Earnings Call: Q4 2017

Feb 27, 2018

Okay. We'll get started. Yep. Everybody, thanks very much for joining us at a slightly earlier time for us. Pleasure to have you all here. I'll say a few comments up front, as is our norm, hand over to Andy to go through the financials in some detail. I'll have a few more comments and statements at the end, and then we will be able to open it up for Q&A. We're quite pleased with the progress that we made in 2017. It's building on the program that we laid out in 2015, executed in 2016 through to 2017. We have clearly demonstrated that the foundations are secure. Our underlying infrastructure, our risk and management controls, our capital base are in good shape. We're now poised for growth. There were some really encouraging signs of growth in our reported results for 2017 and then through to 2018, as we'll mention. You'll see in some of the information that we've set out in the slide deck, that the areas in which we've been investing have been growing consistently. So 13% year-on-year growth, in that subset of our business. We now feel that we've got the platform to extend that growth for the medium term to hit a refreshed set of targets, which is to generate, at a group level, 5%-7% compound growth over the medium term. To do that while maintaining our 12%-13% CET1 target range. To achieve a return on equity above 8%. Of course, that's not the endpoint. This is a milestone that we intend to hit on our way to a full cost of capital plus return, and we see encouraging signs that we can deliver that. We're very happy to report that we've proposed to resume our dividend at $0.11 per share on the back of our sense of confidence in our ability to produce earnings through the medium term, and also some clarity in terms of the regulatory capital outlook. Further encouraged to report that we've had a good start to 2018. I think a number of people have. But perhaps what feels good about our performance at Standard Chartered is it's very broad-based. So every one of our products, every one of our regions, has shown good growth year-on-year. Across the group, it's been double digits year-on-year income growth. Two years, two months does not a year make, we understand. But of course, we'd rather start this way than any other way. Just going back to the walkthrough from 2015 to today. You should be familiar with this largely. We had a substantial drop in income in 2016, which resulted from business exits, some very deliberate de-risking, both in our liquidation portfolio but also in the rest of our business, various other things that we have set out. As we got into 2016, we had the beginning in 2016 into 2017, had the beginning of real underlying business momentum and business growth of net $400 million. That is not, of course, the growth. The growth numbers are much more encouraging. We continue to have areas that have either underperformed or where we are earning lower returns and as a result, shrinking those businesses. The most clear area of underperformance in 2017 was our Financial Markets area, which we will talk about in some more detail. We cannot let that take away from the underlying business momentum that we are demonstrating now that we are through with this period of more substantial business exits and de-risking. Turning to page 5. We have simplistically, but we believe compellingly, sliced our business into three buckets. The top bucket are the areas in which we have been investing. These are our growth engines for some time to come, and these are good businesses to begin with. Transaction banking, wealth management, mortgages, autos, and then really the entire liability side of our balance sheet, so our deposit franchise. A little bit over half of the income of the bank grew 13% year-over-year, and that obviously continued through to the second half with a 6% increase half-over-half. These are the areas in which we have been investing, and we are seeing clear signs that those investments are manifesting themselves in improved customer satisfaction, improved market share, and underlying growth that is at or above the markets in which we operate. The second bucket is another quarter of our income, is those set of activities that we knew we needed to optimize. These were the lower-returning assets in our CIB and commercial banking portfolio, lending assets, some corporate finance assets, as well as big chunks of our credit card and personal loan portfolio that we know needed ongoing optimization. We have been optimizing those. We have managed to keep the income broadly flat, so down 2% year-on-year, but with a bit more encouraging second half results. We know that there is some ongoing optimization to go there. We are not expecting the same level of growth in that business. That will change over time as we reposition the underlying stock and the flow to generate growth in that part of our business as well. We are also investing in improved performance and improved customer penetration in that segment. The third bucket are the areas that are much more external market related, where we can expect period-to-period volatility that is the function of the external environment. Financial Markets most obviously, but also treasury and other related things. Clearly had a poor second half of last year and a less poor but still poor overall year in Financial Markets. We are down 7% year-on-year, down 21% in the second half. Equally obviously from my earlier comment, we have had a good start to 2018. The market was unfriendly last year. I think we were not out of line with other rates and FX competitors. I suspect we won't be out of line with the same in financial markets in the first part of this year. What we expect to do, though, is to have a trend line that goes through the noise of the market that's upward sloping. We think we can grow this business. We think we have real differentiated advantages in this business. We're investing in this set of businesses. We would expect to grow independent of the external environment, recognizing that the results will be volatile as the external environment changes. We are committed to delivering a sustainably higher return on equity. We've made good progress from negative ROEs to 3.5% in the last year, and we intend to continue to drive that through to 8% and then beyond. Continuing to strengthen our risk foundation, clearly focusing on clients, and growth, which we're showing some good signs of doing. Improving our efficiency, productivity. We've been very good at taking expenses out. We're getting better at becoming a more productive organization. That's a big area of our focus, and it's not just for Andy or just for me, it's everybody on our management team is very focused on getting that productivity agenda right. Innovation. Thankfully, we didn't lose the plot on innovation as we went through our period of transition and restructuring. We continue to be a leading firm in a number of areas, most specifically, the way that we connect to our clients, both wholesale and retail, with some really good innovations. One of the first banks, probably the first bank, actually, to take on new clients in a purely digital framework in India, with no human touch at all, launching a digital bank in Côte d'Ivoire as we speak. Again, no human touch end-to-end. This is Standard Chartered Bank that we're talking about, with cutting edge technology, delivered in a seamless way, and it seems to be working. Customers really appreciate this. Our net promoter score surveys in retail and external surveys in our CIB business and commercial banking business have improved dramatically. In many cases, we're best in class in the markets in which we serve for customer service. That's what NPS is ultimately measuring. These are big improvements from a year ago or two years ago. Why? Because we're focusing on the customer again, and we're focusing on delivering the customer the services that they demand. Many of those are digital. Finally, I'll talk about this a bit later, investing heavily in people in order to really drive the performance culture that is critical to our long-term success. The walk forward to the 8%+ ROE. As you have all noted, and it's clearly true, we can only accomplish this with substantial income growth. The results over the course of 2017, in terms of looking at the key areas in which we've invested, is encouraging. Of course, we expect there to be some higher costs going forward, both variable pay, but also stepped-up investment on the back of higher income. But it's not all about income. We do have some tailwinds that will be coming our way, we expect, in terms of interest rate movements and the associated benefit to our effective cost of funds, relative and absolute. We think we've hit the peak in terms of our regulatory cost outlays, and we'll get a bit of incremental benefit there. Of course, as we get to the end of our medium-term period, we've got the reduction in the bank levy. Together, will get us to this 8%+ return on equity. With that, I will hand over to Andy and come back at the end with some more comments and questions. Good. Thank you very much, Bill. Key numbers. Just to pull out a few. $14.3 billion of top line. These are the gray stripes. $3 billion of underlying OP, about triple last year. Statutory profit up a lot, and 3.5% of underlying ROE. Slides on most of these to follow, so I shall go through these at a pretty high level. Income 3% up, but weighed back considerably by financial markets, which was about a 4% drag on the top line, about $0.5 billion. Less income in 2017 than 2016. The fourth quarter, as some of you will have noticed, the income was slightly lower than in the third quarter. Two or three moving parts in there. Strong corporate finance performance in the fourth quarter. Weak financial markets performance in the fourth quarter. Those two sort of broadly offset each other. We had a hedge accounting adjustment, which was slightly disadvantageous to the income. On the wealth management side, the full year bonus for that, as we mentioned last time, we actually achieved by the end of the third quarter. Therefore, there was about $40 million extra income in the third quarter and $40 million less in the fourth quarter. That alone is probably two-thirds of the delta between the two. Overall, that is the sort of picture on the income side. On expenses, broadly in line with what we had expected. A little bit higher on regulatory. We had a lot of big programs going in during the year, particularly IFRS 9 and MiFID II, and things like that. We hope that perhaps we will moderate in dollar terms as we go forwards. Loan impairments then was clearly a big factor in the year-on-year movement on profits. $1.2 billion. We did actually average out at about $300 million a quarter, which was what we saw in the first quarter, but it was almost too good to be true. However, that did pan out for the whole of the rest of the year. We have got half the level of loan impairments. Underlying profit, therefore, on the face of it, 175% up, albeit the previous year did have the Principal Finance losses in it. If you adjust for that, we are 71% up on a like-to-like basis. Restructuring, another $350 million of charges, so that takes us to about the $3 billion level now. We have primarily the Principal Finance portfolio to exit. That is what is left. Goodwill, a small charge re Taiwan, not good business, but to do with discount rates. Overall statutory profit at $2.4 billion. Below the line, not on this chart, in the tax charge of $1.1 billion, there is a $200 million deferred tax write-off to do with the recent changes in the U.S. tax rates. The underlying effective tax rate, excluding the non-underlying items, is about 32%, which is below where we were previously, and we would hope to get that down further over time. Down at the bottom, the CET1 ratio is 13.6%, in fact, at both period ends. So in a good space on that front. The EPS clearly has climbed a lot off the back of the improved profitability and the dividend, as Bill has mentioned, is clearly resuming. On IFRS 9 and Basel III, I will touch upon both of those in a future slide, but I think with both of them, there is now clarity or quite a lot more clarity, and we remain pretty comfortable that those are manageable as we move forward. I will come onto those in a later slide. In terms of the income, this is the walk from 2016 through to 2017. In 2016, there were a couple of items to adjust. One, the income there was depressed by negative income from Principal Finance, which was not a recurring feature in 2017 because Principal Finance was below the line, so we have adjusted that out. Business exits, two small retail exits, in the 2016 numbers, not 2017. So normalized for those. Broadly, it is a 13.9 to 14.3 comparison. In green are things that went well, and in gray things which went less well. Things that went well, transaction banking, very strong performance, 18% up on income over the period. Wealth management, also very, very strong and good performances in treasury and on the deposit front. On the gray, things held us back, financial markets, which I have already referred to. A little bit on lending, which has been very much a conscious decision on optimization of returns. Credit cards, personal loans, that slightly reduced, albeit actually we have now seen a stabilization of that between the first and second half, which I think bodes well for the future. On expenses. Top left chart here, working maybe up from the bottom of that chart, 8.6 billion of underlying expenses is 2% up. I would probably pull out two things there. Slightly higher variable compensation given the high level of profit. Secondly, slightly higher depreciation on ships and aircraft that we lease. If you take those two out, we are completely flat. We have absorbed significant extra investment costs and inflation and have held those numbers constant. The regulatory costs, as I mentioned earlier, are up, so up to $1.3 billion with a large number of big regulatory programs landing in the year. We would hope that that number will moderate slightly as we go forwards. On the bank levy, we have got a quite significant reduction there, about $100 million, as we have gone through in more granular detail some of the netting, and that has given us a benefit, which has clearly come through in the 2017 year. Albeit because it is mostly impacted in 2016, what we are saying is going forward, think of the bank levy as being about a $310 million cost issue for us rather than the high $300s as previously we had guided. On the bottom left, you can see the chart that takes us through the four-year commitment of late 2015 on overall gross cost takeout. We said $2.9 billion. We are making very good progress there. At the end of 2017, we were 85% of the way through that total, and I would hope that we should be at or slightly above that number going forwards. That should enable us to keep the 2018 costs below the 2015 level as we set out a while ago. The money that we saved by the cost takeout in part used to reinvest in the business. I think all of you will be familiar with the fact that we said that we needed to invest a lot more in the business to improve the fabric of it. I think it is not actually just the height of the bars on the left, but if you look at the two blue bars at the bottom, about $0.8 billion on regulatory and on just replacement of systems. What we are actually spending in green to actually improve the business is now $0.8 billion. The equivalent number two years ago was $0.1 billion. So a very, very significant increase in the amount we are spending to improve the fabric of the business. That is now coming through, which I think is good to see. On the right-hand side, one or two factoids there. Proportion of our retail customer base that are digitally active is going up about five percentage points per annum. On the top right, the commercial banking, the straight-through banking customers as a proportion