Q3 2022 Standard Chartered PLC Earnings Call

October 26, 2022

We will be around 165 basis points.

Just a bit more detail on the hedges.

As the U S dollar yield curve has steepened over the last few months. So the negative hedge impact is now more significant the hedge positions total $44 billion.

Which is less than 10% of our average interest earning assets.

It comprises two main elements $16 billion of structural hedges, which have been built since the fourth quarter of 2021 to smooth longer term net interest income and to support our NIM as and when rates fall.

$28 billion of short term hedges, 60% of which were rolled off in February 2023, and the remainder in 2024.

We have included a slide in the appendices slide 17, setting out the details on the hedges and their impact on NIM. So at the end of next year.

As we said at our half year results a Hong Kong dollar sensitivity is lower from the migration of mortgages, the prime cap rate and our U S. Dollar sensitivity is impacted by hedging we will refresh our sensitivities at the year end.

And just spending a moment looking at the balance sheet on slide six there are a number of components impacting the balance sheet numbers. So we set out the simple analysis to show the underlying picture.

In these charts, we stripped out the impacts of currency translation, ultimately I optimization and other reclassifications to show underlying asset growth of 1% in the third quarter and 3% so far this year.

This is in line with our expectations of low to mid single digit growth for full year 2022.

Now if you look at performance through the geographic lens on slide seven.

Unlike the increasingly prominent inflation rate in a recessionary concerns being experienced in certain western markets and the majority of our markets. We are actually seeing economic activity picking up as those economies progressively put the COVID-19 pandemic behind them.

This gives us reasons to be cautiously optimistic about 2023 and beyond.

Just to illustrate these points, we set out in the third quarter and year to date income performance in six of our larger markets and the projected GDP growth rates for 2022.

It is a striking chart for these markets delivered in excess of 20% income growth in the third quarter and all of them are strong rowsey contributors.

Hong Kong, which has had its fair share of challenges in the last few years has recorded its best ever quarterly income number.

China, which is slow to emerge from Covid. The most is still delivering 11% income growth this year and delivered an impressive 22% growth in the third quarter.

The networking can picture is also improving strongly with overall year to date networking income up 18% year on year.

I'll move on to cover expenses now on slide eight.

Turning to expenses. The first thing to note is that we have delivered strongly positive jaws in both the third quarter and year to date.

Quarterly expense run rate in the top chart shows expenses increased slightly in the third quarter.

This was driven primarily by a planned increase in investments spend and we do expect the year on year growth rate to reduce somewhat in the fourth quarter. As for example cost efficiency actions such as further branch closures and technology systems decommission.

Year to date picture into Boston chart shows that after allowing for FX and performance related pay expenses have increased by 6%.

Salary inflation has run its around 3% we have selectively added head count whether it's a sound business case.

We have also seen an increase in expense lines that were subdued during the pandemic travel being that I saw this example.

The effect of these expense increases has been in part offset by our cost efficiency sites.

We are making good progress here, having delivered $330 million of total saved so far this year with CPB delivering $173 million.

Now turning to credit impairments and asset quality on slide nine while its credit risks remain elevated our overall portfolio remains stable and resilient.

Looking specifically at the third quarter credit impairments of $227 million is up 120 million year on year.

The third quarter charge comprised of three main components, China commercial real estate sovereign downgrades and the regular flow of charges and releases and CPB and <unk>.

We have taken an incremental $130 million of provisions for the China commercial real estate portfolio. This represents specific net new provisions of $103 million and a top up to our C. A R E overlay of $27 million.

We see that you're on the CRE issue is one which will go on well into next year and we have provided additional granularity on our exposures independent sees to the main slide pack.

We've also taken a $96 million charge from suffering downgrades relating to Pakistan and Ghana and we've included a slide in the appendices slide 19, setting out our main sulfur and risks.

Lastly, online you can save lives. We now have a total of $204 million remaining $153 million, which on the CRE and $51 million for Covid.

This has resulted in a year to date loan loss rate of 18 basis points.

The stock of high risk assets in our <unk> portfolio across the three indicators in the bottom left graph has declined by $2 billion for the $2 6 billion decline in early alerts largely a consequence of client regular organizations, our severity alerts offset by downgrades into.

