Standard Chartered PLC (LON:STAN)

Earnings Call: Q4 2013

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Mar 27, 2014

Well, good morning, London, and good afternoon to Hong Kong and to Mumbai. 2013 has been a challenging year for the industry and for Standard Chartered. While our clients have remained very active, the overall outcome for the group has not been as good as we would have liked. When this time last year, we announced another strong set of results, we said we were not complacent and would continue to refresh our strategy to ensure the group is able to adapt to the changing environment. As we stated at the Investor Day in November, the annual strategy review confirmed that we are in markets where there remain good opportunities for profitable growth. The new organization structure will ensure that the group is best placed to take advantage of these opportunities by supporting clients and customers in a more seamless way, providing them with access to a broad range of products and services. Peter is going to talk about this in more detail, but first let me comment on the board's perspective. The board remains intensely focused on shareholders' interests, and this was at the top of our minds last year. The business has grown substantially over the last decade, and the board continues to view Standard Chartered as an exciting growth story over the medium to long term. We remain focused on delivering profitable, sustainable growth that is within our risk appetite. The board aims to grow the amount we return to shareholders each year. This year, we are recommending a final dividend of 57.2 cents, resulting in a total annual dividend increase of 2%. We have increased the amount of dividend paid to our shareholders each year for well over a decade. Ensuring the business continues to focus on the returns that are generated for shareholders each year is a top priority for the board, as is maintaining our well-capitalized, highly liquid, and diverse balance sheet. Since 2010, we have organically grown our balance sheet, increasing loans and advances to customers by 21%, and yet we still have the same Core Tier 1 ratio at the end of 2013 that we had at the end of 2010. Richard will go into further detail, but we are confident in our ability to achieve capital accreting growth while supporting our clients and the creation of wealth across our markets. Let me at this point, though, comment briefly on how we remunerate our people, most of whom are not located in the U.K. Consistent with past practice, we reward for good performance, as well as taking into account of how our people deliver long-term, sustainable, and profitable business. Reflecting our performance in 2013, the bonus pool is down on the prior year by 15%, and we are returning to shareholders by way of dividends around twice as much as we are paying out in bonuses as this slide clearly shows. Overall, our staff costs are broadly flat compared to last year. This slide also shows how much we're paying out in corporate taxes. That includes the UK bank levy, which has increased substantially again this year. Finally, I would like to comment briefly on the board-level changes we set out in January when we announced the reorganization of the group. Steve Bertamini will step down from the board at the end of this month after more than five years leading consumer banking. I would like to thank Steve for the very considerable contribution he has made to the business over that time and wish him every success in the future. Sadly, we will also be saying farewell to Richard Meddings, as this is likely to be his last full year's results presentation. Richard has been on our board for 11 years, and his contribution to the business has been immense. As a colleague and as a friend, I know he will be greatly missed. I would also like to take this opportunity to congratulate Mike Rees, who many of you already know, as he takes up his new role as Deputy Group CEO next month. Mike will be available to take questions later in the meeting. While 2013 has been a challenging year, I believe we remain in good shape to support our clients and customers and the opportunities for the business remain compelling. We will continue to support the growth of trade and wealth across our markets and continue to drive value for our shareholders from our competitive strengths and from the opportunities we see in the markets we know so well. At the same time, our focus on conduct has intensified. We expect the right behavior at all times as being Here for good is firmly embedded in our DNA. We are therefore confident that we are well-positioned to drive further value for our shareholders over the coming months. On that note, let me hand over to Richard. Thank you, John. Good morning, London, and good afternoon, Hong Kong and Mumbai. 2013 was a challenging year both for us and for the industry, with margin and spread compression, volatile financial markets, and for us, Korea, which remains difficult. We have responded to these challenges by consistently supporting our customers' growth and by managing costs and risk tightly. We have recently sharpened our strategic focus and flexed our financial framework to strike the right balance between growth, returns, and managing for capital accretion. As with our previous results, we exclude from all of our commentary own credit adjustments, the impairment of goodwill in Korea, and the 2012 settlement with the U.S. authorities. On this basis, profit before tax for the year is down $560 million, or 7%, to just under $7 billion, driven by a number of factors, including continued challenges in Korea, where operating profit is down nearly $530 million, with consumer banking contributing $326 million of this fall. Peter will discuss Korea in more detail. Material margin compression in transaction banking following a significant influx of liquidity into our markets, causing a drag to income of nearly $400 million. As guided concern in the second half of the year surrounding the effect of QE tapering, as well as increased, and to an extent, unclear regulation impacting financial markets where income fell by $564 million half on half, with the fourth quarter 19% lower than the third. The performance pressure in this business, which we highlighted in our pre-close, has since been reflected by other major banks in their recent trading updates. Finally, principal finance performed poorly, down over $200 million year on year. A number of these headwinds are easing as we enter 2014, and there were, of course, some very strong performances in the year, including Hong Kong, but also most countries in Africa, the MESA region and India, and also in mortgages and in corporate finance. In response to the challenges, we have been extremely disciplined in managing costs, with expenses for the year only 1% higher than in 2012 at $10.2 billion. We have achieved this despite inflationary pressure of 4% to 5% across our footprint, continuing our investment programs, absorbing a 63% increase in the underlying cost of the U.K. bank levy, now $266 million. Significant increases in regulatory and compliance costs up some $160 million on 2012, and a one-off VAT related charge in Korea of $54 million. As you saw our income trajectory slow during the year, we managed our costs assertively. Let me draw out several key aspects of our performance. Group income of $18.7 billion was 1% down on 2012, but with 25 markets each now contributing income of over $100 million. As I mentioned earlier, costs remain tightly controlled and were up only 1%. Reflecting a strong but lower profits performance, we have reduced the bonus pool by 15% across the group, and this impact will mainly be borne by the more senior executives. Total impairment has increased 25%. Within this, loan impairment has increased 35%, driven in the main by continued elevated impairment levels in the unsecured consumer banking portfolio. The group delivered profit before tax of nearly $7 billion and normalized earnings of almost $5 billion, down 8%. Normalized return on equity was 11.2% and normalized EPS was 204 cents, down 9%. Our balance sheet remains in excellent shape, highly liquid and well diversified. Finally, we remain well capitalized by any measure, both compared to our peers and looking out to 2019. More on this later. Moving to our performance by business and starting with consumer banking. Consumer banking's performance is in line with our pre-close guidance. Income grew 2% year on year, although it fell 5% in the second half. This reflects slower wealth management income, the initial impact of de-risking the unsecured book, and regulatory cooling measures which dampened mortgage volumes. Expenses were well controlled, increasing by only 1% year on year, delivering positive jaws of 1%. Headcount in consumer banking reduced by 7%. Total impairment increased 45% as guided, and as a result, consumer banking operating profit fell 11%. Korea has continued to have a material impact on the consumer banking performance, driven by a difficult operating environment where industry-wide returns on equity have fallen below 3% Continued elevated levels of impairment and the impact of our selective de-risking of unsecured products, including the planned sale of the consumer finance businesses. As a result of these challenging conditions, consumer banking in Korea made an operating loss of $162 million, which is $326 million lower earnings than the prior year. If you were to exclude Korea, consumer banking income was actually up 5% with profits up 8% driven by Hong Kong, MESA, India, and the Africa region. Turning to income by product. Mortgage income was up 10%, reflecting 14 basis points of margin improvement, and with Hong Kong a significant driver. Deposit income was down 7% year-on-year, particularly in Hong Kong, Korea, India, and China, with margins down 12 basis points to 71 basis points. Wealth management income was up 2% year-on-year, although income in the second half was down by 11%. Market uncertainty impacted sentiment, particularly in equity products, representing about one-third of wealth management income, and which were down 17% half-on-half. Hong Kong remained our largest market for wealth management, growing income 9%, and together with MESA, which grew income 11%, offset weaker performances in Singapore, Korea, and other Asia Pacific. Incoming credit cards and personal loans increased 5% year-on-year and was broadly flat half-on-half. Selective growth in markets like China, the U.A.E., and Africa was offset by continued de-risking in markets like Korea, where we have reduced the credit card and personal loan book by 18% year-on-year to just over $5 billion. SME income was up 3%, with lower deposit income offset by good growth across lending, FX, and trade and working capital as we continue to finance the growth of our SME customers. Moving to impairment. Consumer banking loan impairment increased by 53% or $360 million, with Korea accounting for over 40% of the increase. We have taken action in Korea by tightening underwriting standards, changing customer acquisition strategies, and exiting customer segments more prone to filing under the personal debt rehabilitation