DBRS: Stan Chart: Higher Impairments Reflect Challenging Year

Summary
•Higher impairments and weak revenue growth were key drivers for a 7% fall in profitability in 2013
•Balance sheet remains strong with an 11.2% fully loaded Common Equity Tier 1 (CET1) ratio
•DBRS rates Standard Chartered Bank plc Senior Unsecured Long-Term Debt at A (high) with a Stable trend

From DBRS Ratings Limited’s (DBRS) perspective, the 2013 results of Standard Chartered plc (Standard Chartered or the Bank) reflect a challenging year for the Bank. Statutory Profit before Tax (PBT) was down 11% year-on-year (YoY), and adjusted PBT (excluding Own Credit Adjustments, 2012 US settlement, and goodwill impairment) was 7% lower at USD 6.958 billion. The key drivers were weaker income (down 1%) and higher impairment charges (up 35%). Nevertheless, the Bank was able to contain cost growth at 1%, despite higher costs in areas such as Compliance.

In the Wholesale Banking division, the key driver of the Bank’s profits, Standard Chartered reported Operating Profit down 4% to USD 5.643 billion following a weak H213, with volumes remaining strong but margins coming under pressure in a number of business lines. A strong performance in Hong Kong (income up 12% and operating profit up 16% in the Wholesale Bank) was offset by weaker performances elsewhere. However, overall the Bank’s Financial Markets activities were not as affected by weak market conditions as peers operating principally in US and Europe.

The Consumer Banking division was affected by the Bank’s ongoing problems in its Korean operations, reporting Operating Profit down 11% YoY. In 2013 loan impairments were up 53% YoY at USD 1.034 billion with higher provisions in most regions, but still at a manageable level of 80 bps of gross loans. The Korean business reported a loss of USD 13 million in 2013 (before the goodwill write-down of USD 1 billion) as Standard Chartered continues to derisk and reduce its exposures in Korea. The Bank has also identified a number of disposals of small non-core businesses including Consumer Finance and Savings Bank in Korea, Private Bank in Switzerland, Consumer Banking in Lebanon, and Consumer Finance in Hong Kong.

Despite a recent market sell-off in certain emerging markets following Quantitative Easing (QE) tapering by the US Federal Reserve, DBRS sees the Bank as benefiting from its diversification across Asia, Africa and the Middle East and from the fundamental growth prospects in these regions. The Bank’s ratings remain underpinned by its solid liquidity profile and capital base, with a Basel 3 fully loaded CET1 ratio of 11.2%.

DBRS rates Standard Chartered Bank plc Senior Unsecured Long-Term Debt at A (high) with a Stable trend.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports 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 rating. This credit rating was not initiated at the request of the issuer.

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.

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

Lead Analyst: Elisabeth Rudman
Approver: Roger Lister
Initial Rating Date: November 25, 2009
Most Recent Rating Update: October 17, 2013

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