of total base going up by three or four percentage points per annum. The turnaround time for onboarding new corporate clients is reduced by two-thirds over the last two years. With what we are doing in robotics and lean automation, that has created either 1,300 roles or redeployment of 1,300 roles. But significant productivity improvements, and I think productivity is clearly going to be a major focus as we go forwards. Change of topic. Loan impairments, as I mentioned earlier, those have halved during the period. So $2.4 billion the previous year, $1.2 billion in 2017. That has been pretty broad based across most of the client segments. In fact, all the client segments, albeit the biggest changes have occurred in the corporate spaces. On the right-hand side, one or two factoids, which you will probably absorb at your leisure. But I will just call out on those. The gross NPLs are up by $0.6 billion year on year. The CG12s, the level below that are flat. But the early alerts, the third bottom line here, are $4 billion lower than where they were a year ago. As the early alerts can be a feeder into the other areas, that is good, I think, to be stemming that flow much earlier. That is a big reduction on that front. Cover ratio is slightly down. That is just the mix of the accounts that we have resolved versus ones we have taken up. But more importantly, when you take collateral into account, we are actually up on cover on the non-performing loans, non-performing loans being about 2.3% of the ongoing book now. Just one other thing maybe to highlight, it is not quite so visible here, but one of the big pushes is to be reducing the concentration that we have on a small number of corporates. If you go back to 2014, our top 20 corporates, I think, were over 80% of our Tier 1 capital. That number now is about 50%, so we have really, really made progress on that front. Then finally on this slide, on the bottom right, liquidation portfolio, when we announced that, we had about $20 billion worth of RWA. That is now down to sub $1 billion. Now, on the balance sheet. Top left is the net interest income. Up 5%, $400 million during the year, probably about 200 to do with interest rate increases, 200 to do with conscious improvement of the mix in the book. Margin overall slightly better at 1.55%. You can see on the bottom right chart that it is the same sort of theme as previously. Volumes up across all the product ranges. The margin improvement coming more on liability products with slight compression still on the asset side. Bottom left here on balance sheet momentum, the overall increase in customer accounts, so deposits is 9%. That is about 6% on a constant currency basis, so about 30 billion or so more deposits and a very good mix of those deposits, so very much the more sticky accounts for us. In terms of customer loans, those are up 12%, which is 89% on a constant FX basis, so up about 30 billion over that period of time. Again, fairly broad based. What I think is interesting, though, is on the top right if you look at where the new accounts are in terms of risk profile, the whole of that 30 is in the better risk categories. So categories 1 to 5 with the categories above that essentially being flat year-on-year. Again, evidence that we are investing, we are focusing where there is quality out there. On capital, mentioned this briefly. At the end of the day, we started the end of the year at exactly the same number. There was a fair amount of work in between the two. So about 45 bps of profit that generated, sorry, CET1 generation of 45 bps from profit. Then with the dividend payment, slight reduction, and the model changes that we referred to on financial institutions that took a bit more out. So that is normalized, but that model change was a bit of a one-off. There is a corporate one, but I do not think the effect of that will be anything like as significant. On the risk-weighted assets we are up about 10 billion, and that is primarily actually FX and the model changes. So the rest of that credit migrations were fairly neutral during the period. On IFRS 9 we had indicated previously we thought the full impact of that would be between 10 and 20 basis points of CET1 effect. Our view is that we will be bang in the middle of that, so 15 basis points. That is the equivalent of just over a billion of extra reserves from the accounting perspective. Because some of that had already been taken into account in the regulatory calculations, the effect is more muted on the regulatory front. Because there is then a transition arrangement, actually the year one impact of this we think will be incredibly small. Overall a lot of work to get to a not very big answer. Basel III, more clarity on that late last year. Our best assessment at the moment is that if you applied that to our current book, it's about the 10%-15% uplift. However, it doesn't come in until 2022, so that does give time to think through and to make some refinements in the business. Also, a little bit difficult to be entirely precise, as most banks are pointing out, there is still a fair amount of national discretion that is allowed. Until we have the clarity as to how that is intended to play out both here and elsewhere, it's not a precise science. Overall, our sense is it is manageable, and we will work through that obviously over the intervening period. Just to talk now a little bit about the business performance. Slides on each of the segments and then on each of the regions, which I'll go through fairly high level. Corporate & Institutional Banking, top line flat. That is the story of the financial markets weighing down, as I've referred to earlier, but a very strong performance on transaction banking, which has pretty much offset it. What is more pleasing, the bottom line, seeing the trebling of the profit there, and that has been about in part the focus upon the loan impairments and also the control of expenses. The business Simon talked about in November, the intent is to be getting that into the 5%-7% range on the top line growth, and that is where all of the energy is at this point in time. Commercial Banking, 3% up on the top line. I think most noticeably that business unit that essentially is only two and a half years old, we have now turned from loss into profit. Big focus upon loan impairments. As we go forwards the big focus is upon growing, but growing the business thoughtfully, particularly from the loan impairment aspect. I think that is a big milestone, that business, and certainly gives us a much better platform to be moving forwards on than was maybe the case a while ago. Onto the consumer businesses, the retail banking, obviously another big business for us, 4% top line growth, albeit we had two disposals of retail businesses in the period. If you normalize for those, actually the growth was 7% during the period. Profits moved forwards nicely, double-digit percentage improvement in profits. We have now got 45% of our income from the priority accounts customers that we have targeted. We added 100,000 of those during the year. I'd say really the big push on retail now is digitalization and rolling out the platforms that we have been working on for quite a period of time. Private banking top line, modest 1%. A year ago, we did have an insurance benefit, so if you normalize that, it was up more like 6% to 7%, and underlying profits still held down by the amount of investment we are making in replatforming and upskilling in the business. That is a journey, and we are pleased with the progress so far. But clearly, there is more to come. Assets under management grew during the period. Net new money was up $2 billion during the year. We are seeing the early momentum there, and obviously, it will take a while for that to fully flow through to the bottom line. Turning then onto the regional view, Greater China, Northern Asia, I think the big region, a very good year. 8% top line and 45% bottom line growth there. Really, this was across all markets. Hong