DBRS Assigns Issuer and Long-Term Debt Rating of ‘A’ to Standard Chartered plc, Trend Stable

DBRS has today assigned an Issuer and Long-Term Debt rating of ‘A’ to Standard Chartered plc (Standard Chartered or the Group). The trend is Stable. The ratings reflect the Group’s solid franchise with diversity across geographic regions and products, resilient underlying earnings generation ability, and its sound liquidity profile and conservative liquidity management. The ratings also consider the challenges faced by Standard Chartered, including successfully capitalising on growth opportunities in the Group’s footprint, continuing to generate adequate earnings to absorb the costs of the cycle, and managing the various risks of operating its diverse global franchise.

Standard Chartered has a solid, geographically diverse franchise in countries and regions that have rapidly growing economies and developing financial markets. The Group operates in 70 countries offering a broad range of products and services to retail customers, SMEs and corporates. Standard Chartered’s solid franchise and well established operations in these growing economies are key factors supporting the rating.

The Group’s resilient underlying earnings ability is a clear benefit of the solid, diverse franchise. Throughout the global economic turmoil of the past two years, the Group has delivered sound results and remained profitable across business segments and over the past twelve months, in all geographic regions. Indeed, operating profit before tax, in H1 2009 totalled $2.8 billion, a 9.7% increase year-on-year and a 43% increase on a half-year linked basis. Results were bolstered by robust income growth in the Wholesale Banking segment driven by the Financial Markets business, which benefited from increased client trading volumes and wider spreads increasing flow trading income. Importantly, the Group continues to generate substantial levels of income before provisions for impairments and taxes (IBPT). For H1 2009, IBPT totalled $3.9 billion, an increase of 20.2% from H2 2008. DBRS considers Standard Chartered’s ability to generate a level of earnings sufficient to absorb increased credit costs and still generate internal capital as a key strength factored into the rating.

DBRS considers the trends in credit performance as manageable. The diversity of the lending book across geographies, products and industries affords the Group a degree of stability in asset performance, however, the more recent economic crisis has resulted in increased pressure on performance across most of the book. While there are some indications of improvement in the macroeconomic environment in certain areas within the Group’s geographic footprint, DBRS anticipates credit costs will moderate, but remain elevated through the remainder of 2009 into 2010. As such, the ability to continue to generate sufficient earnings before impairments to allow the Group to weather the difficult operating environment, whilst strengthening its franchise, will be a challenge, especially until global economies show signs of sustained stabilisation.

Standard Chartered benefits from the strong earnings generated across a wide range of growing countries and regions. Nevertheless, it also faces a more challenging operating environment. There is much more uncertainty in the legal, social, political, regulatory, economic and foreign currency environment in these countries. Standard Chartered is broadly successful in managing the risk of operating in these countries. With the growing scale and broader reach of its operations, the Group’s ability to continue to manage these risks successfully and avoid any outsized losses derived from these risks is a challenge that is inherent to the Group due to its business model. DBRS recognises Standard Chartered’s extensive history of managing these risks and expects that the Group will continue to effectively manage these exposures.

The solid funding profile is reflected in the rating. Liquidity is soundly anchored by the strong deposit franchise. Customer deposits are the primary source of funding for the Group’s loan book. At 30 June 2009, loans-to-deposits ratio was a very strong 78.4% demonstrating the prudent liquidity and balance sheet management. The significant deposit base allows wholesale funding to be a low proportion of overall funding, representing just 24% of total funding. Additionally, throughout the crisis the Group has been a net lender in the interbank market, illustrating the strength of its liquidity position.

DBRS considers capitalisation as acceptable, given the risk profile of the balance sheet and the Group’s ability to generate sizeable earnings before impairment provisions. At 30 June 2009, core Tier 1 and Tier 1 ratios were 7.6% and 10.5%, respectively. Further, the recently completed GBP 1.0 billion ($1.6 billion) capital raise increases the core Tier 1 and Tier 1 ratios, on a pro-forma basis, to 8.4% and 11.5%, respectively.

DBRS sees Standard Chartered as well-positioned to capitalise on opportunities for growth in its core markets. Increasing economic activity, trade flows, and wealth accumulation and the accompanying demand for banking services in countries core to the Group’s operations provide an opportunity to grow. However, Standard Chartered faces the challenge that this growth in demand for banking services is attracting strong competition from other large international banks and local competitors, making the Group’s ability to execute on its strategy of becoming the leading international bank in Asia, Africa and the Middle East a key challenge for Standard Chartered over the medium-term.

The Stable trend reflects DBRS’s expectations that Standard Chartered will continue to generate acceptable levels of earnings to manage through the current challenging operating environment. At the current pace of earnings, DBRS observes that impairments could triple from H1 2009 levels and the Group would remain profitable. The Stable trend also reflects the expectation that credit metrics will remain under pressure, as the lagging effects of the recessionary environment impact the Group’s customers. The trend also reflects Standard Chartered’s actions to reinforce its financial profile, by enhancing its liquidity and bolstering its capitalisation.

Support Assessment (SA)
DBRS assigns a support assessment of SA-3 representing that, while some external support maybe afforded to the Group, the level and form of the support is uncertain. Although Standard Chartered is a significant international bank with total assets of $411 billion at 30 June 2009, in DBRS’s view, the diverse activities across numerous countries and regions result in the Group not posing a systemic risk to any one country. Moreover, while the Group is based in the U.K. and regulated by the FSA, the Group has limited activities, mostly Wholesale Banking, in the U.K., as such in the view of DBRS, the U.K. Government may not provide timely support, in the unlikely event that support is required. However, DBRS notes that Standard Chartered is included in the U.K. debt guarantee scheme, although it has not issued under the scheme as of the date of this report. The inclusion in the Scheme, adds a level of confidence, especially if markets become disrupted again. Given the SA-3, the Group’s ‘A’ rating receives no uplift from its intrinsic assessment equivalent.

Note:
All figures are in USD unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.

This rating is based on public information.