Standard Chartered PLC (LON:STAN)

Earnings Call: Q4 2015

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Feb 23, 2016

Hey, good morning, everybody. Good afternoon for those of you dialing in from outside of London. Thanks for joining us. You've had a chance, no doubt, to take a quick look through our earnings and statements. I want to say a couple of things up front. I'll then hand over to Andy, and I'll come back later to provide some more color and some of our progress and expected continued progress over the coming weeks, months, and years. Headlines are clear. Performance is poor and very disappointing to all of us, although not completely surprising given what we've laid out for you as recently as November in our strategy statement. There are a few key messages that I'd like to plant right up front, and these are the messages that we'll be coming back to over the course of the discussion this morning. First is that our balance sheet is in fundamentally good shape. We've raised capital, we've identified other sources of capital. We've got a very strong core common equity Tier 1 at 12.6%, and as Andy will go through in some detail, we expect that to continue to strengthen as we progress our liquidation portfolio. Number two, the risk positions of the bank are in increasingly good shape. We've taken very substantial action to improve our diversification, reduce concentrations, and upgrade the quality of our book, both through direct management actions as well as through the ongoing progress of our business. Third is that our cost progress is very good through 2015. It should continue to be good given what we've identified and have committed to in 2016. Fourth, and equally obviously, the income momentum is a challenge. It's been a challenge through the course of 2015 against the backdrop of the external headwinds that we're all very familiar with. Management actions that we've taken and the process of our own transition. What we'll talk about today is what we're doing about it. We know where we start. We start where 2015 left off, and that clearly is a challenging environment, that's become even more so in the early part of this year. We have a fantastic underlying client franchise, and that's coming through in a number of the areas in which we're investing, but also the areas in which we focused around the core products that differentiate Standard Chartered Bank, our underlying client franchising capabilities, and the way that we're executing our transformation agenda, which demonstrates at a number of data points, which do not offset the headwinds coming from the macroeconomic environment as yet, but will, as we pursue this transformation through time. We believe that the value of Standard Chartered Bank is there, it's real, it's shining through. Part of our task today will be to continue to lay the foundations for that value story, but we realize the real value will only be clear as we execute our transformation and as we execute on our agenda. With that said, I'll hand over to Andy. We'll go through the financial results. I'll come back at the end, spend some more time looking at our lines of business and the progress that we're making. Good. Thank you, Bill. Good morning, good afternoon, everybody. Just a quick tour of the numbers. First slide here has got quite a lot of numbers on it. I'll just pick off the high points, then most of these I'll go into in a little bit more detail on subsequent slides. Key numbers, $15.4 billion of income for the year, $0.8 billion of underlying profit, restructuring charges, and some other adjustments below the line to give a reported profit or rather loss before tax of $1.5 billion. The return on equity, slightly negative, and the CET1 as published, 12.6%. Those are the key numbers. Just very briefly, and I will go into this in more detail on the following slide. On income, $2.8 billion of reduction year-on-year. About 60% of that is through conscious decisions to divest businesses, to de-risk parts of our business, or the impact of FX. On operating expenses, we are 7% lower than a year ago, excluding regulatory expenses, which, as you can see here, are high and have hit about $1 billion for the year. The bank levy at $440 million for the year. On the loan impairments, just to explain this, the $4 billion line is essentially the ongoing loan impairment, including the ongoing impairments relating to some of the exposures that we announced in November that we are going to seek to liquidate. We have a portfolio of assets that we're going to liquidate. The ongoing impairment is included in the $4 billion number. But down below, in the restructuring charge, $1.8 billion, which is 1.8 of the $3 billion we indicated in November that we would incur between the 2015 and 2016 years. In the $1.8 billion, there is a further just under $1 billion, essentially of the additional cost of seeking to exit some of those exposures earlier than we might otherwise have done. I'll come onto this in a little bit of detail later. The second big item in the restructuring is redundancy costs at just under $700 million. The two of those are the majority of the $1.8 billion. We've also taken an $863 million CVA charge, which we had mentioned previously. The derivatives book is now basically accounted for on the basis of proxy pricing rather than internal estimated losses. We now have got enough price points comparison to be able to do that, and hence we have essentially now trued up the end-of-year balance sheet. From this point onwards, that is the basis of accounting. Then there is the own credit adjustment. You put all those together, 1.5 of reported loss. On the CET1, again, come onto this in a minute, 12.6% is the published number, but that has been impacted by moving some of these exposures into the liquidation portfolio as they've now been given higher risk ratings. That will reverse out of the system, in large part, over time as when we dispose of those assets, and hence just by way of reference, the 13.2% number is up there, which will be indicative 13% or so once we have actually liquidated that portfolio. Those are the key numbers. Just turning into the operating income in a little bit more detail, the WALK between years. Different ways, I guess, to sort of cut this chart. We could either look at it in terms of structural versus cyclical or within management control, outside management control, different ways to skin the cat. $18.2 billion, $400 million of that is conscious decisions to divest businesses. Another $100 million on commodity de-risking and $200 million on unsecured retail exposures, which again, is a conscious decision. It may have hit the income line, but we believe over time it is the best thing for the bottom line to reduce some of those exposures. Then about the $300 million increase in mark-to-market provisioning, particularly against SICC positions on the syndicated loan book, most of which had their origin some period of time ago, and where they're now written down to fairly basic levels on the balance sheet. Not a huge amount further exposure there. Currency translation, obviously translating everything into dollars, has hit the numbers by about $700 million for the year. The balance, some of it is sort of clearly discernible. So we put here commodity price falls. If we were funding a barrel of oil a year ago, we were taking a margin on $100. We're now obviously taking it on 30 or thereabout. So there is discernible sort of impact from that. The other $700 million is more the general impact of lending to businesses, whether that be because of liquidity and margin pressure or other factors, but the overall sort of balance is about $700 million to come to the $15.4 billion for the year. As Bill said, clearly the big issue that we are focused upon is the income trajectory within year. On the top right here, put a chart which shows on the first line, the reported quarterly income, which you can see started at about 4.4 and reduced to 3.3 in the most recent quarter. But in the table, I've just stripped out one or two of the sort of less recurring items. So the mark to markets that I referred to because they're charged within income, sort of reversing those out. Divestments, particularly in the earlier periods, obviously those are no longer in the business, so to normalize it, taking them out, and then standardizing the FX on the end-of-year rate and adjusting out for some FX impact of the rights issue. That actually gives us a sort of more normalized line showing 4.2 dropping to about 3.4 over the course of the year. Now, Bill is going to talk more later about the actions we're taking, many of which are wrapped up in the strategy, as to what we're doing to address this. It is clearly a big issue we now need to tackle. I think you should look at this in terms of the sort of de-risking phase was what the big focus was last year. Now we have got the balance sheet. This is sort of open for business. There are a number of areas of the business where we have got good momentum at the moment. For the full year, FX income was up, rates income was up, wealth income did well, priority clients within retail. It's really going to be about how do we move those faster, and for the other areas that have been softer, how do we get the growth back into those? More on that in a minute. Split of income and profit by client segment. Unfortunately, the overall picture is pretty similar to that collectively, unsurprisingly, for the group as a whole. A lot of brackets on here. Corporate and institutional clearly impacted by overall volumes in the market, and they took the brunt of the higher loan impairment costs in the period. Commercial, where we did quite a lot of de-risking of clients in the year, plus again, loan impairments being higher year-on-year. Private bank actually, well, just strip out FX and so on, a reasonably good year, and we took one big loan impairment in there. That aside, numbers were good. On the retail clients, again, if you take out the disposal