Standard Chartered PLC

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1 CREDIT OPINION 18 July 218 Standard Chartered PLC Update to credit analysis Update Summary Standard Chartered PLC (SCPLC) is the listed entity of the Standard Chartered Group (Standard Chartered), with its principal operating subsidiary being Standard Chartered Bank (SCB). SCB s BCA reflects the group s strong capital and liquidity positions, as well as a healthy funding franchise. The BCA also factors in the stabilization in the group's asset quality, which has been under stress since 215. Analyst Contacts Srikanth Vadlamani VP-Sr Credit Officer srikanth.vadlamani@moodys.com Andrea Usai Senior Vice President andrea.usai@moodys.com Komaresan Subramanian Associate Analyst komaresan.subramanian@moodys.com Graeme Knowd MD-Banking graeme.knowd@moodys.com Stephen Long MD-Financial Institutions stephen.long@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA However, the group s profitability remains the weakest factor in its credit profile. SCPLC reported net losses of $2.2 billion in 215 and $.2 billion in 216 owing to lower income and substantially higher impairment charges. Profitability will improve from these levels, as seen in 217 and the first quarter of 218. In 217 the group's statutory profit before tax (including restructuring and other items) increased to $2,415 billion, 49% higher than the $49 million in 216. The first quarter of 218 also recorded an increase with operating income seeing 7% growth year-on-year (y-y) and 11% quarter-on-quarter (q-q). Overall the improvement in profitability was driven by liability products such as cash management, wealth management and deposits. Non-liability products continue to perform weakly. Despite these improvements, profitability will remain the weakest rating driver of the group's overall credit profile, with the return on assets (ROA) in 217 of just.19%.

2 Exhibit 1 Rating Scorecard - Key financial ratios Median -rated banks 5% 16% 45% 14% 4% 35% 12% 3% 1% 25% 8% 2% 6% 15% 4% 2% Liquidity Factors Solvency Factors Standard Chartered Bank (BCA: ) 18% 1% 3.9% 16.% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets % Solvency Factors (LHS).% Profitability: Net Income/ Tangible Assets 25.2% 44.5% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 5% % Liquidity Factors (RHS) Source: Moody's Financial Metrics SCB's BCA and long-term rating reflect our overall assessment of SCPLC on a group consolidated basis. As of the end of December 217, SCPLC s consolidated assets were comprised almost wholly of SCB s consolidated assets. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history July 218

3 Credit strengths» Strong capital» Strong liquidity and deposit funding Credit challenges» Susceptibility of asset quality to any weakening in the operating environment in the bank's markets» Weak profitability owing to challenges in revenue generation Outlook The outlook is stable. Factors that could lead to an upgrade SCPLC's ratings could be raised if there is a significant and sustained improvement in the group's risk-adjusted profitability. Factors that could lead to a downgrade SCPLC's ratings could be lowered if the group's asset quality deteriorates on a sustained basis. The bank's ratings could also be downgraded if losses persist. A downgrade of SCB's BCA would likely affect all the ratings assigned to SCPLC. In addition, SCPLC's deposit and senior debt ratings could be downgraded if the volume of its junior instruments outstanding decreases significantly, thereby reducing their loss buffers. Key indicators Exhibit 2 Standard Chartered PLC (Consolidated Financials) [1] Total Assets (GBP billion) Total Assets (EUR billion) Total Assets (USD billion) Tangible Common Equity (GBP billion) Tangible Common Equity (EUR billion) Tangible Common Equity (USD billion) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) CAGR/Avg [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] May include rounding differences due to scale of reported amounts [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented Source: Moody's Financial Metrics Profile Standard Chartered PLC is the listed entity of the Standard Chartered Group. The group has operations spanning Asia, Africa and the Middle East, and across business lines that include corporate and institutional banking, retail banking, commercial banking and private banking, among others July 218

