Final Results

2nd Mar 2006 08:15

Standard Chartered PLC02 March 2006 2 March 2006 TO CITY EDITORS FOR IMMEDIATE RELEASE STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 HIGHLIGHTS STANDARD CHARTERED PLC RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Reported Results • Profit before tax up 19 per cent to $2,681 million, compared with $2,251million in 2004 • Income up 27 per cent to $6,861 million from $5,382 million • Total assets up 46 per cent to $215 billion from $147 billion, including$58 billion in SC First Bank (SCFB, formerly Korea First Bank) • Profit attributable to ordinary shareholders up 26 per cent to $1,917million (2004: $1,520 million) Underlying Results • Profit before tax up 10 per cent to $2,454 million, compared with $2,233million in 2004 • Income up 14 per cent to $6,002 million from $5,274 million • Expenses up 14 per cent to $3,232 million from $2,826 million • Loan impairment charge up 24 per cent to $266 million from $214 million • Underlying normalised cost income ratio of 53.0 per cent (2004: 54.0 percent) Performance Metrics • Normalised earnings per share up 23 per cent at 153.7 cents (2004: 124.6cents) • Normalised return on ordinary shareholders' equity of 18.0 per cent (2004:18.6 per cent) • Annual dividend per share increased 11 per cent to 64.0 cents • Normalised cost income ratio of 54.5 per cent (2004: 54.0 per cent) • Total capital ratio at 13.6 per cent (2004: 15.0 per cent) within targetrange Significant achievements • Record Group profits, driven by SC First Bank acquisition and strongunderlying business momentum • Continued double-digit income growth in both Wholesale and ConsumerBanking • Record normalised earnings per share • Acquisition of SC First Bank - normalised EPS accretive in the secondhalf of 2005 Commenting on these results, the Chairman of Standard Chartered PLC, BryanSanderson, said: "Standard Chartered's 2005 results demonstrate another strong performance. Weare in markets with economic conditions which present us with opportunities tobuild on our performance track record. It is particularly pleasing to note thatSC First Bank, our Korean acquisition, became EPS accretive in the second halfof 2005. We are seeing the re-investment of petrodollars, strong economies allover Asia and, on the whole, increasing economic maturity in our markets. Theseconditions play to our strengths. We are executing our strategy well and makinggood progress. I am confident of the Group's prospects going forward." Notes: - Comparatives restated in the transition to IFRS (see note 12 on pages 37 to41). - Underlying income and costs excludes the post acquisition results of SCFB andone-off items in 2004. - Results on a normalised basis reflect the Group's results excluding itemspresented in note 5 on page 35. - Normalised underlying results exclude the post acquisition results of SCFB andthe items in note 5 on page 35. STANDARD CHARTERED PLC - TABLE OF CONTENTS PageSummary of Results 3Chairman's Statement 4, 5Group Chief Executive's Review 6-9Financial Review Group Summary 10 Consumer Banking 11-13 Wholesale Banking 13, 14 Acquisition of SC First Bank 15 Risk 16-25 Capital 25Financial Statements Consolidated Income Statement 26 Consolidated Balance Sheet 27 Consolidated Statement of Recognised Income and Expenses 28 Consolidated Cash Flow Statement 29Notes 30-59Additional Information 60, 61Index 62 On 1 January 2005 the Group adopted European Union (EU) adopted InternationalFinancial Reporting Standards (IFRSs). The comparative amounts presented haveaccordingly been restated to comply with EU endorsed IFRSs, with the exceptionof IAS 32/39. The impact of the restatement was published by the Group on 12May 2005. Copies of this announcement are available from the Group's website athttp://investors.standardchartered.com The Group has taken advantage of thetransition rules of IFRS 1, First time adoption of International FinancialReporting Standards to apply IAS 32 and 39 with effect from 1 January 2005.(see note 12 on pages 37 to 41). Unless another currency is specified, the word "dollar" or symbol "$" in thisdocument means United States dollar. STANDARD CHARTERED PLC - SUMMARY OF RESULTSFOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 $m $mRESULTS Operating income 6,861 5,382Impairment losses on loans and advances 319 214Profit before taxation 2,681 2,251Profit attributable to equity interests 1,946 1,578Profit attributable to ordinary shareholders 1,917 1,520 BALANCE SHEET Total assets 215,096 147,124 Total equity 12,333 10,069 Capital base 17,118 13,786 INFORMATION PER ORDINARY SHARE Cents Cents Earnings per share - normalised basis 153.7 124.6 - basic 148.5 129.6Dividend per share 64.0 57.5Net asset value per share 897.3 719.0 RATIOS % % Return on ordinary shareholders' equity - normalised basis 18.0 18.6Cost income ratio - normalised basis 54.5 54.0Capital ratios: Tier 1 capital 7.7 8.6 Total capital 13.6 15.0 Results on a normalised basis reflect the results of Standard Chartered PLC andits subsidiaries (the Group) excluding items presented in note 5 on page 35. STANDARD CHARTERED PLC - CHAIRMAN'S STATEMENT I am pleased to report another strong performance for Standard Chartered. • Profit before tax, including the post-acquisition results for SC FirstBank (formerly Korea First Bank) is up 19 per cent to $2,681 million. • Income is up 27 per cent, up 14 per cent on an underlying basis,excluding SC First Bank. • Strong earnings per share growth, with normalised EPS up 23 percent. As a result of this strong performance, the Board is recommending an annualdividend of 64.0 cents. The underlying business is doing well and the strategic investments made inrecent years are delivering results. The progress with SC First Bank (SCFB) inKorea is especially pleasing. Governance Governance across the company is robust. In addition to the establishedCommittees of the Board we now have a Corporate Responsibility and CommunityCommittee, focused on the environment, diversity and inclusion, community andsocial investment. Activities in the area of corporate responsibility havemeasurable, positive commercial impacts and are very much part of the fabric ofthe Bank. Non-Executive Director Mr Ho KwonPing has played an important part inthe governance of the Group and he will retire from the Board at the conclusionof this year's Annual General Meeting. KwonPing has served for more than nineyears on the Board and I would like to thank him for the valuable contributionhe has made during this important period for the Group. Economic outlook In the Middle East, there is greater investment in the infrastructure aimed ateconomic diversification. Across Asia, moves towards deepening domesticfinancial markets are key to the drivers of economic growth, shifting from areliance on exports to domestic demand. Exports are strong in Hong Kong and South Korea, but it is the sustainedturn-around in consumer spending that is key to their current growth. As aresult, in general, Asian growth rates are expected to remain well above thoseof OECD countries. We are witnessing, at first hand, cyclical strength and structural change. Strategic progress Such strong and sustainable growth enhances our existing franchise and allows usto take full advantage of the acquisitions we have made in recent years. In Thailand, where we have been present for over a century, in 1999 we tookthe opportunity to invest in 75 per cent of Nakornthon Bank. In 2005 we boughtthe remaining 25 per cent stake. Standard Chartered Bank (Thai) pcl, as it isnow known, is well positioned as a locally incorporated bank with internationalstrengths and standards. Similarly, we have had a long presence in Indonesia, a country with 240 millionpeople. In 2004, with our consortium partner PT Astra, we took a controllingstake in Bank Permata. Permata is a consumer bank with more than one millioncustomers, 300 branches and over 7,000 staff. The combination of Permata and ourown branch offers us great access to this growing market. In India, we bought Grindlays in 2000 and this strategic acquisition changed thenature of our presence in that market. We are now India's largest internationalbank and we have major ambitions. Already we have over two million consumerbanking customers and 800 top corporate relationships. With the economy'sconsistently high rate of growth we expect to see even more opportunities ahead. In China, we established our presence as the first foreign bank almost onehundred and fifty years ago. In September 2005, in the presence of ChinesePremier Wen Jiabao and UK Prime Minister the Rt. Hon. Tony Blair MP, StandardChartered signed the documents that allowed us to take a strategic stake inChina Bohai Bank. This is the first bank to be granted a national licence since1996 and in February it opened its first branch. Such a strategic investment is just one part of our approach to taking a leadingposition in this emerging economic giant. Our organic operations continue toprosper. Our long experience of China has allowed us to focus on theopportunities offered by rapid growth, including those in the Pearl River Delta,one of the world's fastest growing economic zones which accounts for aboutone-third of China's exports. Finally, South Korea, which is Asia's third largest economy with a population of47 million. In 2005 we made huge progress following our acquisition of KoreaFirst Bank and SC First Bank is now well positioned for Korea's futureeconomic development. In all our markets we have strong business relationships and extensive networks,which are serving us well as the pace of change and number of businessopportunities increase. Our international network is allowing us to benefit fromnew trade corridors emerging between our regions. We are in growing markets and our geographic diversity is helping us to delivergood performance. Well Positioned Overall, many current economic conditions and trends are advantageous for us. Weare well positioned and our management teams are focused on creating shareholdervalue. Standard Chartered is ideally placed to maximise the existing and futureopportunities presented by our markets. In addition to the growth presented bymajor Asian markets, many of our businesses in the Middle East, South Asia andAfrica are developing rapidly. Our management teams, at country and at Group level, balance strong local andinternational leadership. This ensures international standards are met, localpractices are respected and market opportunities are leveraged. We offer theability to invest in growth, mainly in Asia, with UK regulation. Summary Standard Chartered's 2005 results demonstrate another strong performance. We arein markets with economic conditions that present us with opportunities to buildon our performance track record. It is particularly pleasing to note that SCFirst Bank, our Korean acquisition, became EPS accretive in the second half of2005. We are seeing the re-investment of petrodollars, strong economies allover Asia and, on the whole, increasing economic maturity in our markets.These conditions play to our strengths. We are executing our strategy well andmaking good progress. I am confident of the Group's prospects going forward. Bryan Sanderson, CBE Chairman 2 March 2006 STANDARD CHARTERED PLC - GROUP CHIEF EXECUTIVE'S REVIEW Standard Chartered is in good shape and we continue to deliver strong financialresults. Our strategic intent is to be the world's best international bank,leading the way in Asia, Africa and the Middle East. We are seizingopportunities in our markets, driving value creation and actively seeking futureopportunities. We are building diversity in our products so we can reach