of businesses, de-risking, and the FX, actually performance there was pretty stable. That plus the bank levy is pretty much the WALK between years of the profit. Turning now on to the next slide 9, and different topic, costs. As I said earlier, the underlying costs are down 7% in the business. The chart on the top left here, just looking at the dark green, this is the gross cost takeout of the last couple of years and what we are going to deliver this year and going forward. Roughly speaking, in 2014, we took 200 million out of the gross cost. In 2015, we took 400 million out, and 2016, we will take more than 1 billion out. There is a huge focus on the cost side, as there clearly needs to be. The light green on those charts, just by way of reference is the impact of divestments in terms of reducing the cost. The core of the dark green is what we're really working on, and a lot of the 2016 target is pretty much now hardwired into the business. In fact, some of the headcount reduction we did at the end of last year essentially underwrites that. On the bottom then, one or two charts, you can see staff costs are down about 7% during the year. Staff numbers were down from 91,000 to 84,000, so a reduction of 7,000 in the period there. Regulatory costs, as I said earlier, were rising and are now about 1 billion. I'd hope it won't rise too much further from there, but roughly 1 billion for the year. Onto slide 10, the liquidation portfolio. Just worth me going through a little bit sort of carefully and thoughtfully on this. What we are trying to do here is to show how much of the loan book it is that we are seeking to liquidate. This is the $20 billion of RWAs we identified in November, and how much we are seeking to keep, hence liquidation portfolio, first column, ongoing business, second column. The top part of this chart then is focusing upon the P&L, the bottom part on the balance sheet. On the top part, in the normal loan impairment line, as I mentioned earlier, total charge for the year is $4 billion. Of that, $1.6 billion relates to the exposures we are seeking to exit. Think that $2.4 billion is the 2015 experience on the ongoing portfolio. We also took in the restructuring line, the $968 million, as being the cost to accelerate the disposal of some of these assets, and hence, when you bring that into account, the total loan impairments were just under $5 billion in the period. But importantly, about half of that is going to be exited when we actually liquidate the liquidation portfolio. On the bottom part of the chart then, looking at the balance sheet side of this. The first line here, gross loans in the business, $268 billion. Of that, $260 billion is the ongoing business, and just under $8 billion is the liquidation portfolio, so it is about 3%. The non-performing loans, $12.7 billion. That number looks a lot higher than we published in September, but again, just to explain that, we were at 9.5 in September. Underlying the 9.5 increased by about 0.3 to 9.8. As part of the liquidation process, we have moved $3 billion from Category 12, which is the one below non-performing loans, into non-performing loans, so it is largely reclassification, which is why the 9.8 becomes essentially the 12.8. I will show you in a minute just a little bit more detail on that. In terms of provisioning, we have got provisions clearly against both of those groupings, and all of those are done item by item, account by account. Roughly one-half of what is in the liquidation portfolio has now been written down. Our latest best estimate as to where we are at, where we have got reference price points. For the portfolio as a whole, we are 53% covered. But importantly, the ongoing business is about 62% covered, and that is up, I think, four percentage points from this time last year for essentially the same portfolio. Bottom line, risk-weighted assets, $303 billion. Of that, just under $20 billion by the time we have worked them through and out the system, the largest part of that will disappear over time, and $283 billion is what will be left in the business. Onto slide 11. Just to put in context one point that I made there. On the chart on the right here, in the dark blue are the non-performing loans over multiple quarters, and in the light blue is the Category 12. Category 12 is performing, but the weakest of the performing. Particularly in the last column here, you can see the mix between the dark and the light blue changing. That is the $3 million moving from the one category to the other. Put another way, if you go back to second quarter of 2014, the aggregate of the Category 12, 13, and 14 has stayed broadly flat during that period of time, and most of the change is actually in relation to that reclassification. Change of topic onto slide 12. In terms of management of risk and concentrations of risk in particular, we have made big progress. These charts are comparing 2013 and 2015, so it is a two-year time period. The left-hand one is looking at the top 20 corporate clients. How dependent are we on the small number of clients? The answer is we had $35 billion of exposure to them two years ago, now essentially $25 billion-$26 billion, so that is down about 26% over the two-year period. Looking at the country dimension, in terms of India, we have reduced from $42 billion to $30 billion of exposure over that time interval. Most noticeably in China, we have gone down from $78 billion to $50 billion. The collective across here is about $50 billion of essentially reduction of exposure to these particular areas. Not surprisingly, that is one of the reasons that has had an impact on the income, albeit over time, we would hope that this will be net beneficial to the bottom line. Now, on slide 13 is one other aspect of de-risking, which I know a lot of people are very focused on, which is commodities. Over, again, a couple of year period, we have gone from just over $60 billion of exposures to commodities to just under $40 billion. So a significant reduction there. Roughly half of that is producers, half of that is traders. Top five exposures in terms of concentrations are down 29% in one year, and 68% of the portfolio has maturity under one year. If one takes the subset that is oil and gas producers, then 88% of the current exposure of $9.6 billion is either to state-owned companies or to companies that can withstand a $30 price point for a year. We have over the last 12 months, as we have produced this stat at different price points, we have worked our way down the oil price curve and still have kept the percentages that are sitting in the high-quality end very high. Slide 14. Change of topic and back to one of Bill's points. The income may be a challenge at the moment. The balance sheet, however, is strong. Capital is strong, liquidity is strong. CET1, 12.6%, even suppressed a little bit by the liquidation portfolio. So in the higher end of our range, once the portfolio has gone through at the very top of the range. Cover ratio is 53%, as I just said. Leverage ratio now 5.5%. Minimum requirements for own funds, eligible liabilities at 24% is very close to where that will need to be in 2019 already. Advances to deposits ratio at 72.8%. Liquidity coverage ratio is well over 100%. Liquid asset ratio over 30%, and loans and advances, 67% less than a year. So very strong on balance sheet, very strong capital, very strong on liquidity. Let me go into a little bit more detail then behind one or two of the balance sheet items. Slide 15. Loans and advances to customers in the top and customer deposits on the bottom. This is the WALK year on year. Loans and advances, start of year 289, end of year 261. Reduction there being primarily two things. One, FX, and secondly, in the corporate business with commodity price falls and the actions we have been taking as management, that has been selectively reducing as we have de-risked. That explains the majority of the reduction there. Customer deposits at the bottom, 414 a year ago, now at 359. FX again, a big part of this, but also corporate institutional conscious decisions here about where we are actually sourcing funds from to make sure that we are reducing the cost of funding wherever we can do, and also some movements on ALM balances, in part influenced by the regulatory requirements. Overall, customer deposits at 359 at the end of the period. Slide 16 is then the WALK of the CET1 ratio between years. At the end of 2014, we were at 10.7%. We have then largely through management of the assets, which I will come onto on the next slide, we have pre-rights moved the 10.7% up to 11.5%, and then with the rights issue, we have gone up by a further 1.7% to 13.2%. But as I said earlier, by moving some assets into liquidation portfolio, which automatically puts them in higher risk ratings, that has increased the RWAs and therefore depressed the CET1. Conversely, as we have provisioned against those have the opposite effect. The net effect of those primarily a little bit redundancy cost is that that has taken 0.6% off the otherwise published CET1. 