4 Corporate and institutional banking, and retail banking are the group's largest revenue drivers, contributing 45% (217: 45%) and 35% (217: 34%) of the group's total revenue, respectively, over the three months ended 31 March 218. In terms of geography, the largest contributors to revenue were the Greater China & North Asia and ASEAN & South Asia regions at 4% (217: 39%) and 28% (217: 27%), respectively, over the same period. Exhibit 3 Exhibit 4 Revenue split by geography Revenue split by line of business Three months ended 31 March 218 Three months ended 31 March 218 Europe & Americas 11% Central & Other Items 3% Africa & Middle East 18% Private Banking 4% Commercial Banking 9% Greater China & North Asia 4% Central & other items 8% Corporate & Institutional Banking 45% Retail Banking 34% ASEAN & South Asia 28% Source: Bank data Source: Bank data Detailed credit considerations Asset quality to stabilize After deteriorating in 215, Standard Chartered s asset quality has stabilized as the group proactively recognized legacy credit issues while significantly de-risking its loan book over the last two years. The nonperforming loan ratio declined to 2.8% as of the end of March 218 from 3.6% a year earlier. Over 218 and 219, we expect asset quality to be stable, with a higher probability of a further improvement rather than a deterioration. The group's asset quality weakened in 215, mainly owing to its exposures to commodities and to India (Baa2 stable). But since then, the group has been able to meaningfully de-risk its loan book through concerted management action. The group substantially lowered its top-borrower concentration and commodities exposure in 215, following its tightened risk underwriting. Similarly, the share of lower-credit-grade loans in the group's loan portfolio also declined to 28% in 217 from 37% in 216. As of the end of 217, gross customer loans and advances accounted for only 44% of Standard Chartered's tangible assets, after excluding goodwill-related items. The group has substantial exposures (mostly under one year) to financial institutions, reflecting its trade, interbank placements and large holdings of liquid assets. The quality of Standard Chartered's non-loan assets is good. These assets consist mainly of cash and balances with central banks, from other financial institutions and securities investments. The group's securities investment portfolio largely consists of treasury bills and government debt securities, of which 65% were either rated Aaa or were in the Aa category as of year-end 217. Profitability to remain the weakest rating driver Standard Chartered's earnings have been under pressure for several years, owing to the combined effect of the de-risking of its balance sheet, decline in commodity prices, low interest rate environment, competition from excess liquidity in many of its key operating markets and increasing regulatory costs. We expect profitability to pick up from the very low levels in 215 and 216. Impairment charges have come down meaningfully from the levels recorded over the past two years, in line with our expectation that the group is past the worst in terms of asset quality. Credit costs for the three months ended 31 March 218 were only 26bps (as a % of average gross loans). We expect credit costs to be meaningfully lower than what was reported over 216 and 215, given all the changes that the group undertook with regards to risk management. At the same time, the credit costs seen during the quarter seem unsustainably low and should pick-up over the course of 4 18 July 218