morecustomers, diversity in our markets so our business has a broader base anddiversity in our people, so we can have the best available talent working forus. Our customer base has increased from seven million customers in 2003 to 12million today. Income has increased from $4.7 billion in 2003 to $6.9 billion in2005. The Group is growing rapidly, organically and through strategic alliancesand acquisitions and has expanded from 450 branches in 2003 to 1,200 today. The scale of Standard Chartered is changing. Performance During 2005 the Group made significant financial progress. Profit before tax,including SCFB, was $2,681 million, a 19 per cent increase from $2,251 millionin 2004. Normalised earnings per share saw an increase of 23 per cent to 153.7 cents and normalised return on equity was 18.0 per cent. We intend to be knownas a Group that delivers good results and also as one that is creating a robustfuture. China and India These two major economies already make a good contribution to our performanceand we are excited about our future in these markets. Our network in Indiacovers 31 cities with a combined population in excess of 76 million. India is acountry with major potential, not just for Standard Chartered, but for the worldeconomy. Though increasing competition has led to short term margin erosion insome product areas, we are confident that Standard Chartered is well positionedto realise the potential offered by this dynamic market. We have been investingin new branches, ATMs, people, infrastructure and new businesses, includinglaunching a new consumer finance business. In China, in 2005 the income from our organic business grew over 80 per cent andwe increased the number of directly employed staff by more than 40 per cent to1,200. Our network now covers 14 cities with a combined population of over 100million. The Consumer Banking business now offers services in five out of theten largest cities in China, including Shanghai and Beijing. While managing aprofitable business today we are also preparing for the future. Of our recentgraduate intake from China, 25 per cent are currently on assignment in othercountries, developing broader skills and perspectives to take back to theirmarket in due course. SC First Bank, Korea In Korea, we re-branded all 407 branches, 2,100 ATMs and seven kilometres ofsignage as SC First Bank over one weekend and the Standard Chartered branch hasbeen integrated into the SC First Bank network. The leadership team isexperienced, established and is a balance of local and international executives.It is Standard Chartered's intent to be a leader in the Korean financialservices industry. The speed and success of the integration reflects the talent, focus andcommitment of our Korean staff. The Wholesale Banking business in Korea is progressing well. We have an enhancedproduct portfolio and a fully operational dealing room. In Consumer Bankingin Korea we have launched 12 new products, including the 'Welcome Back' mortgagecampaign - which featured a one month interest waiver, and brought in 38,000new accounts and $4 billion of new mortgage sales. When this acquisition was announced we said it would be EPS accretive in 2006and we are very pleased to have met this target on a normalised basis in thesecond half of 2005. We are at the early stages of our journey but we have made a great start. Koreais a huge market and we are in a good position for the future. Consumer Banking In Consumer Banking, operating profits were up 21 per cent on last year, andincome up 41 per cent. This performance reflects very good momentum in theunderlying business, excellent post-acquisition progress in Korea anddisciplined management of risk and costs. Excluding SCFB, operating profit wasup 8 per cent and income was up 16 per cent. Expansion of our Consumer Bankingcustomer segments and products continues and despite pressure on mortgagemargins, the increased breadth and balance has meant that, overall, the businessperformed well. We are investing for the future, developing new products and client coverage,and increasing our sales channels. During 2005, there were over 240 productlaunches across our franchises including e-Saver, My Dream Account and LinkOne. Our branch 'footprint' is rapidly expanding and we now have 1,200 branches.This growth has been fuelled by Korea, where the number of branches hasincreased to over 400; Indonesia, where, through our stake in Permata, we nowhave over 300 and in Pakistan and the Middle East, where we have doubled ourbranch network in the past two years. Consumer Banking has increasingly balanced earnings streams. Its focus onwealth management and SME is paying dividends. Wholesale Banking We are continuing to make good progress with our Wholesale Banking business.Operating profits for 2005 were up 22 per cent on 2004, with income up 19 percent. Excluding SCFB, operating profit was up 15 per cent and income was up 11per cent. Client income growth was strong at 19 per cent and was well balancedacross geographies, products and client segments. We have seen strong growth inmost key markets, but results have been impacted by Zimbabwe's economicproblems. Our client-led strategy continues to drive performance in key markets and acrosskey products. We are investing for sustainable growth, extending our productreach and increasing our global markets capabilities. We have expanded ourfranchise in a number of markets and strengthened local corporate teams.Previous investments in key product areas, such as in debt capital markets andcorporate finance, are paying off with excellent growth across all clientsegments. Proactive risk management has been complemented by a benign credit environmentwith strong recoveries resulting in a net release. We are continuing to investin regulatory compliance, control infrastructure, risk management and technology. Overall, 2005 was a good year in terms of performance. The Group is now engagedon reaching its goals for 2006 and we have set out our management agenda. Management Agenda 2006 • To accelerate growth in both businesses, by focusing on prioritymarkets and extending our geographic and customer reach. • In Wholesale Banking we will deepen client relationships andcross-sell more. • In Consumer Banking we will enter new customer segments, such asprivate banking and consumer finance. • Korea is a huge opportunity and, therefore, a continuedpriority. We will drive growth and performance. • Across the Group we will accelerate improvements in service andinnovation. • It remains our intent to lead by example in corporateresponsibility. Our programmes on diversity, environment, to help fightblindness, HIV and malaria, are important to the communities where we operate,differentiate our brand and make a difference to current and prospectiveemployees. Looking forward There are changing trends in demographics worldwide, which will inevitablyinfluence our business going forward. In five years time there will be over 100million people in China aged over 65 and, in India, over 350 million under theage of 15. These types of changes have major implications for our business. Wewill see increased product segmentation, as different age groups have verydifferent aspirations and we will have to think deeply about how we develop ourbrand in different markets. The environment is becoming a major agenda item for all businesses. In marketswhere we operate there are concerns about energy, air quality, even water, whichmay impact on our customer base. We have to pay new attention to resources - tohow we as a business are using them, to our lending policies around them and toour participation in the debates on the future economic impacts of these issues. Transparency is another evolving area that affects our business. Moreinformation, moving at higher speeds, in many ways presents excitingopportunities for us, for our employees and our customers. Equally, regulatoryrequirements and pressures are increasing and create something of a burden,despite the positive motivations behind them. These are some of the subjects on which we are focusing our thoughts. Werecognise that to ensure continued performance we need to be thinking ahead. We believe there are three major capabilities we must have to meet futurechallenges. We must have a real understanding of our customers. We must have theability to innovate and create the right environment for innovation to happen.In order to do that we must be able to develop the right quality of people. Being close to our customers is key and our customer knowledge is increasing allthe time. The Group's Outserve initiative is making great progress in reachingour customers and understanding their needs. We carry out world-wide research,providing us with over three million data points from more than 25,000respondents. In Consumer Banking, our survey carried out in 22 countries toldus that in 2005, 80% of customers were 'loyal and positive'. This number was upon the previous year, and the increase equates to an additional 400,000 'loyaland positive' customers - which is very encouraging for us. Our brand promise is to be 'The Right Partner, Leading By Example'. Customerfeedback is at the centre of everything we do. Listening to customers helps usgenerate new ideas. For example in response to customer feedback we launchedour online cheque template - the e-Cheque - in Singapore. Early take up isencouraging and we have patented it. This is one example of increasinginnovation in the Bank and of the type of product that changes the marketplace. As well as customer driven innovation, speed to market is critical. The Group'swork in technology in recent years means we have reduced development times andstill maintain the stringent checks expected of a bank. For example, weimplemented our consumer finance platform in India in just 72 days. To Outserve our customers and to drive innovation we need good people. Happily,the Group is increasingly a magnet for talent. The growing economies andexciting markets where we do business are appealing to many high calibreindividuals. Through our graduate development programme we recruit and grow thetalent we need for the long term. The 2006 international graduate programme hasreceived over 40,000 applications, including over 19,000 from China. Across theGroup we are developing an increasingly international, mobile, talented youngworkforce. We are committed to talent development and have a company wide process thatidentifies talent at all levels and allows us to accelerate the development ofthe best. In 2005, for example, nearly 40 per cent of our high potentialemployees had some form of job development move and 16 per cent wereinternational assignments. In our established workforce, turnover of highperformers and high potential staff is low. Last year 80 per cent of seniormanagement appointments were made from within the Group. Having the right people remains key to supporting our continued growth. Webelieve our investment in people now will give us real competitive edge goingforward. We are working hard to 'Lead the Way' in the areas which will underpin ourbusiness performance now and in the future. Outlook In 2005, the Group achieved a good financial performance and made significantstrategic progress. The outlook for 2006 is promising. Whilst we can never beimmune to external shocks, we anticipate double-digit income growth across theGroup as a whole. Our strength, diversity and breadth give us resilience andflexibility. The Consumer Banking and Wholesale Banking businesses, including SCFirst Bank, have good momentum and we are well positioned to leverage theopportunities available to us in our markets. We will maintain our disciplined