12.6% is the published number, but as and when we liquidate the assets in that portfolio, that will come back more to around the 13% level. Slide 17 then on the RWAs themselves. Again, significant change here, $342 billion at the start of the year, $303 billion at the end of the year. Various moving parts. On the left, we have largely looked at some underlying business. On the right is the impact of this liquidation portfolio restructuring. Just walking across here, natural credit migration has increased the RWAs by 15, but the extra provisioning that we have done in the year has then reduced that by 24. Overall, that has been part of the reason for the reduction. Then actual asset reductions, just under 10. RWA efficiencies that we have been driving through the year, a further 17, and currency about 9. That takes us to about 300. Then the net effect of the increased risk weightings on liquidation pool less the provisioning, has a net effect of $2 billion or $3 billion to come to the $302.9 at the end of the period. In summary, macro environment for a bank like ours is tricky. The income line is our primary challenge, but the balance sheet and capital is strong, liquidity is strong, good progress on the cost reduction, and good early progress on the execution of the strategy. With that, I will hand back to Bill. Okay. Thank you, Andy. We are up to page 20 for those of you on the phone. Just to repeat a little bit what I said at the outset, and hitting on the points that Andy made. Difficult nine months since I have been in the bank, not completely unexpected. Difficult external environment, but I have been pleasantly surprised by the robustness of our organization to respond to that external environment. We have gone through a lot of change. We have a lot of change yet to go through. Always questions about whether an organization or a culture can handle that pace of change. Everything that I have seen so far says that internally, employees, absolutely they are. Able to attract best-in-class talent from outside, and will continue to do so. Clients, 100% behind us. I have not had a bad client discussion yet in terms of clients understanding the process that we are going through and the degree to which we are going to be behind them. The strategy that we put in place in November, which we articulated quite clearly, warts and all, was one that was created in contemplation of this kind of environment. Did we know that the price of oil was going to collapse immediately following our presentation? No, of course not. But we imagined it might. Having imagined it might, we put in place the actions and the program at the time that were intended to deal with exactly the environment they are going through right now. As difficult as the challenges are externally, we have got the right raw material to realize the underlying value of this franchise. I will take you through in a little bit, over the course of these slides, how we are going to do that. These set of priorities and principles are the ones that we set out for you back in our investment day in November. How are we doing against that target? We are on page 21 and building. First, we said we are going to secure the foundations, and that is exactly what we have done. From a capital perspective, from a tightened risk tolerance perspective, and we are talking about risk tolerance here in everything that we do. We are tightening the control environment generally. Conduct and controls, operational risk, credit risk, market risk. We are just running a tighter ship, and we are doing that against the backdrop of a stronger capital position. Getting lean and focused. Andy hit on the expense targets that we set out. We are on track. It is not just the organization is responding to the challenge that Andy and I set out. It is they are identifying their own ways to do business more efficiently and more proactively. We think that we can not only hit our targets but continue to advance those targets as the years go by. Finally, investing and innovating. Many have questioned in this environment, with the more difficult macroeconomic backdrop, should you still be investing in your business the way that you are? Because, of course, these investments translate to your expense, which in the short term, reduces profits. There is no question in our mind that we should be investing in this business. One, because the opportunities are outstanding, and two, because we are coming out the back end of a period of relative under-investment. In order to get the real value of this franchise up front and into the profitability of our business, we're going to have to make these investments. The management team and I, Andy, believe in this strategy fundamentally. We went to our board in the beginning of this year, suggested that we not receive an annual incentive. Instead, we take those funds that were freed up in terms of short-term cash and stock and use that to help buffer the rest of our employee population. The bonus pool is down 22% year-on-year. It's down 44%, 41%, sorry, over the past four years. Everybody is taking some pain. But the senior management, and I'm including in this not just the 15 people at the top of the bank, but the top 200 people, are all giving up all or most of their annual incentive or any entitlement thereto in exchange for long-term incentive programs. For Andy and me, set out clearly in our directors' remuneration report. For the rest of us, a consistent framework that will only pay out if we hit the financial and strategic targets that we set out back in November. We hit the targets, we can get a maximum of 2 times fixed pay. We don't hit the targets, we get zero. That's the bet that we're making as a management team to completely align us with you, our shareholders. Page 23, this is the schematic that we used to set out the core principles of the restructuring strategy back in November. Five key components, which I'll hit on in turn. Just to repeat what Andy said, we've realized or recognized and provided for about $1.8 billion of the $3 billion of estimated expenses. That's still our estimate for what it's going to cost to get us through this restructuring period. First, the concrete action that we're taking to address the concentrated exposures. Andy took you through the accounting impacts of the restructuring portfolio. I'll just add that we have clear line of sight on each of the assets in that portfolio. In some cases, we've got an agreed exit route involving third parties. In other cases, it's more an agreement in principle. But of course, because they are large concentrated exposures, are effectively M&A deals, each one in and of themselves. It ain't over till it's over. We're certainly not declaring victory until the assets are off the books. But in the short period since we made the commitment to liquidate this portfolio, we've made very good progress. When we're done with this, what we'll have is a much more diverse portfolio, substantially de-risked. We will have spent some money, but we'll be less sensitive to the adverse economic impacts that have impacted the business so strongly. We identified $50 billion of low-returning client relationships. The client relationships are fundamentally good and valuable for the most part. There may be a few where we're not able to come to terms with clients and carry forward on a basis that's satisfactory for both us and the client. The early read so far- Having identified every client with whom we're having discussions, having developed a plan for how to get to an acceptable level of profitability, having begun those conversations, recognizing that this is an 18- to 24-month process, the early signs are encouraging. I've gotten the question many times, surely this is the worst possible time to be engaging with your clients about improving your profitability. Quite the contrary. This is the perfect time, because there's never been a better time for us to demonstrate to our clients why we're important to them, why the capital we provide, the products we provide, are what they need right now because they're having a difficult time themselves. This is a time to stand by those clients. This is the time to have a discussion around what works for both of us. We're doing that. Early signs encouraging, but again, too early to declare victory, but good early progress. We identified our focus on two countries with very different situations. Korea, we have a structural profitability problem. We've begun to address that by executing a very robust voluntary retirement program. We took over 1,000 people out of the bank through that process, saving over $100 million in terms of annual expenses. As exciting as that increase in our expected profitability in that business are the operational steps that we're taking. The joint venture with Shinsegae is now up and running. We have a presence in their retail outlets, and we'll have more and more over the course of this year and next. We've just signed a cards joint venture with Samsung. We are on the Samsung Pay platform. These are important partnerships that are intended to focus not just on the expense line, but also on the income line. We think we're making some good progress. We harbor no illusions. Korea is a very difficult market. We have a long way to go. We've substantially advanced on the de-risking of our consumer credit portfolio. That has impacted income, but it's also substantially improved the credit quality of that portfolio. We have a bit further to go, but the operational needs for improvement in Korea will be ongoing, even after this initial phase of good progress. Indonesia is quite different. Obviously, we have two operations in Indonesia, a branch, and a 45% stake in Permata. We've got very active discussions with our joint venture partners as well as the regulators on the opportunities to merge those two entities. Should that not work, and of course, there's every possibility that it won't, we've got active discussions underway to contemplate selling one or the other of those entities. The proceeds of that sale would be used, at least in part, possibly in whole or even more, to reinvest in the other. In other words, we're not exiting Indonesia. We're very favorable and positive on Indonesia. We're trying to find the best way to get to scale, consistent with our other objective to converge to a single legal entity. Page 27. We have made progress on the exiting of some of our smaller financial investments, peripheral businesses, the rundown of our equity derivative portfolio. Page 28. I'm going to hit each of these businesses in turn on the following slides. We've made good underlying progress on the operational improvements in each of our core lines of business. In the C&IB, we've maintained a leadership in transaction banking. I give a bit of detail on that. As Andy mentioned, increasing revenues in a few of our core network product lines, and growing our share of non-financing revenue as