Kong was 8% up on income, 25% up on profit. Korea trebled the profits during the year. China, excluding the associate investment, returned to profit, having been slightly loss-making the year before. Thailand, Japan did well. I think across the board, really good progress there. Clearly, whilst the momentum runs there, it is very helpful for the momentum across the whole of the business. ASEAN and South Asia was a more difficult period. The 5% down on the income here is partly affected by the disposals of the retail businesses. Without that, we would have been about 2% down, and about $200 million of the $500 million reduction in the financial markets income was actually in the ASEAN region. That was the other thing that weighed down, and that would otherwise have been positive if it was not for those two things. However, big focus in there. The rest of the businesses, I think particularly in the retail commercial space, are doing very well, and that remains a big area of focus. The business in India returned to profitability. Bangladesh, very profitable. I think there are good things happening there, but clearly weighed back by a couple of factors last year. Africa and Middle East, top line 1%. If you do it on local currency basis, it was up 3%. Good performance, probably slightly better performance in Africa, slightly more modest performance in Middle East. UAE business returned to profitability in the period, which was good after two to three years when it has not been. Profits in Nigeria up 50% during the period. I think some good progress there, obviously spanning really quite a number of territories. Europe and Americas down 4% on income. But this is another area which probably took about 200 of the reduction in the FM income, which weighed down on the numbers here. Overall, actually, performance in Europe and Americas has been really good. They are involved in about a third of the total income of the CIB business globally in one way, shape, or form. The income that they generate that is not booked in Europe and Americas is booked in other parts of the world, was actually up 10% year-on-year. Of course, they also bear the cost of the remediation efforts in the U.S. Central and Other, similar charts to one that you may have seen before. We have the segmental view and the regional view. There are some items in the middle that are common to both. There is treasury capital and corporate center cost and bank levy, and some that are unique to the segment or region views. Quite a complex story here because there has been quite significant movements in the numbers. If I just briefly talk to the segment side, the previous year, a small loss. Now a big profit. This previous year was weighed down quite a lot by things like Permata. This year has actually benefited a bit from the bank levy and the $100 million benefit that is sitting in there. And it has been weighed down a bit by the hedge accounting adjustment as well. So a sort of billion dollar top line business, if you like, income stream, and probably ongoing profitability somewhere between the 2016, 2017 numbers. Central and Other on the regional side, on the right-hand side, on the other hand, the prior year, big loss there was primarily about the Principal Finance business, which was in the numbers last year, whereas below the line this year. And this year has had some benefit from the low bank levy. So that is probably slightly flattering of the underlying performance of that business area because of the one-off nature of the bank levy. So with that, 2015, the ROE was -0.4%. We set the initial target of 8%, and we are pretty close to being halfway through that ramp up. So halfway up the hill, the other half to go. I think we have been very consistent to what we set out in 2015 as needing doing, and I think that has brought good focus within business. The top line, obviously last year was more muted, but there was one particular product line that was behind that. The start for this year, as Bill has mentioned, has been extremely encouraging, which is good. I think the investments, which always take a while before we start to see the benefits coming through, are now starting to make a difference. The regulatory clouds on IFRS 9 and Basel III are lifting, and hence the dividend coming back. And I think really the focus now from my perspective is about income momentum. It is about continuing to simplify the business and really putting a focus on productivity. With that, Bill, I will hand back to you. Okay. Thanks, Andy. Just a few comments from me to wrap up and little bit into Q&A. Priorities are clear for us. It is the refocus and strengthen focus on clients and growth. Encouraging signs through 2017, but 2018 clearly is the year that we need to demonstrate the potential of this franchise, which we believe in fundamentally. Talked about the ongoing focus on efficiency and productivity. We will not lose track of the underlying risk and control progress that we have made so much of in the past couple of years. And we are very cognizant and aware of the newer risk categories, like cybersecurity, which we are completely focused on as well, and clearly stepping up our resources. Innovation and digitization, it is inherent in our business. The threats come from within and without, and we think we have got a pretty good track record. We need to shape that into a very good track record. We are investing to accomplish exactly that. Then the focus on people and culture, as I mentioned, I will get to in just a moment. The fight against financial crime is ongoing. I think we have distinguished ourselves in terms of the contributions that we have made to making the banking environment a hostile place for criminals and bad doers to conduct their business. We will continue to do that. We have done that through our own investments and initiatives, and we have done that working with other banks and with law enforcement. The feedback that we get from time to time, you have seen some of it in the public domain from our regulators is encouraging, that we have made substantial progress, and we intend to continue to make that progress. We have legacy investigations relating to historical activities, as we have mentioned every time I have stood in front of you. Those investigations are ongoing. Our discussions with the regulators and law enforcement are ongoing. Of course, when we have something to share with you, we most certainly will. The technology change in focus is really key to our future. We recognize that, and we are investing as such. Andy has mentioned that we have maintained at a very high level of investment, over 2017 into 2018. Multiples in terms of the franchise improving investments that we are making relative to where we were in the 2014, 2015 period. This is building on our future. A lot of that is going into technology, and we are seeing that. When we are recognized as the best online bank or digital bank in Asia, when we are the first to market in key South Asian and African markets with digital applications. We recognize that we are a desirable partner for some of the new entrants into this market, the e-commerce companies or fintech companies. We partner with over 200 fintech companies one way or another. That is not a threat. That is an opportunity for us. There are threats out there for sure. We think that we have got a pretty good plan for dealing with those threats. Our track record in terms of delivering on the technology undertakings that we have embarked on are good. We cannot accomplish any of this without continuing to evolve the performance culture of our bank. It is always challenging to talk about the soft stuff in a meeting where we are talking about earnings results, which is all about numbers. But for us, we are spending a lot of time on taking what has historically been a strong performance culture at Standard Chartered, but which went off track. As we transformed the bank, as we went through a challenging transition. The bank turned