DBRS Comments on Standard Chartered’s 2012 Results; Senior Unchanged at “A”, Trend Stable

DBRS Ratings Limited. (DBRS) has today commented that its ratings for Standard Chartered plc (Standard Chartered or the Group), including its Issuer & Long-Term Debt rating of “A” and its Short-Term rating of R-1 (low) are unchanged following the release of the Group’s full year 2012 results. The trend on all ratings is Stable.

Standard Chartered reported profit attributable to shareholders of $4.8 billion, a 1% increase from 2011. Excluding certain items such as the $667 million settlement with U.S. authorities and gains on repurchase of subordinated liabilities and impairment of associates, normalised earnings were $5.4 billion, 15% higher year-on-year (YoY). Results reflect higher income generation on solid average earning asset growth and good levels of client activity, while expenses increased as the Group continues to invest in the franchise, expanding its distribution network and growing its product offering. This solid performance came despite the challenging macroeconomic environment with economic growth slowing in most markets across the Group’s operating footprint while competition throughout the Group’s emerging market footprint continues to intensify.

Income (revenues) for 2012 was $19.1 billion, up 8% from 2011. Standard Chartered benefits from a diverse stream of revenues both by geography and business. Indeed, double-digit income growth was achieved in Hong Kong, China, Africa, Indonesia, Malaysia, the Americas, U.K. and Europe amongst others. Net interest income was 8% higher at $11.0 billion underpinned by stable margins and 6% growth in the loan book. Net interest margin (NIM) was unchanged from 2011 at 2.3%. Non-interest income increased 8% YoY to $8.1 billion, including a gain on a property sale in Korea and income from the liability management exercise. Strong cost control continued as illustrated by the positive 5% growth in cost-income jaws achieved in 2012 excluding normalization items. Standard Chartered’s solid earnings generation power affords significant loss absorption capacity. For 2012, operating profit before impairments (IBPT) was $8.2 billion, a 6% increase and impairments-to-IBPT was a low 15%. Group-wide loan impairments in 2012 were $1.2 billion, a 34% increase from 2011. While the year-on-year percentage increase was notable and reflects some seasoning of loans following a period of high loan growth, DBRS still considers the Group’s asset quality as relatively strong. The cost of risk in Consumer Banking was at a still low 54 basis points (bps) despite a 33% increase in impairments in the business.

By business line, Wholesale Banking income, which represented 62% of total operating income, was up 9% over 2011 to $11.8 billion on the back of strong growth in Trade Finance and Corporate Finance, whereas total operating profit for the segment was $5.1billion, down 2% from 2011 as a result of the settlement with U.S. authorities. Against the back-drop of increasing regulatory requirements, low market volatility and reduced market volumes, Financial Markets reported a largely flat income performance at $3.7 billion. Transaction Banking reported good income growth, particularly in Trade Finance, which reported 10% growth in average assets and contingents and a 10 basis-point improvement in NIM. A double-digit increase in transaction volumes supported the 19% growth in Corporate Finance income.

Within Consumer Banking operating profit increased by 8% from 2011 to $1.8 billion due to 8% growth in income, on a constant currency basis, to a record $7.2 billion, while operating costs were tightly controlled up 3%. DBRS notes that the Group’s presence in emerging markets continues to benefit revenue diversification with Africa, China and Indonesia generating income at double-digit rates while income growth in Hong Kong and India was still solid. Asset margin compression, notably in Mortgages and Cards, Personal Loans and Unsecured Lending (CCPL), was offset by growing balances as net interest income grew 7% from 2011 to $4.9 billion, 68% of the segment’s operating income. Excluding the gains on a property sale in Korea and the disposal of Private Banking operations in Miami, fee revenues were 2% higher YoY at $2.2 billion. Wealth Management fee income generation benefited from growth in bancassurance and fixed income partially offset by lower fees from equity-related products reflecting market uncertainty. Loan impairments in Consumer Banking were up 33% to $697 million on growth in the loan book, shift in the product mix of the book and seasoning. The Group noted that while loan loss rates and forward-looking indicators have weakened slightly in unsecured products, these items remain at very low levels for mortgages.

Standard Chartered continues to demonstrate solid balance sheet management. Deposits are the core of its strong funding and liquidity profile. In 2012, total deposits grew 9% YoY to $427 billion and remain the primary source of funding for the loan book. At year-end 2012, the advance (loan)-to-deposit ratio was a very strong 74.1%. Standard Chartered maintains good access to the capital markets evidenced by the $3.25 billion of Tier 2 capital raised in 2012 and the $2.75 billion of Tier 2 subordinated debt issued in January 2013. DBRS notes Standard Chartered already meets Basel III minimum requirements for both the net stable funding ratio and liquidity coverage ratio.

Regarding capital, Standard Chartered’s capitalization is solid supported by sound earnings retention and prudent management of risk-weighted asset growth. At 31 December 2012, the Group reported a Core Tier 1 ratio of 11.7% essentially unchanged from 2011. Risk-weighted assets grew 12% to $302 billion, with wholesale banking increasing 11% and consumer banking up 12% YoY. On a fully loaded Basel III basis, as the Group currently understands the draft regulations, Standard Chartered expects a 100 basis point reduction to its Core Tier 1 capital ratio. As such, DBRS sees Standard Chartered as well-positioned to meet forthcoming regulatory capital requirements.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]