approach to managing expenses. We will continueto focus on improving productivity and sustain our investment in new products,new capabilities and expanded distribution. Expense growth will be broadly inline with income growth for the full year. We will dynamically manage the pace of investment spend through the yearfactoring in both the risk environment as well as the performance. We will continue to manage risks proactively. In Consumer Banking, we expectloan impairment charges will tend to grow in line with the size and mix of theoverall book though Taiwan will continue to present some challenges. ForWholesale Banking, while the credit environment in most of our markets remainsbenign, we are somewhat cautious on the credit outlook. Moreover, the level ofrecoveries and releases achieved in 2005 will not recur in 2006. Consequently,we expect Wholesale Banking will revert to having a net charge in 2006. In summary Standard Chartered is making good progress. We are clear on our strategy andwell positioned to take advantage of the many opportunities in our markets. Mervyn Davies, CBE Group Chief Executive 2 March 2006 GROUP SUMMARY The Group has continued its strong performance trajectory with another good setof results for the year ended 31 December 2005. Operating profit before tax of$2,681 million was up 19 per cent over the same period in 2004. Normalisedearnings per share has increased by 23 per cent to 153.7 cents. (Refer to note 5on page 35 for the details of basic and diluted earnings per share). On 15 April 2005 the Group acquired 100 per cent of Korea First Bank (KFB). On10 September 2005 KFB was renamed SC First Bank (SCFB) and on 28 November 2005 the assets and businesses of theStandard Chartered branch in Korea were transferred to SCFB. The impact of thepost acquisition results of SCFB in the 2005 results, together with significantone-off items affecting the 2004 results, make the comparability of the fullyear results to December 2005 with the equivalent period in 2004 complex. Thetable below therefore sets out underlying results for the two years excludingthese two components. 2005 2004 SCFB Underlying As *One off Underlying As $m $m reported items $m reported $m $m $mNet interest income 781 3,554 4,335 - 3,182 3,182Fees and commissions income, 29 1,466 1,495 - 1,332 1,332netNet trading income 23 746 769 - 651 651Other operating income 26 236 262 108 109 217 78 2,448 2,526 108 2,092 2,200Operating income 859 6,002 6,861 108 5,274 5,382Operating expenses (579) (3,232) (3,811) (23) (2,826) (2,849)Operating profit 280 2,770 3,050 85 2,448 2,533before provisionsImpairment losses on (53) (266) (319) - (214) (214)loans and advancesOther impairment - (50) (50) (67) (1) (68)Operating profit before 227 2,454 2,681 18 2,233 2,251taxation * See note 5 on page 35. Operating Income and Profit Operating income, including SCFB, increased by 27 per cent to $6,861 millionover 2004. Of this increase, SCFB accounted for $859 million. Underlying incomegrowth excluding SCFB and 2004 one-off items was 14 per cent to $6,002 million.Both Consumer Banking and Wholesale Banking delivered double-digit income growthand business momentum remains strong across an increasingly broad range ofcustomer segments and markets. Net interest income grew by 36 per cent to $4,335 million. Underlying growth was12 per cent. Net interest margin was 2.5 per cent, down from 2.6 per cent in theprior year reflecting the impact of changes in geographic and product mix. Fees and commissions increased by 12 per cent to $1,495 million. Underlyinggrowth was 10 per cent driven mainly by higher volumes in wealth management,cash management and global markets products across most markets. Net trading income grew by 18 per cent to $769 million due to higher volumes offoreign exchange dealing by both Wholesale and Consumer Banking customers.Underlying growth was 15 per cent. Other operating income of $262 million increased by 21 per cent. Excludingone-off items in 2004 from the sale of shares in KorAm and Bank of China (HongKong), growth was strong on the back of structured transactions and sales ofavailable-for-sale securities within the asset and liability management (ALM)portfolio. Operating expenses increased from $2,849 million to $3,811 million. Of thisincrease, $579 million was due to the inclusion of SCFB. Underlying expense growth was 14 per cent, in line with underlying income growthfor the full year. The normalised cost income ratio was 54.5 per cent (2004:54.0 per cent) on a headline basis including SCFB, but on an underlyingnormalised basis has improved to 53.0 per cent (2004: 54.0 per cent). The Grouphas continued to invest in both Consumer Banking and Wholesale Banking in orderto sustain the double-digit client led income growth. Such investments weredirected primarily at new market entry, new products, reinforced capabilities,expanded client coverage, increased distribution and improvements to technologyand infrastructure to support new and rapidly growing markets. Impairment losses on loans and advances rose by 49 per cent from $214 million to$319 million, an increase of $105 million of which SCFB accounted for $53million. The underlying increase in impairment losses was 24 per cent reflecting assetgrowth in Consumer Banking, a deterioration in the Taiwan consumer creditenvironment and movements in portfolio provisioning under IFRS. WholesaleBanking continued to benefit from a benign credit environment, the successfulconclusion of the Loan Management Agreement in Thailand and strong recoveries.Other impairment includes provisions made in 2005 for exposures in Zimbabwe. CONSUMER BANKING Including the acquisition of SCFB, Consumer Banking grew operating profit by 21per cent to $1,278 million compared to 2004. Of the $220 million increment inprofit, SCFB accounted for $137 million. Underlying growth was eight per cent. Consumer Banking has maintained strong income momentum with income up 41 percent to $3,807 million. SCFB accounted for $671 million or 61 per cent ofConsumer Banking's total income growth of $1,107 million. Underlying income wasup 16 per cent to $3,136 million. Underlying income growth was driven by volumeand fee income growth across almost all product lines, strong growth in customerbalances, particularly deposits and the contribution from business segments suchas consumer finance and small and medium enterprises (SME) loans. Businessesacquired in 2004, including Prime Credit and Bank Permata, contributed to incomeand profit growth. Excluding SCFB, customer liabilities saw double-digit growth year on year whileassets grew four per cent. Deposit growth was particularly strong in Hong Kong,Singapore and Other Asia Pacific Region (Other APR). On an underlying basis excluding SCFB, expense growth was broadly in line withincome growth at 15 per cent for the year. This expense growth includedinvestment expenditure in new products, extended client coverage, enhancedinfrastructure, increased compliance costs and investment in new businesses.Total expenses in Consumer Banking grew by $701 million with SCFB accounting for$486 million. Overall, Consumer Banking's impairment losses on loans and advances rose to $425million from $242 million in 2004. This reflects the impact of asset growthoutside Korea, inclusion of SCFB, movements in portfolio provisions under IFRSand deterioration in the Taiwan consumer credit environment. The underlyingimpairment charge has risen 20 bps to one per cent of average customer assetslargely as a result of changes in portfolio mix and the deteriorating creditenvironment in Taiwan, where the banking industry as a whole has beensignificantly affected by a strong increase in consumer default rates. ConsumerBanking anticipated this deterioration and took action to mitigate exposure.Nonetheless, the Consumer Banking loan impairment charge in Taiwan increased to$98 million in 2005 from $26 million in 2004. Consumer Banking in Taiwan hascustomer assets of approximately $1.3 billion as at 31 December 2005. We expectTaiwan to remain challenging through 2006. Hong Kong delivered an increase in operating profit of 17 per cent to $540million. Income growth was four per cent. Operating expenses were lower than in2004 as a result of the actions taken to reconfigure the cost base. Thisresulted in pre-impairment profit growth of seven per cent. Responding to therising interest rate environment, the business has put greater focus onto wealthmanagement and SME, by successfully launching several new products and achievinggrowth in customer liabilities. The acquisition of Prime Credit in 2004 has beena great success with performance well ahead of plan. Asset portfolios continueto perform well with a 56 per cent reduction in the loan impairment chargecompared to the prior period. In Singapore, income was down two per cent in 2005 with strong growth in wealthmanagement and SME largely offsetting the sharp decline in mortgage margins. Mortgage margins reduced by nearly half on a full year basis. The successfullaunch of a new on-line savings product, together with good growth in investmentservices resulted in strong wealth management income growth. Operating profit before provisions was up 28 per cent in Malaysia on the back ofa 19 per cent rise in income and moderate expense growth focused on buildinginfrastructure and expanding distribution. Good balance sheet growth, newproducts, a developing Islamic banking presence and better fee income coupledwith productivity improvements all contributed to a strong performance forConsumer Banking. Loan impairment charges rose from $14 million to $37 millionprimarily due to attributing portfolio provision movements under IFRS. In the eight and a half months since acquisition, the Consumer Banking divisionof SCFB earned $137 million of operating profit on income of $671 million. Withthe expansion of the product range since acquisition there has been good volumegrowth, particularly in wealth management with a significant growth in deposits.The cards and loans portfolios and mortgage portfolio have also enjoyed robustasset growth although moderate mortgage margin contraction has continued duringthe second half of the year. Expenses were higher in the second half, asanticipated, reflecting integration costs, re-branding and investment in productcapabilities. Other APR had income growth of 55 per cent driven by strong balance sheet growthin all product segments and continued investment in expanding sales forces, newbranches and new products. Bank Permata in Indonesia accounted for $69 millionof income and $9 million of profit before tax. China enjoyed very strong organicgrowth in all major products delivering a threefold increase in income. Thailandcontinues to perform very well with increasingly diversified income and balancesheet growth. Impairment provisions increased by $100 million, of which $72million was in Taiwan. India's very strong income growth in wealth management and SME was offset inpart by lower growth in mortgages and a small decline in unsecured lending dueto eroding margins resulting in an overall income growth of 10 per cent. TheConsumer Business has continued to diversify its income streams withdouble-digit balance sheet growth in all business lines except credit cards.Continued investment spending underpinned a 17 per cent overall increase inexpenses directed towards opening five new branches, the launch of six consumerfinance business centres, new investment and insurance products and a continuedstrengthening of the risk and control infrastructure. Whilst there are near termchallenges in profitability, Consumer Banking remains focused on building asubstantial franchise in this fast