<unk> 12 and stage three accounts.

And finally to complete the financial over view risk weighted assets and capital on slide 10.

Starting with the chart at the top.

Overall, <unk> were down $3 billion or 1% in the quarter to 252 billion.

We experienced increases of $4 billion in respect to client driven asset growth and $3 billion from credit migrations, which were largely due to the sovereign downgrades. These.

These increases were more than offset by a further $4 billion of mainly <unk> efficiency actions and $6 billion of positive currency translation movements.

We maintain our full year <unk> will be broadly similar to the end of 2021 at constant currency.

Turning to the <unk> chart at the bottom we remain strongly capitalized with a CET one ratio of 13, 7% in the upper half of the 13%, 14% range within which we will operate.

The CET, one was down 22 basis points in the quarter, mainly from the impacts of the ACO on dividends the share buyback and the small amount of incremental <unk>, which more than offset the retained earnings for the quarter.

Having proactively taken steps to manage the risk SCE OCI movements in the third quarter have not been material.

As we said at the half year results, we intend to operate within the full 13% to 14% target CET one range and there is no change to that intent.

As usual, we will provide an update on our capital management plans and shareholder returns with the 2022 full year results in February .

And now on the final slide before we open the line for questions.

Just to pull together our updated guidance.

With our strong year to date income performance and continued NIM expansion, we are increasing our 2022 income guidance and we now think income for the full year will grow at around 13% on a constant currency basis, which is broadly the same as it has for the first nine months.

Of the year.

This projection takes into account the continuing benefits of rising rates, but also recognizes the weaker market conditions in wealth management.

This is supported by the early trading numbers for October where we continued to see good levels of client flows in financial markets.

Also worth remembering that we usually see a seasonal downturn towards the end of the year, particularly in financial markets, where our fourth quarter income is usually the lowest of the year.

We continue to expect the full year 2022 average net interest margin to be around 140 basis points.

For expenses, whilst there is some incremental positive impact from currency translation. Since we last updated you. This is not sufficient scale to move our estimate of around $10 6 billion for the full year.

On credit impairments, we now expect the full year loan loss rate to be slightly above year to date loan loss rate of 18 basis points, but below the medium term loss rate of 30 to 35 basis points, which we have previously guided to.

Looking further ahead, we are confident of achieving our targeted 10% rote by 2024, if not earlier with continued strong business momentum and income supported by the NIM, reaching an average of around 165 basis points in 2023 and maintaining positive jaws.

And in closing I wanted to highlight that Judy and members of our management team, who will be hosting a virtual investor event on November 22nd focusing on affluent client business.

With that I'll hand back to the operator, so bill and I can take your questions.

Thank you.

We will now begin the question and answer session.

As a reminder to ask a question via <unk> that you will need to slowly press star one and one on your telephone and wait for your name to be announced Alternatively. Please use the question box available on your webcast page to split your question once again star one on one slowly.

We will now take our first question.

Please standby.

Yeah.

And your first question comes from Joseph Dickerson Jefferies. Please go ahead.

Hi, good morning, Congrats on a good on a good quarter I was just intrigued by your slide 17.

Or you've laid out in green.

NIM forecast, excluding the hedges, where it looks like the 2024.

Uh huh.

What unquote forecasted in green is around it.

A little bit above a 180 basis points with.

The actual NIM forecast ex alright, inclusive of hedges somewhere around 180 and Thats about.

Call It 13.

13 to 15 bps ahead of where the current consensus is for 2024, which is actually quite material in pre provision terms does that is that the right way to look at it somewhere around 180 for 2024.

Yeah.

Yes so.

Let me take that question no the.

The guidance for 2024 is the 165.

Number.

So we previously I think as Larry indicated about one six.

And the 165 is sorry for the 2023 is a 165.

This chart is showing essentially.

The X rudi's exclusive hedges the inclusive of hedges numbers, but guidance for 2023 is one five.

Right, but you've shown that 2024.

Number in there to show the roll off of the of the hedges is that.

What was that.

Perhaps we should think about.

Correct that's correct.

<unk> cost.

You will see we have studiously avoided putting a precise number on it in 2024.