scheme. Outside of Korea, loan impairment increased by 47% year-on-year, reflecting previous asset growth and the seasoning of the unsecured portfolio, plus some $53 million of lower debt sales. As previously guided, we have taken steps to de-risk our unsecured book across the group. Given the slower growth in unsecured assets going forward, we would expect loan impairment from seasoning to moderate in the second half of this year. Looking now at wholesale banking. Wholesale banking income is down 2%, which is slightly lower than our expectation at the time of the pre-close, arising from delayed deal execution in principal finance, as well as continuing weak financial markets conditions. Within this client income, which represents 86% of wholesale banking, was up 4% and own account income was down 25%. The operating environment was impacted by a number of factors during the year. Most of these factors were either temporary or cyclical, including the high levels of liquidity in our markets, the persistently low interest rate environment, uncertainty over the pace and timing of QE tapering, and indiscriminate deterioration in sentiment on emerging markets in the second half. Other factors, like regulatory change impacting derivative markets, were more structural in nature. Expenses were very tightly controlled, increasing only 1% year-on-year with lower staff costs offsetting increased regulatory expenses. Furthermore, expenses were down 2% in the second half with reduced variable compensation as business performance fell, as well as tight control over hiring and BAU costs. Total impairment rose 5% year-on-year, and within this, loan impairment was up 12%, representing 39 basis points of wholesale banking customer loans and advances. Other impairment was down 19%. As a result, profit before tax for wholesale banking was down 4%. Looking at income in more detail by product. Within transaction banking, trade income was down 4% and cash and custody income was down 5%, driven by margin compression of 27 basis points or 19% in trade and 15 basis points or 16% in cash. We saw strong growth in both average trade balances, up 21%, and cash up 11%. Importantly, margins are showing signs of stabilization, albeit at levels still lower than that of the first half of last year. Corporate finance continued to perform strongly with income up 13% on 2012. As highlighted in the pre-close, despite some delay in deal execution in the second half, income growth remains broad-based with around 70% annuity in nature and with a strong pipeline as we enter 2014. ALM income was down 10% year-on-year and down 16% half-on-half, reflecting fewer de-risking opportunities in the second half and the continued low interest rate environment. Weak equity markets resulted in lower revaluation gains in our principal finance investments, and income was down 43%. Although we saw challenging market conditions in 2013, the comparator for 2014 has eased. Looking at financial markets in a little more detail on the next slide. Income in financial markets was flat year-on-year at $3.65 billion, as strong volume growth was offset by spread compression. Within this, client income was up 7% and own account income down 25%. Market conditions deteriorated in the second half, as I mentioned earlier, and as a result, financial markets income overall was down 27% on the first half. Rising yields on emerging market bonds and directional uncertainty in the markets led to lower own account income. This impacted our rates business, in particular, where income dropped by a third compared to a strong first half. Negative emerging market sentiment also impacted income from our financial institution clients, although income from corporates remained robust, albeit in line with usual seasonal trends. Our foreign exchange business performed well, with income up 11%, driven by cash FX and FX options, supported by our continued strength in offshore renminbi. Cash FX volumes were up 21%, offsetting spread compression of 12%, and in rates, volumes were also up 20%. Our equities business made reasonable progress, partially offsetting lower commodities income. Moving to impairment. Total impairment in wholesale banking was up 5% year-on-year, driven by a small number of exposures in India and Africa. These exposures drove an increase in gross non-performing loans, up by some $900 million or 22% on 2012. This represents just over 2% of wholesale banking loans and advances consistent with the levels seen in recent years. The cover ratio, given these exposures, has declined slightly to 48%, but this increases to 60% after including collateral at a forced sale value. The net at risk remains well within our observed historic recovery rates. We are also seeing signs of improving potential recovery levels, and in particular, against a number of non-performing loans in our MESA region. The portfolio continues to perform well and early alerts are stable. We are not seeing any new areas of stress, but we remain watchful in India and also the potential impact of lower commodity prices more generally. Turning to the management of risk and the shape of our portfolio. Let me just repeat some of the characteristics of our balance sheet that perhaps get taken for granted, but are material points of differentiation from our peers. In consumer banking, the book has a continuing bias towards secured lending, with 82% of the book being either fully or partially secured at an average loan-to-value on our mortgage book of 48%. We continue to de-risk the consumer unsecured portfolio with credit cards and personal loans balances down 6% year-on-year. Consumer banking 30- and 90-day delinquency rates are stable, as are wholesale banking early alerts. As in earlier periods, a significant majority of past due but not impaired balances, as at the balance sheet date, were cured in the following month. Our portfolios are very diverse. Energy, our largest wholesale banking industry concentration, is around 20% of corporate exposures, and as we've shown you before, is in itself highly diversified. We maintain a short-dated wholesale banking book with 64% of the book maturing in under one year, reflecting our trade bias. Trade assets have the lowest propensity to loss of any wholesale banking asset category with an empirical default rate of around 2 basis points. Wholesale banking is highly collateralized with $197 billion in gross total collateral, which is held at conservative for-sale values. Stick positions are down by 26% to $1.5 billion, representing less than 1% of wholesale banking loans and advances to customers. Finally, we continue to distribute assets successfully, with primary distribution in the year up 9% and loan sales up 29%. The portfolio is therefore diverse, short tenor, highly collateralized, and showing no material signs of stress. Looking to the group's balance sheet. Liabilities. Our strong and disciplined management of the balance sheet provides us resilience and allows us to take advantages of opportunities for growth. Looking at liquidity, the balance sheet remains highly liquid with an AD ratio of 76%, 52% of customer deposits are in current and savings accounts. We have a liquid asset ratio of 30% with over $200 billion of the balance sheet in cash or near cash. We remain a strong provider of net interbank liquidity. We continue to exceed by a substantial degree the Basel III net stable funding ratio and the liquidity coverage ratio and some years ahead of the required implementation dates. Turning to assets. Our loan book remains well diversified by geography, industry, counterparty, and product. Loans and advances to customers were up 4% as we continue to support our clients and customers. Risk-weighted assets grew 7%, driven in the main by asset growth, regulatory consolidation of Permata Bank, and credit migration. As you can see, wholesale banking represents 75% of group risk-weighted assets and grew at 9%, whilst consumer banking remained flat. Now, given the recent market focus, I would like to spend some time setting out the strength of our capital position. Let me deal with Basel II first. The group's Core Tier 1 ratio was 11.8% at the end of 2013, the same as it was in 2010, and up some 40 basis points since the half year, the product of risk-weighted asset discipline, and the phasing of operational risk-weighted assets, and dividend payments. Tier 1 was 13.1% and total capital 18%. In addition, we currently estimate our PLAC, or primary loss-absorbing capacity, at 23%. Again, very robust compared to our peers. Since our 2010 rights issue, we have very evidently self-funded balance sheet growth and the continued payment of a growing dividend. Our Core Tier 1 ratio has remained at 11.8% whilst growing risk-weighted assets by $77 billion at a CAGR of 10% and declared over $5.5 billion in dividends. Turning to Basel III. On 1st of January 2014, our Basel III Common Equity Tier 1 ratio is 10.9% on a transitional basis and rises to 11.2% on an endpoint basis. It is not just our Core Equity Tier 1 that is strong. For total capital, we are again strong in absolute terms and relative to our peers. We have been active issuers of Tier 2 capital during 2013, with total capital reaching 18%. These issuances showed strong appetite for our credit and an ability to issue across markets and currencies. We are well capitalized today in absolute and relative terms on all metrics, including Core Equity Tier 1, total capital, and PLAC. In addition, our leverage ratio stands at a very strong 4.7% at the year-end. We believe it would be helpful for more capital guidance to be given to the market, in particular, around the interplay of the various capital buffers and most importantly, the minimum capital levels for each individual institution. To help clarify, this slide sets out how we see Standard Chartered's capital position against minimum known requirements, which informs the guidance we have received from the PRA. We begin with a 4.5% minimum Core Equity Tier 1 requirement common to all banks. A 2.5% capital conservation buffer common to all banks. It is primarily against this buffer that the Pillar 2B or PRA buffer will be assessed and where we are conservatively positioned. A 1% G-SIB buffer applicable to Standard Chartered and a 0.4% Pillar 2A Core Equity Tier 1 requirement, which is subject to annual review by the PRA. This totals to a known capital stack of 8.4% Core Equity Tier 1 capital ratio for Standard Chartered, and let us call this our capital stack. At 10.9% Core Equity Tier 1, we are already significantly and materially above our capital stack and by some 250 basis points. We are therefore substantially above the known threshold with capacity for additional buffers. We are also today already significantly and materially ahead of the target ratios the PRA has guided us to achieve and by 2019. On this next slide, let us look at the broader industry. It is crucial to understand that capital requirements will differ for each bank. This is the new regulatory model. The PRA's Pillar 2A guidance is different. G-SIB buffers are different. Countercyclical buffers and structural capital requirements will be different to reflect each bank's unique business model and risk profile. Capital requirements are not uniform, nor should they be. As recent peer results demonstrate, there are variances in the end state capital levels with targets ranging from above 10% to 12% or above. When you think about a bank's capital strength, it is not how high the current ratios are or what the target capital ratios are, it is by how much they are above their own capital stack. Let me give you two examples. First, the G-SIB capital requirements range from 0% to 2.5% according to the different systemic risk profiles of each institution. The G-SIB requirement for us at 1% is between 1% and 1.5% lower than that of other U.K.