growing and highly competitive market. Operating profit in the Middle East and Other South Asia (MESA) increased by 23per cent to $163 million with income up by 28 per cent to $378 million. Thiscontinued strong year on year momentum was led by wealth management, creditcards and SME. Investment in sustaining this growth trajectory resulted in a 26per cent increase in expenses, with a focus on strengthening distribution,product and people capabilities. The global Consumer Banking business model isnow embedded in these rapidly growing markets. CONSUMER BANKING continued In the United Arab Emirates (UAE), Consumer Banking grew income 27 per cent to$158 million driven by wealth management, SME and credit cards. As new productscontinue to be launched, volume growth on both sides of the balance sheetremains robust. In Africa, operating profit more than doubled as a result of broad based incomegrowth of 18 per cent and expense growth contained to just five per cent,benefiting from productivity gains and prior year investments. Asset growth of26 per cent reflected an increasing market demand for borrowing. The Americas, UK and Group Head Office saw a decrease in operating profit from$19 million to $9 million largely driven by lower income as a result of thereconfiguration of the Jersey business. The following tables provide an analysis of operating profit by geographicsegment for Consumer Banking: 2005 Asia Pacific Korea Other $m Asia Hong Pacific Kong $m $m Singapore Malaysia $m $mIncome 989 322 209 695 611Expenses (415) (126) (95) (505) (342)Loan impairment (34) (30) (37) (56) (166)Other impairment - - - - -Operating profit 540 166 77 134 103 2005 *Middle Americas UK & Consumer Banking East & Group Total India Other Head $m $m S Asia Office $m Africa $m $mIncome 285 378 257 61 3,807Expenses (179) (182) (205) (52) (2,101)Loan impairment (56) (33) (13) - (425)Other impairment - - (3) - (3)Operating profit 50 163 36 9 1,278 2004 Asia Pacific Korea Other Asia Hong $m Pacific Kong $m $m Singapore Malaysia $m $mIncome 954 330 175 7 393Expenses (416) (117) (86) (12) (225) Specific (88) (40) (18) - (69) General 11 6 4 - 3Loan impairment (77) (34) (14) - (66)Operating profit 461 179 75 (5) 102 2004 *Middle Americas UK & Consumer East & Group Banking Other Head Total S Asia Office $m India $m Africa $m $m $mIncome 258 296 218 69 2,700Expenses (153) (144) (196) (51) (1,400) Specific (29) (21) (6) - (271) General 2 2 - 1 29Loan impairment (27) (19) (6) 1 (242)Operating profit 78 133 16 19 1,058 * Middle East and Other S Asia includes UAE income of $158 million (2004: $124million), expenses of $67 million (2004: $51 million), loan impairment of $21million (2004: $9 million) and operating profit of $70 million (2004: $64million). An analysis of Consumer Banking income by product is set out below: 2005 2004Income by product Total SCFB Underlying $m $m $m $mCards and Loans 1,526 248 1,278 1,117Wealth Management and Deposits 1,442 212 1,230 891Mortgages and Auto Finance 764 207 557 638Other 75 4 71 54 3,807 671 3,136 2,700 CONSUMER BANKING continued Including SCFB, cards and loans have delivered a solid 37 per cent increase inincome to $1,526 million. Underlying income and assets have increased 14 percent and 17 per cent respectively in a highly competitive market environmentwith lower net interest margins broadly offset by higher fee income. Cards andloans enjoyed strong growth in Malaysia, Other APR, MESA and Africa. In HongKong three per cent growth year on year was achieved, reversing the previousdeclining trend in balances. Growth accelerated in the second half as successfulnew campaigns were rolled out for the Manhattan brand, cashback and balancebuilding, leveraging the new positive file credit bureau. In wealth management, underlying double-digit deposit growth and improvedmargins have been the primary drivers of a 62 per cent growth in income to$1,442 million. The primary contributors being Singapore, India, Other APR andMESA. Product innovation, expanded distribution and effective sales andmarketing campaigns have boosted both core deposit volumes and fee basedinvestment product sales. Total mortgage and auto finance income is up 20 per cent at $764 million.Underlying income is lower by 13 per cent reflecting significant mortgage margincompression in Hong Kong, Singapore and India. Proactive re-pricing strategieshave helped to offset some of this margin compression together with very goodvolume growth in Other APR. WHOLESALE BANKING In 2005 Wholesale Banking continued to execute its highly successful client-ledstrategy, driving sustained income momentum in all key client segments andacross multiple products and geographies. Including SCFB, operating profit wasup 22 per cent to $1,439 million. Underlying profit growth increased 15 per centto $1,349 million. Total income growth was 19 per cent to $3,054 million. Underlying income growthof 11 per cent to $2,866 million was achieved through client revenue growth of19 per cent, driven by balanced growth across local corporates and large localcorporates, multinationals and financial institutions. Global markets productstogether with cash and custody were the principal contributors to the continuedstrong growth in Wholesale Banking client revenues. Own account ALM and tradingrevenues were adversely affected by a rising interest rate environment and aflat yield curve. Expenses in Wholesale Banking increased by 20 per cent to $1,710 million.Underlying expense growth was 13 per cent. Investment spend focused on enhancingglobal market product capabilities and client coverage with an emphasis oncorporate finance and capital markets and the high growth markets of India,China and the UAE. Higher transaction volumes plus continued upgrading of thetechnology and operations infrastructure and preparation for Basel II made upthe balance. The net loan impairment release in 2005 was $106 million compared to $28 millionin the prior period. New provisions increased by three per cent and recoverieswere up by 60 per cent. The following tables provide an analysis of operating profit by geographicsegment for Wholesale Banking: 2005 Asia Pacific Korea Other $m Hong Asia Kong Pacific $m Singapore Malaysia $m $m $mIncome 523 188 124 259 443Expenses (234) (120) (55) (127) (268)Loan impairment (83) (13) 7 (5) 117Other impairment (1) - - - -Operating profit 205 55 76 127 292 2005 *Middle East & Americas Wholesale Banking Other Total S Asia UK & $m $m India Africa Group $m $m Head Office $mIncome 305 430 294 488 3,054Expenses (127) (157) (194) (428) (1,710)Loan impairment 6 42 (30) 65 106Other impairment 1 - (8) (3) (11)Operating profit 185 315 62 122 1,439 2004 Asia Pacific Korea Other Asia Hong $m Pacific Kong $m $m Singapore Malaysia $m $mIncome 416 183 95 63 362Expenses (226) (111) (58) (29) (252) Specific (54) (2) 11 3 19 General 6 3 1 - 4Loan impairment (48) 1 12 3 23Other impairment - - - - -Operating profit 142 73 49 37 133 2004 *Middle East & Americas Wholesale Other Banking S Asia UK & Total $m Group $m India Africa Head $m $m Office $mIncome 231 352 366 506 2,574Expenses (98) (125) (164) (363) (1,426) Specific 3 13 (6) 15 2 General 2 4 - 6 26Loan impairment 5 17 (6) 21 28Other impairment 2 - - (3) (1)Operating profit 140 244 196 161 1,175 * Middle East and Other S Asia includes UAE income of $173 million (2004: $147million), expenses of $66 million (2004: $49 million), loan impairment recoveryof $1 million (2004: recovery of $8 million) and operating profit of $108million (2004: $106 million). WHOLESALE BANKING continued When looking at the performance of Wholesale Banking on a geographic basis it isimportant to note that it is a network business, with about half of clientrevenues originated in a different geography than where they are booked. Thismeans the geographic segmentation can give a somewhat imperfect view of theperformance of different parts of the business. In Hong Kong, income grew by 26 per cent to $523 million as the increased focuson the local corporates segment yielded good results. Global markets and cashproducts generated strong growth in volumes supported by improved margins.Expenses grew four per cent to $234 million with most of this increase directedtowards building the sales force and product capabilities to deepen incomegeneration from existing client relationships. Income in Singapore was up three per cent to $188 million driven by transactionbanking together with global markets sales. Double-digit client income growthwas offset by a reduction in trading and ALM income. Singapore continues toincrease its franchise value, originating significant revenues for other partsof the network. Expenses grew eight per cent to $120 million reflectingincreased front office investments to sustain the strong client revenuemomentum. In Malaysia, income increased 31 per cent to $124 million with global marketsproducts now contributing 64 per cent of the total. The business achieved stronggrowth in the large local corporate sector. Expenses were lower by five per centat $55 million. The Wholesale Banking business in SCFB earned $90 million of operating profit onincome of $188 million. Income and volumes of global markets product sales,together with cash management and custody grew in the second half as thesignificant investment in more sophisticated products, new skills andinfrastructure began to deliver benefits. Other APR continued to deliver strong growth in income and profits from allcountries with significant contributions from China, Indonesia and Taiwan.Income increased 22 per cent to $443 million and expenses grew six per cent to$268 million. India's income grew 32 per cent to $305 million with client income growing at aneven higher rate offset by lower trading and ALM income. Growth was balancedacross all target segments with transactional banking and global marketsproducts leading the way. Expenses grew 30 per cent to $127 million, withcontinued investment in geographic expansion to sustain the momentum amongstlocal corporates. Operating profit in the Middle East and Other South Asia grew by 29 per cent to$315 million. Income rose 22 per cent to $430 million and expenses 26 per centto $157 million. Client revenues enjoyed very strong growth in cash, capitalmarkets and corporate finance products. Within this total the Wholesale Bankingbusiness in the the UAE grew income by 18 per cent. In Africa, income at $294 million was 20 per cent lower than in the prior year.A marked deterioration in Zimbabwe was the primary contributor to this result.2005 saw Zimbabwe suffer from high inflation and very rapid currencydepreciation, particularly in the fourth quarter. Elsewhere in Africa, WholesaleBanking saw robust income growth in Nigeria, Ghana and Tanzania, driven by cashmanagement, trade, and corporate finance. The Americas, UK and Group Head Office has seen income decline by four per centto $488 million mainly as a result of lower income from asset and liabilitymanagement. Expense growth of 18 per cent reflects the full year impact of theproject finance business acquired at the end of 2004, which originates revenueslargely booked elsewhere, together with significant investment in compliance andcontrol infrastructure. An analysis of Wholesale Banking income by product is set out below: 2005 2004 Income by product Total SCFB Underlying $m $m $m $mTrade and Lending 879 69 810 868Global Markets 1,434 75 1,359 1,217Cash Management and Custody 741 44 697 489 3,054 188 2,866 2,574 Trade and lending income increased one per cent overall to $879 million anddecreased by seven per cent on an underlying basis due to lower lending income.Trade finance income grew three per cent reflecting the