5 the year. Note that a similar trend was seen last year, with credit costs in Q1 217 being comparable to the current quarter while the rest of the year saw an increase. Profitability has also been positively impacted by an increase in interest rates, which benefits the group's margins. Profitability will also be supported by the emergence of positive operating leverage. Overall operating cost growth at 4% y-y trailed operating income growth of 7%, with the resultant positive operating leverage leading to pre-provision profit growth of 14%. With credit costs being broadly flat on a y-y basis, the profit before tax growth was even higher at 2%. Management has slightly revised upwards its operating cost guidance for the full year, in part because of currency effects. Even so, we expect the group to continue to enjoy positive operating leverage over the next 128 months. At the same time, profitability will remain low on an absolute basis and continue to be the weakest driver for Standard Chartered's ratings. The de-risking of the group's loan portfolio had a negative effect on its revenue generation in wholesale banking, evident from the group's weak performance in 216. While there may be some pickup in revenue generation, in line with a revival in loan growth, we expect the revenue-generation rate, and hence profitability, in the wholesale business to remain significantly lower than what it was before 214. The group reported statutory profit before tax of $1.2 billion over the three months ended 31 March 218, recording a 2% y-y growth. This improvement was driven by two factors: (1) much lower credit costs and other impairment charges, and (2) sustained growth in liability-driven products. In terms of revenue generation, strong performance in the cash management business, which reported a 25% increase for the three months ended 31 March 218 from the same period a year earlier, was the key positive because this business tends to have very sticky revenue. The group's wealth management business also recorded robust revenue growth of 28% over the same period. However, other key business lines, such as financial markets continue to report weak revenue trends. Capital to remain a key strength Standard Chartered's reported Common Equity Tier 1 (CET1) ratio was marginally higher at 13.9% as of the end of March 218 compared with 13.8% a year earlier. The CET1 ratio of 13.9 per cent was up 26 basis points since the end of 217 due mainly to profit accretion. The reported CET 1 ratio is higher than the minimum of requirement of 1.% in 219, including Pillar 1 and 2A minimum requirements and capital buffers. The group had reinstated dividends and announced a dividend of USD 11 cents per share for 217. Nevertheless, we expect its capital to remain a key credit strength. The group's early assessment of the final Basel III reform implementation in 222 suggested a potential increase in RWAs by 15% from its pro forma 217 level. Given the group's current Common Equity Tier 1 (CET1) ratio of 13.9%, it is on track to maintain its CET1 ratio within the stated medium-term management target of 123% even after factoring in the estimated increase in RWAs. The day one capital impact of adopting IFRS 9 has been muted, with little impact on the CET 1 ratio. The USD1.2 billion net impact to equity due to the adoption of the expected credit loss (ECL) approach for impairment provisions was partly offset by the tax benefit from the IFRS 9 adjustments and re-measurement of assets reclassified to fair value. Standard Chartered is well positioned to meet other capital requirements. As of the end of March 218, the group reported a 5.9% leverage ratio. Strong liquidity and deposit funding levels The strength of Standard Chartered's international network has attracted cross-border trade and enhanced the loyalty of its target customers. Owing to its strong focus on trade finance, a substantial portion of the group's loans are short term and may be liquidated within months. This flexibility further enhances the group's already-strong liquidity position. As of the end of 217, 61% of the group's total assets were due to mature within one year, out of which 74% were due to mature within three months July 218

6 The group holds a large amount of liquid assets in investment-grade treasury bills and debt investment securities. Moreover, the group's excess liquidity is mainly managed in a few key money centers, instead of in emerging markets where cross-border fund transfers may not always be reliable. Standard Chartered's funding position is strong. Customer deposits are its dominant source of funding, comprising 67% of its total liabilities as of the end of 217. As of the same date, the group's advances/deposits was 69% (net loans and advances to customers as a percentage of customer deposits), and around 55% of its customer deposits were in current and savings deposits. Such deposits are often sticky. The group's second-largest source of funding is debt issuance, with senior and subordinated debt accounting for 12% of its total liabilities as of the end of 217. Support and structural considerations Loss Given Failure (LGF) analysis SCPLC is subject to the EU's directive on bank recovery and resolution, which we consider to be an operational resolution regime. We assume residual tangible common equity at 3% and post-failure losses at 8% of tangible banking assets, a 25% runoff in junior wholesale deposits, and a 5% runoff in preferred deposits. We assign a probability of 25% to deposits, in preference to senior unsecured debt. The balance sheet at failure, which forms the basis for our advanced LGF analysis, includes the combined balance sheet of SCPLC and SCB. At the same time, we exclude deposits and assets owned by the group's overseas subsidiaries, given that they lie outside the scope of the UK authorities. SCPLC's instruments ratings are based on the group's liability structure as of year-end 217. The large volume of junior debt instruments that could be bailed in during resolution to the benefit of senior creditors at SCPLC, as well as the large volume of senior unsecured debt at SCPLC itself, reduces the expected loss for these creditors. At the same time, the A2 rating of SCPLC's senior unsecured debt assumes that a portion of the loss-absorbing debt at the holding company level could be downstreamed to support SCB s subsidiaries, thus reducing the buffers available to absorb the losses at SCB. SCPLC's Ba subordinated debt rating reflects our Advanced LGF analysis, which indicates a moderate loss given failure. SCPLC's Baa3(hyb) junior subordinated debt ratings reflect (1) our Advanced LGF analysis, which indicates a high loss given failure; and (2) an additional notching to capture the risk of differential probabilities of default across different instruments. SCPLC's B(hyb) rating for its Additional Tier 1 capital securities reflects the group's high CET1/risk-weighted assets of 13.9% as of the end of March 218. These instruments are now rated at the non-viability cap of SCB's Adjusted BCA minus three notches. Our rating on high-trigger capital securities is based on the likelihood of the issuer's capital ratio reaching the conversion trigger, and the probability of a bank-wide failure and loss severity. Government support considerations SCPLC's ratings are based solely on SCB's standalone credit profile and our LGF analysis. These ratings do not include any uplift for external support. The current policy direction in the UK clearly suggests that the Government of United Kingdom (Aa2 stable) is unlikely to provide extraordinary support to banks in times of need. Moreover, aside from its headquarters in the UK, the group does not operate a material retail business in the country, thereby making it even less likely that the government would extend support to the group. While SCPLC does operate in other jurisdictions with more supportive regulatory approaches, we would expect any support provided to be ring-fenced to the group's local operations in those jurisdictions. Consequently, while we include market-specific systemic support in the ratings of a number of SCPLC's subsidiaries and affiliates, such support is not taken into account in rating the UK-incorporated SCPLC July 218