You would not be relevant to you.

Put your slight rollover it to come in somewhere around this sort of 180 number for 2012 Thats right. Okay, great. Thanks.

Thank you.

We will now go to our next question.

Please standby.

And your next question comes from the line of well that enable from Deutsche Bank. Please go ahead. Your line is open.

Mario Thanks for taking my question.

8% to 10% revenue growth that you highlighted in the past is that still achievable.

Higher than expected 2020.

Revenue base going forward.

Secondly, can you just give us an idea.

How it's progressing.

Shares as well and I want that revenue contributions have been so far to stay on track with the targets. Thank you.

Yes.

So Robert let me, let me start then with the revenue growth. So you're right clearly we have built a slightly higher basis point, but equally we've seen rates rise a little bit more than earlier, we would have anticipated.

Eight.

8% to 10% is very much still within our sights.

And that is I think consistent if you take that sort of NIM guidance with.

What we would seek to do so so high base and still aiming for that 8% to 10% Ryan.

On the ventures Marx has continued to to build and we are very pleased with the progress that we have got there I think probably the standout for US has been slightly more on the trust side. So trust.

As Bill mentioned earlier 200000 customers in its first month.

It was ahead of what we had been hoping thought which is good 1 million transactions.

As of today, we've got Mark with about 400000 customers and trust now moving above the 200000 level.

The financial contributions today is still relatively low obviously it does take time to build up the income but the bottom line is we are very happy to be sorry, Chris.

And particularly they are relatively nascent trust business has been a very encouraging start.

Robert I, just had a little bit of color.

Answer is completely correct and comprehensive.

And I will say, it's a real pleasure for me to be here with Andy Although we're not in the same room.

The HSN percent growth, obviously is off of a.

But both a robust NII and NII number I'm most impressed actually by our non financing income performance over the first part of the year, because that's where the strategic focus that we've had on.

Growing the network business focusing on the affluent but of course, it's been challenging, but nevertheless is performing well I think in the circumstances.

Building out the digital partnerships sustainable finance et cetera, they're all showing really good progress.

As Andy pointed out right upfront.

We have the growth we've had so far is coming from interest rate increases, which we've also positioned well for in terms of our deposit base, obviously, not so well in terms of our hedging.

But thats a hello, that's a whole other discussion and us as.

As we pointed out those hedges.

Roll off and give us some incremental upside.

As as those hedges roll off in the coming years assuming rates.

Don't go into complete reverse which is which is not our expectation.

So.

Reaffirming that the confidence in any shared on the ability to generate this growth.

On the venture side, and you mentioned <unk> and trust Whichard, which are two standouts.

From an income perspective.

We led to where we started with a trust bank as a credit proposition and we did that largely because our partner MTBC.

An existing credit card partnership with a local bank, which they exited in order to make room for us and trust. So.

So we had a an.

An immediate uptake in credit cards.

On the Trust account in addition to debit cards and current account openings.

Theres been balanced transfers, we are building a nice loan balance early on and that is with customers that are.

That are well known to us and our partner.

That bodes very well for <unk>.

A relatively quick ascension to profitability amongst the first digital banking in Hong Kong to be offering credit product and scale and also building up some nice loan balances and.

Together, obviously with higher rates in the beginning of <unk>.

Hong Kong opening up so getting that the travel related benefits through our other partner, there which is strip dot com.

All bodes well for achieving a.

What level of profitability, it's not going to be.

Game changer for standard chartered bank anytime soon but I think it's an enormous affirmation of the value of the franchise that we built.

And.

Something that we can build off of from there just a couple of other things to mention.

The cell platform is up to over 400000 SME customers in India continuing to go very strong we've launched in Kenya, which is met a great reception.

We have other partnerships and solve lunches.

Elsewhere in the World in Asia.

We've not announced yet, but which are in advanced stages. So that as a platform I think is extremely valuable as we pointed out at the half year, we sold.

A 10% stake.

To add to it an external investor I think reflecting the confidence that this is a platform that can grow grow quite nicely and generate profits over time.

We could go on and on but broadly we're very comfortable with the progress that we're making on the venture side.

Great. Thank you very much.

Thank you.

Okay.

Well now go to our next question.