increasedcompetitiveness in pricing and a shift to integrated supply chain financing tosupport strong intra-Asian trade flows. Global markets income grew strongly at 18 per cent overall to $1,434 million and12 per cent on an underlying basis. The enhanced product set, including FX options, fixed income and project andexport finance, has made a significant contribution to this growth. Income fromALM has fallen due to the flat yield curves and rising interest rates prevalentin most markets, particularly in the second half. Cash management and custody income was up by 52 per cent at $741 million.Underlying growth was also very strong at 43 per cent driven by volume andmargin growth. ACQUISITION OF SC FIRST BANK (formerly Korea First Bank) On 15 April 2005 the Group acquired 100 per cent of SCFB. The post-acquisitionprofit has been included in the Group results within the Korea geographicsegment. The following tables provides an analysis of SCFB's post acquisitionresults by business segment:Consumer Banking 2005 2004 Total SCFB Underlying $m $m $m $mIncome 3,807 671 3,136 2,700Expenses (2,101) (486) (1,615) (1,400)Loan impairment (425) (48) (377) (242)Other impairment (3) - (3) -Operating profit 1,278 137 1,141 1,058 SCFB Consumer Banking income was broadly based with margin, volume and feeincome growth in wealth management and SME banking. Mortgage and unsecuredlending volumes have continued to grow but margin compression impacted incomegrowth.Wholesale Banking 2005 2004 Total SCFB Underlying $m $m $m $mIncome 3,054 188 2,866 2,574Expenses (1,710) (93) (1,617) (1,426)Loan impairment 106 (5) 111 28Other impairment (11) - (11) (1)Operating profit 1,439 90 1,349 1,175 SCFB Wholesale Banking income is being generated by a broader product set andclient base. New global markets products and cash management are now drivinggrowth while balance sheet reshaping continues in lending.Korea segment - Total 2005 2004 Total SCFB Underlying $m $m $m $mIncome 954 859 95 70Expenses (632) (579) (53) (41)Loan impairment (61) (53) (8) 3Operating profit 261 227 34 32 Operating profit from SCFB for the eight and a half months since taking controlon 15 April 2005 was $227 million. Operating income for the period was $859million, expenses were $579 million and loan impairment was $53 million. RISK Through its risk management structure the Group seeks to manage efficiently thecore risks: credit, market, country and liquidity risk. These arise directlythrough the Group's commercial activities whilst compliance and regulatory risk,operational risk and reputational risks are normal consequences of any businessundertaking. The basic principles of risk management followed by the Group include: • ensuring that business activities are controlled on the basis of riskadjusted return; • managing risk within agreed parameters with risk quantified whereverpossible; • assessing risk at the outset and throughout the time that we continue to beexposed to it; • abiding by all applicable laws, regulations and governance standards inevery country in which we do business; • applying high and consistent ethical standards to our relationships with allcustomers, employees and other stakeholders; and • undertaking activities in accordance with fundamental control standards.These controls include the disciplines of planning, monitoring, segregation,authorisation and approval, recording, safeguarding, reconciliation andvaluation. Risk Management Framework Ultimate responsibility for the effective management of risk rests with theCompany's Board. Acting with authority delegated by the Board, the Audit andRisk Committee (ARC), whose members are all Non-Executive Directors of theCompany, reviews specific risk areas and monitors the activities of the GroupRisk Committee (GRC) and the Group Asset and Liability Committee (GALCO). GRC, through authority delegated by the Board, is responsible for credit risk,market risk, operational risk, compliance and regulatory risk, legal risk andreputational risk. GALCO, through authority delegated by the Board, isresponsible for liquidity risk, for structural interest rate and foreignexchange exposures and for capital ratios. All the Group Executive Directors (GEDs) of Standard Chartered PLC, members ofthe Standard Chartered Bank Court and the Group Head of Risk and Group SpecialAsset Management (Group Head of Risk) are members of the GRC. This Committee ischaired by the Group Head of Risk and Group Special Assets Management (GSAM).The GRC is responsible for agreeing Group standards for risk measurement andmanagement, and also delegating authorities and responsibilities to riskcommittees and the Group and Regional Credit Committees and Risk Officers. The committee process ensures that standards and policy are cascaded downthrough the organisation from the Board through the GRC and the GALCO to thefunctional, regional and country level committees. Key information iscommunicated through the country, regional and functional committees to Group soas to provide assurance that standards and policies are being followed. The Group Finance Director and the Group Head of Risk manage an independent riskfunction which: • recommends Group standards and policies for risk measurement and management; • monitors and reports Group risk exposures for country, credit, market andoperational risk; • approves market risk limits and monitors exposure; • sets country risk limits and monitors exposure; • chairs the credit committee and delegates credit authorities; • validates risk models; and • recommends risk appetite and strategy. Individual GEDs are accountable for risk management in their businesses andsupport functions and for countries where they have governance responsibilities.This includes: • implementing the policies and standards as agreed by the GRC across allbusiness activity; • managing risk in line with appetite levels agreed by the GRC; and • developing and maintaining appropriate risk management infrastructure andsystems to facilitate compliance with risk policy. The Group's Risk Management Framework identifies 18 risk types which are managedby designated Risk Type Owners (RTOs) who are all approved persons under the FSAregulatory framework and have responsibility for setting minimum standards andgovernance and assurance processes. The RTOs report up through specialist riskcommittees to the GRC, or in the case of Liquidity Risk, to the GALCO. The Group Finance Director and the Group Head of Risk, together with GroupInternal Audit, provides independent assurance that risk is being measured andmanaged in accordance with the Group's standards and policies. Credit Risk Management Credit risk is the risk that a counterparty will not settle its obligations inaccordance with agreed terms. Credit exposures include individual borrowers and connected groups ofcounterparties and portfolios in the banking and trading books. Clear responsibility for credit risk is delegated from the Board through to theGRC. Standards are approved by the GRC which also delegates credit authoritiesthrough the Group Finance Director to the Group Head of Risk, the Group andRegional Credit Committees and independent Risk Officers at Group and at theWholesale Banking and Consumer Banking business levels. Procedures for managing credit risk are determined at the business levels withspecific policies and procedures being adapted to different risk environment andbusiness goals. The Risk Officers are located in the businesses to maximise theefficiency of decision making, but have an independent reporting line into theGroup Head of Risk. The businesses working with the Risk Officer, take responsibility for managingpricing for risk, portfolio diversification and overall asset quality within therequirements of Group standards, policies and business strategy. RISK continued Wholesale Banking Within the Wholesale Banking business, a numerical grading system is used forquantifying the risk associated with a counterparty. The grading is based on aprobability of default measure with customers analysed against a range ofquantitative and qualitative measures. There is a clear segregation of dutieswith loan applications being prepared separately from the approval chain.Significant exposures are reviewed and approved centrally through a Group orRegional level Credit Committee. These Committees receive their authority anddelegated responsibilities from the GRC. Consumer Banking For Consumer Banking, standard credit application forms are generally used which are processed in central units using manual or automatedapproval processes as appropriate to the customer, the product or the market. Aswith Wholesale Banking, origination and approval roles are segregated. Loan Portfolio Loans and advances to customers have increased by 55 per cent during the year to$112.2 billion. Of this increase, SCFB accounts for $31.2 billion (28 per cent). The Wholesale Banking portfolio is well diversified across both geography andindustry, with no significant concentration to sub-industry classificationlevels under manufacturing, financing, insurance and business services, commerceor transport, storage and communication. 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mLoans to individuals Mortgages 12,051 4,129 2,532 22,522 996 Other 2,154 1,043 663 3,954 3,145Small and medium enterprises 791 1,673 794 4,727 989Consumer Banking 14,996 6,845 3,989 31,203 5,130Agriculture, forestry 24 - 44 9 110and fishingConstruction 91 48 11 90 64Commerce 2,004 958 325 237 598Electricity, gas and water 290 1 65 17 284Financing, insurance and 1,425 925 589 1,135 1,065business servicesLoans to governments - 2,323 1,976 66 101Mining and quarrying 24 11 8 19 140Manufacturing 1,223 302 344 1,702 2,955Commercial real estate 1,194 834 3 797 555Transport, storage 320 235 240 80 304and communicationOther 50 85 49 750 11Wholesale Banking 6,645 5,722 3,654 4,902 6,187Portfolio impairment provision (57) (26) (30) (68) (107)Total loans and advances 21,584 12,541 7,613 36,037 11,210to customersTotal loans and advances 5,688 2,431 173 3,222 2,213to banks 2005 India *Middle Africa Americas Total $m East & $m UK & Group $m Other Head S Asia Office $m $mLoans to individuals Mortgages 1,469 132 88 152 44,071 Other 947 2,001 525 158 14,590Small and medium enterprises 332 78 107 - 9,491Consumer Banking 2,748 2,211 720 310 68,152Agriculture, forestry 17 25 183 234 646and fishingConstruction 139 223 41 6 713Commerce 392 1,324 420 819 7,077Electricity, gas and water 49 180 12 664 1,562Financing, insurance and 502 1,235 168 1,842 8,886business servicesLoans to governments - 70 7 331 4,874Mining and quarrying 10 185 75 656 1,128Manufacturing 1,019 1,210 402 2,186 11,343Commercial real estate 61 5 13 18 3,480Transport, storage 108 452 174 1,477 3,390and communicationOther 5 257 46 40 1,293Wholesale Banking 2,302 5,166 1,541 8,273 44,392Portfolio impairment provision (33) (29) (10) (7) (367)Total loans and advances 5,017 7,348 2,251 8,576 112,177to customersTotal loans and advances 238 1,255 313 7,426 22,959to banks * Middle East and Other S Asia includes the following amounts relating to theUAE: Consumer Banking, $915 million (2004, $832 million) Wholesale Banking$2,448 (2004, $2,300 million), total loans and advances to customers, $3,363million (2004, $3,132 million), and total loans and advances to banks, $391million (2004: $237 million). RISK continued 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mLoans to individualsMortgages 12,189 5,064 2,422 - 737Other 2,097 651 488 194 2,909Small and medium enterprises 731 1,622 578 - 200Consumer Banking 15,017 7,337 3,488 194 3,846Agriculture, forestry and fishing - 26 55 - 56Construction 154 27 6 - 34Commerce 1,560 