-based international banks. We were also included in the 1% category, not because the calculation methodology required it, but through a supervisory override. This is therefore conservative. Second, Pillar 2A guidance naturally varies from bank to bank as it reflects the PRA's intention to capture idiosyncratic risks not included in Pillar 1. These include pension, interest rate, credit concentration, and operational risks. You will know from other disclosures that this Pillar 2A buffer can be very different between banks. Our current Core Equity Tier 1 Pillar 2A guidance of some 40 basis points is demonstrably less than a number of our U.K. peers, simply because we do not carry any material U.K. pension risk. To summarize, our known minimum is 8.4%. The minimum requirement for other banks is very different, given their often higher G-SIB or other requirements or their Pillar 2A guidance. Our current buffer above the capital stack of some 250 basis points is clearly very strong compared to peers and positions us very well to manage future regulatory capital demands as they evolve. The rules governing the counter-cyclical or systemic risk buffers are not yet finalized, but when we stand back and we compare the diversity of our balance sheet and our risk profile against the 250 basis point buffer, we believe we are very strongly positioned with our current capital to absorb any capital add-on that we can see today, whilst continuing to support the growth of our clients and customers. Next slide. Despite this, the U.K. regulatory sentiment towards capital levels is clear, and there will be further model adjustments, which we currently estimate could be in the range of 30 to 50 basis points for us in 2014. It is against this backdrop that we introduced the fifth metric to our financial framework, a commitment to gradually accrete capital over time. Whilst we expect risk-weighted assets to be up in 2014 with the introduction of Basel III and expected model changes, we intend to mitigate this by driving capital accreted profitable growth through the fifth metric, by more assertive tail management of our existing portfolio, and by divesting certain risk-weighted asset-intensive assets and non-core businesses. The combined impact of these latter non-core disposals is expected to be some 10 to 15 basis points benefit to Core Equity Tier 1 in 2014. Since our Investor Day last November, we have already released $3 billion of risk-weighted assets from low-returning client relationships in wholesale banking, which we will look to redeploy into higher-returning relationships. As we look into 2014, we have identified over $10 billion in further reductions, over half of which will be achieved in the first half. Finally, and although we currently have no immediate issuance plans, the regulations now clearly strongly incentivize banks to hold up to 1.5% of risk-weighted assets as Additional Tier 1 rather than Common Equity Tier 1. Given this, we will seek the necessary regulatory and shareholder approvals to enable us to issue these instruments in the future. I have spent some time on this, but hopefully, it gives you a much clearer picture of the strength of our capital position, both of itself and relative to peers. So let me conclude, and turning first to outlook. Our outlook for 2014 is, as you know, one of modest growth. Market and trading conditions are more volatile and difficult than a year ago. Whilst current performance momentum is ahead of the second half of last year, performance in this first half will remain challenged, both at an income and at a profit level. And finally, as this is my last full year results presentation for Standard Chartered, if you will allow me just to reflect on aspects of the bank of which I am very proud. This is a bank underpinned by excellent foundations, a hugely robust balance sheet, well-capitalized, highly liquid, diverse in both assets and liabilities, and disciplined by a financial framework that balances growth and returns. We serve customers and clients in the growth markets of the world and have since the financial crisis, almost doubled our lending to our customers, increasing that lending by some $190 billion, doing what a bank should do. And it is an organization full of really great people. And I also wanted just to take the opportunity to thank you, our investors and analysts, both in the room or listening via the webcast or dial-in. For the past 11 years on the board, seven as Finance Director, and through quite a remarkable period of utter change for the industry, I have really appreciated your support, both personally and for the bank. I've valued our relationship. I've tried to answer all of your questions. I've usually enjoyed the conversations we've had. And I've also learned a great deal from all of you. So thank you. And let me now hand over to Peter. Thank you, Richard. Good morning, London, and good afternoon to those of you in Hong Kong and Mumbai. As you've heard, 2013 was a tough year. We faced margin pressures in a number of key businesses and markets. Regulatory requirements and the UK bank levy put upward pressure on costs. Various factors drove a sharp increase in unsecured loan impairment. And much more negative sentiment towards emerging markets affected valuations and transaction flows in wholesale banking. And we took a goodwill impairment on our business in Korea, given the severity of the challenges facing us and the industry as a whole in that market. And as a result, we slipped from our trajectory of record income and profits, posting lower income and profits for the first time in over a decade. And our share price fell, reflecting both our own performance and investor sentiment towards our markets. This is not what we aspire to achieve. So as we saw the challenges mount and our momentum slow, we took action to mitigate the impact and to adapt to the changing environment. Some of the things we've done are unashamedly tactical, putting even tighter controls on spend and headcount, de-risking certain portfolios. But the more fundamental changes relate to our strategy and how we are organizing ourselves and deploying our resources to deliver the sustainable, profitable growth and returns that drive shareholder value. That's what I want to focus on today. But first, let me tell you how we're looking at the world. I don't need to tell you that investor sentiment towards emerging markets turned sharply from May last year and remains quite negative and jumpy. At least as far as our markets are concerned, we think this is a quite short term, perhaps somewhat overblown phenomenon. The longer term attractions of Asia, Africa, and the Middle East remain compelling. In fact, we expect our markets to do better in GDP growth terms in 2014 than they did in 2013, with aggregate growth rising from 2.8% to 3.5%. The underlying drivers of economic growth across the emerging world, demographics, urbanization, rapid growth in the consuming middle class, investment in infrastructure, remain very strong. By 2030, Asia alone will add just over 2.2 billion people to the consuming middle class, taking its share of the global total to about 66%, two-thirds. When I talk to our clients, it is clear that there is some disconnect between the dynamics of global financial markets and the drivers of the real economy. Our clients see much, if not most of their growth coming from the emerging world, and particularly from Asia. They see a robust recovery in the U.S. and even a weak recovery in Europe as huge positives for Asia, Africa, and the Middle East. Of course, there are economic and political risks. Some of our markets face difficult political and social transitions that could have a significant impact on business confidence. India and Indonesia face important elections this year, which will determine the pace of future reforms and GDP growth. Reshaping China's economy will create stresses. The tensions in the South China Sea pose risks. While we are not directly exposed, we are obviously watching events in Ukraine very carefully, alert to potential knock-ons. While it may make perfect sense for investors to rebalance their portfolios to capture the rebound in the West, the resulting negative impact on emerging market indices and valuations risks disguising the fundamental attractiveness of these markets. In addition to the issues specific to our markets, we face some broader challenges. One is the ongoing torrent of regulatory change. The Basel III agenda is nearing completion, which is a considerable achievement and one we welcome. But this risks being undermined by a profusion of unilateral initiatives and interpretations. What the global economy needs now is consistency and stability in the international financial framework. A second big challenge, which affects the entire industry, is to rebuild trust and credibility. Put bluntly, society expects more of us. We must raise the bar on conduct so that every employee looks to comply with the spirit, not just the letter of the laws and regulations in everything they do. In 2013, we launched a multi-pronged program to address this challenge. We have substantially increased the resources devoted to conduct issues. We have invested in systems to enhance our controls and reduce the risk of manual errors. We have relaunched our code of conduct, requiring every member of staff to complete mandatory in-depth training and personally commit to the code. We have sharpened the way we link performance assessment and reward to personal values and behaviors. We recognize that we have not got everything right in the past and that we have got a lot of work to do in this arena, but we are determined to raise the bar to make doing the right thing a front-of-mind imperative for everyone in the bank. That is what Here for good is all about. A third challenge is technology. As a fundamentally digitizable industry, every aspect of banking can be transformed by technology. Yet this is as much an opportunity as a threat. Through technology-driven innovation, we can empower our clients, cut costs, improve risk management, reinvent every aspect of the business. The trick is to make it happen rather than to have it happen to us. At our annual strategy board last June, we took stock of the strategy, asking tough questions about the growth potential in our markets, our ability to win market share, the impact of a more challenging regulatory and market environment. Since capital and investment spend are going to be even scarcer resources, we wanted to sharpen our focus, get really clear on what we should