Half Year 2022 Standard Chartered PLC Earnings Call
On a normalized constant currency basis supported by continued positive momentum in the second quarter, which was up 11% and generating a 10, 1% return on tangible equity. We're also announcing today, a new share buyback of $500 million to start imminently.
Actively manage our capital with the aim of returning the region to $5 billion to shareholders over the next three years. We've achieved all of this by actively supporting our clients and communities and will continue to be challenging conditions.
The external environment is likely to remain difficult to predict in light of the ongoing Russia, Ukraine War, the continuing impacts of COVID-19, and widespread supply chain disruptions recession risks arising in the U S and Europe and central banks are compelled to raise interest rates to address rapid and sizable increases in inflation. However.
East many of the markets in which we operate are showing early stages of a post pandemic recovery.
China is deploying strong policy stimulus that should kickstart the economy.
Boosting domestic and regional activity.
We are well equipped to navigate this complex macroeconomic picture with a solid risk management Foundation that the group has built over time and the resilience of our diversified business model. So with this backdrop, we remain confident in achieving the financial and strategic targets laid out back in February to deliver at least 10% return on tangible equity by 2024.
Earlier, if the rates in operational starts a lot.
I'll come back and provide a more detailed update on the encouraging progress, we're making against the five strategic actions that we set out as well as our strategic priorities. After Andy has talked to us through our first half results, we will both be available for Q&A as usual.
Andy over to you.
Thank you Bill and good morning, and good afternoon, everybody I'll start with the first half highlights before providing more color on what has been a strong financial performance for the first six months of the year first half operating income of $8 1 billion, excluding DVA was up 10%.
On a constant currency basis, and after normalizing for the 2021 I first nine interest income adjustment.
This growth was largely driven by a 12% increase in net interest income and a record half for financial markets, partially offset by a more subdued wealth management performance expense.
Expenses were up 6% at constant currency and excluding at higher performance related pay accruals with cost efficiency savings more than offsetting increased investment spend this resulted in 2% positive income to cost shows for the first half.
Credit impairment for the first six months of the year was $267 million. This compares to a net release of $47 million for the same periods last year.
The resultant underlying operating profit for the half year was therefore $2.8 billion up 7% when compared to last year on a constant currency basis.
All of this led to a return on tangible equity of 10, 1% loans.
<unk> advances were down 1% in the second quarter on a headline level, but when you just the currency translation and excluding the impact of volatile optimization actions. There was underlying growth of 2% risk weighted assets reduced by the $6 billion in the second quarter to 255 billion.
Driven mainly by currency translation and sort of the optimization actions.
And our CET, one ratio was 13, 9%, which remains towards the top of our 13% to 14% target range.
And as Bill said, we've just announced a new $500 million share buybacks, leaving us with a strong capital position to fund future business growth and have capacity for more shareholder returns over time.
Looking at income now in more detail.
Income overall was up 9%, excluding DVA and on a constant currency basis and was up 10%. After normalizing for the <unk> nine interest income adjustment in the second quarter of 2021 income growth was driven by record half in financial markets up 18%, excluding DVA with.
Strong performance in macro trading, which benefited from high levels of volatility increased client flows and elevated commodity prices and some income also included a $212 million mark to market gain on liabilities driven by the current market volatility.
Some of this gain may will reverse out over the coming quarters, if conditions stabilize and spreads narrow transaction banking income was up 14%, reflecting encouraging signs of economic recovery across a number of our markets with the cash management business benefiting from the rising rate environment up 25% retail.
Promising comes up 11% with deposit margins, improving as interest rates rise and starts to flow through particularly in the second quarter driving a 37% increase in deposit and other income Treasury and other income was up 39% mainly from the structural hedges, we put in place earlier in the year and the benefit from rising rate.
<unk>.
Lending and portfolio management was down 20% impacted by the execution of the art Abdullahi optimization initiatives in the CCI B segment, mainly in the first quarter and lastly, wealth management was down 16% two main factors at play here Firstly, the extensive COVID-19 measures.
The oil in place across Hong Kong, China, and Taiwan for much of the first half reduced customer and sales activity.
Secondly, investor sentiment remained very weak negatively affecting market sensitive products.
Whilst income growth in the first quarter was driven by SM in the second quarter, we saw a more balanced picture with transaction banking retail products growing strongly helping to drive the second quarter income growth rate up to 11% looking at our top 10 markets, which account for around 80% of the group's income most showed good income growth.
With only two markets, Hong Kong, and Taiwan down year on year, but it's negatively impacted by COVID-19 and weaker market sentiment.
Looking at the early trading numbers for July in financial markets. We continue to see similar levels of client flow to those we experienced in the second quarter as well as ongoing elevated volatility in wealth management, we are starting to see signs of recovery in Hong Kong. However, we remain cautious given the challenging market conditions, particularly.
With varying degrees of Covid lockdowns, continuing across China, Let me now provide little more color on the 45% of our income that is interest rate dependent.
Statutory net interest income was up 13% to around $400 million on a constant currency basis on the first half of 2021.
This was driven by two things a 5% underlying growth in interest, earning assets after adjusting for FX and the impact of volatile optimization actions, which was particularly encouraging to see given the varying economic conditions being faced by our clients across our markets.
And it was also driven by 11% increase in the normalized NIM compared with the same period last year driven by higher interest rates.
We are already seeing transmission of interest rate increases into our U S dollar book.
Casa deposit pieces have so far been lower than expected and we have seen some early signs of migration from cancer into time deposits.
With the margin having bottomed out in the third quarter last year. We have now had three quarters of sequential increases with the second quarter margin of 1.35% increasing by a further six basis points compared to the first quarter.
This quarter on quarter increase in the NIM reflects a 10 basis points expansion from rising rates, partially offset by three basis points contraction from changes in product mix and a third the one basis point from treasury hedging activity.
This is a picture we expect to see over the next couple of quarters rising interest rates driving NIM expansion with some increased dampening effect from our hedging activity mix changes and increasing deposit bases as we go through the cycle.
Whilst dampening our short term rate sensitivity, our structural hedge will protect our NIM as and when rates fall and given the relatively modest size of our overall hedging program rising rates remain a material tailwind fought.
And finally on net interest income we have updated our interest rate sensitivity is to reflect the impact of further rate rises since we've now experienced the first 150 basis points or so of increases.