804 136 31 864Electricity, gas and water 387 40 71 78 193Financing, insurance and 1,914 1,608 554 41 721business servicesLoans to governments - 306 1,551 - -Mining and quarrying - 65 63 - 122Manufacturing 1,343 423 269 316 2,196Commercial real estate 984 721 2 - 388Transport, storage and 366 280 128 134 187communicationOther 19 128 51 - 354Wholesale Banking 6,727 4,428 2,886 600 5,115General ProvisionTotal loans and advances 21,744 11,765 6,374 794 8,961to customersTotal loans and advances 2,852 2,072 349 1,646 1,705to banks 2004 India #*Middle Africa Americas #Total $m East & $m UK & Group $m Other Head S Asia Office $m $mLoans to individualsMortgages 1,194 87 63 262 22,018Other 1,201 1,928 431 102 10,001Small and medium enterprises 230 42 76 - 3,479Consumer Banking 2,625 2,057 570 364 35,498Agriculture, forestry and fishing 15 19 171 314 656Construction 105 239 46 4 615Commerce 262 1,202 353 1,113 6,325Electricity, gas and water 104 119 102 300 1,394Financing, insurance and 497 1,362 47 2,268 9,012business servicesLoans to governments - 16 7 225 2,105Mining and quarrying 1 149 95 1,032 1,527Manufacturing 814 1,267 404 2,294 9,326Commercial real estate - - 29 2 2,126Transport, storage and 226 299 165 1,177 2,962communicationOther 43 243 24 86 948Wholesale Banking 2,067 4,915 1,443 8,815 36,996General Provision (335) (335)Total loans and advances 4,692 6,972 2,013 8,844 72,159to customersTotal loans and advances 171 892 374 7,321 17,382to banks * Middle East and Other S Asia includes the following amounts relating to theUAE: Consumer Banking $915 million (2004: $832 million) Wholesale Banking $2,448(2004: $2,300 million), total loans and advances to customers, $3,363 million(2004: $3,132 million), and total loans and advances to banks, $391 million(2004: $237 million). # A reclassification of $997 million from Other to Small and medium enterprisesthat was made at 30 June 2005 (31 December 2004: $951 million) has beenreversed. Maturity analysis Approximately 47 per cent of the Group's loans and advances are short termhaving a contractual maturity of one year or less. The Wholesale Bankingportfolio is predominately short term, with 75 per cent of loans and advanceshaving a contractual maturity of one year or less. In Consumer Banking, 65 percent of the portfolio is in the mortgage book, traditionally longer term innature. Whilst the Other and SME loans in Consumer Banking have shortcontractual maturities, in the normal course of business they may be renewed andrepaid over longer terms 2005 2004 One year One to Over five Total One year One to Over five Total or less five years $m or less five years $m $m years $m $m years $m $m $mConsumer BankingMortgages 4,756 9,598 29,717 44,071 1,877 4,156 15,985 22,018Other 8,352 4,666 1,572 14,590 5,718 3,880 403 10,001SME 5,883 1,687 1,921 9,491 989 440 2,050 3,479Total 18,991 15,951 33,210 68,152 8,584 8,476 18,438 35,498Wholesale Banking 33,450 7,246 3,696 44,392 27,670 5,227 4,099 36,996Portfolio impairment provision (367) (335)Loans and advances to customers 52,441 23,197 36,906 112,177 36,254 13,703 22,537 72,159 RISK continued Problem Credit Management and Provisioning Consumer Banking An account is considered to be in default when payment is not received on thedue date. Accounts that are overdue by more than 30 days (60 days for mortgages)are considered delinquent. These accounts are closely monitored and subject to aspecial collections process. Accounts that are overdue by more than 90 days areconsidered non-performing. The process used for raising provisions is dependant on the product. Formortgages, individual provisions are generally raised at 150 days past due andfor other secured products at 90 days past due based on the difference betweenthe outstanding amount of the loan and the present value of the estimated futurecash flows. For unsecured products individual provisions are raised, and loansare charged off at 150 days past due. A portfolio impairment provision is held to cover the inherent risk of losses,which, although not identified, are known by experience to be present in theloan portfolio including performing loans and loans overdue. The provision isset with reference to past experience using flow rate methodology as well astaking account of judgemental factors such as the economic and businessenvironment in our core markets, and the trends in a range of portfolioindicators. The 2005 coverage ratio includes the Consumer Banking portfolio provisions uponadoption of IAS 39, whereas 2004 comparatives exclude the UK GAAP generalprovision. 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mLoans and advances 81 117 171 856 101Gross non-performingIndividual impairment provision (22) (31) (63) (310) (61)Non-performing loans net of 59 86 108 546 40individual impairment provisionPortfolio impairment provisionNet non-performing loansand advancesCover ratio 2005 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $mLoans and advances 53 22 17 29 1,447Gross non-performingIndividual impairment provision (13) (16) (9) (3) (528)Non-performing loans net of 40 6 8 26 919individual impairment provisionPortfolio impairment provision (278)Net non-performing loans 641and advancesCover ratio 56% 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mLoans and advances 72 146 181 - 94Gross non-performingImpairment provision (32) (24) (28) - (47)Interest in suspense (1) (4) (24) - (7)Net non-performing 39 118 129 - 40loans and advancesCover ratio 2004 India Middle Africa Americas Total $m East & $m UK & Group $m Other Head S Asia Office $m $mLoans and advances 42 42 24 46 647Gross non-performingImpairment provision (12) (22) (9) (5) (179)Interest in suspense (8) (15) (8) (7) (74)Net non-performing 22 5 7 34 394loans and advancesCover ratio 39% * Middle East and other S Asia includes net non performing loans and advancesnet of individual impairment provision relating to the UAE of $nil (2004: $1million). RISK continued Wholesale Banking In Wholesale Banking, accounts or portfolios are placed on Early Alert when theydisplay signs of weakness. Such accounts and portfolios are subject to adedicated process with oversight involving senior Risk Officers and GSAM.Account plans are re-evaluated and remedial actions are agreed and monitoreduntil complete. Remedial actions include, but are not limited to, exposurereduction, security enhancement, exit of the account or immediate movement ofthe account into the control of GSAM, the specialist recovery unit. Loans are designated as impaired and considered non-performing as soon aspayment of interest or principal is 90 days or more overdue or where recognisedweakness implies that full payment of either interest or principal becomesquestionable. Impaired accounts are managed by GSAM, which is independent of themain businesses of the Group. Where the principal, or a portion thereof, isconsidered uncollectible, an individual impairment provision is raised being thedifference between the loan carrying amount and the present value of estimatedfuture cash flows. In any decision relating to the raising of provisions, theGroup attempts to balance economic conditions, local knowledge and experienceand the results of independent asset reviews. Where it is considered that there is no realistic prospect of recovering anelement of an account against which an impairment provision has been raised,then that amount will be written off. A portfolio impairment provision is held to cover the inherent risk of losses,which, although not identified, are known by experience to be present in anyloan portfolio. The provision is not held to cover losses arising from futureevents. In Wholesale Banking, the portfolio impairment provision is set withreference to past experience using expected loss and judgemental factors such asthe economic environment and the trends in key portfolio indicators. The following tables set out the total non-performing portfolio in WholesaleBanking: 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mLoans and advances 355 125 36 156 133Gross non-performingIndividual Impairment provision (257) (109) (33) (51) (118)Non-performing loans and 98 16 3 105 15advances net of individual impairmentprovisionPortfolio impairment provisionNet non-performing loans and advances 2005 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $mLoans and advances 83 60 89 210 1,247Gross non-performingIndividual Impairment provision (27) (48) (51) (164) (858)Non-performing loans and 56 12 38 46 389advances net of individual impairmentprovisionPortfolio impairment provision (90)Net non-performing loans and advances 299 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mLoans and advances 409 185 117 1 557Gross non-performingImpairment provision (257) (89) (68) (1) (255)Interest in suspense (92) (56) (35) - (54)Net non-performing loansand advances 2004 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $mLoans and advances 68 175 104 674 2,290Gross non-performingImpairment provision (29) (100) (46) (435) (1,280)Interest in suspense (26) (68) (42) (127) (500)Net non-performing loans 510and advances * Middle East and other S Asia includes net non performing loans and advancesnet of individual impairment provision relating to the UAE of $nil (2004: $5million). RISK continued Wholesale Banking Cover Ratio At 76 per cent, the Wholesale Banking non-performing portfolio is well covered.The balance uncovered by impairment provision represents the value of collateralheld and/or the Group's estimate of the net value of any work-out strategy. The cover ratio as at December 2004 shown below was calculated on a UK GAAPbasis which included interest in suspense as part of the cover. Thenon-performing loans recorded below under Standard Chartered Nakornthon Bank(SCNB) are excluded from the cover ratio calculation as they were the subject ofa Loan Management Agreement (LMA) with a Thai Government Agency. Claims underthe LMA were settled in the first half of 2005 and accordingly the balancesreported under SCNB have reduced to nil in the 2005 table below. 