be investing in, where we should cut back. Our answer, which we set out for you in November, was go to the core of what we are all about. We bank the people and companies driving investment, trade, and the creation of wealth across Asia, Africa, and the Middle East. That's the essence of who we are. We're not trying to bank everybody, but we do want to bank those that are making things happen. We're focused on investment, trade, and wealth. We're sticking to the markets we know so well, Asia, Africa, and the Middle East. From this core statement, we distilled, first, a set of five strategic aspirations that flesh out how we will grow the core. I'll put a bit more color on some of these in a moment. Second, a set of five tests we're applying to more peripheral businesses to ensure we reinforce the core. I'll show you how we're using these. Third, a significant reorganization of our regions, business, and functions to ensure alignment to the strategy and to streamline the way we work. Fourth, our flexed financial framework, which now has five metrics, including both positive jaws and capital accretion. We'll use this to explain our performance and ensure we're balancing the imperatives of near-term delivery against longer-term strategic progress. Finally, our, as it happens, five priorities for 2014. These are used to set personal and team objectives across the bank, ensuring that everybody is marching to the same tune. So what you have here is an overarching framework that links strategy to performance and to the way we run the bank and to our immediate priorities. Let me expand a little on each of the elements. In November, we set out these five strategic aspirations that crystallize what we want to achieve in growing the business. Our strategy revolves around relationships, not products, not transactions. We've shown you before the success we've had in deepening relationships with our biggest clients. Yet we think we have scope to do much more, particularly by focusing on the next 500 clients, and we could do better in building similarly deep relationships with our smaller corporate, private banking, and retail clients. This is one of the key reasons why we are reorganizing the business, combining wholesale and consumer banking to create three client segment groups and five product groups under Mike Rees, who's sitting up here today and will join us in answering questions. For example, by creating the commercial client segment, we'll make it much easier to focus on the needs of mid-size corporate clients. Such middle-size companies are a huge part of the economies in which we operate, up to 60%, and represent a rapidly growing component of the banking revenue pool. Yet up to now, we have failed to make the most of this opportunity. We fragmented our efforts between wholesale and consumer banking and generate less than 10% of our total income from this important client segment. Now, we will take a much more integrated approach. Through targeting high growth in exporting industries and being more efficient in onboarding, we will grow the client base. By leveraging our network and full product capability, we will make ourselves more relevant and deepen relationships. When these clients get bigger, we will transition them up to our corporate and institutional client segment much easier now that we are organized as one global business. Also, grouping our commercial clients with our private banking business will massively facilitate cross-referral. The new commercial segment will start with about 50,000 or so clients, mainly entrepreneurial family-owned groups that are the perfect target market for private banking. Yet up to now, a very small proportion have become private banking clients. An obvious opportunity. Indeed, the scale of the private banking opportunity across our markets is enormous. Today, there is some $10 trillion of assets under management, AUM, from high-net worth individuals in Asia, Africa, and the Middle East. By 2017, this number should more than double. We start with a very good platform, with $58 billion in AUM, good product capabilities, experienced relationship managers, and a network of advisory and booking centers. But we can scale up and enhance our offer, leveraging our client franchise and network more effectively. A great example is the Africa to London corridor, which we are superbly positioned to serve given our extensive African footprint and London advisory and booking center. But the greater emphasis we are putting on private banking is just one element of the way we are stepping up our efforts in the wealth management arena. Given the pace of individual wealth accumulation across our markets and the relatively early stage in the development of these markets, there is a huge opportunity to provide our retail and private banking clients with wealth management products and services. This is already a substantial business for us, generating income of $1.3 billion in 2013, but this is only the beginning. Our aspiration is to more than double assets under management by 2020 to $300 billion. That is why we are elevating wealth management from being a product group within consumer banking to sit alongside our well-established wholesale banking product groups in the new structure, like corporate finance, transaction banking, and financial markets, which are already all much bigger. Turning to trade and payments, this is at the heart of what Standard Chartered is all about. We are already a top two trade bank by SWIFT data. Our goal is to be number one. We continue to win market share, with average trade assets up by 21% in 2013 against market growth of around 6%. Of course, trade income was affected by the sharp fall in margins, but we are clearly well-placed to benefit as margins stabilize. We are taking advantage of the shift towards companies using the renminbi for trade and payments. From virtually nothing in 2009, some 16% of China's trade, just over CNY 730 billion, is now settled in renminbi. By 2020, we think this will more than quadruple to over CNY 3 trillion. To give a sense of the pace at which the renminbi is being internationalized, the Standard Chartered Renminbi Globalization Index, which measures all aspects of offshore renminbi activity, went up 84% in 2013, whilst our own international renminbi payment flows were up 122%. New things are happening all the time. In December, we launched Renminbi clearing in London by a joint venture with Agricultural Bank of China. Last month, we executed the first renminbi cross-border sweeping transaction for a company based in the new Shanghai Free Trade Zone. To create the capacity to achieve our strategic aspirations, we need to sharpen our focus. We've therefore been systematically subjecting those businesses that are underperforming or less aligned to our core strategy to five tests, asking tough questions about their strategic relevance, alignment with Here for good, and sustainable economics. As a result, we are exiting or reconfiguring a number of smaller businesses. Just as important is being more selective about our client relationships. We're exiting or reshaping relationships, both big and small, which offer no prospect of attractive returns, making clear to our clients that to be sustainable, our relationships have to be economically attractive for both sides, and this has made for some tough conversations. We're also continuing to take action on our most underperforming or problematic businesses, above all, Korea. As Richard said, our business in Korea had an extremely challenging 2013, with profits down before the goodwill impairment, $527 million to a loss of $30 million. Much of this was due to a sharp fall in consumer banking performance, given elevated levels of impairment, up 66%, and income falling by 12%. Partly as a result of selective de-risking of the unsecured book and the charge we've taken on the prospective sale of two small subsidiaries. Weak underlying trading performance was exacerbated by a one-off tax-related charge of $54 million and the non-repeat of last year's property sales, which had contributed income of $74 million. Against this, one positive factor was the continued strength of our network income relating to Korean clients, a significant and growing revenue stream of over $200 million. Of course, we weren't alone in encountering difficulties in Korea. Six of the seven major banks saw income and profits fall by double-digit rates, and average ROE was below 3%, the lowest for a decade. As the sixth-largest player in the industry, we can't entirely escape the dynamics of the industry, yet neither can we tolerate such underperformance since it creates such a drag on the performance of the bank as a whole. We are continuing to take action on multiple fronts. There's no silver bullet, but we're shrinking the businesses while very selectively investing to support the areas of most opportunity. In 2013, we reduced risk-weighted assets in Korea by 7%. In 2014, we will reduce it further. We're simplifying the structure, selling our small consumer finance and savings bank subsidiaries, and we will reduce the number of legal entities from nine to three. We're reducing costs as fast as we can, given the constraints, with staff numbers down by nearly 400 year-on-year. We're consolidating the branch network, down by 24 during 2013, as we increasingly interact with our clients through digital means. We're redeploying capital in wholesale banking from locally oriented clients towards clients that can benefit from our network. We're selectively de-risking the unsecured book in consumer banking and putting greater emphasis on wealth management. As a result of these actions, our business in Korea will be smaller, more profitable, more focused on where we can play to our strengths. But given the constrained context, we cannot achieve this transformation as swiftly as we would like. Korea will continue to be very challenging through 2014. In November, we showed you what we described as our flexed financial framework, setting out the metrics we would aspire to deliver over the next couple of years. As we said before, these are aspirations, and we don't expect that we will always be able to deliver against all of them. We clearly haven't in the past. But they give you a sense of what it is we're setting out to achieve. We said we did not expect to deliver double-digit income growth over the next couple of years, given various pressures, not least Korea. However, we haven't abandoned double-digit growth as a longer-term aspiration. Given the scale of the opportunities in our markets, we believe this remains a stretching but realistic aspiration. Of course, we're not going to compromise our risk appetite or strategic discipline to chase growth. If market circumstances only support somewhat slower growth, that's what we will deliver. To protect earnings momentum in an environment of slower income growth, we're shifting from a stance of broadly neutral cost income jaws towards aiming to deliver positive jaws, i.e., costs growing more slowly than income. This will be challenging given the inflationary and regulatory pressures, the UK bank levy, and the measures we're taking to constrain RWA