The positive impact from the next 100 basis points of rate rise is now $750 million in the first year rising thereafter as fixed duration exposure. Subsequently reprice. This reduction insensitivity is due to the impact in Hong Kong with the migration of mortgages, the prime rate cap and some of the rate rise benefit already been.
Captured by Treasury hedges.
In summary, as we've previously guided we expect the NIM to continue to gradually increase through the remainder of 2022 with the full year average net likely to be around 140 basis points.
Turning to the other 55% of our group income fees and other income which was up 7% at constant currency. Excluding DVA. This has two component parts, which moved in opposite directions.
<unk> trading and other income was up 21%, excluding DVA driven by our record financial markets trading performance.
Net fees and commissions were down 9% year on year due largely to the softer performance in wealth management, which I covered earlier moving on to how our clients segments before I'll keep this reasonably high level.
CCI be income, which accounts for broadly 60% into group income was up 16% on a constant currency basis benefiting from the record financial markets performance asset growth and the positive impact of rising rates on transaction banking cash.
<unk> income was broadly flat, reflecting our continuing the subdued wealth management performance, but a nice pickup in retail products in Q2 with deposit income being particularly strong.
We continue to invest in the ventures segment with expenses up 26% as we look to develop interconnected ecosystems across multiple markets.
We've included three slides in the appendix of the supporting Slide pack available on our website with further details on the various benches.
Now turning to our geographic regions, where we saw good all round growth.
Our largest region Asia delivered a resilient performance with income up 4% on a constant currency basis, and the return on tangible equity of 12%.
We're also the largest market Hong Kong was understandably given the COVID-19 challenges down 5% eight of the 10 largest markets in the region delivered income growth and five of those grew at double digit.
We even experienced growth in China in Q2, despite the Lockdowns in the Africa and Middle East region income was up 8% on a constant currency basis.
We saw some very strong market performances with the UAE, Pakistan and South Africa, all producing strong double digit growth.
The region's profit increased by 28% to <unk> $6 billion.
We did say that we would move our Ami exit markets into restructuring however to keep a comparative analysis as clean as possible. We have decided to leave it as is for this set of results.
Markets will be reported in restructuring when we are further advanced in the disposal process and finally in Europe and Americas, We saw very strong income growth up 48% driven by the strong financial buckets performance and the regions operating profit more than doubled.
Europe and Americas is also a key origination center with its offshore network income up 10%.
Bill will be talking more about the value of our networks later looking briefly at our top five markets Hong.
Hong Kong's income was down 5% in the first half impacted by the resurgence of COVID-19 in the first quarter and generally weak market sentiment. The second quarter was how does the stronger off the back of higher interest rates and some recovery in business momentum the Singapore economy has rebounded as the country continues to reopen.
Post COVID-19.
Our businesses performed well with income up 10% with financial markets cash and deposits being notably bright spots profits were up by 7% and returns up by one percentage point, it's a similar story in India with a healthy post COVID-19 recovery reflected in good economic growth.
Income in India. It was up strongly with 14% growth for the first six months of the year driving profit up by 9%. The Korean economy has navigated the pandemic well maintaining low single digit GDP growth and our career franchise continues to go from strength to strength.
Income was up 14% and expenses were down 3%, reflecting the restructuring action. We took last year. This helped drive a 27% increase in operating profit and a mid teens royalty.
China business grew income 6% year on year to produce its best ever first half income result, this was driven mainly by CCI be more than offsetting a weak wealth management performance as a result of the ongoing COVID-19 containment measures lastly, our full optimization markets continued to deliver strong bottom line growth.
With operating profit up in aggregate, 24% at three quarters of $1 billion, just seven years ago, They lost more than $1 billion.
Now turning to expenses total operating expenses were $5 3 billion for the first six months of the year up 6% at constant currency and after normalizing for relatively higher accruals. This year, reflecting our currently improved trading outlook investment related spend was up a $100 million, including a 39 million.
The increase in our ventures segment. This was more than offset by the delivery of around $200 million expense efficiency savings in the first six months of the year, including the closure of an additional 31 branches in CPP.
Looking now at credit impairment.
Charges for the first half totaled $267 million. This compares to a net release of 47 million for the same period last year.
This represents a loan loss rate of 15 basis points still low, but starting to move gradually towards the medium term range of 30 to 35 basis points.
There were three major items driving this charge, mostly arising in the first quarter $237 million on stage three assets relating to China commercial real estate exposures $70 million relating to the sulfur and downgrade of Sir Lanka offset by a $129 million release.
Power management overlays.
This included releasing $160 million from our Covid I've liked but increasing our overlay in relation to the China commercial real estate sector by $31 million to $126 million.
We continue to monitor the situation very closely and remain alert to the challenges the sector is facing given the external market conditions.
Turning now to <unk>, which were down a net $16 billion or 6% in the first six months of the.
There are many moving parts.
Starting with the $14 billion of increases 6 billion from regulatory changes that were affected from the first of January this year and $8 billion of asset growth and mix.
This increase was offset by around $30 billion of RW, a reductions, including 14 billion from efficiency actions primary in the first quarter positive credit migration of 6 billion and an $8 billion favorable impact from FX movements Lastly, looking at our capital position, we closed 2021 with the <unk>.
Q1, 14, 1% and our ending the first half at 13, 9% towards the top of our target range.
Profit generation and the benefit will reduce our W. Is added a combined 150 basis points to the CET one ratio during the first half this is being offset by a number of items, primarily a 100 basis points from regulatory changes and the $750 million share buyback. In addition to 50 basis points for.
Instruments fair proud you through other comprehensive income on the treasury portfolio.
Finally, looking ahead for the rest of this year as I mentioned in my opening comments, our financial performance in the first six months of the year has been very strong and as Bill said, we are making encouraging early progress against the strategic priorities that we highlighted to you in February .
However, external conditions remain difficult to predict particularly in the west.
Taking account of our current performance and the external environment. We have updated our guidance. We now expect 2022 income growth, excluding DVA of around 10% on a constant currency basis significantly ahead of our earlier expectations for the year.
We have also updated the currency translation impact, which we're currently forecasting to be around a $4 billion headwind.
As previously guided we expect further NIM progression in the second half the year, taking the outlook for the full year average to be around 140 basis points and around 160 basis points for 2023.