we manage through this difficult loan impairment period and the RWA optimizations. Commercial. Fundamental work to be done here, but we've made some very good progress. We've reset the management team with the top two layers of management almost entirely replaced and upgraded. We focused on getting on-the-ground skills and training that's appropriate to this client base. We're adding new clients who are the right sort of clients, i.e. the ones that leverage our network capabilities and leverage the links through to our C&IB. Private banking and wealth management. Performance is actually up despite some of the challenges that we face, I think unusual for our competitors. We have core competitive advantages in this area. Both in wealth and in private banking, we've got a new management team that's coming in and starting shortly. We're adding RMs, we're adding clients, and we've got a business model that's much more robust in the face of macroeconomic exposures, less dependent on group company lending, and much more focused on wealth products. Retail, the transformation progresses. We're seeing very good signs of progress in our core client base, priority clients in the key urban centers, and making good progress on the underlying technology program to boost our efficiency. On page 29, just looking at each of these in a little bit more detail. We mentioned the improvements and the progress we're making on the optimization of our risk-weighted assets. You can see that the aggregate risk-weighted assets have fallen substantially, largely through de-risking over the course of 2015. We'll never call an end to de-risking, but we will call an end to the intentional shrinkage of our balance sheet. We think we've got our risk portfolio across commodities, India, China, as well as all the other dimensions that we look at, approaching the right sort of place. When we're done with the liquidation portfolio, which as we've mentioned earlier, is substantially commodity-related exposures and/or Indian-related exposures, not entirely, but substantially, we will have further advanced in terms of the de-risking. What we're focused on now is actively managing our portfolio. We're not looking at wholesale portfolio shifts. We're looking at managing the pieces to continually optimize return and to continually deal with concentrations as they arise, and ideally, well before they become problematic. That's not a declaration of victory by any means, but it is an important milestone in our process of shifting from a de-risking bank to an optimizing bank. The approach that we've taken in terms of managing expenses in the C&IB is to have expenses coming out along with or in advance of risk-weighted assets. We've done that over the course of last year. We built a very robust set of capabilities around financing our clients and serving our clients' financial ecosystems. Their suppliers and distributors. This is also a key linkage to our commercial bank. Very good progress in establishing that, and you'll see in a moment when we drill in on transaction banking, some of the manifestation of that focus. Building on our leadership in RMB, which despite the volatility in the currency, we have no doubt that China will continue to open up through time. In fact, this may even work to our advantage because the complexity of dealing with that opening-up capital market are probably greater now that we've got two-way volatility in the currency. Looking at Transaction Banking, this is just one snapshot. We could be looking at key parts of financial markets. We could be looking at key parts of capital markets or structured finance. This is an area where it happens to be an external survey that relates to Asia. We have a leading market share position at 22%, a clear gap to the second-biggest global player, and well ahead of the regional players. The market share is increasing up 2.1% over the past five years from a strong start. Importantly, that 68% number that you see in the gray circle reflects the proportion of the banking wallet that the primary bank captures with its clients. Obviously, we have the highest number of clients where we're the priority bank, and we're capturing the highest wallet share, and the market share is improving. How can this be at Standard Chartered Bank with all the problems that we have? The answer is the underlying franchise is really good. We actually invested in this business over the past several years, the kinds of investments that we're making now in private banking, in wealth, in retail, and commercial banking. To make it clear, the underlying franchise is in very good shape. Unfortunately, the income improvements that we get from this investment in transaction banking, et cetera, is not offsetting the headwinds that we're experiencing as a result of the macro environment. But it will, and we'll talk about that as we go through the rest of the presentation this morning. I mentioned the overhaul in commercial banking. We've addressed some of the risk-weighted asset issues. We have recycled a large number of our clients, so out with the clients where we don't have a real competitive advantage, in where we do. We've managed the expenses along the way, all in the context of a new management team. Private banking and wealth management, we're competing against local players that don't have our global capabilities and don't have our differentiated wealth platform. We're competing against global players who are not on the ground, that can't harvest a commercial banking and C&IB client base the way that we can, who don't have an on-the-ground retail capability, who don't have an on-the-ground broad wealth management product offering. We're in a very sweet spot between those two. We're growing this business. We're adding RMs. We're investing in underlying technology to improve the quality of service. We're already seeing the results in terms of percentage of our clients that are dealing with us in investment product. We're already seeing the results in terms of increasing AUM, and we're already seeing the results in terms of improving income and efficiency. There's a lot more to go on this. The retail transformation is very much on track. Again, when we look at the core markets on which we're focusing, so the urban centers, the affluent and aspiring affluent, the priority client segments, who are more inclined to use our wealth management products than our generic banking products, we're already making good progress. Priority client income year-on-year up 14%, despite the reduction in our number of branches, a higher proportion of that coming from wealth. The second key tenet and platform for our retail transformation is on the efficiency and expense side. We've got a very robust technology program that will substantially improve our customer service quality at the same time as bringing down our marginal expense. Both of those programs very much on track and underway. Talked about the investment program, a substantial increase in the cash amount year-on-year. The accounting impact is less, obviously, as we capitalize and amortize, but this is the cash impact. Focus on three broad areas, maintaining the ongoing franchise, regular upgrades, and maintenance. Investments in improving our regulatory and control environment. Much of this investment will go to automating existing manual processes, which will result in lower operating expenses down the road. But as Andy said, while we think we may be coming to the end of the substantial year-on-year increases in regulatory expense, we think it's quite a while before we can start looking at decreases in our ongoing regulatory expense. And then, of course, we've got $400 million being targeted at the strategic investments. Upgrading our capabilities in Africa, upgrading our capabilities in private banking and wealth, increasing and improving the internationalization of the RMB, and then completing our transformation of the retail business. These eight principles were on page 35, were the eight principles that I set out back in November. They still stand. We're as committed to these as we were in November and as we will be over the course of this year. We continue to believe that by executing this program, on which we are on track, that we will generate returns in excess of 10% in the medium term, and we'll do that while maintaining very strong capital ratios throughout. Just to conclude, I, Andy, the board, and the management team are fully aware of the disappointing performance in 2015. It rips at our soul every single time we look at the results, and we don't ever want to stand up here and tell this kind of a story again. So what are we doing about it? We have substantially improved our capital position. We've substantially improved the quality of our risk portfolio. We've reduced our expense base and will continue to become more efficient. That's against the headwinds of ongoing regulatory burdens. We refocused on our customers in every way that we can, focusing on the areas where we really have core differentiated advantages. If we do this, no doubt we'll have a difficult and challenging time for the rest of 2016. Continued subdued environment, as I mentioned at the outset. We are starting 2016 where we finished 2015, and that was with a difficult starting point and a difficult trend. But we're building from there. And we're taking the concrete actions to both address the income line as well as continuing to address our expense, our profit, and our capital line. So with that, I'll ask Andy to rejoin me, and we can take questions. Question here. Hi there. It's Claire Kane from RBC. I have a question on slide 10, where you've given the asset quality detail of the liquidation portfolio, the liquidation portfolio, sorry. Given you say that you've priced these or provisioned them to likely recoverable amounts, would we not expect the collateral plus the provisions to be close to 100% of the non-performing loan portfolio? If not, the gap, which I think is about $2.7 