growth. And we must also keep creating the capacity to keep investing for growth. This means we must generate several hundred millions of dollars of productivity benefits every year. We did this in 2013, and we intend to keep doing it. Delivering positive jaws should help us towards our aspirations for earnings per share growth, even at sub-double-digit rates of income growth. This in turn will help us continue to improve returns on equity. We already deliver returns above our cost of capital, and we'll continue to look to improve returns whilst also paying out a good level of dividends as we have consistently done. In November, we also introduced our fifth metric of growing profits after tax faster than RWA. As Richard has said, we have broadly funded our RWA growth through retained earnings, and we are in a strong position in terms of capital ratios. Yet given the ongoing uncertainty about regulatory expectations, we think it makes sense to manage for a positive capital trajectory to give us greater flexibility and resilience. So what are our priorities for 2014? They flow very naturally from our strategic aspirations and financial framework. First, to deliver profitable and capital accreting growth. After a disappointing performance in 2013, we are determined to get back to delivering the kind of results you expect from us. This won't happen automatically or overnight. Given the weakness of our Q4 performance, we anticipate that the first half of 2014 will prove challenging. But we are confident that the actions we are taking will give us the platform to deliver sustained and profitable growth. Second, to make tangible progress on our five strategic aspirations. Here's where the reorganization will make a difference, because it'll enable us to put a sharper focus on the key strategic priorities, optimizing the deployment of capital and investment spend. Third, to innovate, digitize, and simplify to improve productivity and effectiveness. For us to simultaneously deliver positive jaws and keep investing for growth, we have to be delivering significant productivity improvements every year. That requires constant innovation, a bias towards digitizing everything we can, and a relentless focus on simplifying and streamlining the way we work. Here again, the reorganization will help. We can strip out some duplications and drive greater standardization. Fourth, to raise the bar on conduct, demonstrating that we are Here for good. This is a strategic imperative. Finally, to accelerate the next generation of leaders. The reorganization gives us a real opportunity to do this. 2013 was not a great year for the bank. 2014 will inevitably bring its own challenges. We are very clear on what we have to do. We are making changes to adapt to the new realities. We have a strong balance sheet, and we have great client relationships and superb capabilities. I would like to take this opportunity to thank all our staff for their hard work, commitment, and professionalism during 2013. I would particularly like to thank Richard for all he has done in his 11 years as a director, including seven by my side as finance director. I would like to thank Steve for his leadership in transforming our consumer banking business over the last five years. Finally, I would like to thank you, our analyst investors, for your support through these turbulent times. Jaspal, Ben, and Julian will now take any questions in Hong Kong. Sunil and Anurag will do the same in Mumbai. John, Richard, Mike, and I will take your questions in London. Thank you. Now, we are going to do this usual way. If you could put your hand up, wait for the mic, and when you get the mic, if you could say your name and the institution you are from. Why don't we start up front with Sandy? Yeah. Morning, it is Sandy Chen from Cenkos Securities. Just two questions. One on NPLs. If you could reconcile the movement in NPLs versus the impairment allowances on pages, I think, 39 through 43, and in particular, the increase in wholesale NPLs. Also, if we can get a bit of a regional country-by-country break. Why is Korea going down in terms of impairment allowances and things like that? The second question is a broader question, looking at the commercial and private banking division, and also wealth. For commercial and private banking, obviously, private banking is already a well-banked proposition. What is the edge that you intend to bring, probably this is a question for Anna, and that will allow you to get the customers away from existing other private banks? Also comparing the private bank versus the wealth proposition, what are the key differences between those two propositions? Thanks. What I'll do is I'll ask Mike to come in on the second one. Do you want to start by addressing Yeah. Let me do the wholesale NPLs. You may want to come back with specifics, but the overall picture, as I presented it, the NPLs in wholesale are up 22%, $930 million up. It's a handful of accounts that have largely contributed to that. You actually look at the levels of collateral actually applied to those, it's also up equivalently, around 21%. It's a level of NPLs which is wholly consistent with that which we've seen actually all the way back to, if I went back as far as 2005, I stopped at that point. It's been running at around that level over that period. As I say, there are 3 or 4 accounts in there that actually create the increase. They're predominantly in Africa, where we had a couple of those, and India. With regard to India, it's offshore booked. The Africa accounts are both in commodity space, actually. One is in hard commodities. It's mining, where there were production issues in the underlying mine, and we've taken conservative provisions on that. The other actually is in our agri business, the soft commodities. We'd already provided that at the first half. We added to the provision when we looked at our collateral treatment. I think, again, we've moved to conservative positioning on that. So it basically comes down to a small number of individual accounts, which have gone to non-performing in this period. But in terms of trend, it remains very consistent with the levels that we've seen over the past few years, I think. Mike, if you want to comment on private banking and also the relationship between private banking and wealth. I would just say one thing, which is one of the key differentiators we have is we already have relationships with these people. We just haven't been providing them with private banking services up to now. That's why there is a logic to grouping commercial and private. But Mike, do you want to comment? Yeah, let me just pick up on a couple of things Peter said in his presentation. First of all, 60% of the GDP of the countries we operate in relates to medium-sized enterprises. Those are companies between $10 million and $200 million of revenue. The other 60% is that 60% of the world's growth in high-net-worth individuals are going to come over the next three years in our market. Actually, the two things are linked because what's going on and through the life cycle of those companies is that their business wealth is growing and their personal wealth are growing. What we want to capture is both the business growth wealth as those companies grow through their life cycle, but also as it splits between personal and business wealth to start to bank them at that juncture. Our advantage is capture them at that juncture, not when they become multi-billionaires and trying to compete at that stage. Most of these companies are actually family-owned promoter groups, and that's the sort of heritage of Standard Chartered, and we haven't quite got that link together before. We've got about 50,000, 60,000 medium-sized enterprises now alongside the private bank, and if we can get that moment in their life cycle when that business and personal wealth starts to separate and as companies grow, that's the competitive advantage we have. To your point about wealth and private banking, wealth is going to be a product group in the same way that financial markets is or corporate finance is, and that will be supporting both the retail segment and the private banking segment with products. So you have a group that is focused on our product capability and specialist sales and advice in the same way that we have done in transaction banking, for example. It's a way of combining both product strength and a relationship focus. Just building on that, the one thing you know from history is when we get focused on something, we succeed. If you think about over the last 10 years, we started with no corporate finance business. We built it to $2.5 billion of revenue. If you think about private banking, we started in 2007. We've built AUM at 30% compound annual growth rate. When we get focused, we get real traction, real delivery. You look back in history and we've succeeded where we focused. Should we stay on this side and just slip down, then I will go over to that side? Yeah. No, whichever. Morning. It is Mike Trippitt at Numis. Two questions. On costs, as you have highlighted, 1% growth with a lot of headwinds in terms of regulation, inflation, et cetera. Can you just give a sense of sensitivity on 2014 in terms of It looks like headcount has come down at the end of 2013, so maybe BAU has come down, but there is inflation in there. Has investment been deferred from 2013? I am just trying to sort of get a handle on the sensitivities on the 2014 cost base. The first thing to say is we are, unsurprisingly, I think, given our comments around how we kind of see conditions, we are holding costs pretty tight. We are holding the gate quite tight on investment release, for instance. Our going-in assumptions for the year would be for a slight increase in headcount. The budget has 1,000 headcount increase. Our inflation assumptions are broadly the same levels as last year, again, for the budget purposes. So you are looking at an underlying inflationary pressure coming at sort of 4%-5% again is what we have in the budgets. But as Peter said, I think the task to repeat, as we did successfully this last year and in prior years, is to achieve significant productivity benefits. I remember, was it the Investor Day, that we showed you some of the productivity benefits we get, particularly some of the wholesale platforms. If I remember, FX, we had a 152% lift in income for 6% lift in underlying costs given the investment in platforms. You see the same in trade volumes. I think it is about taking productivity benefits to offset pretty similar going-in assumptions, pretty similar to that which we saw last year. We have got good investment budgets in there. In 2013, we went in with good investment budgets. We stayed pretty well with those in wholesale. Wholesale investment was up about 11%, but we cut back on consumer banking investment and did less branch opening than we were going to do and focused more of our investment on digital in a number of the markets. If that's CB, in consumer, I think we cut our investment spend by about 50%. Should we stay one more over this side, and then we'll go over that side? Thank you. Good morning. It's Rohith Chandra-Rajan of Barclays. Two really just points of clarification, if