We now expect operating expenses, excluding the U K bank Levy of around 10 $6 billion for 2022.
This is net of around $3 billion of foreign exchange translation benefits based on the current outlook for exchange rates, but it does include increased performance related pay.
As a result, we now expect the currency translation impact to be a net drag of around $100 million to pre provision operating profit as a result of the scale of the dollar strength thing across multiple currencies impacting our income more than our expenses. We're also adjusting our risk weighted asset growth expectations for the impact of currency translation and <unk>.
<unk> to be broadly similar to 2021 on a constant currency basis.
As previously guided credit impairment is expected to normalize over time towards the medium term loan loss rate of 30 to 35 basis points.
And we fully intend to operate dynamically within the 13% to 40% range, taking account business opportunities and the macro outlook, we remain fully focused and confident in delivering on our 10% rote target by 2024, if not earlier dependent on interest rates and the broader operating.
<unk>.
So with that I'll hand back to bill to update on our strategic progress.
Thank you Annie back.
Back in February we highlighted five strategic actions to help us achieve our 2024 targets. Since then geopolitical and macroeconomic volatility has adversely impacted the global economy and it appears at this stage of the Asian markets have been less affected than those in the west and as Andy mentioned several are rebounding well from the COVID-19 pandemic and as you can see.
This is coming through in our results against this backdrop, our strategic actions remain highly appropriate and serve as catalysts for the whole organization I'm extremely pleased with the progress. We've made since we set up these commitments I've already talked about our latest action on shareholder returns and I will now run through the other strategic actions.
Firstly in TCE IV, we're going to drive improved returns targeting an improvement in income return on risk weighted assets by 160 basis points.
In the first six months of the year income return on risk weighted assets was 6% already 110 basis point improvement from 2021.
And that was driven by strong growth in income from financial institution clients up 11%.
Which now accounts for 44% of Cc IV income. In addition, the CCI. The team successfully delivered around a third of their $22 billion three year <unk> optimization target in the first half of this year, enabling the business to remain well under their R. W. A target for 2024.
And <unk>. The team has made steady early progress on their journey to transform profitability with a cost income ratio down two percentage points since the end of last year to 72% of their $500 million three year gross expense savings target. They have delivered $98 million of that so far including a further 31 branch closers.
And are executing plans to deliver the remainder of this year's target of $200 million.
The business also continues to add a very healthy number of new clients through partners with over 350000 partnership clients added so far this year.
Key contributor and driving growth in the number of mass retail clients as we go into the second half of 2022, CPB should see tailwind for both interest rates and hopefully an improving wealth management outlook.
Which will help improve the cost income ratio further China presents the group with one of the biggest strategic opportunities over the coming years and as Andy mentioned, China. This year delivered its best ever first half income performance, our CIB business made good progress in the first half of the year and China Network income grew strongly along a number of key corridors in ASEAN.
36% in South Asia of 24%, we saw a strong growth, particularly in Singapore, India and Bangladesh.
In addition, there was strong growth in both sustainable finance income and income from new economy clients Unserved.
Unsurprisingly, our CPB business in China is faced headwinds with large scale, COVID-19 lockdowns and weaker market sentiment impacting both management.
Despite this we continue to make great progress with our focus on digital partnerships with the launch of a number of new partnerships in the first six months of this year, including J D Dot com and we bank.
The long term prospects from the structural shifts relating to China opening its financial and capital markets remain intact. We believe we are in a unique position to capitalize on the significant opportunities from this opening and are investing $50 million this year and both onshore and offshore capabilities.
The overall $300 million three year investment plan to further strengthen our position.
Expense efficiency is core to enabling us to create positive operating leverage whilst creating capacity for us to continue investing into strategic initiatives and here as Andy mentioned, we have already delivered around $200 million of the $1 $3 billion gross structural cost savings target moving onto our strategic priorities and network at the start of 2021.
We also set out four strategic priorities continued to grow our network business continued to grow our affluent business returned to growth in mass retail and advanced on all fronts of our sustainability agenda, we're making good progress in every area given the changing economic environment I'd like to drill down a bit on our network business the group's unique and.
<unk> network continues to be a source of competitive advantage through which we facilitate investment trade and capital flows for our clients' network income that is income book outside of clients' headquarters country is around 55% of <unk> income and is up strongly so far this year with 14% year on year growth with all our main <unk>.
Corridors showing good growth network income is highly attractive for us it produces higher returns for the group with an income return on risk weighted assets of seven 2%, a 120 basis points higher than the CCI be average Asia is the largest originator of network income with $1 $1 billion of income for the first six months of the year, which is up 40.
Percent.
Intra Asia corridor is account for around three quarters of this with growth of 10% China is the largest single network market.
Europe , and Americas network income of $1 billion was up 10% with more than half of that into Asia.
Particularly strong growth in the ASEAN and South Asia corridors up 22%.
Lastly, Africa, and Middle East generates about $3 billion of network income for the group and is also an important corridor for Europe , and Americas and Asia.
And whilst the overall network picture is a positive for the group.
We're also taking action as we sharpened our focus on the most significant opportunities for growth while simplifying our business.
To that end back in April we announced that we are exiting the onshore operations in several markets in the Africa, and Middle East region, and focusing solely on the CCI segment into additional markets.
We will look to refocus resources into new markets, like Saudi Arabia, and Egypt, as well as ongoing investments into several of our larger markets in sub Saharan Africa building on the strong corporate retail and digital banking operations, we have in those markets.
Now turning to sustainability, we continue to see strong incremental and our sustainable finance business with income up 43% and asset growth of 11% year on year or.
Our pipeline continues to build and we remain confident in delivering our $1 billion income ambition in the medium term, the Russia and Ukraine War is creating some negative sentiments for sustainable plants as companies and countries are having to switch suppliers just to keep the lights on volte.
Volatility and higher prices in core commodities will also impact of supply chain issues at renewable companies.
However, this is likely to accelerate the climate transition in the medium term with energy independence now, becoming a security issue I'm very excited by the appointment of Maurice withdrew as our Chief Sustainability Officer Luisa is a highly experienced CSO and she will lead the newly created CSO organization across sustainability strategy client solutions and our net zero.
Program, we continue to implement our ambitious net zero pathway, including those enhancements we announced in March.