7 Methodology and scorecard About Moody s Bank Scorecard Our scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity July 218

8 Rating methodology and scorecard factors Exhibit 5 Standard Chartered PLC Macro Factors Weighted Macro Profile Strong Factor 1% Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #2 Solvency Asset Risk Problem Loans / Gross Loans 3.9% baa2 Long-run loss performance Market risk Capital TCE / RWA 16.% aa3 Capital retention Expected trend Profitability Net Income / Tangible Assets.% b3 ba3 Expected trend Return on assets Deposit quality Term structure Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 25.2% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 44.5% Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA baa3 baa2 Stock of liquid assets Quality of liquid assets a3 Aa2 a3-baa2 Balance Sheet is not applicable July 218

9 Debt class De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA Counterparty Risk Assessment (cr) Deposits Senior unsecured bank debt Senior unsecured holding company debt a2 Dated subordinated bank debt Dated subordinated holding company debt Junior subordinated bank debt baa3 (hyb) Junior subordinated holding company baa3 (hyb) debt Holding company non-cumulative b (hyb) preference shares Instrument class Counterparty Risk Assessment Deposits Senior unsecured bank debt Senior unsecured holding company debt Dated subordinated bank debt Dated subordinated holding company debt Junior subordinated bank debt Junior subordinated holding company debt Holding company non-cumulative preference shares Loss Given Failure notching Additional Preliminary Rating Notching Assessment Government Support notching Local Currency Rating (cr) a2 A1 (cr) A1 A1 A2 -Ba Foreign Currency Rating -A1 A1 A2 Ba Ba baa3 (hyb) baa3 (hyb) Baa3 (hyb) Baa3 (hyb) -Baa3 (hyb) -2 b (hyb) B (hyb) B (hyb) Source: Moody's Financial Metrics 9 18 July 218

10 Ratings Exhibit 6 Category STANDARD CHARTERED PLC Outlook Senior Unsecured Subordinate Jr Subordinate Pref. Stock Non-cumulative Moody's Rating Stable A2 Ba Baa3 (hyb) B (hyb) STANDARD CHARTERED BANK Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured Subordinate Jr Subordinate -Dom Curr Other Short Term Stable A1/P A1/P A1(cr)/P(cr) A1 Ba Baa3 (hyb) (P)P STANDARD CHARTERED BANK (SINGAPORE) LIMITED Outlook Counterparty Risk Rating Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating ST Issuer Rating Rating(s) Under Review Aa2/P1 Aa3/P2 a23 a23 Aa2(cr)/P(cr)2 Aa33 P3 [1] Rating(s) within this class was/were placed on review on June [2] Rating(s) within this class was/were placed on review on February [3] Placed under review for possible downgrade on February Source: Moody's Investors Service 1 18 July 218

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12 CLIENT SERVICES 12 Americas Asia Pacific Japan EMEA July 218