DBRS Confirms Standard Chartered plc at “A”; Trend Stable

DBRS Inc. (DBRS) has today confirmed its ratings for Standard Chartered plc (Standard Chartered or the Group), including its Issuer & Long-Term Debt rating of “A”. The trend on all of the Group’s ratings remains Stable. The ratings of Standard Chartered reflect the Group’s solid franchise in the growing emerging markets in Asia, the Middle East and Africa which underpin its resilient underlying earnings generation ability. The ratings also consider the Group’s sound liquidity profile and conservative liquidity management. Offsetting these strengths are the challenges faced by Standard Chartered which include successfully capitalising on growth opportunities in the Group’s footprint while continuing to generate adequate earnings in the face of increased competition. The Group also faces the challenge of operating a global franchise across many jurisdictions, in an evolving, more costly regulatory environment.

Standard Chartered’s solid, geographically diverse franchise in countries and regions that have rapidly growing economies and developing financial markets is a key rating strength. The Group operates in 70 countries offering a broad range of products and services to retail customers, SMEs and corporates. The resilient underlying earnings generation ability is a clear benefit of the diverse franchise. Indeed, throughout the downturn, Standard Chartered remained profitable in all geographic regions across business segments and 2010 results, as discussed in the most recent Interim Management Statement, are expected to show record revenues and profits.

Earnings generation ability is a significant driver in the rating and profitability is considered solid. Indeed, operating profit before tax totalled $3.1 billion in 1H10, up 9.8% year-on-year and 34.7% on a half-year linked basis. Results were bolstered by a sharp decline in impairments, which fell 60% from 1H09 to $437 million. Importantly, the Group continues to generate substantial levels of income before provisions for impairments and taxes (IBPT). For 1H10, IBPT totalled $3.6 billion, compared to $3.9 billion in 1H09 and $3.3 billion in 2H09. DBRS considers Standard Chartered’s ability to generate a level of earnings throughout the recent economic downturn a key strength, which is factored into the rating.

Standard Chartered also benefits from its geographic diversity which affords the Group the ability to generate earnings across a wide range of growing countries and regions, though DBRS notes that the growth prospects for several of the Group’s core regions are closely tied to the Chinese economy. Moreover, Standard Chartered is facing a more challenging operating environment. There is much more uncertainty in the legal, social, political, regulatory, economic and foreign currency environment 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. Importantly however, DBRS recognises Standard Chartered’s extensive history of managing these risks, and expects that the Group will continue to effectively manage these exposures.

The ratings consider the Group’s solid funding profile. Liquidity is soundly anchored by the strong deposit franchise as customer deposits are the primary source of funding for the Group’s loan book. At 30 June 2010, loans-to-deposits ratio was a very strong 76.2% 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 22.5% of total funding. Additionally, throughout the crisis the Group remained a net lender in the interbank market, illustrating the strength of its liquidity position and the Group’s well-regarded reputation.

During the second half of 2010, the Group successfully completed a rights offering. However, prior to that, at 30 June 2010, core Tier 1 and Tier 1 ratios were 9.0% and 11.2%, respectively, well exceeding regulatory requirements. The $5 billion rights offering is expected to add about 200 bps to the Group’s capital ratios, which will position the Group well for the anticipated increase in regulatory capital requirements. At the same time, Standard Chartered currently anticipates that Basel II amendments and Basel III will reduce its Core Tier 1 ratio by 100 bps. The Bank’s capital position is also enhanced by the Group’s demonstrated ability to generate net profits, adding to retained earnings.

Furthermore, with its strengthened capital levels and solid earnings capacity, DBRS sees Standard Chartered as well-positioned to capitalise on opportunities for growth in its core markets. Increasing economic activity, trade flows, wealth accumulation and the accompanying demand for banking services in countries core to the 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 ability to execute on its strategy of becoming the leading international bank in Asia, Africa and the Middle East a key challenge over the medium-term.

The Stable trend reflects DBRS’s expectation that Standard Chartered will continue to enjoy solid momentum in financial performance. While the recent performance trajectory has been quite positive, the operating environment is less than certain. Globally, regulatory issues remain uncertain, while the knock-on effect of the ongoing issues at the weaker Sovereigns has yet to be ascertained. Moreover, as discussed in more detail below, a change in DBRS’s support assessment assignment could lead to positive rating momentum. However, given the uncertainties as to the timing of the aforementioned unresolved matters, DBRS deems a stable trend appropriate.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

The sources of information used for this rating include the company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid

Initial Rating Date: 25 November 2009
Most Recent Rating Update: 25 November 2009

For additional information on this rating, please refer to the linking document below.

This rating did not include issuer participation and is based solely on publicly available information.