longer context in terms of thinking about the cost and income jaws. The normalized cost income ratio for the group in 2010 was marginally below what it was in 2008, and marginally below what it was in 2007. Actually, the exceptional year was 2009, where we did two things. One is we were able to grab some unusual opportunities in terms of own account income, amongst them, liability management exercises, but also just wider bid offer spreads through our trading businesses. Secondly, we pulled back hard on costs. In a sense, what we've done is deliberately come back to where we wanted to be and where we were before. I think we'll see which bucket ends up bigger, and it really depends upon how we manage the income horizon and how we see that and how we see loan impairment. But essentially managing the jaws to income growth. As we look forward, we're currently holding pretty tight on investment levers. So we've released some investment, but we are holding. Whilst we've had a clearly very good start in January, we want to see that sustained, and then we can release further investments. So where will the investment spend end up? We'll see. If you think about pressures on costs, 70% of the group's cost is staff. You saw us increase headcount significantly on a net basis in 2010, so up 7,000 people, 9%. Our expectation for 2011 is less than 1,000 net increase in staff. So we'll be holding that. You also know that, like many financial institutions, we have relatively high turnover rates within staff. So it gives us an ability through managing phasing, again, to manage BAU costs. So which will end up bigger? We will see. I do think we have got a very good hold on the investment levers. We have a different approach with regard to the net increase in headcount expectations for 2011. So we are in good shape to control the outcome. Okay. Ian. Thanks. Ian Smillie from RBS. Three questions, please. Firstly, on risk-weighted assets in the second half up 5% versus the loan book up 12%, if you could give us some color as to what was happening there, please. Secondly, inside the acceleration in cheap deposits in the second half by geography, it looks like the U.K. and Americas did particularly well and India went backwards. So a bit of color as to those moving parts might be helpful, please. And thirdly, at a broader level, Peter, you talked about Indonesia. Historically, I guess the Permata joint venture has struggled to deliver the profits that the market opportunity might allow. So are you pointing us to think in more coming from Permata, or are you pointing us to think more about the own brand business, or are you encouraging us to think about M&A appetite there? A bit more color on Indonesia would be helpful, please. Okay. Should I do Indonesia first? Yeah. The RWA is very straightforward. It is, yeah. And then- I'll think about the deposits question. You will think about the deposits. Good question. Indonesia, actually, I think there are opportunities. I think what we're signaling is we're positive about both businesses. I think we've made a lot of progress in terms of the way Permata is run operationally. I think we're considerably more confident about its stability and resilience as a platform from which to grow. We also are optimistic and confident about the opportunities for growth in our own business. Essentially, Standard Chartered in Indonesia is typically about the very big Indonesian corporates, the multinationals, and high net worth individuals. Permata is much more about local corporates, SMEs, and mass affluent. They actually target very different groups. Just given the pace and scale and the breadth of what's going on in Indonesia as an economy. We're increasingly excited by the nature of the opportunities that both businesses have before them. In terms of the RWA H2 on H1 dynamic, the main explanatory feature there is a change in the market risk RWA, which is basically moving certain trading businesses to CAD2 from the standardized. We got an RWA benefit from that. That's probably the single biggest reason that RWA pressed down in the second half. Just to add on that, the first half saw not the same scale, but we saw model changes attached to the consumer business that inflated increased the RWA in consumer in the first half. In the first half, we've got a higher RWA coming from the model change, and in the second half, that's in consumer and wholesale, as Peter said, attaching to agricultural and energy commodities, we had a CAD2 dispensation under the second half, which drove the RWA down. RWA for market risk is down 21% year on year. Can you repeat your question, which I'm still struggling with on U.K. and India? On the cheap deposit performance through the CASA performance- Oh, right. through the second half of the year. At the group level, accelerated in the first half, but if we look at the geographic split within that, it looks like U.K. and Americas went up quite a lot, and India went down sequentially. I was just wondering what was going on there, if there's anything we should be thinking about. Well, I think I have to say, you have me on that. I don't know the answer to that, I'm afraid, in terms of why the deposits are moving, the CASA is moving in those directions half on half for India as opposed to the U.K., where the CASA deposits in the U.K., consumer, very small. Wholesale is predominantly the capital businesses. I would expect to have seen steady progression in U.K., Europe, Americas on CASA, second half on first half. The reasons India would be going backwards, I struggle to think what they would be actually. We've seen pretty steady growth across India more broadly. I'm looking down at my team and all