DBRS Confirms Standard Chartered Bank at A (high), Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Standard Chartered Bank (“Bank”) including its A (high) Long-Term debt and deposit rating and R-1 (middle) Short-term rating. The ratings of Standard Chartered plc (Standard Chartered or the Group) are also confirmed at A for the Issuer and Long-Term debt rating and R-1 (low) for the Short-term rating. The Trend on all ratings is Stable. The Intrinsic Assessment (IA) for Standard Chartered Bank plc is A (high). Given the Group’s franchise is predominantly in Asia, Africa and the Middle East, DBRS does not view the Group as systemically important within the U.K. Consequently DBRS categorises the Group as SA-3 and the ratings do not incorporate any uplift from the IA for systemic support.

The confirmation of the ratings reflects the strength and breadth of Standard Chartered’s franchise in its key markets in Asia, Africa and Middle East. The Group has an extensive network covering 68 markets and generates a substantial proportion of its business from transactions straddling more than one country. Despite some slowdown in the economic growth in this region, the growth prospects remain relatively strong especially in the area of Standard Chartered’s particular strength – international trade finance. The Group’s profitability remains resilient compared to peers, and also capital and liquidity are strong.

DBRS considers the most significant challenges the Group faces are the following: managing operational risk, given the wide range of emerging markets in which it operates; the impact of the moderate economic slowdown in its key markets (albeit from high levels); and ongoing margin pressure across a number of businesses and geographies.

Standard Chartered’s ratings are already at a high level, but upward rating pressure could result from the Group significantly deepening its market position in existing markets, particularly in the Consumer Banking division where the Group has relatively weaker market positions. Conversely, the ratings could come under downward pressure due to the following: if an economic downturn affects a number of the Group’s key markets at the same time; if the Group increases its appetite for market risk in the Wholesale Banking division and increases the weight of more volatile capital market activities; or if there is evidence of a significant weakness in controls and operational risk in its geographically dispersed franchise.

The most significant incident the Group has faced in recent years is the USD667m settlement with US authorities in 2012 in relation to breaches of US sanctions, laws and regulations over the period 2001 – 2007. Despite this issue, DBRS views Standard Chartered as having strong risk controls and notes that non-performing loans are low at 2.02% of loans at the end of H1 2013. Generally this reflects a more benign economic environment in its major markets compared to the US and Europe, although DBRS notes that lending growth in the Consumer Banking division has remained subdued (loan growth was 3% from end June 2012 to end June 2013) and LTVs on mortgage lending are low (average 47.4% in H1 2013). The Group’s most problematic market currently is Korea, where weak profitability among other factors, including a marked shift in industry economics since the 2005 acquisition of Korea First Bank, resulted in a USD1bn writedown of goodwill in H1 2013.

International trade finance is a core strength of the group and this has supported the Group’s strong and steady growth in Wholesale Banking over recent years. This division drives the Group’s profitability, representing 62% of operating income in H1 2013 (excluding Own Credit Charge and Goodwill writedown) and 79% of operating profit. Standard Chartered continues to benefit from strong growth in the Financial Markets segment (which includes FX, Rates, Commodities and Equities, Capital Markets and Credit). The Group’s market risk exposure, as indicated by its Value at Risk or Market Risk RWAs remains limited, but – as mentioned above – if this were to show significant growth it could put downward pressure on the Group’s ratings.

Standard Chartered has a very strong funding profile, resulting from the Group’s presence in deposit-rich markets, and loans are fully funded by customer deposits across its markets. The Group had a strong ratio of deposits to loans of 129% at the end of H1 2013. The Group estimates it is already in a position to fully meet the proposed Basel 3 LCR and NFSR.

Similarly, the Group has continued to post strong capital ratios, despite ongoing changes in regulatory requirements leading to higher capital requirements. The Group’s Core Tier 1 ratio at the end of June 2013 was 11.4% and the estimated fully-loaded CRD4 CET1 ratio was 10.6%. The Group’s leverage compares favourably to peers with an estimated fully loaded leverage ratio of 4.6%.

Notes:
All figures are in USD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other applicable methodologies used include the DBRS Criteria – Intrinsic and Support Assessments; DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on July 30, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include company documents, the IMF October 2013 World Economic Outlook and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 25 November 2009
Most Recent Rating Update: 31 January 2012

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf