5th Dec 2007 08:17
Standard Chartered PLC05 December 2007 Standard Chartered PLC Pre-close Trading Update 5 December 2007 Standard Chartered PLC will be holding discussions with analysts and investorsahead of its close period for the full year ending 31 December 2007. Thisstatement details the information that will be covered in those discussions. Peter Sands, Group Chief Executive, commented, "It's been another year ofdelivery. Our operating performance is strong and our markets remain full ofopportunity. We continue to accelerate investment to take advantage of themultitude of growth opportunities in our markets and continue to build aplatform for sustainable future income growth, whilst remaining acutely vigilantfor any signs of slowdown or deterioration impacting our markets." All comparisons will be made on a full year basis unless otherwise stated. Overall Standard Chartered has continued to perform very strongly, building on anexcellent set of results in the first half. Trading conditions in the Group's main operating markets continue to benefitfrom strong economic conditions, good local currency liquidity and benign creditenvironments. During the second half of the year there have been three specific items thatimpact upon the Group's results. In summary these relate to; taking arepresentative proportion of Whistlejacket assets onto the balance sheet; theimpact of accounting asymmetry on economically effective hedges in Korea and; adelay in the sale of the Indian fund business which had been anticipated toclose this year. The impact of these items has been balanced by the strength ofthe Group's trading performance. Apart from the sections describing these specific items in more detail, allcomments in this document exclude the impact of these items. The Group has very strong income momentum, especially in Wholesale Banking, andacross almost all geographies. The Group continues to deliver a strong performance across a wide range ofproducts and customer segments. Net interest margins have remained broadly stable. The Group continues to take a dynamic approach to managing expense growth. Forthe full year we anticipate that expense growth will be broadly in line withincome growth. We have accelerated investment in the second half of the year, whilst stillproducing very good double-digit profit growth. The Group's liquidity position remains healthy with 24 per cent of the balancesheet in cash, net interbank placements, and marketable assets. The deposit base across Wholesale and Consumer Banking customers remains stableand the Group has a loan to deposit ratio of just over 90 per cent. The Group continues to be a provider of liquidity to the interbank money market. Asset quality in both businesses remains good and impairments remain at lowlevels. For the full year, we anticipate being above our target ranges for both Tier 1and Total capital. The integration of Hsinchu in Taiwan continues to make good progress and theintegration of Union Bank in Pakistan has now been successfully completed. Business Performance Consumer Banking Consumer Banking has delivered strong income growth and is exiting the year withstrong momentum. On an underlying basis (excluding the impact of Pakistan,Hsinchu and the increased stake in Permata), Consumer Banking has maintained themomentum seen in the first six months. Markets such as Middle East and South Asia, Other Asia Pacific Region(specifically China), India, Singapore and Malaysia have performed particularlywell. In Hong Kong, the rate of income growth has accelerated from that seen in thefirst six months of 2007 and is anticipated to be double digit for the fullyear. Wealth Management and SME continue to drive income growth and both are achievingexcellent performance across many geographies, with particularly strongperformances in MESA, India, Hong Kong, Malaysia, Africa and Singapore. Mortgage income has continued to be affected by rising interest rates,regulatory constraints and strong competition in a number of key markets. We have accelerated investment across the franchise, especially in; distribution(where we have upgraded and added outlets and ATMs); product capability in SMEand Wealth Management; the Private Bank (which has now been launched in sevencountries); China; Pakistan; and India. Reflecting continued investment, growth in expenses will exceed the growth inincome for the full year. Overall Consumer Banking asset quality remains strong and consequent loanimpairment is in line with previous guidance given, moving in line with thechange in volume, mix and maturity of the book. In Pakistan the level ofimpairment continues to be a challenge but is not material in the Group context. The shape of the Consumer Banking asset portfolio, which overall is exhibitinggrowth higher than seen in the first half of the year, reflects the changing mixof the book and the shift towards SME and Wealth Management products. The