We're also continuing to demonstrate our thought leadership with the release of our just in time report that investigated the cost and socio economic implications of a net zero carbon transition. We know that emerging markets are most in need of capital and require almost 95 trillion to.
To affect their transition to <unk>.
They needed a significant and reaching net zero in our markets will therefore be no mean feat and we remain optimistic in our ability to play a pivotal role in supporting this just and sustainable transition.
Lastly, I wanted to drill down a bit into our of inter segment. We built a diverse portfolio of 20, plus investments and over 30 ventures across six high conviction themes, providing optionality for our future and a key catalyst for change in our broader organization and we're making meaningful progress across a number of areas. We now have around one 2 million customers across.
The various centers, including over 350000 customers and marks our Hong Kong Virtual bank up 100000 in the second quarter alone.
The total value of customer assets across the various platforms that now almost $2 $5 billion with transaction flows of around $8 billion in the first six months of this year, our recently announced partnership with Spi Holdings will help us accelerate growth of salt the <unk> digital marketplace for micro small and medium enterprises.
We also have in the pipeline some exciting new ventures that are close to launch Trust second separately licensed digital bank in Asia in partnership with <unk> do you see is an extensive user testing and plans to go live in the next couple of months.
Our plug and play banking as a service solution Nexus.
Now has regulatory approval for launch in Indonesia, which is planned imminently and we're looking at expanding this to a second market more to come on that later this year.
So as you can see since its creation interest has come a long way with very promising future potential.
So to sum up what Andy and I have just covered we delivered a strong financial performance in the first half, we're making very encouraging early progress against the five strategic actions we've laid out in February .
Looking forward, whilst recession risks are rising in the west we're seeing the early stages of a post pandemic recovery in many of the markets in which we operate underpinning our prospects for growth.
We have the right strategy business model and ambition to deliver our 2024 targets.
The management team and I remain focused on delivering these targets, while we create exceptional long term value for the group.
So with that I'll hand over to our operator, so Andy and I can take your questions.
Thank you we will now begin the question and answer session. If you wish to ask a question. Please press star one and one on your telephone keypad and wait for your name to be announced.
Alternatively, please use the question box available on your webcast page to submit your question once again star one on one if you would like to ask a question via the telephone.
We will now take our first question.
Please standby.
Your first question comes from Joseph Dickerson from Jefferies. Please go ahead. Your line is open.
Hi, good morning, Congrats on a.
Very good set of results.
Just had a couple of quick questions on the margin one in terms of the current quarter.
Just discussed the headwinds from treasury effects, because that was quite a tailwind.
Last quarter, and then I was little surprised you didnt quite see somewhat higher on the on.
On the guide for this year, given we've got the one month and three month high bar up about 50 bps. Since the end of Q2 is this is this.
Partially explained by the.
Prime rate cap.
Okay. Joseph Thanks, very much for your question.
So we've seen another pick up in the name in the second quarter compared with the first quarter.
Reaffirm that.
140 number for the full year, we think feels good in fact, if anything we're slightly upgraded that because I had said previously.
Jim Alden 40, now probably semantics, a little bit but around one or two so we feel the direction of travel there is good.
We have included in the slides.
The move of the name between first and second quarters.
And you can see there's a basis point compression from hedging.
This underlying growth.
It's moving strongly obviously in a favorable direction.
For next year, we've said more than 60 still feels a good number for us. So we've got the flow through of what's already happened and obviously some of that book re prices at periods of time, not immediately but over a period. So I think duration of travel there is good.
The hydro or prime side effect in Hong Kong, we factored into that there are caps on some of the mortgages. So that does provide a ceiling on some elements of the book, but that is factored into those numbers.
Right around 140, this year 169 tier I think perhaps the world now.
Back to the operator.
Thank you thanks very much.
Thank you.
We will now take our next question please standby.
Your next question comes from the line of <unk> from Credit Suisse. Please go ahead. Your line is open.
Good morning, everybody. Thank you very much for taking the questions.
I was hoping you could give us a bit of an update on the progress.
Around the efficiency measures.
On the capital ratio, which have been very strong.
Just wondered if you could give us an update too.
How much optimization and efficiency might still be.
Yet to be delivered upon.
And what the.
Total targets that were set out it could be.
<unk> exceeded that.
Just related to that whether you could summarize some summarize the movements in <unk> going forward.
We ended the year. Thank you.
Great. Thanks.
First of all I'm sure will add some color.
Bottom line things are very much on track, so first half, but 7 billion reduction in <unk>.
Very much on track in terms of the improvement in the return on risk weighted assets that obviously has a number of moving pieces, but as we break it down the businesses.
Demonstrating very very strong discipline in terms of our management of risk weighted assets.
Across the board, but in particular in the <unk> area.
And that's coming through in the numbers, so well on track to hit our $22 million.
Optimization target over that over the three year period, and the return on risk weighted assets has seen a big jump obviously thats also contributed.
Contributed to by the strong income results.
And as Andy mentioned that begins with with very strong financial markets results. In Q1 continued strong in Q2 that obviously offset that torrid pace from early in the year, but also strong income growth across the rest of the business.
It was much more balanced in the second quarter, which of course is encouraging when we.
Look forward, we look at we look at the deal pipelines, we look at the expectation for ongoing customer activity in financial markets.
Associated with what we expect to be an ongoing volatile environment.
And we see the opportunity to continue to drive both the <unk> optimization, but also.
The associated income growth that will improve that return on risk weighted assets.
So the <unk> have moved around a lot.
Over the course of the year. So we've had regulatory changes we've had the efficiency drive we had the asset mix changes et cetera, and the FX, obviously has played into it as well.
What we've said is if you take your thoughts if you adjust for FX, we would expect to be roughly that level at the end of the year that would imply probably a 3% growth in the second half of the year that will be net of efficiency guidance. So obviously, you're assuming some client growth might be a little bit ahead of that offset by some of the efficiency guidance and in that zone is where we would expect to be at the end.
The year.
Operator can take next Thats wonderful.
Thank you.
Your next question.
Comes from the line of.
Tom Rayner from Numis. Please go ahead your line is Nathan.
Yes, thanks, good morning, everyone.
Two questions. Please.
First on credit quality.
I think you reiterated I think your medium term guidance.
ECL charge, but.
Got you still seem very benign trends on sort of all the indicators of whether or not noticeably.