And your question comes from the line of <unk> <unk> from Barclays. Please go ahead. Your line is open.

Good morning Gents.

I had.

Two questions if I could one in relation to the hedges.

That you've disclosed.

Thank you very much for your new disclosure on the hedges and the impact on <unk>.

Net interest income.

Alright, I wonder in terms of the short term hedging can you can you just help me understand exactly what the differences between thought hedging on.

On the structural hedging that you put on.

Because it does look like you're kind of you're taking the mark to market impact.

The move higher in interest rate through net interest income is negative revenue on that portion of the hedge but you.

No not on the structural hedge so.

Can you help me understand exactly.

While there is an accounting difference there and also in your mind strategically what's the difference between nicely hedges why would you put on that short term hedge effects.

I guess with the benefit of hindsight it drag on your net interest income.

And.

Can I also just relates to the ask around trading.

Interest expense again, thank you very much about disclosure.

I think that actually modest complicates the comparison versus consensus, which I guess is a problem for us but.

I think you talk about $700 million of trading related interest expense and.

And can you help us think about the associated trading income is there a kind of a wonderful long trading income expectation that we should kind of put into our numbers.

That comes through.

Financial markets, so with Treasury income.

I guess the final one I'll just sneak in there is just around your capital ratio Youre at 13 seven.

I can't say much by the way if draws on that kind of capital ratio in Q4.

Given that your operating towards the top end of that range or towards the top end.

The temptation to buy back at Q3, it just interested in thinking that please thank you very much.

Okay.

Yes.

And then I know youre going to enter.

Like I said it all through those questions, but I just wanted to comment on the hedging upfront I'm not going to get into the accounting distinctions, which Andy will will explain.

But we took a decision towards the end of last year and in the beginning of this year when when rates had had their firstly, obviously they've moved much further subsequently.

Made sense for us to to.

Take a little bit of our rate sensitivity off the table of course that was positive carry at the outset.

That wasn't the objective the objective was to just to desensitize a bit as we went through a crucial strategic period for our company and as we were taking.

Very very deliberate decisions to accelerate our return to a 10% plus return on tangible equity.

So we put on some short dated hedges to take some of that sensitivity off in the first year or two.

That ongoing strategic.

Acceleration for the group.

And.

With the benefit of hindsight, our timing was wrong.

No no ifs ands or buts about that.

Given that these were these were hedges of our existing sensitivity to rising rates.

And it was a relatively small percentage of our overall sensitivity that is recall that we took and we will continue to take a cold like that with the best information that we've got and after very careful deliberation.

That was the short term hedging strategy that we put in place at the time.

But as you point out in your question is I think from from.

From the structural hedging, which was effectively hedging the long duration of our equity.

I think.

And mechanism is used by you Sir thanks regularly.

Although we were relatively light in terms of structural hedging until until recently.

I just wanted to give that a little bit of context on the approach to hedging and you can get into the specifics of your question.

Yeah.

Yes, okay.

So the accounting side is pretty straightforward.

The difference between the short term and the structural in essence is jewelry.

And secondly, the accounting for both the short term and the structural is the same.

We have locked in as an income is shown as an income and funding cost is which is now higher than it was before is shown as a cost and that is applied equally devices. So therefore NII is shown on entirely the same basis, but also just with different rates and different durations.

On the <unk>.

Funding cost we have tried to make that a little bit clearer. We do include the detail.

The slide.

But in essence it is a switch between one type of income and another is therefore neutral in terms of the overall income for the bank, but if you're trying to build a multiple up off the basis of our NIM and our balance sheet you need to make that adjustment in order to come back to the net interest income and other income split so hopefully.

That has made that a little bit clearer.

On the capital front and the buyback fronts. We have said that we will provide an update on capital management in February .

We are comfortable at 13, 7% with where we are at this point in time and as has been the case of it initially in the recent past if we do think the surplus then it will come back, but we will not do that every quarter and we'll monitor that as we move forward to an update on that in February .

Thank you so much for the answers.

On the trading cost point of view should we be thinking about.

Trading income offsetting that.

Hi, Felicia.

Trading income is already.

Income so it is in the numbers. This is purely a reclassification of the cost of the purpose of calculating a NIM.