business continues to enjoy liability growth across the franchise,especially in higher margin current and savings accounts. Wholesale Banking Wholesale Banking continues to demonstrate very strong income momentum, bothoverall and on an underlying basis (excluding the impact of Pakistan, Hsinchuand the increased stake in Permata), delivering broad-based growth in all keyclient segments and across multiple products. Current trading remains buoyant, underpinned by strong liquidity and an ongoingappetite for assets in our markets. The deal pipeline remains strong. As a result of our success in deepening our client relationships, client-drivenincome has performed very strongly, showing higher double digit growth than inprior periods. In line with our strategy of broadening our product offering,lending as a proportion of income continued to fall in 2007. The business remains vigilant on credit quality and sensitive to levels ofappetite for primary and secondary distribution of assets. Our syndicationactivities continue to perform strongly with limited impact from the turbulenceseen in Europe and the US. The investments made in enhancing Global Markets capabilities have contributedto strong growth in the Rates and FX, Capital Markets and Corporate Financebusinesses. Investment has been increased as Wholesale Banking has further expanded productreach and capabilities in areas such as convertible bonds and in commodity andequity derivatives; strengthened regulatory, control and complianceinfrastructure by enhancing customer documentation; and built out our trade ande-commerce platforms. Despite this, jaws are anticipated to be positive for thefull year. Wholesale Banking continues to benefit from the benign credit environment in ourmarkets. The quality of the Wholesale Banking loan book remains excellent. Newimpairments remain low, and recoveries and releases continue to be achieved,albeit at lower levels than in 2006. Growth in Risk Weighted Assets has strong momentum but is growing more slowlythan client income. Specific items Whistlejacket Standard Chartered Bank is an investor in the capital notes of Whistlejacket, aStructured Investment Vehicle ("SIV"), and is also the appointed investmentmanager. With the current dislocation in the credit markets and the ensuing reduction inliquidity, Whistlejacket, like other SIVs, has had limited access to the shortterm commercial paper markets. Whistlejacket's Board has been actively pursuinga series of actions, including the use of repos, deleveraging of the portfoliothrough the sale of assets, and offering capital note holders the opportunity totake 'vertical' slices of the portfolio. As a result assets have fallen fromUSD18.2 billion at the end of August to USD10.8 billion as at 30 November 2007. Alongside another capital note holder for its investment, during the course ofNovember, the Group exchanged USD140 million of the Group's capital notes for apro rata 'vertical' slice of Whistlejacket's assets. The representativeportfolio of Whistlejacket assets acquired, amounting to approximately USD1.68billion, is reflected in the Group's balance sheet. This has an impact on theTier 1 capital ratio of less than 0.1 per cent. These assets were acquired by the Group at market value and their acquisitionhas resulted in a negative fair value adjustment, taken against income, ofapproximately USD46 million. The Group remains confident in the underlyingquality of the assets acquired and it is expected that the temporary write downin value will flow back through income over the next three and a half years,which is the average life of the assets. It is highly likely that the Group will undertake a further 'vertical' slicewhich will be effected before the end of the year, alongside similartransactions by a number of other capital note holders. The assets of Whistlejacket remain of a very high quality, with a conservativeeligibility criteria and diversity in asset type and 95 per cent rated Aa orhigher by Moody's. As at 30 November, Whistlejacket's asset composition was approximately: 40% infinancial institutions, mainly large banks and non-monoline insurers; 7% in Aaa/AAA-rated monolines; 48% in asset-backed securities (excluding ABScollateralised debt obligations); and 5% in CDOs of ABS. Whistlejacket is supported by USD1.5 billion in third party liquidityfacilities, including bank liquidity lines and breakable deposits and is fundedinto 2008. Korea In Korea we have continued to make progress in reshaping the business in thesecond half of 2007. There are several items that will impact the financialperformance in Korea including the ongoing but reducing impact of fair valueadjustments ('FVAs') in relation to the original acquisition of StandardChartered First Bank ('SCFB'), and a reduction to income arising as aconsequence of new legislation relating to the treatment of dormant accounts.There is also an adverse impact to income that