Yeah.
Sort of gone up now two quarters in a row.
Wondering if there's anything.
On there that we should be concerned about.
Just a second question on <unk>.
But the right optimization.
Well, thank you all that now as well.
What are you guys.
We're thinking about them.
Yes, yes.
I know you had said.
Comfortable with the 22 billion over three years.
Yes.
Quarterly progress this year I think it was $6 billion in Q1, and then only one can't tell you I was just wondering why that's sold.
The second quarter quite light.
Good.
I'll take a quick stab and again I'm sure Andy will have color.
Credit outlook is pretty good right. So that the quality of the portfolio is strong we weathered some some some storms.
We continue to be very well provided well covered in terms of our provisions and we continue to have a small but meaningful overlays both around the.
The tail end of the Covid pandemic, let's hope it's a talent.
And also around China real estate.
The.
Early alerts I think reflects the fact that the markets in which we operate are under stress and what will come under more stress and that stress obviously from <unk>.
So down in growth in the west as restroom from higher cost of living higher commodity prices and the higher interest rates associated with the strong dollar. We've obviously seen that stress manifest in Sri Lanka, and a very acute way.
The markets in which we operate are under pressure as well and I think we've taken a very prudent approach in terms of identifying the potential.
<unk> problems that could come down the road and that's what the early alert portfolio is.
But I would say against that backdrop, we've weathered the call at the early stages of this storm very well and we have every reason to think that we'll continue to.
But the guidance back to what we would consider to be a more normal through.
Through the cycle credit cost range.
Is that the basis on which we're planning its the basis on which we planned for for the investments that we're making the returns that we expect to achieve.
We think thats prudent cautious and we think Thats a citizen pretty good said so far.
I'll turn it over to Andy for any any comments on either of the two questions.
Obviously, as particularly focusing on the already great question.
Yes, Okay, I mean, just to supplement that might be on the credit. If you look not just to the alerts, but the three that we have in our bucket. We are 11 billion level. So we've been a little bit below that the last couple of quarters, just fractionally above it now I wouldn't see anything significant in there I mean, obviously, there is a little bit more pressure in certain countries.
And hence the slight increase I think is consistent with that credit impairment charge going through the P&L has been very low we said over a period of time. It will normalize I think it's all it's all pretty consistent with that so it's a modest change.
Inches rather than anything more substantial.
In terms of the RW efficiencies that not going to comment in a purely linear why there is some of those so it's a relatively easier to do there is some of those that will take a bit more time to actually work through we remain completely committed to getting the overall number out on a three year basis. So I think on a quarter by quarter, you would expect that number to move it.
Around little bit, but nothing wrong with us.
And back to the operator.
Thank you.
We will now take our next question please.
Please standby.
Your next question comes from the line of <unk> Kumar from Redburn. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my questions just a couple the first one just going back to NIM.
For the 160 that guide in 'twenty three I think 160, it was kind of where you were pre COVID-19 when U S rates are kind of more like the low twos, we're looking at U S rates being kind of reasonably above 3% is there anything that.
Change in the balance sheet structure that would mean that your mom.
Margin shouldn't be materially higher than that given the U S rate environment. It doesn't look like the hedge is really a big enough offset.
So is there anything else going on in the balance sheet that would result in your NIM relative to what the U S, Mexico and being lower than where they were pre COVID-19. That's my first question.
Second question was just thanks for the comments on wealth seeing early signs of recovery a couple of wealth management in Asia Pac and Peyton I think more constructive seeing Asian clients deleveraging and taking a bit more risk. So what do you see on the outlook for wealth management, given the kind of zero carbon policy in China would you are you also seeing signs of more risk taking better.
And you mentioned thanks.
Thanks, Ed and you wanted to take the NIM question and when they come into on the upside that can come back in on either.
So you're quite right. The name immediately pre Covid was about the 160 level. So 2023 being back at that level will be very equivalent to our.
Immediately pre Covid I think the balance sheet has moved a little bit not Paris, it will be a total of three.
So there is some product mix change.
Obviously in our forward forecast as well we are second guessing what we think will happen over a period of time. So overall I don't really have anything thats all domino's in the air I think getting back to more than 60 is more putting ourselves back on us long term average interest rate basis, where you would expect this business to be operating and clearly the profitability of the business will be.
Hi.
<unk> launch as a consequence of that.
The wealth management side look sentiment has been against the investment just recently.
First quarter in particular to some extent the second quarter there were lockdowns.
Biggest wealth market market of Hong Kong that obviously doesn't help for the face to face sales et cetera. So our view is that over periods of time, particularly lockdowns now fighting sentiment will be what it will be but typically after a period of sentiment all things do rebound. The question really is when we will.
But I think we've taken a reasonably cautious view of that but I would hope at some point in time, we would see actually sentiment change coming and remember the wealth management business for us over a multiyear period. The CAGR on our income there has been very very strong sort of 8% to 10% over a multi year period. It has had periods when it's been periods, when it's being higher but overall.
Our confidence in that business remains absolutely unchanged. This is just the tougher periods just at this point in time.
I think I'd be.
Even even more direct when we look over 10 years or 15 years.
Theres, leading indicators and then theres the outcome the outcome as income in the income is highly dependent on market sentiment in any given quarter.
And whether it's in this quarter apart from that the Hong Kong related and China related to Covid Lockdowns, which of course has a direct impact in terms of our ability to connect with customers equity markets were very weak in particular early in the period Chinese equity markets and the <unk>.
Sector, which had been.
A higher proportion of our wealth management activities and then the broader the broader market.
So like earlier market disruptions that we've seen that come from time to time, we have had a meaningful drop in income.
That typically stabilizes at a period, perhaps who are in that stabilization period right now and then we get a gradual return.
Generating this this 8% to 10% compound growth that Andy talked about consistently the leading indicators are very encouraging for us in terms of new clients.
In terms of the customer satisfaction that we get from those new clients the amount of money that they're moving into their accounts and we see that in terms of a good Casa growth and time deposit growth.
Customers are getting ready to invest with center chartered by moving the money into our accounts, it's a leading indicator because they are not yet putting that money to work in the the.
The riskier markets, which of course generate higher wealth management income for us.
And I would make is that while the bancassurance distribution has been very disrupted by the COVID-19 related lockdowns. The underlying performance there continues to be very strong as well so we're.