of them are looking at me relatively blankly. I think you have us all here. But we'll come back. Doesn't that give you real confidence in the bank? Do you want to just go next door as it's convenient, then we'll go over the other side for a minute. Good morning. Robert Lorriman-Mura. Can I have a couple of initial questions and then a more general follow-up, please? Firstly, in terms of the current year, can you give us some sense of the kind of asset growth you think you're going to need to achieve that double-digit revenue you're talking about? Do you want to ask all your questions? The second, unrelated, is on the capital position. Are you updating any of the Basel III guidance? If you are not, presumably you are at something like 9.8% on a Basel III basis. Could you comment on where you think you need to be on a Basel III basis, referencing the comments made by the bank down the road? Talk to Thomas. Did you have a third question? I did, but I would like those two first. Oh. Keep us in suspense. Because it's related. I mean, the asset growth to support. We saw customer asset growth of 22% against customer deposit growth of 23%. The balance sheet has good momentum. I don't think you will be seeing quite the same pace of asset growth in 2011. But it's very difficult to give a generalized picture because you've got a lot of moving parts there in terms of geographies and product mix. I don't know if you want to. Well, I can reinforce that. We're not budgeting at the same levels of asset growth that we saw in 2010. But we're budgeting a good growth, but not at the same levels. We've talked before about our ability to support RWA growth. As it translates, we should be able to generate 14%-15% RWA growth whilst maintaining our return on equity objectives and maintaining flat capital. As an RWA indicator, we should be able to travel at 14%-15% RWA. The key to that, as you know, is return on tangible equity as opposed to return on equity. That's the driver. With regard to Basel III, well, if you tell me where the regulations are going to end up, I can tell you what sort of target range we would have. We do not have a target. What we've said is we clearly think it's important to be above the fray. We started at 11.8% core equity. We gave guidance at the time of the rights, and we thought it was around 80 to 100 basis points was the impact. The rules have changed somewhat since, as we all know, and our guidance would still stay at around 100 basis points. Perhaps a touch over, so between 100-110 basis points we think is the Basel III impact. It's fairly arcane, this set of regulations, as you know. It basically splits about half and half, 50 basis points to the core equity calc and about 50 plus, a little over 50 to RWA. Core equity is impacted by the excess EL deduction and the loss of the tax shield, plus minority interests and carry forward tax losses. As you take those treatments out of your impact core equity with those, that's about a 50 basis points impact. The majority of that impact is actually to the EL deduction and the tax shield. If you go to the RWA impact, there are four drivers of it. You've got the RWA treatment on securitization. You've got the stress VaR on market risk. I did say it was arcane. You've got the RWA treatment on the utilized allowances for material holdings, which I'm sure will all work out. Then you've got the CVA. You've got four items all driving at RWA increase. The- 9.8 is not something we recognize. We start at 11.8. We think it's about a 1%, assuming- Roughly speaking. those adjustments come in in full now, no transition. What I was going to add to this was a question on marginal returns. To generate double-digit revenue, you are indicating something like 15%-type RWA growth. With a return on equity of that kind of level, you are obviously not generating equity post distributions at a 15% rate. I was interested in your view about the sustainability of the capital ratios over time, given this pace of asset growth, and also a comment on marginal returns versus stock returns. I think the answer is, we are talking in broad numbers here. The maths work, if you do the maths, as I said, about a 14%, 14% plus RWA growth at a return on equity level, which is again, the same sort of level, actually, 14 or so percent, 14% plus, translates into a return on tangible equity of over 18%. If you do that, it generates capital level, holds capital levels broadly at the level, a touch under the 11.8, but where we were effectively at the interims plus the rights, so around 11 or so percent. That is what the maths would do. On marginal returns? I am not sure how to answer you on marginal returns, really. I think that if we look where we are, certainly we are generating good levels of return. The suppression to return on equity levels will only be the impact of the equity just raised until we deploy it, and that depends upon what we think about forward regulation and the bank levy. The bank levy remains as a suppressant, if you like, potentially to returns. Okay. Shall we start at the front with Herb? Thank you very much. Arturo de Frias from Evolution. Two questions, please. The first one is on cost incomes, and the second on interest rates. On cost incomes, I think you already told us in the IMS that you were going to look through the revenue weakness and keep on investing, and it is clear that that is what you have done in 2010. But I think you could do that in 2010 because impairments were going to fall quite significantly. Yeah. From current levels, I do not think impairments are going to fall very significantly again. So you do not have that cushion into 2011. So I think the pressure for revenue versus