inward. People became risk-averse and reluctant to make investments and reluctant to take decisions. We are shifting that very deliberately, and we have done that with extensive interaction with most of the 85,000 employees of the bank, through extensive workshops and listening sessions and things of that nature. We have got a redefined purpose statement, which is focusing clearly, as you can see, on the roots of Standard Chartered. When we go back to what made Standard Chartered a great bank 160 years ago, it was the fact that we were focusing on commerce and creating prosperity for citizens of the markets in which we operate. That continues to be the case today. This leveraging our unique diversity has a lot to do with the fact that it's not just our bank, which is diverse, our 85,000 colleagues and 15,000 contractors, but our clients as well, and making the connection between those markets, between clients, between cultures, between economies is a key part of what differentiates Standard Chartered Bank. We don't want to lose that. In fact, we want to invest more in that diversity, which is unique to Standard Chartered. The markets in which we operate are unique. Finally, we've tried to drive this through to what we call valued behaviors, which are very simple statements that guide our colleagues in terms of everything that they do. I call out in particular the Never settle. This idea of continuous improvement, that good enough isn't good enough. We're here for good, not good enough, is a key part of what we mean by Never settle. That, I have to say, as we've rolled out these words, and they are just words at the end of the day, and we recognize that they're just words. But behind those words is a tremendous passion in our bank. Comes from our board of directors, it comes from our management team, our senior management, to really live these values. It's resonating. We see people taking different decisions about the way that they conduct their business based on these three valued behaviors. We'll continue to drive that. You should continue to form your own views, whether we're actually changing the culture of Standard Chartered Bank so that we can position ourselves as a best-in-class bank, not a bank that's trying to catch up. We're making progress. We're very happy with the progress. We're doing what we said we were going to do. We're in great markets. We think we can match the growth of those markets and exceed that growth over time. We've become more efficient and productive. We can become much more productive. That's going to drive our returns. It's going to allow us to cover our cost of capital and more in the years to come. Thanks again for coming out first thing in the morning. Andy will join me, and we'll take some Q&A. Mike. Is that a mic? Okay. Sorry. Mark will come to air. Okay. Thank you. It is Robert Sage from Macquarie. I have got a couple of questions, if I can. The first was with the ROE target, because the previous one was sort of specifically related to particular years, I think 8% in 2018, 10% in 2020. I was just sort of wondering how we should be thinking about the medium-term sort of timeframe here. Is it a sort of a 2020 number, or sort of how hard is it? I guess my other just point of clarification on this is, I assume we are talking ROE not return on tangible equity in terms of what it refers to. The second question was just on the dividend, which I see is very helpfully sort of reinstated today. In terms of sort of dividend policy moving forward, how should we think about how we might be thinking about future dividend payments beyond 2017? All right. Well, let us take those in order. I will take the return on tangible equity. We did give that some thought. The impact it makes is not particularly significant, and we did not want to give the impression that we were just upping our numbers courtesy of a redefinition of the base point. We could have done that. I think it would make about 40 basis points difference to our published returns if we did go that route. Medium-term, yes, we have, as you have correctly observed, remained slightly non-specific, and I think that is reflecting the fact that some of this is within our control and some of this will not be within our control. We will get there as fast as we possibly can do. I think if you take our 5%-8% and some views on cost for inflation, you can triangulate to within a couple of years of when it is likely to happen, but we have been just a little bit more circumspect given that that is not something completely within our control. Dividend policy. Step one was obviously the decision to recommence. Step two was how much to recommence, and we have obviously landed on $0.11, which is a full-year number for last year. Policy going forward is that the group will look to increase the dividend as the profitability of the business improves. We have not put it in tight formulas or payout ratios because we think that is just a bit too precise. But as we go forward, we will look at the earnings outlook. We will look at the regulatory outlook, both at the group and local level. We will look particularly at where there are opportunities to invest and expand the business, and to the extent that there is a good return, then we will seek to return a good number back to shareholders so that we keep that line moving up. Thank you. It is Michael Helsby from Bank of America, Merrill Lynch. Just one question, please. Transaction banking, clearly the star of the show last year. That was pretty much driven by cash management. Trade obviously quite subdued still. I was just wondering if you could give us a comment on how both businesses have entered 2018, and if you could disaggregate it for us in a volume and a margin context, and whether you think trade can actually start to grow revenues this year. Thank you. Yeah. As you say, the overall is very strong, and actually within that, the cash is incredibly strong. That we have seen flowing through into this year thematically. I think on the trade side that volumes are up, but the margins are under a little bit of pressure, and that the two have offset each other in that space. On the other side, on the cash side, we have seen both volume and slight margin improvements, obviously with rising interest rates, a slight ability to reprice. What I would say is we have put a huge focus upon offering to run the OPAC accounts of corporate accounts as part of the overall offering. As part of our push on the overall cost of funds, we have both been pushing in the corporate space on the operating accounts, but also in the retail space, to try to make sure that we are getting an increasing share of the more sticky, the less expensive debt. Because our overall cost of funds, and it is one of the things on your ROE wall chart, where we are saying over a period of time, we do think we can make more inroads into the cost of funds, and that is one of the areas that we are most targeting to do it. Yeah. I will just add a bit of color. On the cash improvement, obviously is encouraging. Only about half of that is the result of interest rate increases. The other half is an improvement in the quality of the underlying liabilities, which has come from a really determined focus on the liability side of our balance sheet. In transaction banking, the market has been subdued for sure. Margin compression has been substantial. But our market position has strengthened. You may remember a couple of years ago, we showed an external survey chart that showed that we were the number one bank for trade in Asia, with about a 22% share of the primary trade bank. We have maintained the overall share, but the proportion of the earnings that the primary trade bank actually gets from the trading relationships has increased significantly over that period. We are maintaining a very strong number one share in our core Asian markets with an increasing share of that wallet. That is an offset by subdued volumes until recently, early part of this