We're happy satisfied I guess, it would be the better way to say it with our current performance given the context.
Quite optimistic about the outlook in the wealth space.
Can we go back to the operator, and just one follow up.
Kerry I thought.
Sure.
Okay.
But how do you got to go back in the queue.
Sorry.
I will go to the next question.
Please standby.
Your next question comes from the line of Robert down from Hate SBC. Please go ahead. Your line is open.
Good morning.
Just one one quick question for me.
We tend to focus on what kind of margin numbers, but.
The average interest, earning asset figure is also kind of important.
So the guidance if I look at Youll sort of average balance sheet day from page 170, it looks like Youre running down.
Bank lending.
Wholesale customer lending.
If you could give us a kind of sense for.
What you'll see in terms of customer loan demands that Rhode Island.
Where you might expect to see.
Average interest, earning assets going in the second half and perhaps if you've got a crystal ball into kind of 2023.
Yes, let me, let me pick that up Robyn. So there has been again quite ultra movement in the average interest earning assets over the course of the year. So we've had underlying growth through customer demand. We've had foreign exchange. We have had the consequence of the odds of efficiency metrics.
You put all of that together, we probably had on the line about 2% growth in the six months year to date.
Is there sort of a fair indicator of what's happening under the surface of it.
As we look forward for the balance of year I think we've got a number of factors in play here.
One is markets like Hong Kong, which clearly had a more difficult first half hopefully picking up a little bit more momentum.
Secondly, quite a lot of our markets is still in the coming out of Covid phase.
Which.
Think still give some opportunity for growth in that space.
We will obviously play a role as we go forward over the coming months.
Think we are still sitting here, so I actually with the way that the economies in which we are price remember those largely northwestern wardens playing out that actually there is reason to still be quietly confident about the growth. That's there. There's obviously a lot of talk about recession and the western market, that's probably for us a slightly lesser issue certainly as we talk about balance.
So this year.
We'll have to see where that goes next year, but at the moment outside the <unk>.
And there is still running okay, and we will continue to push hard on that over the balance of this year.
Operator can we pick up the next question.
Thank you.
We will now take the next question please standby.
Your next question comes from the line of Alastair Ryan Bank of America. Please go ahead. Your line is open.
Thank you good morning, and two related questions. Then please go back to the net interest margin guidance, if I go to the.
Year end 2021 results.
You gave us $1 3 billion for 100 basis points, plus 30% to 40%.
Over time.
So given the 3% move in rates since then.
That was mechanically from the $1 one nonstop.
Give you a number about one nine.
No I appreciate it.
Things change.
But one six to one point now and it's a really big caps for the question and Shaw.
Is the one six.
<unk> guidance or.
Some things really meaningfully different to what you thought at the beginning of the year.
And the second question is on the <unk>.
Savings accounts book.
10, 7% slide 41.
Down 7% year to date, which is called a meaningful reversal of what's been a very strong trend.
Is there anything in there just Karen thank you.
Yeah, Alex let me take the first point up.
I know, we give it to the guidance sensitivity analysis at 1.3, but it is an incredibly difficult number I think to work from.
It is an assumption of simultaneous change in FX rates across all markets in time. It is a full year effect and obviously the big ramp up we've seen that's been at mid year. This year.
FX that comes into play and we have got as you observed in your question. The fact that after.
After the first year as a first year number we then get more assets rollovers et cetera that need repricing. So it is genuinely really difficult to do that sort of a correlation.
I think that I would place personally most all of what we've said on the $1 40, and 160 because that takes account of difference in timing operate changes across the many many markets in which we operate.
It takes account of wane during the current year, particularly those rates started to move it takes accounted at the very latest view that we've got all bases et cetera.
I would say that the 141, 6% is sort of the real life number, whereas the one three number.
On a particular set of.
Assumptions.
On the savings.
Listen I think what we've seen in the first part of this year.
Is a slight movement not surprisingly between how sort of current account savings account and the term deposits.
Obviously as rates increase any sort of gap between what you can get my current accounts and what you can't get on the time deposit more people will start to look at that and I think by memory. The mix between the current accounts on the term deposits in our consumer business has changed by two percentage points I think it is on a year to date basis and probably we will.
See that continue over the balance of the year.
Time deposits fraction, nor expensive for us, but overall, it's very good quality deposit so I'd sort of look at the two its a collective.
I'm very happy with the overall liquidity position at the moment, it's not not troublesome.
And then maybe just a big picture level.
As we reflect on the guidance that we gave in the beginning of the year, we obviously made assumptions and market by market about the pass through rates and the beta deposit beta and we made assumptions about the migration from from current accounts savings accounts into time deposits.
And that was the basis of our $1 $3 billion guidance as we see how things have played out so far it's basically perfectly in line with our guidance. So the market behaviors are exactly what we expected were obviously not done with the rate hike cycle.
But the behaviors of the same.
The behaviors are in line.
As you point, putting it out when you when you ask the question Alastair.
The FX impact on the current account and savings account.
And time deposit numbers, it's material when you normalize for the currency effect or does it take a constant currency view, it's more or less flat when we get to the savings account. So.
So it is largely down to the FX.
Really important point is that overall, we were guiding to 160 basis points and that's something that we're very happy to standby as we sit here today.
Operator, I think we can go to the next question.
Thank you.
I will take the next question now please standby.
Your next question comes from the line of Nick <unk> from Morgan Stanley . Please go ahead. Your line is open.
Thank you very much and thank you for taking my questions two questions actually the first is just referring to slide 33.
Our China commercial real estate.
Breakdown of $3 7 billion I, just wonder if you could remind us in terms of.
Sort of split it up between its safe to say that enterprises between private enterprises.
And also the.
The.
Steph, it's booked out of Hong Kong.
Is that sort of directly exposed on.
Sort of mainland China.
Sort of property or is it sort of.
Hong Kong exposure that mainland developers and also just want to make sure that you sort of captured in there.
Sort of any exposures outside of China mainland about this so I'm just trying to get a feel for what's in and what's not a lot three seven.
And then the second question.
As high ball, one month LIBOR starts to move up which I assume it will do over the next few months.
Just sort of close the gap with one month LIBOR.