I could, please. First, on capital. Just wanted to check what's included in the 11.2% endpoint Basel III Core Tier 1. Firstly, in terms of mitigation, the RWA reduction looks like about 20 basis points benefit. Just wanted to check that and also get your indication of what the centralized clearing on derivatives would be. Yes. Secondly, just in terms of some of the regulatory change headwinds, you talked at the time of the pre-close about 20-40 basis points from large corporate exposures. I don't know if that's in the 11.2 or not, or that's part of the 30-50 you expect this year. Also the 30 basis point dividend impact, which is a timing difference. Right. Again, is that in the number or is it part of the expectation for this year? Let me try and help. Yeah, yeah. Just go. You can deal with either. The foreseeable dividends is not included in there. We make a comment in the press release that assuming our normal scrip assumption, which is around 25%, we think the foreseeable dividends one-step adjustment, if required, is around 30 basis points. You take that off the 11.2 endpoint, which would take you to 10.9 for that. On the last point you raised in terms of models, one of the reasons we came in, I think, higher than most of you expected, I think, on the ratio at 10.9, is that we have talked to you about a real expectation of a model adjustment coming through on EAD, and that, boringly, is adjusting the k-factor, which is the momentum factor attaching to corporates. You're going to regret asking this question. headroom and limits, and it was an adjustment to the momentum component. We think that's about a 30 basis point model adjustment. That is at the bottom, therefore, of the range we were indicating for 2014. We think that is going to come in. We think it's likely to come in in this first half. It will probably have impact on other banks. I don't know the extent to which it is the same impact on other banks. Staying with that theme, if I might, on the models, we've said we think 30-50. The other two main components of potential models are essentially loan default portfolios, predominantly in corporate, but also FI. There's a very large component, which is potentially the unsecured LGD requirement on unsecured FI exposures. We honestly don't know whether that's coming in. We would step back from a policy perspective, Peter's better at this, and argue that perhaps it isn't very sensible to put a 45% LGD on unsecured FI exposures, because what happens to interbank. I don't know whether that comes in or not. Then there's some mitigations that we're expecting. There's some mid-corporate PD adjustments. There's some CAD2 on FX, and there's some CAD2 on equities. Those elements net out to a 30-50 basis points. If we don't get the LGD adjustments, it's quite possible that the EAD of 30 will be lower by getting some of the mitigants. So our best estimate today is it's 30-50 basis points in model adjustments. There's probably a lot more that you- There was a little bit about mitigation and the- Oh, yeah. Sorry. The mitigation. If you get to transitional, we have got CVA and AVC. CVA and AVC are 8 and 5.5 billion. There is also another 2 billion or so coming through from some RWA threshold adjustments. We have got some mitigation to those, which is about 6.4 billion, under current regulations, basically in our options businesses, particularly for us FX, commodities, and currencies. Under BIPRU, you are required to risk weight them gross, in other words, without allowing for offset. You actually take RWA on each of the options disconnected. Basel III allows you to offset, which is the way we manage the book and actually the way the business runs. You get about a 6.3 billion offset predominantly as you net off options which are matched in terms of both economic and financial management. You bring those down, and there is about a 9 billion, I think, of risk-weighted increase at the transitional level. You then adjust that for mitigation, which is internal management methodology. You have got move to central clearing. That is about 6 billion. Then I will do the capital if you want, but you probably have had enough. Did you do it? Did you do it? Stepping back from the detail, the picture you should take away is there are a lot of things that are still unfolding in terms of the capital picture. Some of them are perfectly sensible changes that the regulators are putting in place. Some we think are more questionable. Firstly, I do not really see the logic of the foreseeable dividends thing because it is a subsequent decision and it is a key management lever. If you were under pressure on capital, you would act on your dividend. To make it automatic and built in seems to me like a kind of curious thing to do. You missed that. You just put a sign up saying, "We'll miss you" for next year. Given all that, what's important is that we are in a very strong starting point with a significant buffer over the things we know we have to meet, and we are managing for capital accretion. Right. Should we go over this side? What's his name again? Tom. It's Michael, Adrian. Tom. Tom Rayner from Exane BNP Paribas. Just to stay on the same theme, there were 2 surprises from my point of view on RWAs in the results. Firstly, the extent of the slowdown in the second half. This is just on a Basel II basis. Secondly, the small impact of moving to CRD IV endpoint. I have questions on both of those. On the first, how exactly have you achieved that sort of slowdown in the second half? Is it sustainable? Could you talk about the impact on revenue, profits, and returns going forward, of the sort of measures you've taken and whether they continue? Secondly, coming to Rohith Chandarajan's point on mitigation, I am assuming this is mitigation that you've not yet put into place. The dividend issue as well is something may not be sensible, but it is something which it looks like it is happening. I would look at your 11.2 on an endpoint, and I take off the 40 for the dividend and the 20 for the mitigation and say you are really at 10.6, which is still not bad versus 8.4. But I look at your 8.4 and say, well, there are lots of other things here that are going to get added on. Countercyclical, sectoral add-ons going to get you to 9.5, 10. You are going to have to run with a percent above that as a sensible management sort of position. I think go to you are looking at 11 versus 10.6 today, which again, is not disastrous, but I think it does mean that your whole management of RWAs versus dividends is a little bit more tricky than you are kind of suggesting. I just wondered if you could comment on all of those things, please, just to sort of wrap it up. Well, why do not we start with the specific issue around the slowing of the growth of RWA in the second half of last year, and because most of the action was in the wholesale banking business. Mike Rees, why do not you comment on the actions we were taking there? Okay. If you go back to the Investor Day, you will remember we talked about specific things we were doing to get returns up and grow revenue. One was the next 500 clients, but we also talked about the suboptimal clients as well. We talked about the progress we had made. What we did was turned up the heat on that. In the back end of the year, as Richard Meddings alluded to earlier, we got about a $3 billion save out of suboptimal clients, which in addition to that, we also got a 14 basis points uplift on the return on those clients as well. That was the predominant lever we pulled to really intensify our focus on those suboptimal clients. That will roll into this year. We are targeting around about another $10 billion of RWA saves from this year. The one thing I would caution you is don't build all that into your models because your other point was very valid as well, which is clearly we are going to start with the easy ones to do, and the ones which have more income impact, we leave to later. We will be redeploying some of that $10 billion of savings into high-yielding assets to mitigate the income drag of that save. It is a very intensive program we are running. We told you about the Investor Day, and that was the large piece of the lever we pulled towards the year end, and it is continuing into this year. On the board of capital. Yeah, I think it is going to be a subject of a broader discussion between us, actually, because I think the fundamental thrust of what we are trying to make sure people understand, which I know you do, is that point about it is the surplus over the requirement that matters in a world where the regulatory world is no longer a common threshold for banks. The idea of a common threshold stops at the 4.5, and then you start getting differences, because even the 2.5 is where the Pillar 2B buffer gets assessed. Every buffer that goes over the 4.5 is bespoke. The important thing is, to what extent are you above that requirement? To your numbers, 11.2, adjust for the dividend, I think that is 30. You could say 40 if you are getting no scrip. We have never not had scrip. It's a reasonable assumption, I think. We think 30 to 10.9. Yes, but then there will be model adjustments. Take it down to 10.5, 10.6%. Add 15 basis points, 10 to 15 basis points for the current disposals by the end of this year. Listen to our language around risk weight efficiencies, another $10 billion taken out this year out of wholesale and redeployed to high return. But $10 billion will be a reduction from our base load expectations, and we're going to continue to manage well. In terms of the surprise to you, I never want to surprise you. It really is fundamentally the fact that the EAD model, we had fully expected it to bite by the end of in the second half of last year, and then there was some RWA efficiency. I think we'd have been around 20 basis points higher than we had thought for those I'll call the more organic management of risk weight, as Mike Rees has talked to. But then, Tom Rayner, it does come back to, one, we're accreting, fifth metric, we're committing to that. Two, we've got disposals. Three, we've got risk weight discipline. Fourthly, it's about the surplus. That surplus you see, you have to do if you say it's about 11% of Standard Chartered, there's a risk that you fall into, I think, the old, the similar misconception of trying to set some sort of threshold. The way to test yourself on the threshold is to do the capital stacks through our peers, and then say, okay, Standard Chartered, if you're at 11, what do I know that that means other banks have got to be traveling at as a minimum, and are you asking for that? Yes. More important, as the regulators look, they can see our capital stack of 8.4, which informs their target guidance through us. Just to reassert it, because I think it is very important to understand this, we are, quote, significantly and materially ahead of the target capital ratio that the PRA is guiding us to achieve by 2019. Today, we are significantly and materially ahead of it. Okay. I accept that. Thank you. Peter, could I just pin you down on your 2014 priority when you say profitable and capital accreting growth? What exactly We're talking against organic. We're talking against organic. It's a very