year is encouraging, and margin compression. But in terms of the underlying customer franchise, which we still think is a very valuable thing to have, it is encouraging. Just to follow up, on the cash piece, that volume growth that you have seen, can you disaggregate that between the clients that you have won that are new because of the new initiatives that you put in, or is it all clients that you have already had? Well, it is mostly clients that we already have, as a practical matter. That is all I had. We've started to earn money on the new clients. It's a two or three-year ramp-up period to get to full speed. The vast majority of our improvement is still coming from the existing stock. Very simply, we're just asking for different business. We put different metrics in place around what's attractive to the bank. We clearly prioritize high-quality deposits to improve our funding mix and our cost of funds. Our RMs and clients are responding to that. I'll go to Tom and then we'll move down the line. Okay, thank you. It's Tom Rayner from Exane BNP Paribas. Could I have three, please? Just firstly on costs. I think ex the levy costs were about $225 million ahead of consensus, which when you look at Q4, I mean is relatively big overshoot. I wonder if you could just give us a bit of color how much of that you think was MiFID II, IFRS 9 related, and which should drop away and how much was the other things. Just on costs as well, can you just clarify that inflation still means 2%-3% from Standard Chartered's point of view? I think that's what you've said in the past. I've got two others, please. Right. Okay. I would look at the cost. We're about $300 million up year-on-year, against consensus, probably $200 million up. Three things. One, roughly $100 million of increased spend on big regulatory projects that landed during the year. Secondly, about $100 million on extra variable compensation off the back of the much higher profitability, and just under $100 million on airline and shipping depreciation on the assets that we lease. Those three things pretty much explain for that year-on-year delta. I think the regulatory is hopefully, as I said earlier, a year of a peak level of projects being delivered. Obviously, the performance of the business this year will determine where the variable comp is, and the shipping and aircraft should be seen as part of a profitable business stream. That is broadly where we're at. I mean, inflation, you could do a sort of weighted average at circa 3%, something like that at this point in time. It's in that sort of zone. But we are talking about inflation in our markets. In our markets. Yeah. Okay, perfect. Thank you for that. Very clear. Just a second question, please, on financial markets. Obviously, low volatility's been an industry-wide issue, but your Q4, certainly on a Q4 looked a little bit weak versus peers. Is there anything you can add to why that might be or what you might be doing to address that or why that might not repeat in 2018? It sounds like you're off to a better start. Yeah. First off, keep in mind that one part of a financial markets business is capital markets. Capital markets were roaring in the developed world and less roaring in the emerging markets. Just when we do the side-by-side comparisons, we, in this case, are operating in a slightly disadvantaged market. The real story is we rebuilt our financial markets management team over the course of last year. A new head came in at the beginning of the year. The team was filled out over the course of the year. They were beginning to hit their stride towards the end of the year. We would expect the real settling in of a new team with new focus to occur over the course of 2018. As we've said, the early start to 2018 is encouraging. Obviously, don't read too much into that. As I said, I think we won't be unique in having had a good start to the year in financial markets. What's important to note, though, is that the team hasn't been hobbled by the challenging performance last year. They're there. They're ready to take advantage of opportunities. I'd also note that even with the subdued performance in 2017, it's still a high-returning business for us relative to the rest of our portfolio. It's not an unattractive business, even at these depressed results. Okay, thanks. I had one final one. I was a bit cheeky, I think. Just on what you said on your dividend policy, you will look obviously at investment opportunities as an alternative. I just wondered how do you think about the sort of hurdle rate when looking at those investments? Is it the 8% interim return target, or is it the cost of capital that you hope to be ultimately earning in the longer term? Yeah, we would look more with a lens of a sort of 10% return because ultimately that is where we want to get the business sort of up to. I think we need to make decisions today that are building towards that sort of space. The 8% is clearly an important signpost on a journey. I think it's very important motivation within the business. People can see we're actually making inroads there. It is not a stopping point. We want to get a bit higher, and hence your question would apply a slightly higher hurdle to things we're looking at now. Tom, we're taking incremental decisions on the basis of a 10% cost of capital. when it comes to new lending decisions, acquisitions, which we obviously have not made any, divestitures, which we have, we're looking against that benchmark. as the decisions roll through the portfolio over a period of time, we'll obviously drag to the 10%, or else we'll get smaller. That's the other option, of course. the intention is, and we think the opportunity is to make marginal decisions based off of a 10% phased in. I mean, we didn't exit every client that wasn't earning a 10% return back in 2015, and we didn't say that we were going to, and we haven't. we've been quite deliberate about pacing the way that we Effectively force the upgrade of our clients or the alternative forced exit. we are taking marginal decisions off of a 10% return, which should obviously drag the total up over time. Thank you. Can you pass on to Martin? Yes, good morning. Martin Leitgeb from Goldman Sachs. I have two questions, please. The first one is a little bit of a broader question just in terms of U.S. rate outlook. Some commentators expecting seven, eight hikes. I was just wondering, how do you think about your business? How it's going to be affected from those rate hikes? Obviously, variable one is the direct link to U.S. dollar and U.S. dollar-backed currencies, which you elaborate in the disclosure. In terms of level two impact, how do your local currencies react? How do risk costs react? How would you think your footprint, your business is affected by that? We've talked previously about rising interest rates and impact on the group. And we sort of said 50 bps on a full year basis, $300 million-$400 million. Obviously, so far, the primary uplift we've seen has been in the U.S. and to some extent in Northern Asia, but much less so elsewhere around the world, hence about $200 million of benefit kind of in the numbers of 2017. We've gone back round and had a look at those numbers again because clearly at a slightly higher start point than the dynamics as to how customers will react to further increases does change a little bit. And our view, albeit this is dependent upon a lot of assumptions, is that sort of 50 bps number now is probably $330 million or something like that. So it's still in the range a little bit below the midpoint of it. Our sense is having risen a bit more on the U.S. interest curve that probably would see a little less opportunity on the U.S. either because it gets priced away or whatever, and therefore the balance slightly more into the other regions. And hence we've sort of given a broad brush sort of view of that. So I think still some opportunity in the U.S., but a little bit more muted, but still quite a lot of opportunity elsewhere. The second