Youre going to have to begin to sort of thinking about what you do with prime rates in terms of your mortgage spreads. So I just wonder if you could give us sort of a view on what you might think will happen to mortgage pricing in Hong Kong and what you've sort of incorporated in that margin forecast.
For mortgage pricing in Hong Kong.
Yeah, Okay. Thanks, Clay, so slide 33.
You referred to as you say, a $3 $7 billion of commercial real estate relating to China that slightly down on where we were previously.
We've given various data points on that slide.
I would say overall, we've been pretty thoughtful about which exposures we've taken on over a period of time generally speaking we've been with the high quality developers.
Roughly I think three quarters of that exposure is investment grade portion of that is project under construction in China is I think less than 1%.
No.
It's a well constructed portfolio not without its issues. You know we have said that a big part of the credit impairment charge, we took in the.
First off I mean looked at most of the great. The charge overall did relate to the China commercial real estate area. We also show a split of that chart of how much of the exposure is booked in China, how much of it is booked in Hong Kong that depends a lot on where the clients are based et cetera.
On the high ball, we are clearly as we always do monitoring the position.
We want to grow the mortgage book that we want to grow the business that we want to make sure. We're competitive on pricing. So we will continue to monitor our pricing on that front and we'll see how things develop over the coming quarters. We have made a set of assumptions on that incoming obviously throughout NIM forecast for the group as a whole, which I referred to earlier and that is embedded within that.
Sure.
Operator, I think next question.
Thank you.
We will now take our next question.
Please standby.
Next question comes from purely among from K B W. <unk>. Please go ahead. Your line is open.
Oh good morning, Thanks for taking my question.
Yes.
Can I go back to the prime rate in Hong Kong So.
So what are the consideration when you think about moving into prime rate because historically is not a rate that move too much but just wondering what are the considerations, but other way are there I mean non commercial reasons that you would have to consider.
<unk>.
Possession, yet to think about whether to move time or not and then how much of the deposit and Hong Kong Alpine linked.
Condos on the lending side with some of the benefit to be offset by higher deposit rate ultra and about what you would expect some obviously.
Interest rates going higher genuity.
So that's the first one.
And then a second one.
The NIM guidance for next year, one six days.
I mean, there are already some noises from fed.
Last week.
Nobody took some rate hikes might be selling mix et cetera. So if we see that happening.
It goes down by 160.
It's sort of just what sort of assumptions are in that number. Thank you.
Yeah.
Let's start on that any.
Yes, So let me let me see if I can have a go at that.
So the prime rate I mean, I think as with any rate setting where you will take a view as to what the market is doing we will take a view as to what customers are doing and if we think it is appropriate we will might change the prime rate has not historically changed very much at all so.
Hold your breath, but nonetheless, we will keep it under review.
Proportion of the deposits that are prime linked I think by memory, its just over half or something of that order.
And then in terms of the NIM guidance.
Listen we can only give a view based upon our best expectation of what might happen.
It may well be clearly estimates prove to be inaccurate, but we think because of sort of middle of course <unk> hundred 60 is around where we will be.
The other factor clearly going into not the NIM necessary, but the NII is then just walk us through the recession. We talk to is there an offset from some of the NIM increase but we'll see at the moment recessionary more western and eastern but we'll see over a period of time, whether that continues to be the case, but.
I'm reasonably some ammonia I think would be the 160 areas, where we should be in 2023.
Maybe just to state the obvious I think it is implicit in your question.
<unk>.
If rates do move in such a way that it caused the banks in the market, including ourselves to increase the prime rate.
There would be that would be a partially hedged outcome in terms of the <unk>.
I'm, writing mortgages versus prime.
Linkage on the deposits, but net net it would probably be a modest negative, but that's the expectation or probability as president of the 160.
Thank you.
We will now take our next question please standby.
Your next question comes from the line of <unk> from Barclays. Please go ahead. Your line is open.
Good morning, Bill Good morning, Andrew.
One question on <unk>.
Capital.
<unk> tier one ratio of 13, 9%.
Top end of your target range I appreciate all that related to the wind drift higher in H, two that youre likely to be pretty capital generative I'd imagine.
I'm just trying to work out why perhaps you didn't look to announce the bigger share buyback than the 500 million that you've announced in Q2, and particularly given the last buyback you did $750 million I think.
Executed that well within the quarter could thinking about three months.
Like me to execute this actually entirely sure.
Is there any reason why you would not announce something higher.
Should we expect that perhaps you could announce another buyback with Q3 results for this half year.
Thanks.
That's great. Thanks, a lot for the question.
We said that we're going to operate dynamically within the range and we are.
We've also said that we want to generate enough excess capital to return in excess of $5 billion to shareholders over a three year period.
At 1.4, or so billion dollars as we sit here today, we are very well on track to deliver that so.
It feels like we're on the right track, we want to be well capitalized as we go into a period of uncertainty. We are I think we were very comfortable with our asset quality and our provision level, we're comfortable with the earnings momentum that we've got we want to have a strong capital position and we do we think that there will be opportunities both both internally too.
But obviously also also externally and we want to be prepared for things to come along so we're operating dynamically in the range exactly as we said we would have got a good healthy return to shareholders and in 500 felt like the right ground to hit at this point, but I'll turn to Andy I'm sure you've got some more thoughts on this.
Well, probably not many more towards actually ever since the violence, we want some capabilities growing the business further we want to make sure. We're protected on the downside for the recessionary concerns become an E Bay and all of a sudden says at this point in time to be able to pro forma 13, seven feels fine what we read.
And future absolutely always still committed to the 5 billion overall in the three years absolutely.
Look at the buyback plus the interim dividend, we declared today 135 billion.
The share price, where it is today makes it pretty attractive to be doing the buybacks as well, so I think us a sensible place to be and over.
Over a period of time as we have done before obvious who will review it but 5 billion over the three years to remain objective.
Consider a additional buyback in Q3.
We will review will review it on a regular basis.
So that patent as being more one.
Half years, but there is no absolute reason why that has to be the case. So we'll review it at <unk>.
Various points in time, if there is anything more that we can do.
Sure.
We are very prepared to do buybacks.
Can we take the next question.
Thank you.
We will now take the final question.
Please.
Hi.
The question comes from the line of James Inland from Society Generali. Please go ahead. Your line is open.
Hi, good morning.
I just had one question on the rate sensitivity slide slide 29 of the deck.
I mean, it's come down.