billion, do you look at that in relation to the amount of capital you have against those RWAs, and that therefore that $2.7 billion will be written down as you dispose of them such that the disposals are capital neutral from here? Right. I think what Andy said was that we took provisions that will cover the discount to face value that we expect to incur upon liquidation. If we were to carry these on our books, this would be the lowest expected realization. If we were to carry these on the books long term, we could recover more. We've clearly identified the amount of incremental expense that we're expecting to incur by virtue of getting these off the books now. Why are we doing that rather than just sitting with these big concentrated exposures on our books for the years to come and trying to work them out the old-fashioned way? Because they reflect risk concentrations that are imprudent against our capital base, our balance sheet, and our income stream today. So we're taking the decisive action at some expense to move those out sooner rather than later. Let me just add one thing to it, because there are sort of two groupings within here. One is where we have got reasonable sight as to where we think we might end up, where we have provided for that view. It doesn't mean to say that view will be absolutely precise. When we do eventually crystallize it, we will true up, and hence why we've used $1.8 billion of the $3 billion. There's still some left for this year. The other is where there are not clear evidential price points yet available to us, and it's only when we have progressed discussions and have got clearer that we will be able to put a number on those and hence get the provisioning to the right level on those, which is why some of the gap occurs that you're referring to. Can I just have one follow-up? I think you mentioned that a reasonable pro forma or slightly, the capital ratio be closer to 13% if you dispose of this portfolio. If you dispose of the $20 billion, you'd have a much higher capital ratio. Should we impute the difference being the additional impairments you're likely to take on that portfolio? Well, it's a complex mix of regulatory and accounting. When we do dispose of the assets, then obviously the RWA disappears. But to the extent we've taken accounting provisions, it has already reduced some of the RWAs. Without boring you a huge amount with detail, trust us, it will get nearer to 13% when they do get liquidated. If I could just try to put this in layman's terms, the capital rule makers are basically saying, you've got to recognize more capital intensity for this portfolio between now and the time that you liquidate it, even if you sell it at exactly the price that you provided for. We're just telling you that's a very heavy capital burden because you're at risk on the closure of the deals. Once you've closed, that capital goes away, that capital requirement goes away, as does the asset and the income. Yeah. Hi, this is Jiro from Bernstein. Two questions. One is, going back to the income line, and we're speaking to clients. Do you think you'll be able to reprice trade and cash in this market where you've got stressed liquidity conditions in Asia, and you do USD trading, you say that's a franchise. How much of that could be a tailwind on income when you see actually volumes decreasing? The second one, or do you want to take the first one? Well, up to you. How related is the second question? No, it is totally different. Okay. You can go ahead. We are seeing clearly some signs of tightening in liquidity in some markets, most notable in the Middle East and Africa. Not particularly noteworthy in Asia, which is obviously our largest chunk of business. The competitive dynamic in Asia, including China, remains as intense as it has been. We are seeing ongoing pressure on NIM as well as transaction margins. How will that persist through the evolution of the NPL cycle and the unwinding of the credit cycle? It remains to be seen. But certainly, we are not seeing a substantial change yet. Whereas there is quite a substantial degree of tightness in the Middle East and Africa, which is benefiting us. But of course, those are smaller businesses for us. Thanks for that. The second one, do you also have both idiosyncratic and macro hedges on your commodities portfolio? If yes, how do you run it through the P&L? We have neither idiosyncratic nor macro hedges on our commodity portfolio. Everything goes to the P&L in terms of your conservativeness should be reflected in coverage. That's right. Correct. Okay. Thank you. Just to be clear, as Andy mentioned, we have introduced CVA, which is a large portion of our creditworthiness. We are hedging our CVA. Thanks. It's Manus from Autonomous. I appreciate that the incentive schemes have changed this year, and that many of the senior managers are taking zero bonus. There is also a seven-year clawback in place for previous employees or for previous schemes. One of the criteria around that is a failure in risk management. Given the results you've reported are largely the result, I would argue, of failures in risk management previously. I wondered if you've considered clawing back any of those previous awards that have been made. Well, let's look at what's happened concretely. First, the executive directors of the bank received no bonus this year or last year. Second, the 2013 LTIPs that they were awarded have expired worthless, as you would expect. There were no LTIPs in 2014, so there was no remuneration. So the executive directors have already paid a price for the underperformance, part of which is flowing through to this year. Apart from that, we've got quite a robust system of accountability reviews, where at any point in time, right now we have over 150 different individuals that are at risk of clawback or malus pending the conclusion of investigations that we're doing around the real accountability for some of the mistakes that have been made. Now, some of these are clear compliance-related transgressions or things of that nature. Those are the ongoing investigations as it were, and we wouldn't, and couldn't comment on those until we've concluded those. Certainly, to the extent that any of those impact current or former executive directors of the bank, that will be duly disclosed in due course. Sorry, just to clarify that, there are ongoing investigations about the possibility of clawback given previous underwriting decisions that have been made. Given a whole host of issues, some of which contribute directly to our financial results now. Okay, thank you. Yeah. Morning. It's Arturo de Frias from Santander. Two questions, please. One on revenues, and then one on oil exposures dynamics. The one on revenues, looking at the chart you show on page 6, which I think is quite useful, looking at the different drivers that have impacted revenues, the WALK that you mentioned. There are several drivers there. There is reductions in business, there's disposals, there's revenue momentum, there is Forex, et cetera. Is it possible that you give us some idea, of course, I'm not asking for a guidance, but is it possible that you give us some idea of how you think this WALK would look in 2016 instead of 2015, i.e., what kind of additional revenue weakness you would expect from disposals? What kind of additional revenue weakness you would expect from revenue momentum? Obviously, Forex, nobody knows. Some commentary around that would be extremely useful. I'll let Andy answer that, but I just have to say, if that's your way of not asking for guidance, I'd hate to see how you ask for guidance. Listen, we've got lots of moving parts here. The divested businesses, as I showed, I think last couple of quarters, have largely worked their way through the system, so there's not going to be a significant impact from that. You'll have your own views on what FX is going to do, and that will play out whichever way it's going to do. I think the way I'd look at this is, at the moment, the market is still pretty tough out there, and the numbers reveal that. Who knows, for a period of time, that I guess is likely to continue to be the case. There are definitely parts of the business that are doing well. The wealth side, the priority retail clients are slightly more annuity streams there have been doing well, and that absolutely we need to build on. The commodity part of the book is what? 8% of the corporate book now. Sometimes I think people talk about Standard Chartered and commodities as if it's 100% relationship. It isn't. Also, the suppression we saw there last year, we cannot physically go down another $70 an oil price. It just cannot happen. So whilst there clearly can be a little bit more exposure there, it's nothing like the level of change that we experienced last year. So I think this is very much going to be about the macro, it's going to be about FX, and it's going to be about how quickly the strategy and the strategic actions we're taking start to actually bear fruit. We have questions coming in from Asia and online. Sorry, I have a second one. Okay. If I may. The second one was on oil exposures. Obviously, you have decreased your oil exposure very substantially, but there is still a lot in the book. Can you discuss how would be the dynamics in that book if we assume, I know it's an assumption, but if we assume that the oil price remains at $30 or below $30 for one or two years more, should we expect a very substantial additional reduction in that portfolio? Should we expect a very substantial additional increase in impairments? How protected or otherwise is that oil book to a prolonged weakness in the oil price? We made a very specific disclosure, which is we've got $9.6 billion of exposure to oil and gas producers, 88% of which is robust, recognizing that these are either state-owned companies, major oil companies, or companies that would have no cash flow issue for a one-year period with a $30 oil price. So that's a very specific disclosure. That means that 12% of that