cost growth is going to be much worse in 2011 versus 2010. You have said that you want costs to grow in line with revenues, but my question is, what happens if revenues do not grow as you expect for whatever the reason, for rates or for competition or for the world economy? What happens if revenues grow, let us say, low single digit instead of or mid-single digit instead of double digit as you expect? Given that you do not have that room for maneuver anymore, will you have to automatically bring down the cost growth, or will you accept another year of, let us say, negative jaws? That is one question. The second question is, what level or what performance of interest rates have you built in your revenue growth guidance? Are you hoping for rates to go up, in Asia, in general, for you to get to this double-digit growth in revenues? Thank you. On the first question, I think the short answer is, I think we demonstrated in 2009 that when circumstances change, we are prepared to take action on the cost base. Indeed. Can I just add to that? I think this management team have demonstrated very, very effectively over particularly the last 2-3 years, their ability to adapt the model to meet the circumstances. The fact that we have so many opportunities to keep investing in the business, so many of the markets that we have identified today. As Peter said, we are taking steps all the time through technology innovations, tight control of costs, to give us the options to find ways of continuing to invest in the business. It is a balance. It is a very important balance that has to be struck. The team has clearly demonstrated its ability and indeed willingness to keep doing that on an ongoing basis. It partly depends on the nature. Yeah If I can just build on the nature of what's driving the income slowdown, and therefore how we're thinking about the outlook and the momentum of the business. We're absolutely prepared, as I said, and we will flex the cost dynamics, and we'll flex the shape of the balance sheet depending on how events unfold. Now, in terms of interest rates, did you want to Our budgeted assumptions are for some rises, really for small rises to interest rates second half of the year, predominantly fourth quarter. Which means they do not actually have much impact because of the annualization effect. I suspect if anything, that might be a conservative assumption given this, if you just look around the world and look what's happening certainly in some local interest rates, and some already quite clearly are on the move. But certainly our budgeted assumption was a conservative one around later arrival and modest increases in some markets. Can I just add to the first one? I think there's an important feature, which is I think the Group has a reputation for delivering. I absolutely agree with Peter. It depends on the nature of the income slowdown. We have a reputation for delivery against financial objectives, four pretty clear guidelines about how we perceive we have to deliver whilst at the same time giving ourselves significant investment capacity against income growth, but focus also on returns and on EPS. We understand the value of that reputation for delivering to our shareholders good performance as forecast, as foretold steadily, and one of those is managing jaws. Should we go further back behind you? Hi, it's Ed Firth here from Macquarie. I just had two questions. One was on the margin. I think if I've got my numbers right, the second half was reasonably down on the first half. Is that the base that we should look at as we look into 2011? Are your comments about competition saying we would expect that to come down a bit? Or are your comments about the liability pressure easing, meaning we should be looking at a flatter picture? Suhal. Can you just say that I wasn't- Oh, sorry. I was writing down your first question while you were saying your second question. No, that's fine. If you could just repeat the second question. Well, I was just saying, is your guidance that you would expect that to be broadly flat looking into this year? Or that the competitive pressures, you would see some further pressure? I think the high level answer, and of course, there's lots of moving parts because you're talking a lot of currencies and a lot of just different jurisdictions. The high level answer is liability margin pressures easing, not much trend in them. Some competitive pressures in some places, but some helpful upward bits from local interest rates in other places. On the asset side, you did see some softening of asset margins across a number of markets in both businesses in the second half. Quite where that goes, you might see a little bit more. It's quite difficult to tell. But I don't know if you want to I tend to have learned over many years that actually the picture tends to be sort of a steady slow degradation. Asset margins tends to be the feature of the industry, and I wouldn't say it's going to be different here, but liability margin tends to stabilize. So some slight diminution, I think, is where you should think. But the second half is where we should see there's a base going forward. Predominantly, yeah. Predominant. It's a good base then. Yeah. Sorry, just one other question, which was I guess a more strategic question. Listening to your presentation about the sort of longer term, I guess one of the key themes or key successes of the group has been a reasonably small acquisition some years ago, which wasn't that well received, which has grown to be this huge business in India. Are you alive to the fact that other such businesses or opportunities may be around? Can I ask you to sort of, if there are, where would you see