She has come down for the reasons, you've laid out right now.
Now we see the other currency block.
Pretty much I think the overall.
Sensitivity. So I'm just wondering if there's any color.
Color you can give us maybe a little.
One or two oversized couch is in there.
Yes.
If you're a great flavor sensitivities coming from thanks.
Yes, Thanks James.
As I said earlier I think this slide is based upon a set of assumptions, but the real world will be different.
Options, so everyone just needs to be thoughtful about it.
In aggregate I'll come onto your question specifically is clearly we are one of the half percentage points further up the curve than we were when we did the previous guidance and therefore, the next 100 basis points is very different to the 100 basis points that was the next one starting round.
Factors that come into that of prime capital in the Hong Kong mortgages et cetera, things we've talked about.
So that's why the numbers come down but it is a very different start point to sell at point itself is higher and therefore, the increments as law.
It makes between currencies I guess in part that is because some of the non U S. Dollar currencies have actually increased rates later in the U S. Dollar increments. So therefore, and we've got more of that still to come and that is the largest part of why that block is moving less than some of the other blocks on that job.
So operator.
The largest say two or three countries in there.
There's a whole there's a whole mixture I think on the slide we've split it out into <unk>.
Five different currency blocks I think it is.
We've not subsequent and smooth out that but.
The markets, which we are and you can see the.
The broad split of activity so.
It's quite a variety.
Okay. Thank you.
Okay.
If there are no more calls online do you have any on the phone do any any questions online.
Yes, we've got three questions online first one is from Manas Castello at autonomous.
You referenced the risks from a strong dollar and high inflation, which of your markets. Most concerned with regards to these risks and what are you doing to mitigate it.
But the best mitigation, obviously is prevention and we've done a.
Quite a good job over the last year several years in making sure that we don't have significant concentrations I think we demonstrated that in.
In the real world with with the challenges in Sri Lanka, where we absorbed the necessary provisions and increases in risk weighted assets into what was nevertheless, a very strong first quarter as we look across the characteristics of markets.
That are under pressure they tend to be.
Smaller and more open economies that are.
Subject to the.
The economic impact of.
Higher U S dollar rates and a stronger U S dollar so higher external debt balances and.
Yes, I think there is if we refer back to some of the work that the IMF has done in terms of identifying some of the hotspots is probably correlated with.
Some of our own concerns.
There's no there's no good news, obviously in periods of financial stress, but.
We do feel quite comfortable that we are prepared for the and the adverse outcomes in a number of markets that we face we don't welcome any of them.
We're very very close.
To our central bank and sovereign clients.
In cases, where that where the ratings adviser for these countries.
Across sub Saharan Africa, South Asia ASEAN.
We clearly are seeing some pressure.
That leaves us in some position to to help influence outcomes.
So certainly puts us in a very good position to understand what we can be doing both to help our clients.
The communities in which we operate but also to protect ourselves, which is what we've been doing so I won't get into much more detail in terms of specific names, but broadly I think we're positioned well as well as weak as we can be we see the stresses we think it's going to be manageable I think the IMF has been very proactive in countries that have thought IMF helped relatively early on.
Navigated well, so far others that typically four for domestic political reasons and sort of like it would be the most obvious case that only brought the IMF in late <unk>.
They're less well, but we're optimistic on balance that we can work through this period of stress, but thanks for the question Matt.
Thanks, Bill next question from Rob Noble at DB, There was a decline in market interest rates in 2024 in the U S. Given the shape should we expect NIM in 2024 below the 160 basis points average or does the rate rise movement build through 2023 and the second part of the question is 10% rote.
2024 possible with the expected dip in U S rates.
So 2024 is still some way out.
And I think high level per route to sort of effects. One is if you saw any of the rates start to drop a little bit in that period, obviously that would be a bit lower.
On the other hand, we do have a lot of our book re prices beyond the first year and therefore, there isn't sort of undercurrent that actually flows through into subsequent years. So.
I'm not going to put a number on 2020 for all I know you didn't ask but I wont put one on that but I don't think we should be seeing a significant dip in that period, unless obviously U S. Reits fundamentally changing in the other direction.
Consistent with that or do you think 2024 of the 10% royalty is absolutely achievable is what we are setting our stall out to achieve the.
The rates will be one part of how we get that but let's not forget.
And growth with our customers is still good and I think particularly for those is based in the western globally, a lot of press about the gloom and doom in the recession in the markets. We're operating in actually there is more positivity markets coming out of Covid, maybe there'll be some.
From a recession over periods of time, but I suspect it might be a little bit later.
So overall 2024 for the 10% rate, we feel very strongly about.
Thank you Andy last question for the day from guys Stebbins at Exane.
It's interesting to hear that Youre already seeing some signs of negative deposit mix shift into time deposits. At this early stage in the rate cycle could you elaborate on what you've seen to date and what you assume within your NIM guidance for deposit mix shifts as we move further up the curve.
Andy will take the question that it's not surprising to us at all it's exactly what we expected.
And the profile of the mix shift is it varies a bit from market to market those broadly exactly what we had factored into our our $1 $3 billion of interest rate sensitivity guidance back in February so.
So no big surprise.
And I would underscore that while of course three current accounts are preferable to time deposits, where we paid some interest rates.
These are still attractive deposits for us in aggregate were growing and that reflects as much as anything the strong customer physician that we got the underlying strength of our cash management business, it's coming both on the retail and the corporate side. So we're not surprised by the evolution and we're happy with the progress of the underlying business, but Andy.
Yes.
Repeat what I said earlier, we are seeing a small movement to time deposits. So I think to maybe 3% actually so far in the year to date.
We would see another two percentage points over the balance of the year, because obviously rates still rising.
As a site for us overall, there's a balance here.
It might be marginally more expensive not a lot more but actually sticky good quality. It stays there from a regulatory treatment. It's very very good funding for us. So yes, a little bit that makes change north are already factored into the NIM thinking and 5% and then thinking indeed for next year as well.
Good so we'll wrap it up here I'd like to offer you. Thanks to all of you for taking the time on a Sunday Friday morning in London, If Thats, where you happen to be.
It was a very busy day for all of you are ahead of what I hope will be a relaxing weekend and for those getting a break a really nice.
It's been a break over the summer, but thanks again and look forward to seeing you next time.
Alright.