2005 Total SCNB Total excl $m (LMA) LMA $m $mLoans and advances - Gross non-performing 1,247 - 1,247Impairment provision (948) - (948)Net non-performing loans and advances 299 - 299Cover ratio 76% 2004 Total SCNB Total excl $m (LMA) LMA $m $mLoans and advances - Gross non-performing 2,290 351 1,939Impairment provision (1,280) (115) (1,165)Interest in suspense (500) - (500)Net non-performing loans and advances 510 236 274Cover ratio 86% Movement in Group Individual Impairment Provision The following tables set out the movements in the Group's total individualimpairment provisions against loans and advances: 2005 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mProvisions held at 1 January 2005 289 113 96 1 302Adjusted for adoption of IAS 39 5 6 31 - 17Restated provision held at 294 119 127 1 3191 January 2005Exchange translation differences (7) (2) 1 4 (8)Amounts written off (156) (30) (58) (21) (204)Recoveries of amounts previously 49 6 11 5 36written offAcquisitions - - - 352 -Discount unwind (3) (3) (4) (28) (2)Other 1 - - - 19New provisions 165 92 62 57 153Recoveries/provisions (64) (42) (43) (9) (134)no longer requiredNet charge against/(credit) to profit 101 50 19 48 19Provisions held at 279 140 96 361 179 31 December 2005 2005 India Africa Americas Total $m *Middle $ m $m East & UK & Other S Asia Group $m Head Office $mProvisions held at 1 January 2005 41 122 55 440 1,459Adjusted for adoption of IAS 39 2 3 9 17 90Restated provision held at 43 125 64 457 1,5491 January 2005Exchange translation differences (1) 5 (4) (13) (25)Amounts written off (66) (70) (43) (223) (871)Recoveries of amounts previously 21 14 4 7 153written offAcquisitions - - - - 352Discount unwind (1) - (2) (5) (48)Other (1) 1 (2) 3 21New provisions 105 48 60 12 754Recoveries/provisions (60) (59) (17) (71) (499)no longer requiredNet charge against/(credit) to profit 45 (11) 43 (59) 255Provisions held at 40 64 60 167 1,386 31 December 2005 * Middle East and Other S Asia provisions at 31 December 2005 includes $26million (2004: $42 million) relating to the UAE. RISK continued 2004 Asia Pacific Hong Singapore Malaysia Korea Other Kong $m $m $m Asia $m Pacific $mProvisions held at 1 January 2004 268 123 144 - 390Exchange translation differences - 3 - - 2Acquisitions - - - - 36Amounts written off (154) (62) (63) - (142)Recoveries of amounts 29 7 10 - 12previously written offOther 4 - (2) - (42)New provision 207 60 36 1 94Recoveries/provisions (65) (18) (29) - (48)no longer requiredNet charge against/(credit) to profit 142 42 7 1 46Provisions held at 289 113 96 1 30231 December 2004 2004 India Africa Americas Total $m *Middle $m UK & Group $m East & Head Other Office S Asia $m $mProvisions held at 1 January 2004 55 158 58 465 1,661Exchange translation differences 2 (4) 2 8 13Acquisitions - - - - 36Amounts written off (65) (42) (21) (58) (607)Recoveries of amounts 24 7 4 2 95previously written offOther (1) (5) - 38 (8)New provision 106 43 27 35 609Recoveries/provisions (80) (35) (15) (50) (340)no longer requiredNet charge against/(credit) to profit 26 8 12 (15) 269Provisions held at 41 122 55 440 1,45931 December 2004 Country Risk Country Risk is the risk that a counterparty is unable to meet its contractualobligations as a result of adverse economic conditions or actions taken bygovernments in the relevant country. The GRC approves country risk and delegates the setting and management ofcountry limits to the Group Head, Credit and Country Risk. The business and country Chief Executive Officers manage exposures within theselimits and policies. Countries designated as higher risk are subject toincreased central monitoring. Cross border assets comprise loans and advances,interest bearing deposits with other banks, trade and other bills, acceptances,amounts receivable under finance leases, certificates of deposit and othernegotiable paper and investment securities where the counterparty is resident ina country other than that where the cross border assets are recorded. Crossborder assets also include exposures to local residents denominated incurrencies other than the local currency. The following table, based on the Bank of England Cross Border Reporting (CE)guidelines, shows the Group's cross border assets including acceptances wherethey exceed one per cent of the Group's total assets. 2005 2004 Public Public sector sector $m Banks Other Total $m Banks Other Total $m $m $m $m $m $m USA 1,227 555 2,505 4,287 824 745 2,660 4,229Korea 13 1,476 2,006 3,495 47 1,258 698 2,003Hong Kong 1 311 2,776 3,088 4 199 2,719 2,922France 159 2,550 155 2,864 149 1,243 183 1,575China 63 982 1,405 2,450 101 686 902 1,689India 1 949 1,456 2,406 74 1,132 867 2,073Singapore - 326 1,945 2,271 - 325 1,939 2,264Netherlands - - - - - 2,639 406 3,045 RISK continued Market Risk The Group recognises market risk as the exposure created by potential changes inmarket prices and rates. The Group is exposed to market risk arising principallyfrom customer driven transactions. Market Risk is governed by the GRC, which agrees policies and levels of riskappetite in terms of Value at Risk (VaR). The Group Market Risk Committee (GMR)provides market risk oversight and guidance on policy setting. Policies coverthe trading book of the Group and also market risks within the banking book.Trading and Banking books are defined as per the Financial Services Authority(FSA) Handbook IPRU (Bank). Limits by location and portfolio are proposed by thebusinesses within the terms of agreed policy. GMR approves the limits withindelegated authorities and monitors exposures against these limits. GMR complements the VaR measurement by regularly stress testing market riskexposures to highlight potential risk that may arise from extreme market eventsthat are rare but plausible. In addition, VaR models are back tested againstactual results to ensure pre-determined levels of accuracy are maintained. Additional limits are placed on specific instruments and currency concentrationswhere appropriate. Sensitivity measures are used in addition to VaR as riskmanagement tools. Option risks are controlled through revaluation limits oncurrency and volatility shifts, limits on volatility risk by currency pair andother underlying variables that determine the options' value. Value at Risk The Group uses historic simulation to measure VaR on all market risk relatedactivities. The total VaR for trading and banking books combined at 31 December 2005 was$10.8 million (31 December 2004: $15.4 million). Interest rate related VaR was $10.3 million (31 December 2004: $15.6 million)and foreign exchange related VaR was $1.1 million (31 December 2004: $3.0million). The average total VaR for trading and banking books during the year to 31December 2005 was $12.4 million (31 December 2004: $15.8 million) with a maximumexposure of $20.6 million. VaR for interest rate risk in the banking books of the Group totalled $9.2million at 31 December 2005 (31 December 2004: $16.7 million). The Group has no significant trading exposure to equity or commodity price risk. The average daily income earned from market risk related activities was $4.1million, compared with $3.8 million during 2004. SHAPE /* MERGEFORMAT Foreign Exchange Exposure The Group's foreign exchange exposures comprise trading and banking foreigncurrency translation exposures and structural currency exposures in netinvestments in non US dollar units. Foreign exchange trading exposures are principally derived from customer driventransactions. The average daily income from foreign exchange trading businessesduring 2005 was $2.0 million (2004: $1.6 million). Interest Rate Exposure The Group's interest rate exposures comprise trading exposures and non-tradinginterest rate exposures. Structural interest rate risk arises from the differing re-pricingcharacteristics of commercial banking assets and liabilities. The average daily income from interest rate trading businesses during 2005 was$2.1million (2004: $2.2 million). Derivatives Derivatives are contracts whose characteristics and value derive from underlyingfinancial instruments, interest and exchange rates or indices. They includefutures, forwards, swaps and options transactions in the foreign exchange,credit and interest rate markets. Derivatives are an important risk managementtool for banks and their customers because they can be used to manage the riskof price, interest rate and exchange rate movements. The Group's derivative transactions are principally in instruments where themark-to-market values are readily determinable by reference to independentprices and valuation quotes or by using standard industry pricing models. The Group enters into derivative contracts in the normal course of business tomeet customer requirements and to manage its own exposure to fluctuations ininterest, credit and exchange rates. Derivatives are carried at fair value and shown in the balance sheet as separatetotals of assets and liabilities. Recognition of fair value gains and lossesdepends on whether the derivatives are classified as trading or for hedgingpurposes. The Group applies a future exposure methodology to manage counterparty creditexposure associated with derivative transactions. RISK continued Hedging In accounting terms, hedges are classified into three typical types: fair valuehedges, where fixed rates of interest or foreign exchange are exchanged forfloating rates; cash flow hedges, where variable rates of interest or foreignexchange are exchanged for fixed rates, and hedges of net investments inoverseas operations translated to the parent company's functional currency, USdollars. The Group uses futures, forwards, swaps and options transactions in the foreignexchange and interest rate markets to hedge risk. The Group occasionally hedges the value of its foreign currency denominatedinvestments in subsidiaries and branches. Hedges may be taken where there is arisk of a significant exchange rate movement but, in general, managementbelieves that the Group's reserves are sufficient to absorb any foreseeableadverse currency depreciation. The effect of exchange rate movements on the capital risk asset ratio ismitigated by the fact that both the net asset value of these investments and therisk weighted value of assets and contingent liabilities follow substantiallythe same exchange rate movements. Liquidity Risk The Group defines liquidity risk as the risk that the bank either does not havesufficient financial resources available to meet all its obligations andcommitments as they fall due, or can access them only at excessive cost. It is the policy of the Group to maintain adequate liquidity at all times, inall geographical locations and for all currencies. Hence the Group is in aposition to meet all obligations, to repay depositors, to fulfil commitments tolend and to meet any other commitments made. Liquidity risk management is governed by GALCO, which is chaired by the GroupFinance Director and with authority derived from the Board. GALCO is responsiblefor both statutory and prudential liquidity. These responsibilities are managedthrough the provision of authorities, policies and procedures that areco-ordinated by the Liquidity Management Committee (LMC) with regional andcountry Asset and Liability Committees (ALCO). Due to the diversified nature of the Group's business, the Group's policy isthat liquidity is more effectively managed locally, in-country. Each CountryALCO is responsible for ensuring that the country is self-sufficient and is ableto meet all its obligations to make payments as they fall due. The Country ALCOhas primary responsibility for compliance with regulations and Group policy andmaintaining a Country Liquidity Crisis Contingency Plan. A substantial portion of the Group's assets are funded by customer deposits madeup of current and savings accounts and other deposits. These customer deposits,which are widely diversified by type and maturity, represent a stable source offunds. Lending is normally funded by liabilities in the same currency. The Group also maintains significant levels of marketable securities either forcompliance with local statutory requirements or as prudential investments ofsurplus funds. The GALCO also oversees the structural foreign exchange and interest rateexposures that arise within the Group. These responsibilities are managedthrough the provision of authorities, policies and procedures that areco-ordinated by the Capital Management Committee. Policies and guidelines forthe maintenance of capital ratio levels are approved by GALCO. Compliance withGroup ratios are monitored centrally by Group Corporate Treasury while localrequirements are monitored by the local ALCO. Policies and guidelines for the setting and maintenance of capital ratio levelsare also delegated by GALCO. Group ratios are monitored centrally by GroupCorporate Treasury, while local requirements are monitored by the local ALCO. Operational Risk Operational risk is the risk of direct or indirect loss due to an event oraction resulting from the failure of technology, processes, infrastructure,personnel and other risks having an operational impact. The Group seeks toensure that key operational risks are managed in a timely and effective mannerthrough a framework of policies, procedures and tools to identify, assess,monitor, control, and report such risks. The