that? Is it a consumer type businesses? Is it new markets? Is it existing markets? How do you think about how you might try and replicate that again? Well, to start with, I think Grindlays was an excellent acquisition. I think we would have built a pretty good business in India, from the base of what we had had anyway. It turned out Grindlays was a perfect complement to what we had, and it ended up giving us a fantastic platform for growth. We are constantly looking around for acquisitions. The honest answer is there aren't a lot of sorts of unloved gems like Grindlays around, which is perhaps unfortunate. If anything, there are the opposite, which is things that are overpriced and not as good as they look. We will continue to look, and you should expect us to look at pretty well any banking assets that are arriving in our markets, because we will want to take a hard look at them. You should also expect that because we want to make sure that these things actually deliver for shareholders, that we will take an extremely skeptical attitude towards them. We approach them from the point of view that we don't need to do acquisitions to grow. If you look at the momentum of the business, we have grown assets by 22%, deposits by 23% last year. The impact of acquisitions on that is de minimis, right? We did some tiny little things around the place, but this is organic growth. We are very capable of delivering very good organic growth. So we approach acquisitions from the source of, it really has to add something special and extra that we can't do organically. I can tell you, absolutely, we do have our eyes open. Unfortunately, if I knew of them, I probably wouldn't want to tell you of them. Do you know of any? So if you have any bright ideas. Thank you. Should we. We'll stay over on this side for- Hi, it's Manus Costello from Autonomous. I noticed that your NPL coverage ratios in wholesale have come down over the year, and your excess expected loss has obviously gone up a little bit as well in capital. I know you explained the drop in coverage ratios from some movements in the Middle East to some extent. I just wonder what we should take as what you're comfortable with for the wholesale book going forwards. Is 50% the right level of coverage, or do you think we would see that rise once those Middle Eastern issues are dealt with? I think the cover ratio is an outcome. As you look at it, quite right, it is the Middle East. I think it's got a net NPL number, rather Hastings quality of 1066, I think. The handful of accounts in the UAE are the material element of the addition to the gross non-performing loans, and they are the material element of the increased to impairment. To an extent, it's a technical discussion. These restructurings are well advanced. We are on steering committees with regard to certainly a couple of them. Very good insight into the underlying business plans and asset disposal programs or whatever is incorporated. We've got a good sight on the appropriate provisioning level, and that's what we've taken. Now, as these go back and restructure and perform, and our definition of performance is if you perform for six months after the restructuring, then it falls out. I think it's a relatively conservative policy compared with others. Technically, through the end of the year, I think you'll see that. No problem. That cover rate will simply improve from those hamper accounts going out. Where are we comfortable? Actually, I do think what's important is you look at the measures of our recovery rate over the last few years, and we are substantially over 40% covered in the wholesale business. I think last year we quoted some numbers from Moody's. Moody's senior unsecured recovery rates of 31% in Asia and 35% in Asia excluding Japan. That on itself is a level of comfort, and we travel substantially ahead of that in terms of the proportions that we recover. Net, if I look at the level of provisions to loans advanced in MESA, they were about 450 basis points, total provisions to total loans and advances. At the end of this year, they're 550 basis points. Our level of provisions to the loans and advances in MESA is up. We feel very comfortable at this current level. Just go beside you, the gentleman there. Thanks. It's John Kirk at Redburn Partners. Three questions, please. Firstly, thanks for your comments on the flexibility of the cost base. Can you just help finish off the picture by describing approximately what proportion of your cost base today you would describe as BAU, as investment, and as regulatory, and whether any of those buckets are particularly different from the long-term average in terms of proportion? The second question, Hong Kong loans obviously grew very sharply in the year. If you could just give us some comfort on that and why we shouldn't worry about that pace of loan growth. Hong Kong loans. And then possibly a subsect of that, can you describe how important the offshore renminbi market is to the group? So in terms of revenue generation or loans or deposits or what have you, can you just give us some context for that? Thank you. Okay. If I do the renminbi one first, and then I'll start on the Hong Kong, then you can take up from there and do the cost flexibility. Does that make sense? Yeah, fine. Actually, the renminbi in the 2010 numbers is a relatively small factor in our P&L. The reason for highlighting it, though, is I think it is a harbinger of quite a dramatic shift in what's going on in the world. If you start thinking about how big China's external trade is and what it would mean if a significant proportion of that was denominated in renminbi, that is a fundamental change in the way the world's