portfolio is exposed in a one-year period to a $30 oil price. You can do the math on 12% of $9.6 billion and what you would expect a loss rate to be in that portfolio. What we can say is, as we've seen prices go from 60, 50, 40, 30, on down, we've seen our clients respond quite aggressively. They respond by raising equity, by selling assets, by cutting back on CapEx, by managing their OpEx. Some have hedges that have benefited their results. The expected loss on that group of producers in that scenario is relatively low based on our recent experience of falling oil prices. Obviously, if the $30 oil price persisted for a second year, we'd have another group of clients that would be exposed. The total is $9.6 billion. You can't lose more than that. In fact, we think it's, at this point, a well-structured and reasonably well-protected portfolio. By protection, I mean our clients have taken the steps, of course, at our very strong urging, to shore up their balance sheets in the face of this kind of adversity. So this is not a portfolio without risk, but the risk is manageable. The other point I'd make on that is, I know a year or so ago, we were looking at exactly the same fact pattern, but like at a $60 price point. We were like, "We're 90% state-owned, or $60 withstand a year." Bear in mind that two-thirds of this is rotating every year. We have managed, over the course of the year, to work down from a sort of 60 to a 30 number without major catastrophe in the P&L. Duncan, questions from the line? Yes, sure. We've got a question from Steven Andrews at UBS. This kind of follows on from the question on the cover ratio on the liquidation portfolio. If you're comfortable with cover ratio on the liquidation portfolio, as we think forward to 2016, 2017, how more closely do you think loan impairment will start to reflect the charge you took in 2015 for the ongoing businesses? Yeah, I think forward forecasting the LI is not one of the most precise sciences in the world. Clearly, the sort of clues are that of the ongoing portfolio in 2015, we took $2.4 billion as a charge there. I think things which will influence what happens going forward, clearly the macro. The more difficult the macro gets, obviously, it puts a bit more stress on some businesses. But conversely, we did put in place now several months ago, tightened particularly concentration risk and things like that, it should be helpful. I think giving a clear, precise forward guidance on the LI line is always difficult. But the key point for me would be that roughly 60% of what the LIs were in 2015 relates to the ongoing book. I would just add, if we just turn back to page 11 in the slide pack, the aggregation of CG12s and non-performing loans has been relatively flat over the past six quarters. No doubt in this stressed environment, we will have new entrants into our CG12 category. No doubt, some of the remaining CG12 will convert to non-performing loans. But the stability of the aggregate troubled credit portfolio over the past six quarters, it's not an accident. It reflects the fact that we substantially tightened our risk tolerance a year and a half ago. As a result, we are passing that rat through the python, as we say, but there's no evidence of new rats about to be consumed. But of course, we'll feel pressure. In this macro environment, we'll have an increase in CG12 at some point. But we think it's very manageable. Yeah. Joe Dickerson from Jefferies. Thank you. It's Joe Dickerson from Jefferies. I just have a quick question on the revenue outlook. In November, when you gave your 2018 8% ROE target, you gave a WALK to get there. The implied revenue base in 2018 is about $17 billion. If I look at Q4, you're annualizing at about 13. It sounds like certainly for the first half of this year, that's going to continue to go backwards. I guess how do we solve for that? That's quite a bit of growth in revenues from, say, even if you assume that we have a pickup in the back end of this year. How do we get there, and how do we solve for the 8% return? If we don't make the revenue number, would you look to restructure the cost base further? Yeah. I don't know that we're going to go backwards in the first half of the year, just to be clear. There's an element of seasonality, and we're also, as we mentioned, taking very concrete actions to address the income decrease. What we can't address is the headwinds. To the extent that we have ongoing weak commodity prices and an ongoing or perhaps increasingly weak economic environment, of course, we'll experience more pressure in the first half of this year. But by the same token, we're taking very concrete steps to stabilize the balance sheet, and then to begin to grow the balance sheet. Along the way, we have and will continue to focus on our non-balance sheet related income sources, which have shown some really good signs of stabilizing and growing. But mathematically, you're quite correct. The progression that we showed back in November did have a steady increase, not a particularly dramatic increase, but a steady increase in income back up to levels that we enjoyed just two years ago, two and a half years ago, with much lower capital ratios. Is it impossible to get there? Absolutely not. In fact, we continue to think that that progression is a reasonable progression in the environment that we're looking at right now, which, remind me again, was not completely dissimilar to the environment that we imagined back in November, and for which we were accused of being grossly and excessively cautious. I just had to throw that in. Yeah. Yes. Martin Leitgeb from Goldman. Just to follow up on this question. If the macro environment were to remain difficult, if the rate rise cycle would be slower, would you see further scope within the group to address profitability by further disposal or chopping some of the less performing bits of maybe a few retail business in order to get your return targets? Yeah. As we said back in November, there are no silver bullets. If we had big drags on our portfolio that we could just magic away and improve our profitability, we would already have done that. So it's a grinding out of an execution program. That said, we've got inputs and new information coming all the time, and we're responding to that all the time. So we will continuously adjust the way that we execute the strategy. But the strategy itself is one that we're looking through this period of fundamental economic transition in the markets in which we operate. If we reach the conclusion that the Asia, Middle East, African markets simply don't offer the medium to long-term prospect that we thought they did at the time that we set out our strategy, of course, we would reconsider the strategy. But we see no evidence right now that suggests that that's the proper medium, long-term conclusion, however difficult the very short-term is. If I just may follow up on asset quality. Previously mentioned China, India, and obviously the commodity space as one of the key areas. Some of your competitors highlighted Indonesia and some of the other areas where stress is arising slowly. Did you see any change in the composition of the asset quality over the past three, four months? Indonesia is clearly a challenged environment, and we see that in the results of our branch. We see that in the results of Permata. Yes, there's a challenge in Indonesia. It's not surprising given its position as a substantial commodity exporter. We think that the underlying economic strength, the political reforms in Indonesia, and the demographics make it an extremely attractive place to be, and we've got a good starting point. We're just looking for the best way to basically stabilize our core business so that we can grow as the opportunities in Indonesia unfold. But we're very defensively positioned in Indonesia in the meantime. But elsewhere, you mentioned India. That's obviously been the source of a lot of our non-performing loan problems. There are some signs that the logjam in the local capital markets are beginning to free up and release. I imagine that that will result in higher impairments taken by the local banks over some period of time. I think we're in front of that trend. I think we recognize the magnitude of our problems early on, and we're dealing with it. That puts us in a fundamentally stronger position at a time when possibly the local competitive environment will move in our favor, recognizing that the underlying economy in India remains very strong and robust. We see that both in the economic statistics, but also in the nature of our wealth and SME business on the ground. Yeah. Hi, Chintan Joshi from Nomura. I have three incentives, RWAs, and margins. On incentives, can you be more specific about what targets you have to hit? Is it the ROE target as the primary driver in 2018 that gets you the 2X payout that you talked about? Yeah. Those will be recommended by the board and approved by shareholders for executive directors. What we would expect is a set of financial metrics, including ROE, relative total shareholder return, and then a series of strategic objectives around hitting the key non-financial aspects of the strategy plan we set out in November. The details are in the ARA. It is subject to shareholder approval. But a third in an ROE range of 7%-10% in 2018, a third TSR, and a third specifically on the RWA and other strategic actions. Completely linked to the strategy. Okay. The second was on RWAs. On slide 23, can you update us the four quadrants that you have, where you are currently on those quadrants? I am guessing in quadrant one and three, you have already reduced a lot. In quadrant, I am going clockwise. Then in the $50 billion you are looking to optimize, how much of that do you expect to keep? First of all, on the $20 billion liquidation portfolio, we said that is 18 to 24 months. All Andy and I said is that we are making good progress. So we have got a clear line of sight on the bulk of the assets in that portfolio. Agreements