difficult What exactly does that mean? Does that mean the ROE and the CET1 ratio are both going to rise this year? Is that a good way of interpreting that? No. What we're saying is that in that financial framework, we've added, for the steering of the group, a fifth metric. We've also said when we introduced it, you won't see us get a good beat on that metric when you get in a step in one-off adjustment. So for instance, if you get full model hit of 50 basis points, that's quite a difficult increment to get past in terms of organic growth. Nor would you want us, I suspect, to try and grow to do that. But against the organic growth of the business, we are going to be managing it at a return for that business on a way that is capital accreting. But we won't in one reporting period be able also to absorb one-off step changes from a singular model arrival. The way you should look at the priorities is they should give you comfort as to the signals we are sending within the organization as to what we want the business to achieve. These are priorities that we cascade internally, and they are all about the emphasis we are putting on returns, on capital accretion, on very disciplined growth. Growth in its own right is not good enough. It needs to be profitable and capital accretive. This is not just something that we articulate at a board level or a finance director or whatever. It is something that we are driving through the disciplines of the business. Thank you very much. Sure. Michael, go on. Thank you. It is Michael Helsby from Bank of America, Merrill Lynch. I have got three quick questions. Firstly, just going back to this wholesale NPL, Richard. You explained Africa, I think, which makes sense. I think the big jump was in offshore, and it was about $0.5 billion of higher NPLs. Actually, the bad debt provision went down, and it was only very, very small to start off with. So I do not know if you could just explain, because that looks very specific. Something very notable going on there. Second question is in Korea. I think, Peter, you stressed that there will be another drag, which I think you told us before about in Korea in 2014. I think the drag was 13 million PBT-wise. Can you size the drag? I know that is hard, but if you can give us a ballpark, that would be helpful. And then finally, just to go back to what Bob was saying over there. Sorry, Tom. I'm just trying to square the circle, to use your words, you're materially above the minimum capital requirement. The minimum capital, yeah. Yeah. I'm just trying to square the circle on the dividend policy, the fifth metric, and that very strong capital position that you've got. If earnings growth is zero in 2014, I know that's not what you're suggesting, but if they were, would that mean dividends are flat in 2014? Is it the dividend that you're going to flex? Thank you. Can I take the last one first, which is we fully understand the importance to shareholders as of a progressive dividend policy. We have multiple levers we can pull in terms of driving capital accretion. It depends on the scenario and precisely how you get to that scenario, which levers that are the most attractive ones to pull. But we are showing you that we are actively pulling two levers in particular at the moment. One is extension of RWA or pulling back on RWA to lower returning clients. Two is disposal of businesses that aren't either strategically aligned or performing. And three is taking action on businesses that aren't giving us good returns. So it isn't the case that dividend is the only lever that we have to pull, and it's a lever that we would be extremely thoughtful about pulling. You kept the dividend flat on the second half from last year. It is not like you did pull the lever on dividend this year. If you do the maths, it does not make any difference at all to our capital ratios to make very small changes in any one year to the percentage of the dividend. If we were using that as a lever, it is not a very useful lever. Are you signaling- The signal you should take is our demonstrable record of paying increasing dividends, which we have done for a very long time. Second, I will do Korea, and then I will hand it back to you on the NPL- Yeah in U.K. Look, I'm not going to give you a precise number on where we're going to end up on Korea. There's a lot of moving parts, where a lot of it depends on things like our success in de-risking the unsecured portfolio. We would anticipate loan impairment falling in the second half of the year, but there's a lot of external factors that drive this. What we're certainly not expecting, when you think about it in terms of P&L drag, what we're not expecting is the same negative delta of $527 million that we experienced in 2013. But we are saying, look, we can't do all the things we want to do as fast as we would like. It's not a quick fix. We know what we're trying to do. This year will continue to be pretty difficult. Do you want to pick up on the OBU? On the OBU, I think you can see it in the OBU in the U.K. segment. Fundamentally, if you look at the U.K. segment, it's not just one account, it's a number of accounts, but a majority of the increase is predominantly on one account, and it's an account held at fair value, and it's predominantly a stick position, therefore, held fair value through the trading book. We've taken a negative income discount on that amount, sorry, on that exposure, as we fair valued it through the- So it's half a billion. There's an increase in the U.K. segment of about that amount. It is not half a billion. But the majority of the increase in the geography is one account. The rest are a whole series of other accounts, and they're comfortable where they are. Should we go ahead, one more? I'm just conscious of giving- Yeah. Good morning. Chintan Joshi from Nomura. Two questions and one quick follow-up. Your outlook comments of modest growth for 2014, could you just elaborate what do you mean modest for revenues, volumes would be helpful. Second, can you set some expectations for trade or transaction banking for 2014? What have you seen in the initial months of this year, margins, volumes, and what you have in your plans? The quick clarification was, you said you'll reduce RWA by about 10 billion and reinvest them in high-yielding assets. What are we talking about when you mean high-yielding assets? The last point, just very quickly, is similar customer focus. Sorry, not the same customers, but customers who allow us essentially to cross-sell or up-sell. It's not a cost to an investment portfolio. It's actually, as we look at the customers, if it's trade, or we're selling trade, which is a lower-term business, trade works if we get the up-sell. If we don't get the up-sell, actually, why are we putting our balance sheet there? It would be moving those risk weights to those customers who will give us, who will buy from us, the other risk management products that are attached. But it's not going across to investment portfolios. Do you might want to just comment on trade and cash as the main components of transaction banking? Look, throughout last year, the core element, despite the challenging markets, was stay close to our strategy. Our strategy was about staying close to our clients. I go back to the point Peter made earlier about the disconnect between what is going on in GDP growth and what is going on in financial markets. You can see that in two halves of our P&L. Our client volumes, our client business grew pretty well. Even FM, which in the market is challenged, was up 7% on client income. Underpinning that, because we are staying close to our clients and they were seeing GDP growth, was our volumes are up. What we are seeing this year on a volume side is a continuation of the theme. What we are seeing on the margin side is, particularly on trade, margins are stabilizing. They wobble around a bit depending on here and there, but Chinese banks are paying up in the dollar market at the moment. You see that reflecting through the trade clients. Overall, margins are stabilizing, and we are continuing to get the volume growth. We had the margins went up about 115 basis points. We think they have trade broadly stabilized around that level. In a couple of markets, we have seen margins up, actually. There is an upwards direction. Hong Kong is up in terms of trade margins. Singapore, slightly up. Chinese, I think it is China impact. Elsewhere, there is some still slight decline. The overall picture for our margins in trade are currently flat. Volumes are up on last year for the start of the year. As for modest growth, it is a deliberately expensive phrase. Yeah. Because there's a lot of uncertainty. It's very early in the year. But we do anticipate that broadly speaking, the business will see modest growth. Thank you. Mega. Thanks. It's Manus Costello from Autonomous. I've just got a question about the structure of your balance sheet. If I look at your Americas U.K. Europe division, which is always a bit of an enigma, but it's grown as its share of deposits from a percent of the group deposits. It's grown by more than 100 basis points this year. It's grown by about 5% since pre-crisis. My questions are, has that happened as a result of a deliberate strategy, or is it just because people have been parking deposits with you as a safe international institution over the last few years? Following on from that, as the West recovers, as rates rise, as people maybe find other places to park their deposits, how's that going to impact your growth and your margins over the next few years if you don't have that source of liquidity? It's partly regulatory driven, actually. It's where, as you look at an international group, you want your deposits placed. It's partly changed with regulatory influence, particularly in Americas and U.K. That is the main driver. Then actually, if you look at the rate of increase generally across the balance sheet, it won't be that far out if you adjust for that factor than elsewhere. Increasingly, we're holding levels of liquidity in our home market and in our core clearing market. There are regulatory requirements if you're going to be a significant player about the underlying liquidity balances you hold against that business. Should we go right back, Chris? Yeah, you two should switch me. Good morning, everyone. It's Chris Manners from Morgan Stanley. I have two questions for you. The first one was just on competitiveness at Standard Chartered in this high capital world. It does look like at least the PRA is putting some super equivalents on yourselves versus where your international peers are. How are you able to price competitively if you need to hold higher capital, and how do you think about that competitiveness point? The second one was just on procyclicality of risk-weighted assets. Obviously, Asian default's been very low over recent years. They're set to pick up. Do you think that a pickup in Asian defaults will cause some credit migration, which would then inform higher risk weights? Also, you see things like the HKMA jacking up the risk weights on the mortgages. Have you got any other areas where you could see countercyclical measures that may push up your risk weightings? Thanks. Do