DBRS Confirms Standard Chartered’s Senior Ratings at “A”, Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings for Standard Chartered plc (Standard Chartered or the Group) and related entities, including its Issuer & Long-Term Debt rating of “A” and its Short-Term Instruments rating of R-1 (low). The trend on all ratings is Stable. The ratings action follows a detailed review of the Group’s operating results, financial fundamentals and future prospects.

The confirmation of the ratings reflect Standard Chartered’s solid franchise in the growing emerging markets in Asia, the Middle East and Africa, its resilient earnings generation ability and sound financial profile. Evidencing these strengths, Standard Chartered has been able to consistently outperform most of its peers in the still-stressed environment. While the trend remains Stable, DBRS expects that continued progress in advancing the Group’s franchise and sustained strong financial performance that continues to demonstrate Standard Chartered’s ability to cope with the uncertain operating environment could bring about positive rating momentum. However, the uncertain external environment and potential contagion effects, which may spread outside of the euro zone, are causing a pause in upward ratings momentum.

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 71 markets offering a broad range of products and services to retail customers, SMEs, and corporates. Importantly, Standard Chartered’s sound earnings ability and lack of exposure to the more problematic asset classes that were linked to the recent financial downturn have enabled the Group to defend and grow its franchise in these key markets even as competition from large international banks has increased over recent years. To this end, the Group continues to benefit from its investments in new capabilities that strengthen its ability to build long-term, deep client relationships. Standard Chartered has invested over recent years to build a Private Bank, bolster its Corporate Finance expertise, strengthen its capabilities in commodities, and broaden its range of SME products. Evidencing the success of these efforts, these businesses accounted for almost 25% of Group income in 1H11.

The ratings consider the resilient and considerable earnings generation capabilities that are a clear benefit of the diverse franchise. Importantly to the rating, throughout the downturn, Standard Chartered remained profitable in all geographic regions across both business segments, Wholesale and Consumer Banking, which DBRS views as an illustration of the Group’s solid and predictable earnings generation ability. For the six months ended 30 June 2011, Standard Chartered generated profits attributable to ordinary shareholders of $2.5 billion, a 20% increase from 1H10, and some 18% from 2H10. Indeed, the results for 1H11 were Standard Chartered’s ninth consecutive year of record first half results. The Group continues to generate significant levels of income before provisions for impairments and taxes (IBPT). For 1H11, IBPT stood at $4.1 billion and the Group maintained a solid impairment/IBPT ratio of 10%. DBRS views the resilient and substantial earnings power, combined with a strong liquidity and funding profile, and solid capital levels as affording Standard Chartered greater flexibility, relative to many banks, to manage through the uncertain operating environment. As such, DBRS sees the Group as well-placed to absorb the changing regulatory landscape while investing in its growing franchise. Furthermore, as discussed in the most recent Interim Management Statement, 2011 results are expected to show record revenues and profits for the ninth consecutive year.

While Standard Chartered benefits from its geographic diversity which affords it the ability to generate earnings across a wide range of growing countries and regions, DBRS notes that the growth prospects for several of the Group’s core regions are closely tied to the Chinese economy. Moreover, DBRS sees the potential of a more challenging operating environment as stress from weaker sovereigns adds uncertainty about the strength of the global economy. DBRS nonetheless recognizes that Standard Chartered’s key markets are less dependent on large western economies. Moreover, within Standard Chartered’s footprint, there is increasing uncertainty in the legal, social, political, regulatory, economic and foreign currency environment. 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 in the Group’s business model. Importantly however, DBRS recognises Standard Chartered’s well-established history of managing these risks, and expects that it will continue to effectively manage these exposures.

The ratings also reflect Standard Chartered’s strong financial profile and sound risk management. Liquidity is anchored by the strong deposit franchise as customer deposits are the primary source of funding for the loan book. The substantial deposit base, which totalled $342.7 billion at 30 June 2011, allows for a lower reliance on wholesale funding than many of the Group’s peers. To this end, wholesale funding represents only 22% of total funding. Furthermore, despite the volatility in the capital markets, the Group has maintained good access to the markets evidenced by the recent $1.0 billion subordinated debt issuance, illustrating the strength of the Group’s franchise.

Capital levels have strengthened, benefiting from the $5.2 billion rights offering that was completed in 2H10 and solid earnings retention. At the end of 1H11, Standard Chartered’s Core Tier 1 ratio was 11.9%, 290 basis points higher than at 30 June 2010. In DBRS’s opinion, Standard Chartered’s current capital levels provide ample loss absorption capacity, and DBRS sees the Company as well-positioned to address coming Basel III requirements.

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 Group’s operations provide an opportunity to grow. However, Standard Chartered faces the challenge that this growth in demand for banking products and 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.

Notes:
All figures are in USD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

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

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 25 November 2009
Most Recent Rating Update: 18 January 2011

For additional information on this rating, please refer to the linking document under Related Research.