arises from the market movementson certain securitised assets entered into by SCFB. SCFB has a long, successful track record of mortgage securitisations and thereare currently seven such transactions in the market comprising around USD4.5billion of assets. Despite these securitisation structures being economically hedged, under IFRSthere is an accounting mismatch which leads to a charge to the income statementwhich was approximately USD23 million as at 30 June 2007. In recent weeks,however, there have been significant price movements in the relevant crosscurrency swap/interest rate swap-spread for three years which has widened from32 basis points at 30 June to 176 basis points at 30 November, after rising ashigh as 232 basis points during November. The negative impact on year to dateincome had risen from USD23 million as at 30 June to USD133 million as at 30November. This income impact arises due to an asymmetry in accounting treatment. Thestructures in place are economically hedged and the negative income witnessedthis year should flow back to income over the remaining lives of thetransactions, which is approximately three years. Excluding these items we have seen a solid income performance in the secondhalf. The performance in Consumer Banking income reflects strength in SME and WealthManagement but also continuing pressure on mortgage assets and margins. Theperformance in Wholesale Banking reflects the investments made in both peopleand products, but also Private Equity realisations in the second half. Growth in expenses has exceeded income growth, in part reflecting a fullallocation of Group expenses as well as continued investment in new products andinfrastructure. Adjusting for the consequence of the accounting asymmetry, Korean operatingprofit before tax, given the current trading, will show a moderate reductionover the comparable figure in 2006. Indian fund business We announced on 26 January 2007 that we had agreed, subject to regulatoryapprovals, the sale of our Indian asset management company to UBS for aroundUSD120 million. It now seems unlikely that UBS will receive the requisiteapprovals in 2007. The sales proceeds will not therefore be included in headlineincome or profit for the year. There will however be no impact on normalised EPSas the sale proceeds would have been treated as a normalisation adjustment. Conclusion In summary, the trading performance of our businesses remains very strong and wecontinue to see good operating conditions in our markets despite the turbulencein credit markets in Europe and the US. Income momentum is very strong and thestrong performance in the second half of the year has balanced the impact of thespecific items mentioned above. Expense growth remains at planned high levelsas we continue to make further investment in the franchise. The approach torisk management remains highly disciplined. Whilst markets remain volatile, weare broadly comfortable with the operating profit before tax consensus for thefull year. The pre-close conference call, hosted by Richard Meddings, Group FinanceDirector, will be webcast live on Standard Chartered's website. To access thewebcast follow this link http://investors.standardchartered.com from 09:30 GMTonwards. A recording of the webcast and a podcast will also be availableshortly after the event. For further information, please contact: Stephen Atkinson, Head of Investor Relations +44 (0)20 7280 7245 Fiona Chan, Acting Head of Media Relations +44 (0)20 7280 7163 This document contains "forward-looking statements" that are based on currentexpectations or beliefs, as well as assumptions about future events, and includematters which are not facts. These forward-looking statements can be identifiedby the fact that they do not relate only to historical or current facts.Forward-looking statements often use words such as anticipate, target, expect,estimate, intend, plan, goal, believe, will, may, should, would, could or otherwords of similar meaning. Undue reliance should not be placed on anyforward-looking statements because, by their very nature, they are subject toknown and unknown risks and uncertainties and can be affected by other factorsthat could cause actual results, plans and objectives of Standard Chartered, todiffer materially from those expressed or implied in the forward-lookingstatements. Any forward-looking statements contained in this document based onpast or current trends and activities of Standard Chartered should not be takenas a representation that such trends or activities will continue in the future.Any forward-looking statements speak only as of the date of this document.Standard Chartered undertakes no obligation to revise or update any forward-looking statement contained within this document, regardless of whether thosestatements are affected as a result of new information, future events orotherwise. 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