you want to do the procyclicality? On the broader competitiveness implications of different capital requirements in different places, this is part of the reference I made to interpretations and unilateral initiatives. One of the concerns I have about the way the whole Basel III thing is actually being translated into reality is there are lots of different flavors. That does have competitive implications. It isn't all one way, though. If you look at some of our local bank competitors, actually, they operate at quite high levels of core equity. The accounting and potential standards vary from market to market, so it's not a uniform picture. I think the only answer I can give to that is we see huge merit in getting greater standardization across these kind of metrics. Competition is not going to be completely driven on the price of your balance sheet. If it were, we wouldn't have been able to win as much market share as we have demonstrably done over the last few years. It's also driven by the quality of products and services and the way you build the relationship. I think in going forward, you should also think about competitiveness not only just in terms of capital models and liquidity, but also conduct of business. So you look at how things like the Volcker rule, look at how CFTC rules are affecting some of the global banks now and what they can do and who they can do business with. It's getting more and more complex, and I think at our peril, we just think it's about capital and liquidity. It's about a whole broader range of measures coming out through conduct of business regulation as well. Generally speaking, as an international bank operating in lots of other jurisdictions against competition from local banks, our starting assumption is that the playing field is tilted against us. That's our operating assumption. So, plus ça change. I will just pick off some of the specifics. I think the HKMA, it is an interesting point, they have increased the floor, essentially, increased the risk weight on mortgages. They did not do it for the historic book. They brought it in for new bookings. I contrast that with the Scandinavian region. It is not just in Asian markets that you have got potential lift to underlying risk weight. In terms of, again, the book, remember short tenor. As you reflect on the fact that 64% of the wholesale business is short tenor, largely trade, it reprices. It reprices actually to reflect risk. It reprices to reflect capital. This is not that we sit there with a 10-year bullet structure and just watch what happens. Actually, we are moving with the markets in terms of making our facilities available to our clients and pricing for the risk accordingly. This year, we had a $9 billion negative credit migration. You will see in the actual numbers. An element of that actually was from a change in policy that we had. We changed the policy around treatment of parental support and how we applied that, and that caused some increase. Our long run rates of credit migration are around $3 billion. This year, going into 2014, we have got an assumption of between $5 billion and $6 billion for negative credit migration. We clearly take it into significant account. When we run stress tests, it is part of all the scenarios that we run in terms of what happens in stresses to the underlying risk weight as, essentially, default probabilities move. I think we are all over the point. Remember, the balance sheet is short tenor. Remember, it is not just Asia, actually, where you have got regulatory not interference, regulatory adjustments to mortgage floors, as your example. We have gone into this year with a very substantial, I think, assumption within our planning around negative credit migration. One of the other issues also, Chris, which I know that the regulators are thinking about and debating through the FSB and so on, is the interplay between procyclicality and the RWA measures and the countercyclical buffer. Yeah. Because actually, the two should operate in opposite directions, right? Because otherwise, they are both trying to do the same thing. And the one thing that they are very keen to avoid is having the regulatory system exacerbate the natural procyclicality of market behavior. There should be some offsetting against the two as well. I am conscious of time, so if we can make the questions snappy, and we will try and make our responses snappy as well. Good morning. It is Chris. Welcome. How are you doing? from Equity Baker. A couple of questions. The first one, just for the clarification. We have talked a lot about the reorganization that you announced in January, and you talked about being cost-effective. You have not really talked about whether the reorganization will actually generate any cost savings on the platform. I know you have talked a lot about it being client-led, and I get that. I just wondered if you had given any thought to what you think you can actually contribute to that cost management. That is the first question. Then just going back to what Sandy asked on the private banking. Trying to get my head around a little bit the private banking initiative. It sounds to me like your focus. is on the high net worth segment. You have the wealth management, I think, focusing on the affluent segment. That's an enormously expensive segment. Obviously, it has the higher margin than the ultra-high net worth, but has a pretty high cost base generally because of the cost of hiring financial advisors, particularly in the Asian market. I'm just wondering how you're going to manage that, whether that's partly down to, as you say, sharing some of the benefits of what wealth management is doing. Also, I notice you're selling the Swiss private bank. Does that mean you're walking away from having a Swiss booking center? Because obviously, that has dinner party impact in the developing markets, and I don't know if that's losing you any kind of edge or whether you have another plan for how you might deal with that. Thank you. Okay, very quickly, on the reorganization, I was quite explicit at the time we announced the reorganization that we weren't giving any separate cost targets or whatever for that, and that the reorganization should be seen as one of the ways in which we are going to achieve the things we had already said we were going to achieve, including positive jaws. The financial impact of the reorganization on 2014 will, in any case, be de minimis. The real thing it does, though, is it enables us, this is on the cost side of the equation, it enables us to take a fresh look at areas where we have duplication and difference between the businesses, which we can harmonize and roll out standardized solutions and get a more efficient structure. There's then a whole bunch of stuff on the effectiveness side, which is about focusing on segments and product groups. Very quickly, on private banking. This is a business and wealth management that is high return on capital, and yet, as you say, typically has a higher cost-income ratio than many lower return on capital businesses. But as the equation of banking has changed so that every business that requires capital requires lots more, that trade-off itself changes. It's also the case that the shift scale of the opportunity, as Mike outlined, around individual wealth accumulation linked to the way businesses are growing and performing in our markets is just an absolute natural opportunity for us. On Geneva, very quickly, this is just not a very good bit of our private bank. It's an underperforming bit of our private bank. We don't think we need a Geneva booking center as part of our proposition. We're not majoring on being a Swiss private bank. That's not why people will come to put their money with us. It is only around $2 billion of AUM, and we will be offering to rebook for those customers or clients who want to come to Jersey, London, or other booking centers. Peter, we may have to make this the last question, I think. Here is the mic coming to you. Peter Toeman from HSBC. Thank you for disclosing your Pillar 2A buffer, 0.4. I have to say, I thought it was a bit lower than one might have expected. You have told us that mostly this is about pension risk. Could one infer perhaps that regulators are quite comfortable with the idiosyncratic concentration risk in the loan portfolio and the idiosyncratic interest rate risk that Standard might have? I am a bit surprised in the sense that I thought that in an environment where rates are rising, the consumer bank would have a positive sensitivity, the wholesale bank, a negative sensitivity. Yes. Actually, the first answer would better be thought about is it is always subject, as I said, to annual PRA adjustment. But it is absolutely the calculated 56% equity treated guidance for the idiosyncratic risks of credit concentration, interest rate risk in the banking book, operational risk, and pension risk. Fundamentally, all we are saying, Peter, is that given that there is a significant pension liability for banks that have historic sizable workforces, and there is a regulatory view about how that should be covered in capital, it is simply not a factor for Standard Chartered, and that is the difference. Now, I'm- I was just going to say, remember, in the banking book risk, Richard's point about the short tenor of the assets also affects the banking book interest rate risks. That's an important component as well. I'm conscious we've used a lot of your time this morning. J.P., do A few of these sentiments have already been echoed, but I think given that it is Richard's last public appearance in a Standard Chartered form, Richard, it's been 11 years at Standard Chartered. For a few of the gray hairs around here like me and yourself, it's been 15 years nearly since you arrived at Woolwich and started interacting with us in the sector. I just wanted to wish you well on your way. I think the Chinese proverb of living in interesting times, as though it being cursed to live in interesting times, has pretty much summed up the last few years or so. But good luck, and I think the sentiment will be borne by all of us here to wish you well on your way. Thank you. Thank you very much. Can I get a very last final word with you, John, if you wanted to? I will, Peter. I will summarize very quickly, but can I just say thank you for the warmth you have shown towards Richard. I know how much that means to him, and thank you for doing it so spontaneously and so warmly. I hope you have enjoyed the presentations today. We have got some very important messages, hopefully, across to you. 2013 was a challenging year. We were not complacent. We have moved very quickly to refocus and evolve our strategy, putting in place a new organization structure, which we think will deliver value for our shareholders over the medium to long term. We have an excellent balance sheet. We think we are well capitalized, and we are confident that this is an exciting growth story, which will, over time, deliver excellent returns for our shareholders. Thank you for coming this morning, and hopefully, we have answered all of your questions.

Data Source: Quartr Last updated: Mar 27, 2014

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