question I had is just to try to get a little bit more color to your strong start of the year guidance in terms of broad-based double digits comment. And I was just wondering, does this relate to January and February, I would assume as we're at the end of February? And if there any more color you could add if this skewed a little bit more towards financial market or compared to performance last year. I was just wondering if you could add a little bit more color on where the strength comes from. A bit of color. Last year, January and February were not bad. The comparator was relatively flattered, as you could say by in particular Treasury markets results in Q1 of last year. Second, yes, it is January and February. We're not quite done with February, but it's a current measure. I think we've given a lot of color with our reference to broad-based. When I said that it's every product line and every region, that's about as broad-based as you can get. Thank you very much. If you want to just crack along, and then I will come this way. I will try and get everyone a question in. Yeah. Morning. It's David Locke from Deutsche. I've got one clarification, please. Just on the 5%-7% CAGR you've assumed on income. Just wondered if you could just confirm that assuming a forward curve on the U.S. rate, first of all. Then, the second one, which is on impairment. The 2017 impairment obviously much better than last year. We look at consensus. Consensus is now lower for '18, '19, and '20. Do you think that the current levels of impairment you're seeing are sustainable, or are you expecting actually that they will drift up towards that kind of consensus level? Yeah. The 5% to 7%, obviously, that's our best guess, including our estimation of interest rates. To Martin's point, we're not in the school that thinks the Fed is going to raise ahead of market expectations. As such, we think that the market is, in particular our markets, will be well equipped to handle the effective shock that could come from higher interest rates. It's just very well priced in. One of the risk factors for sure is surprises in the Fed outlook. We don't see it, but obviously it's possible. Impairments, yeah, we absolutely think it's sustainable. We've changed the way that we underwrite credit risk, and we've changed the way that we hold credit risk. We're a much more dynamic manager of our portfolio than we have been. Of course, we'll have ups and downs as the environment fluctuates. Not saying that we'll never have a higher level of loan impairments, and from quarter to quarter, we'll have jumps and dips. In terms of the credit costs that we've reported in 2017, it is certainly supportable and sustainable. Thank you. Okay, moving on. Thanks. It's Manus Costello from Autonomous. Can I ask how much of your cost base do you now consider to be variable? I ask specifically thinking about 2018 and the management of jaws in 2018. If you continue to deliver double-digit revenue growth in 2018, might there be upwards pressure on that cost guidance that you've given if variable costs have to grow? I think our big challenge is actually more the productivity rather than purely the raw cost. By implication, if you look at the forward guidance, the 5% to 7% on the top line, below inflation and on the bottom line. This is going to be more about how do we get more for less over a three, four, five-year period. Yeah. Clearly, the variable comp has impacted a little bit in 2017, and it will depend a bit on how we perform in 2018 relative to our expectations for how we'll do as to whether that could put a little bit more pressure on. If the business performance is sufficiently good that there is a bit more payout on that, then I'd hope that there would be a little bit of understanding. We are trying to make sure that we're keeping the 2018 costs as much as we can do down to the 2015 levels. Is that to be clear, you're saying if you do deliver double-digit revenue growth, the chances are that the 2018 costs will also be a bit higher? I'm saying that we have only had two months of the year of double digits, and therefore, let's not get ahead of ourselves. Understood. Good morning. It's Chris Manners from Barclays here. Two questions, if I may. The first one was, I was just looking at slide 14 in the deck, on the balance sheet momentum. It's nice to see net interest margin expanding, and you're seeing customer loans up 12%, customer accounts up nine. But then if I think I've got an expanding margin and looks like almost double-digit customer balance sheet growth, I've only got NII up five. So maybe just a little bit of an explanation of the dynamics, how we should think about earning assets versus loans and customer accounts growth. Then maybe on the 5%-7% growth rate that we're expecting in the top line, maybe you could help us think about how much you're going to have as earning asset growth, what's going to be margin expansion, what's going to be fee growth, and just maybe a little bit of help there. And I had a second one on capital afterwards. Loan growth, $30 billion as per the chart, and about a third of that is from FX. Okay, so $9 billion or so. So that's not interest earning, or maybe it is, but not overtly. Of the balance, we are about half on corporate finance and the other half split between retail and financial markets. The retail bit, obviously enduring. The corporate finance, as we have discussed before, can move up and down a little bit depending upon the time of deals and things like that. But I think the key to understand is that there is a reasonable amount of this is FX, and it's about a third of the increase actually on the customer deposits is FX as well. Customer deposits, a third FX, about a third better retail deposits and a third the corporate OPAC accounts or credit accounts. I suppose if we're growing our top line at five to seven, we're growing our balance sheet like this, and maybe with some FX impact to there, how much margin expansion do we need to have to get to our 5% to 7% top line? is the question. Yeah. We will see what the mix is. Overall, the 5% to 7% on the top line, the cost below inflation. We have now had two periods where we have had the margins stable to fractionally up, and that is after a multi-year period when it has been down. We are driving the liability side as much as we can do now. Partly, to Bill's point, that's about the quality of the mix, which is within our control to some extent. Partly it's about interest rate increases. We're not going to forward guide specifically on the margin itself. We will do whatever we can to get it as high as we can. I would just add, I think we've tried to position ourselves to be much more dynamic in terms of the way that we allocate our assets and liabilities. it's not a static picture of margins staying constant for some period of time. As we see attractive assets that we can access, and we're trying very hard, obviously, to position ourselves to access those markets, we can grow faster. perhaps at a lower margin, if we think it's good from a risk return perspective. I think the real point is we're better positioned to dynamically manage our assets and liabilities than we have been any time in the past couple of years. Thanks. I have one follow-up question on capital as well. You're still guiding to the 12% to 13%. When I look at, you had a quite a big 6% stress test drawdown. Stress drawdown may go up with IFRS 9, might have a lower trough. Just trying to understand, given where your systemic reference point is, how do you calibrate the 12 to 13? Is that do you think your Pillar 2A might come down? Do you think that the stress test trough, the PRA demands might be changed? Just how do you square those two? Thanks. Yeah, we've held to the 12-13 at the moment, even though we're slightly above that 13.6. I think inherent in your question, there are still some moving parts in this. IFRS 9 has not yet been stress tested, and we'll see where that goes. Basel III A, there is a level of