financial system works. It is going to have a profound impact, not just in Hong Kong, but elsewhere. We are positioning ourselves right at the core of that. So it's very much a future-looking development rather than a factor in the 2010 P&L. In terms of asset growth in Hong Kong, essentially all our businesses, both consumer and wholesale and across most parts of both businesses, saw opportunities for attractive asset growth. So you saw asset growth in credit cards, you saw asset growth in mortgages and so on. The one that was particularly marked was trade finance, where trade finance volumes, if I'm correct, increased by what, 120%? The actual assets were up over 150% in trade finance in Hong Kong. So it's very strong trade finance flows, and that business we are very happy to take on, both because of its risk characteristics and because it's absolutely the core business that we do. Yeah. Now, on the cost point. On the cost point, our investment budget, if I gave you a range, it is high single-digit percentages of the cost base is the investment budget. So depending on how we are expending it, 7%, 8%, 9% of the cost base would be our investment appetite in any particular period. As to regulatory costs, I think the question there attaches more to the GBP 150 million we have identified for you as the increase and how sort of sticky is that. I think we would expect some relief from that sort of level, just given the content and what goes into it. But the world is undoubtedly becoming more expensive in terms of engaging with regulators on all sorts of things. So I would not be expecting much relief from it, but some. In a way, it is a bit of the tip of the iceberg, because that is the direct sort of regulatory and compliance costs, and unfortunately, regulatory and compliance issues affect our efficiency in our doing our businesses at every aspect of the business. So there is a fair amount of invisible costs there as well. I am going to take one very last question. I am sorry, because I am conscious of I am being told that I have to truncate. So I will take one last, and we can make it snap. Yeah. Two questions from one. It's- Two questions. You make it one answer. quite thrown off. It's Michael Helsby from Merrill Lynch. Yeah, two questions. Firstly, I enjoyed the historical perspective. It made me feel quite old with my beard and whatnot. Yeah. But I guess it's been a hell of a journey, and throughout that journey, there's been clearly a lot of market share gain along the way. As you look forwards, clearly you think there's a hell of a lot more to go for. So I was wondering if you could try and break that down into how much of that is market growth, that will happen anyway, and how much of that you think is you taking share from your competitors? That's question one. Question two is, if I look at your ROE that you've just produced, and as you say, if you dilute for the rights, it's about 12.5. Now, within that, I think quite clearly you're running at bad debts at 15-year lows. I know it's very difficult to do, I was wondering if you could help us. When you're thinking about pricing, clearly, you're building in some sort of credit risk when you're pricing. So it doesn't feel like 30 basis points or whatever is the right level. So when you're thinking about pricing, what would you point to as the right level for the group as a bad debt charge? Thanks. I am going to give you really quick answers to both. The first question about how much of it is market growth versus market share. The short answer is it depends on the market and it depends on the product, what the nature of the opportunity is. In something like private banking, we see opportunities to win market share and phenomenal market growth, right? Yeah. There are going to be some businesses where we are going to be more inclined to just grow with the market. It is going to be a balance between the two. CB Mortgages, for instance, this year, I think we will have a slightly different tag. We have got very good market shares, built with very good asset growth. I think if anything, we will be tweaking towards repricing more than share gains. We are going to work that elasticity through 2011 quite strongly and we will see where we go. There is a different stance to that of strong market share build in CB Mortgages, for instance. In a sense, I think it is something we manage more dynamically depending on market circumstances rather than having a grand plan out there. In terms of the underlying loss rate that we use to think about. We do not think about it in terms of an aggregate loss rate. The reality is it is the sum- That's true. of multiple different loss rates across different businesses across the group. The picture is very different. You're absolutely right that on the consumer side, we are seeing a very low rate of loan impairment. As we grow the book and as the mix changes, that will change. We do factor those things into our calculations. I am conscious, and my apologies to those of you who wanted to ask questions, but we haven't had time for. I'm conscious that we promised we would end at 11:30. Thank you for questions. I just wanted to hand over to John, if you had any concluding remarks you wanted to make. What are key messages from today? 2010, again, a very strong set of results from Standard Chartered, the eighth consecutive year of record income and profits. We've continued to invest in the business. It is a growth business. We still see significant growth opportunities looking forward, strong balance sheet, and we've started 2011 with great momentum. Thank you all for coming today and thank you to our shareholders for their support over the last 12 months.