in principle or actual contracted terms on the bulk of the assets in the portfolio, but all subject to things that are beyond our control, that could derail the entire process, as is the case with any M&A type deal. The $50 billion of risk-weighted asset optimization, too early to say how much of that we will retain. What we built into our progression back in November was that we retain none of it. The worst possible outcome is that we lose the clients, we lose the RWAs, and we lose the associated income. As we sit here today, having mapped out the clients and begun to have the discussions, recognizing that it takes months to play through this, is that we will retain most of those clients. Some of them will reduce the amount of lending we do to them, so we will reduce the risk-weighted assets and associated income. Some we will keep our capital commitment stable, and they will find other ways to pay us money. The mix between those three things is not clear, but it is a lot better than it all goes away. Okay. Then finally on margins, you talked about trade finance margins and repricing opportunities. Can you also comment about whether your corporate deposit funding cost has increased in the last six months with the increase in CDS spreads, front book deposit costs? Not materially or discernibly. But we watch it very closely. We're obviously not happy with our CDS spreads at the levels at which they're trading. We hope that through our ongoing communications, today is one important piece of which we'll make it clear that with such a strong capital and liquidity position, there's simply no rational reason for our CDS to be trading at the kinds of elevated levels that they are. But words are cheap and actions are dear, and we're intending to demonstrate through action. Why we should be enjoying much tighter borrowing costs than we are right now. But we see no impact on our deposit base, either quantity or pricing as yet. Thank you. Front row. Oh, no. Sorry. Back row. Hi, Angus from Investec. Just two quick ones, please. Just on the 3 billion restructure, can you either remind or update me on the expected buckets for the residual $1.2 billion? Secondly, on costs, I think in November you gave us some reasonably clear absolute cost guidance, 2018 versus 2015. Can you just comment on how that has developed? Obviously, FX as a tailwind, regulatory is possibly a headwind, and everything else you may have thought about may act as an incremental tailwind. So the 3 billion, we said the primary spend will be on loan impairments, redundancy, and goodwill. The balance for the 1.2, I guess probably loan impairment is the bigger item in there as we get to my earlier point, clarity on some of the discussions on that front. Cost, we said 2018 will have a lower cost base than 2015. Again, a lot of moving parts in that effect, as you refer to being one, inflation being another. But more particularly to the chart I put up, taking out 1 billion out of the gross cost in this year will be much higher than what we have done before. Now, unfortunately, there will be some spend on regulatory and things like that, and on the very targeted investments in the retail space. We're just sort of trying to get that balance of not being too short term, because some of those investments in those platforms we do need to do. But essentially driving harder on taking core cost out so that we can afford to do those things. Thank you. It's Tom Rayner from Exane BNP Paribas. Can I have a couple please, just first on capital. You mentioned a couple of times the very strong capital position. So I just challenge you a little bit on that because, I'd argue where you are today is probably the sort of minimum level the PRA would want you to have, say by the end of 2018. Before then, you've got to absorb issues like IFRS 9, Basel IV, probably some more procyclicality, possible AT1 shortfall if the market remains dislocated, you may have to make up the difference with equity. So I just wonder, in your planning, have you kind of taken account of all of those potential regulatory headwinds when you sort of talk about the capital position and how comfortable you really are? I have a second question please, on the return targets. Thanks. Yeah, I think as best we can do, the answer is yes. Clearly, there are a number of things there, particularly BCBS, which are just quite difficult to actually really form a view on 306, 307 now renamed 34 something or other. There are statements that it's not intended to be a capital raise across the sector. It's intended to be broad to neutral, is reassuring. On the other hand, there can be winners and losers within the sector. So until that is clear, that remains slightly unknown. IFRS 9, we're working through that at the moment. I don't actually think there will be a big capital consequence on that, but we are working the numbers at this point in time. I think in the ROE targets we gave, by implication, one could come to somewhat higher capital numbers over a three-year period. Clearly, if some of those uncertainties, which mostly will be out of the way by 2018, are clearer, then whether we actually need to run at those levels, we will obviously re-explore nearer that point in time. But I think if you compare us against stress test results, you compare us against the peer group, I would say that is a good place to be. I do take the statements by the head of the PRA and the Governor of the Bank of England that they don't intend to increase capital levels with a fair amount of credibility. Because we have things like pillar two add-ons that are being set with an eventual migration of things like BCBS 306, 307 as renamed in mind. That's clearly the buffer for a normalization of required capital level on the part of our regulators. So your statement that the capital level that we're running now is likely the minimum that we would need to cover in 2018, I don't accept. You may be right, but there's nothing that we've seen that suggests that that's the case. In fact, at a rhetorical level, it could be quite a bit more attractive than that. We look at Standard Chartered Bank relative to our peer group, both in terms of capital and MREL or TLAC, and we are towards the top of the chart, which is where we think we should be on a balance sheet, which is substantially cleaned up relative to the balance sheet that we experienced just a year ago. So I do think we're very well capitalized, and I'm afraid I would have to robustly rebut your assertions. Fair enough. You are allowed to do that. Just on the return targets, because you mentioned a couple of things there, TLAC, making your AT1. Obviously dislocated markets make all of these things more expensive. I wonder how much of that was in your sort of thought process when you set those targets. Because a few people have raised it already. If we just look at Q4 2015 revenue, look at the sort of run rate on the impairments on the ongoing portfolio today. In 2016, you probably congratulate yourselves for making a profit, let alone making your return target. I just wonder how tough you think those targets really are when you take in some of the dislocation we have seen in the last sort of few weeks. I think there are many moving parts. Clearly income at the moment, trajectory is there, which we have said is what we are most working on. Loan impairments, I think, will change the nature and shape because of the liquidation portfolio. The cost side, we are already driving on. I think one has got to put all that in the mix. I would take the slightly longer term view, though, and say, look, we are repositioning the business. We are sharpening it up. It is going to be a period because of external factors where the profitability will be lower. But that is a period of time. We have the balance sheet strength. We have the liquidity. We will work through that. If we come out the next 12 months with the strategy blocks in place and a stronger business, even if it is a subdued year, so long as the building blocks are in place, I think actually that will be a substantive plus for the business going forwards. Thank you. We can take another question from the line. Yeah, sure. I think the first part of this question might have broadly been answered, but it was around, can you give us a sense of revenue momentum into Q1, and particularly for CIC? Would it be fair to say that the rebasing effect of de-risking has perhaps been a little more severe than you originally planned? The second part, the same question is, in your original ROE targets, you had some expectation of interest rate rises. How might that have changed with these factors in mind? Yeah, I think early days this quarter, January not dissimilar to December and November, albeit January can be a slightly higher month in the year. There is nothing that we are seeing that is saying that there is a fundamental change in trajectory, but equally not the opposite. I think on interest rates, again, back to the point over a three-year period, taking a view as to how each of the component parts have moved, there will be some that will move more and others that will move less. Clearly, as of today, probably the interest rate increase is looking a little bit more subdued. But we did actually take views on interest rate increases back in November, which were lower than what the market at that time was forecasting. So maybe we are erring on the side of what is panning out as we see the world today. Just got a mic in the back. Good morning. It is Andrew Kim from Citigroup. Three questions from me. Just firstly, on the cost WALK you provided back in November, it was based on $10.1 billion of estimated OpEx for 2015. You have come in at $10.5 billion underlying. So can you just elaborate how much of that $400 million difference is due to FX versus other factors to the point you have made? The second question would be on the redundancy costs that you have booked. I think $400 million of the $700 million relates to retail. There is surprisingly little in