national discretion which isn't yet clear, and the concept of stress testing of that is also completely new. Thirdly, we've got preexisting sort of stress tests and the peak-to-troughs in there. Our sense was, for the moment, it's sensible to keep the range where it is, to run a little bit higher on that, and then we've got a little bit of a cushion, hopefully, to absorb things like that. Our sense is we're in the right sort of zone on that, but stress tests and things like that are clearly going to play a part as we evolve the thinking and the regulators evolve the thinking over the coming quarters. Your thoughts then on 12-13, you're just going to stick with that until Until we have a better number it's 12-13. Okay. One more at the back, and then we'll come back one more stage. Yeah, Richard Smith from KBW. I wondered if I could just ask you two quick follows. Just firstly, on the regulatory cost, you were saying that you hoped that it was going to be a peak and we see it come down from here. I wondered how much you thought we might see tail off from here with some of those programs abate. Then secondly, if I look at your average balance sheet disclosure, it looks like the non-interest-bearing liabilities, the non-interest-bearing deposits, are actually remaining relatively stable coming down. I wondered, when you talk about cost of funds vendor that you can see, how much of that the answer is effectively that we see less being passed through in terms of your interest-bearing deposits as opposed to actually growing those non-interest-bearing liabilities? Yeah. The forward accuracy of regulatory is always a little bit difficult. There was a time when we hoped that we'd top out at about $1 billion, and we are now at $1.3 billion. I think as most banks have found, it is quite a difficult one to give a definitive view on where is the top. Some of what is in there is compliance and ongoing regulatory costs, which as the business expands, it is likely to expand. Obviously, we look at automation and things like that. I think at this point in time, we have got a higher number of in-flight projects than we did have in 2017. That is normal. There was a lot of work on things like IFRS 9. Now, ultimately, it may not actually transcend itself into very much movement on CET1, which is slightly quirky, but it is a year when we had an abnormally high number of in-flight projects land. I'd hope it would moderate a little bit as we go forward. It's more moderate rather than fundamentally change. The cost of funds, I think if you do a comparison of us with some other banks, then our cost of funds are higher. In part, that is because the overall mix of our business is slightly less retail, maybe than some other banks, and hence the lower cost deposits from customers on that side is a lower part of our overall funding mix. But it is something that is on the ROE walk, which we are very focused on. How can we get the mix change? Can we do more in a digital world with retail to actually get a higher proportion coming through retail? With the OPAC accounts, the operating accounts from the corporate side, which tend to be sort of sticky and do sit there for long periods of time. How can we make more of that? There are regulatory requirements in terms of how much we have to then put on deposit with central banks and so on, and just making sure that we are optimizing the mix of those. There's a whole variety of different factors that are going into it, but it is something the treasury team, working with the business are now very focused on. I'm afraid we've just got time for one more official one. We are hanging around for questions after. Thanks. Good morning. It's James Invine here from Soc Gen. I just wanted to ask about your investments, please. You mentioned to Tom's question that you consider projects that give you more than a 10% return. How much are you restraining your investment because the group returns are still quite low at the moment? Is there a much bigger pipeline that you will release if you are more profitable overall? The real constraint as we went from 2015 to 2016 and 2017 was capacity. As Andy pointed out in his slide, the investments that were not in just system replacement or regulatory improvements were $100 million in 2015. It's up to $800 million today. We needed to ramp up pretty substantially our capacity to prudently and thoughtfully make that incremental investment. That is still pretty close to the binding constraint. That said, we've made commitments about overall expenses in 2018 relative to 2015. We take those seriously. We have kept a pretty careful eye on the margin as to whether we can be a bit more efficient in terms of how we invest and spend. You also saw in our ROE walk forward, we would expect expense increases to partially offset the income growth that we think we can generate. Obviously a chunk of that, some of that's variable comp, but a chunk of that is stepped up investment because we do have capacity to incrementally invest, and that will always be the case. There are the things that we fully imagined we would be investing in as we progressed with our business, and then there's things that arise along the way. The extraordinary focus that we've all got on cybersecurity and really understanding what's involved with staying at the cutting edge, or at least some sort of leading edge of cyber protection. That will evolve. We have stepped up our pace of investment in that sort of area beyond what we probably imagined in 2015 because the threats become more clear. Nothing specific, but just it's an obvious one. It's in the news every day. Not to say that we won't have other things like that that will come up that aren't in our immediate horizon for planning today. A brief follow-up on the investments, please. You helpfully given us some metrics on slide 12 of the progress you're showing. I guess those are group averages, and you're in some pretty varied markets. Are there any particular regions or countries where you think you're way ahead of the competition and this is a real edge? Maybe some areas where you think you're kind of lagging some of your competitors. If we look at the countries or markets or segments where we thought we were at the leading edge of capabilities three years ago, it'd be a very short list. When we look today and we see zero human touch, online account opening, servicing, self-servicing, and management in a handful of markets, we would expect that to continue for some time to come. We're first to market in a number of cases today. By no means are we first to market across the board. We're just not. There's still a reasonably big technology and capability gap between where we are and where the best of class is in each market in which we operate. But we've demonstrated an ability when we focus to get to best in class or at least to get to first to market, we'll subsequently demonstrate that we can be best in class. That's an ongoing evolution. We've never going to compete on the basis of our sheer scale. That isn't what Standard Chartered is. We've got to be more nimble, and we've got to hit very hard in the markets where we have an advantage. We've identified what we think those markets are. Africa has been a key. We really want to be at the cutting edge across our African markets. We want to get more than our share of growth from Africa. We want to get more than our share of growth from South Asia. We want to demonstrate that we can satisfy a mass affluent market in India efficiently. We haven't fully demonstrated that yet. The individual products and services that we're rolling out are laying a pretty good foundation for us to say, yeah, when we focus on it, we can get it right. Obviously, we would expect that to snowball over time. Good. With that, thank you again for coming out first thing in the morning. Good questions as always. Appreciate your thoughtfulness and support, and happy to engage as we ordinarily do in the days, weeks, and months to come. Thanks.