Group Operational Risk Committee (GORC) has been established to superviseand direct the management of operational risks across the Group. GORC is alsoresponsible for ensuring adequate and appropriate policies and procedures are inplace for the identification, assessment, monitoring, control and reporting ofoperational risks. An independent Group operational risk function is responsible for establishingand maintaining the overall operational risk framework, and for monitoring theGroup's key operational risk exposures. This unit is supported by WholesaleBanking and Consumer Banking Operational Risk units. They are responsible forensuring compliance with policies and procedures in the business, monitoring keyoperational risk exposures, and the provision of guidance to the respectivebusiness areas on operational risk. Compliance with operational risk policies and procedures is the responsibilityof all managers. Every country operates a Country Operational Risk Group (CORG).The CORG has in-country governance responsibility for ensuring that anappropriate and robust risk management framework is in place to monitor andmanage operational risk. Compliance and Regulatory Risk Compliance and Regulatory risk includes the risk of non-compliance withregulatory requirements in a country in which the Group operates. The GroupCompliance and Regulatory Risk function is responsible for establishing andmaintaining an appropriate framework of Group compliance policies andprocedures. Compliance with such policies and procedures is the responsibilityof all managers. Legal Risk Legal risk is the risk of unexpected loss, including reputational loss, arisingfrom defective transactions or contracts, claims being made or some other eventresulting in a liability or other loss for the Group, failure to protect thetitle to and ability to control the rights to assets of the Group (includingintellectual property rights), changes in the law, or jurisdictional risk. TheGroup manages legal risk through the Group Legal Risk Committee, Legal Riskpolicies and procedures and effective use of its internal and external lawyers. RISK continued Reputational Risk Reputational Risk is the risk of failing to meet the standards of performance orbehaviour required or expected by stakeholders in commercial activities or theway in which business is conducted. Reputational Risks arise as a result of poormanagement of problems occurring in one or more of the primary banking riskareas (Credit, Market, Operational risk areas) and/or from Social, Ethical orEnvironmental Risk issues. All members of staff have a responsibility formaintaining the Group's reputation. The Group manages reputational risk through the Group Reputational RiskCommittee, which reports to the GRC, and through Country Management Committees.Wholesale Banking has a specialised Reputational Risk Committee which reviewsindividual transactions. In Consumer Banking, potential reputational risksresulting from transactions or products are reviewed by the Product andReputational Risk Committee. Independent Monitoring Group Internal Audit is an independent Group function that reports to the GroupChief Executive and the ARC. Group Internal Audit provides independentconfirmation that Group and business standards, policies and procedures arebeing complied with. Where necessary, corrective action is recommended. CAPITAL The Group Asset and Liability Committee targets Tier 1 and Total capital ratiosof 7-9 per cent and 12-14 per cent respectively. 2005 *2004 $m $mTier 1 capital:Called up ordinary share capital and preference shares 5,982 3,818Eligible reserves 6,151 4,617Minority interests 115 111Innovative Tier 1 securities 1,542 1,246Less: Restriction on innovative Tier 1 securities (83) (68)Goodwill and other intangible assets (4,321) (1,900)Unconsolidated associated companies 186 30Other regulatory adjustments 153 110Total Tier 1 capital 9,725 7,964Tier 2 capital:Eligible revaluation reserves 195 -Portfolio impairment provision (2004, general provision) 368 335Qualifying subordinated liabilities: Perpetual subordinated debt 3,128 1,961 Other eligible subordinated debt 4,169 3,525Less: Amortisation of qualifying subordinated liabilities (229) -Restricted innovative Tier 1 securities 83 68Total Tier 2 capital 7,714 5,889Investments in other banks (148) (33)Other deductions (173) (34)Total capital base 17,118 13,786Banking book:Risk weighted assets 99,378 69,438Risk weighted contingents 16,274 14,847 115,652 84,285Trading book:Market risks 6,701 4,608Counterparty/settlement risk 3,571 3,231Total risk weighted assets and contingents 125,924 92,124Capital ratios:Tier 1 capital 7.7% 8.6%Total capital 13.6% 15.0% * As previously reported under UK GAAP Consolidated Income StatementFor the year ended 31 December 2005 Notes Excluding SCFB 2005 2004 SCFB acquisition $million $million $million $millionInterest income 6,938 1,812 8,750 5,312Interest expense (3,384) (1,031) (4,415) (2,130)Net interest income 3,554 781 4,335 3,182Fees and commission income 1,724 116 1,840 1,614Fees and commission expense (258) (87) (345) (282)Net trading income 746 23 769 651Other operating income 236 26 262 217 2,448 78 2,526 2,200Operating income 6,002 859 6,861 5,382Staff costs (1,834) (311) (2,145) (1,559)Premises costs (321) (42) (363) (321)General administrative expenses (861) (159) (1,020) (731)Depreciation and amortisation (216) (67) (283) (238)Operating expenses (3,232) (579) (3,811) (2,849)Operating profit before impairment losses and 2,770 280taxation 3,050 2,533Impairment losses on loans and advances and (266)other credit risk provisions (53) (319) (214)Other impairment (50) - (50) (68)Profit before taxation 2,454 227 2,681 2,251Taxation 3 (657) (53) (710) (630)Profit for the year 1,797 174 1,971 1,621 Profit attributable to:Minority interests 25 43Parent company's shareholders 1,946 1,578Profit for the year 1,971 1,621 Basic earnings per ordinary share 5 148.5c 129.6cDiluted earnings per ordinary share 5 146.9c 127.4c Paid and proposed dividends per ordinary share: Cents CentsInterim paid 18.94 17.06Final proposed* 45.06 40.44 64.00 57.50 $million $millionInterim dividend 248 201Final proposed dividend* 595 524 843 725 * The final dividend will be accounted for in 2006 as explained in note 4. As more fully explained in note 12, financial instrument accounting isdetermined on different bases in 2005 and 2004 due to the transitionalprovisions of IAS 32 and 39. Consolidated Balance SheetAs at 31 December 2005 Notes 2005 2004 $million $millionAssetsCash and balances at central banks 8,012 3,960Financial assets held at fair value through profit or loss 10,333 4,744Derivative financial instruments 9,370 -Loans and advances to banks 21,701 16,687Loans and advances to customers 111,791 72,019Investment securities 37,863 33,611Interests in associates 128 -Goodwill and intangible assets 4,321 2,353Property, plant and equipment 1,644 555Deferred tax assets 498 318Other assets 7,163 11,597Prepayments and accrued income 2,272 1,280Total assets 215,096 147,124 LiabilitiesDeposits by banks 18,834 15,162Customer accounts 119,931 85,093Financial liabilities at fair value through profit or loss 6,293 2,392Derivative financial instruments 9,864 -Debt securities in issue 25,913 11,005Current tax liabilities 283 295Other liabilities 8,446 14,789Accruals and deferred income 2,319 1,321Provisions for liabilities and charges 55 61Retirement benefit obligations 476 169Subordinated liabilities and other borrowed funds 10,349 6,768Total liabilities 202,763 137,055 EquityShare capital and share premium 5,638 3,802Reserves and retained earnings 6,244 5,303Total parent company shareholders' equity 11,882 9,105Minority interests 451 964Total equity 12,333 10,069Total equity and liabilities 215,096 147,124 As more fully explained in note 12, financial instrument accounting isdetermined on different bases in 2005 and 2004 due to the transitionalprovisions of IAS 32 and 39. Consolidated Statement of Recognised Income and ExpensesFor the year ended 31 December 2005 2005 2004 $million $million NotesExchange differences on translation of foreign operations (90) 96Actuarial losses on retirement benefits (150) (5)Available for sale investments: Valuation gains taken to equity 7 - Transferred to income on disposal/redemption (107) -Cash flow hedges: Losses taken to equity (65) - Gains transferred to income for the year (20) -Deferred tax on items recognised directly in equity 141 1Other 1 23 (283) 115Profit for the year 1,971 1,621Total recognised income and expenses for the year 1,688 1,736 Effect of change in accounting policyEffect of adopting IAS 32 and 39 on 1 January 2005: Available for sale reserve 73 Cash flow hedge reserve 42 Retained earnings (36) 151 1,839 Attributable to:Parent company shareholders 1,814 1,693Minority interests 25 43 1,839 1,736 As more fully explained in note 12, financial instrument accounting isdetermined on different bases in 2005 and 2004 due to the transitionalprovisions of IAS 32 and 39. Consolidated Cash Flow StatementFor the year ended 31 December 2005 2005 2004 $million $millionCash flow from operating activitiesProfit before taxation 2,681 2,251 Adjustment for items not involving cash flow or shown separately Depreciation and amortisation of premises, plant and equipment 250 238 Gain on disposal of property plant and equipment 1 (4) Gain on disposal of investment securities (107) (164) Amortisation of investments 18 (41) Loan impairment losses 319 214 Other impairment 50 68 Assets written off, net of recoveries (718) (504) Increase in accruals and deferred income 952 80 Increase in prepayments and accrued income (1,248) (164) Net increase/(decrease) in mark to market adjustment 939 (259) Interest paid on subordinated loan capital 274 338 UK and overseas taxes paid (611) (573) Net increase in treasury bills and other eligible bills (686) (78) Net increase in loans and advances to banks and customers (5,730) (11,999) Net increase in deposits from banks, customer accounts/debt securities in issue 18,996 15,004 Net increase in dealing securities (1,494) (2,118) Net (decrease)/increase in other accounts (4,082) 2,730Net cash from operating activities 9,804 5,019Net cash flows from investing activities Purchase of property plant and equipment (135) (240) Acquisition of investment in subsidiaries, net of cash acquired (1,093) (333) Acquisition of treasury bills (13,443) (9,188) Acquisition of debt securities (33,655) (75,353) Acquisition of equity shares (658) (121) Disposal of subsidiaries, associated undertakings and branches - 6 Disposal of property plant and equipment 8 51 Disposal and maturity of treasury bills 12,599 10,778 Disposal and maturity of debt securities 35,748 71,482 Disposal of equity shares 351 356Net cash used in investing activities (278) (2,562)Net cash (outflow)/inflow from financing activities Issue of ordinary share capital 2,000 17 Purchase of own shares, net of exercise, for share option awards 150 (95) Interest paid on subordinated loan capital (274) (338) Gross proceeds from issue of subordinated loan capital 3,874 499 Repayment of subordinated liabilities (1,026) (25) Dividends and payments to minority interests and preference shareholders (173) (75) Dividends paid to ordinary shareholders (685) (587)Net cash from/(used in) financing activities 3,866 (604)Net increase in cash and cash equivalents 13,392 1,853 Cash and cash equivalents at beginning of year 22,112 20,202 Effect of exchange rate changed on cash and cash equivalents (278) 57Cash and cash equivalents at end of year (note 6) 35,226 22,112 MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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