C&IB. So should we assume that that is where the bulk of the future redundancy costs are to come from? The final question, I am going to revisit the revenue outlook. When you look at the revenue attrition that you flagged in slide 5, you said $400 million on business exits, $100 million on commodity de-risking, $200 million on cards and personal loan incomes. That is 700. Plus we can assume that some of the $700 million that business momentum you have lagged is probably permanent. Given that you have flagged this $105 billion of RWAs that you plan to exit, reposition, or remanage, $75 billion ex-Korea and Indonesia, and you have only achieved $27 billion of asset reduction or RWA effectiveness, it seems to suggest there is actually quite a long way of that to go still. Can we assume there is quite a sizable further chunk of revenue attrition to come through? Maybe I will turn it back into the, there still might be sizable revenue attrition factors to come through as you reposition and remanage those RWAs this year. Which order are you want to take them in? Your cost one was something about FX impact. We have had about a $400 million benefit from FX on translation into dollars in the 2015 year. Equally, we have got inflation going the other way, the cost reduction initiative. That is sort of where the numbers have come out on that front. Second question was on- 10.5 versus 10.1 on expenses. Yeah. The second question was on what? That was- The first question is on what is driving the $400 million difference in Q4 versus the expectation back in November. Regulatory costs are a bit higher. The second question was on the redundancy costs, and given that the bulk Yeah of those sits in retail. Yeah You mentioned once in. The majority of the redundancy cost was taken in Korea. It was to take out about 1,000 heads in Korea, which is the $100 million a year of ongoing cost reduction. That was largely targeted at the retail part of that business. That is why the majority of the group redundancy cost is more retail than in other areas. The final is the long-winded one on revenue attrition. Yes. Thank you. Let's tease it apart a little bit. There is no income on the liquidation portfolio. It's almost entirely non-performing now. So the income drag from that is zero. There is no income impact on the Korea and Indonesia pieces. If anything, we would hope to have some real income increases coming as a result of the refocused team in Korea and the partnerships that I mentioned. Obviously there could be some real upside if we were able to get effectively an Investec outcome in Indonesia. As I said, that's work in progress. There is essentially no income associated with the $5 billion of smaller retail businesses, et cetera, to be restructured. I've given a sort of a fulsome answer to what's, or fulsome as I can be, what's the income impact of the $50 billion of risk-weighted asset optimization. About what I'll say, though, clearly is that to the extent that we do have income slippage, i.e., we have clients that reduce their borrowing balances with us or that exit the bank outright, that's all capital that we intend to redeploy. In this environment, short term, it is difficult to redeploy that capital on acceptable terms in terms of returns. We're only just beginning to refocus our relationship managers, both in retail and in wholesale, on the business that we want to do. I think this is probably the part that, frankly, I don't expect you to accept at face value because you can't feel it the way we do inside the bank. We had a group of relationship managers, both in retail and wholesale, that were substantially focused on the wrong business. They weren't bad people, they're not bad client relationships. We didn't have bad products, but they were incented to do the wrong thing. We changed those incentives over the course of the second half of last year, and we did that by telling them what we wanted them to do, by putting a whole different set of metrics in place, by putting scorecards in place that actually track the things that we want to track, and by holding people accountable, supported by, as necessary, new members of our management team, and then down through the lines. That will have a profound impact on the way that we generate income in this bank in the months and years to come. We can't turn the whole organization on a dime. We've already made really good progress, and some of that comes through in the increasing income to priority clients, increasing wealth management, et cetera, et cetera, on the back of some very good starting market share positions. We have a lot further to go, because we've got the remaining relationship managers in this group, which is a higher number in retail, private banking, and wealth, a lower number in C&IB, but much differently focused than they have been. They will generate better and higher quality and more income as we continue to progress. We've just got five minutes left, so just a couple more questions. Yeah. Hi. Sandy Cheng from Cenkos. Actually, following on that, could you give some more specific examples of the corporate book, or actually how the profitability per relationship is going to be increased? What I am thinking about is you have got a relatively short maturity in the corporate book. That means that repricing conversations can happen more quickly than, say, normally. Would some of the examples, in a sense, be add another 5 bps? Yeah. That is a possible way out. We have not experienced that pleasure yet. We have not been able to reprice the book. Could this stressful environment develop in such a way that we could? Absolutely. It will come first in the Middle East and Africa. It will come later in Asia from what we are seeing so far. But the more typical conversation is, "Dear client, we have lent you $300 million. We are sort of at our capacity. We are not generating a very good return. What would you like to do about that?" The responses that we have gotten so far have been, "Well, if we knew it was a problem, we have got this cash management mandate that we are about to RFP in Bangladesh. Why don't we see if we can steer that your way, and we get an extra 30 basis point return on risk-weighted assets." Or, "There isn't much else we can do. You have got a big share of our wallet today. There isn't much else we can do. Why don't we see if we can help you syndicate 100 of that 300 without impairing the rest of the relationship?" Every conversation that I have been part of so far has had one or both of those outcomes, the result of which, in every case, has been to increase the return on risk-weighted assets. Not one of which that I have been involved with has said, "Okay. You know what? We loved you when you were cheap and cheerful. You are not anymore. Goodbye." Those are not the ones that get sent to me, all right? I realize that. Mark, who is the head of our C&IB, is in the room, and he could comment as well. The discussions are ongoing. It is never a single-shot deal. Well, that is not true. In many cases, it has been single shot. We shouldn't expect that these are going to be quickly resolved in most cases. But we are making good progress. Okay. Then actually, to latch onto that word short again, if the RM doesn't actually get that deal converted, I get your point anyway, a billion, an extra billion of additional cost savings this year is a high target. Looking back at last year, it seemed like headcount reductions were really quite a big component of getting that. Are you, in effect, signaling that there could be quite another bigger round of headcount reductions this year? No. We did the major exercise at the end of last year, some of which is flowing through into the early part of this year. That is the major push we've had. What we've said is from now onwards, the focus we've got on technology, processes, et cetera, plus the natural attrition within the business is as much as we can do. The remainder will come through natural attrition. Okay. Then last question was just on Greater China and NPL visibility. Obviously, there was a big jump in the impairment charge year-on-year last year. Can you give us any more detail in terms of the pattern with the jump to CG 12 that you saw in Q4 upon further review of that book that was behind some of the impairment charges? Also, what's the sense so far into Q1 this year? Yeah. I think as we said earlier in the year, we have done a very intensive review of non-performing loans. We've done a peer review. We've had different regions looking at other regions to make sure that we really have covered it. In certain parts of the world, we have increased the cover ratios, more so probably India than anywhere else. I think the process is thorough. I don't think we're seeing a huge change in trend at this point in time. Obviously, as over running a business like this, we are very, very focused upon it. But I wouldn't call out any particular recent trend as being noteworthy. Right. Just to be clear, there's nothing you flag at this point. Thank you. We have time for one more question. Peter? Peter Chapman from HSBC. I'm probably being very obtuse, but I've never really understood why provisions plus the collateral doesn't come to a number closer to 100%. I notice that you haven't given us a comparative for 2014, but I think, remember, the number for 2014 was also about 67-ish. Well, the key number really to my mind is what sort of recovery rate do we normally get, and between provisioning and collateral, are we covered to at least that extent? The answer is yes, we are. The typical recovery rate has been just over 50%. The typical collateral plus provision rate has been up in the mid to high 60s. I think that is the key stat, and that would give me the comfort that we are fully covered relative to history. Good. Well, thank you very much for joining us this morning or this afternoon if you are on the line. We look forward to carrying forward and staying in touch.

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