Okay. Thank you so much.

Thank you.

We'll now go to our next question.

And your next question comes from the line of Tom <unk> from UBS. Please go ahead.

Good morning, Bill morning, Andy.

Two questions. Please just the first one can I just stick on slide 17 in the margin.

Chart, because it does look like.

Our new guidance for 2024.

Thank you Kevin.

Guidance beyond 'twenty, three before but yes.

The chart suggests.

Suggest the margins getting to close to $180 currently.

Consensus is $1 67, so it was quite material.

<unk> uplift versus consensus I'm. Just wondering was was it intended to be this or was that chart ready to sort of illustrate the impact of the of the hedge I mean and have you sort of say lets say in your 2020 full assumptions market implied rates deposit betas deposit migration the effect of the Hong Kong mortgage.

Cetera.

I'm trying to get a sense of business Whitney Guy.

Guidance for 2004.

The second one on cost please.

Okay.

Let me take that one Tom and then we'll go on to your answer your second one is it firm guidance I guess the answer is no is it directionally, where we think things could end up if we play out the various factors you have referred to and the current outlook for rates etcetera continues to hold yes that is for solar.

Space, but we would expect to be in so we're not just purely a question. This chart just shows the difference between the hedged and unhedged. We are actually also looking at how we think the business will evolve and as we've said before there is a sort of a rollover at the balance sheet the natural momentum.

So some of the right benefit coming through in later periods as the book Repriced and by inference versus say, we don't think 'twenty three will be the peak.

<unk> told throughout or thereafter.

A little bit more in the tank in the subsequent year 2024.

Okay. Thank you that's very clear.

The second question on costs.

So a little bit of concern I think <unk> guidance for the full year.

Currency adjusted growth rate is about 7%.

<unk> yeah.

The consensus has got that slowed to 4% per annum sort of 'twenty two.

<unk> fallen.

Just trying to get a sense of is.

Is that still achievable given the inflationary well that we're now living in or what do you think that.

The 4% slow down from seven to four you know.

It's going to be challenging, but maybe revenue is going to be good enough that that's not necessarily a problem regarding you'll you'll return targets I'm just trying to get a sense.

Thank you.

Okay. Thank you.

Yes.

Youre right.

The 10 points.

<unk> is about 7% growth.

There's a bit of profit related Pike, 7% is where we think we will end up to the current year.

We are very focused probably cost drug as you know the programs type one 3 billion.

Out remains very much on track.

So that this year has been good.

Every call that will continue through next year.

Great.

Cost inflation, certainly western market is a little bit higher at the moment.

But not necessarily so much in some of the Asian markets, the precious there probably a little bit less than that.

Our intent and we I think communicated this before is to be growing the jaws two percentage points per annum and that remains very much. The objective over the next couple of years. If we can do better than that we'll do better but at least the 2% jaws. So I would think when you're looking at your forward projections.

You should focus about 2%, 2% a bit number and multiple it in that way.

Okay, and just to be clear that 2% Joe will have the benefit of higher interest rates that's correct yes.

Is that is that is a reported number.

I'd, rather just say yes.

Got you okay. Thank you.

Yeah.

Thank you.

Okay.

We will now go to our next question.

Please standby.

And your next question comes from the line of Mark Keenan from Credit Suisse. Please go ahead. Your line is open.

Good morning, everybody. Thank you very much for taking the questions.

I've got two questions. Please.

First one is also on slide 17.

Hum.

About the NIM.

The forecast for financial year 'twenty four.

Just help me understand I guess that is a reflection.

The.

The average U S rate.

For 2000 and festive.

September .

In the chart above.

And.

We can see that it's kind of going at it assuming an average of over 400 basis points.

Financial year, 'twenty, three before coming down in financial year 'twenty four.

But.

The chart below shows the meaningful cost excluding hedges continuing to.

Go up so.

Could you, perhaps just talk a little bit about the mechanics, and maybe the delay.

In terms of the rates benefits coming coming through.

And maybe.

Maybe just give us an idea of.

What deposit pass through assumptions.

He made from here going forward.

My second question was just on impairment.

I know you.

Standard chartered to users.

The multiple economic scenario.

Give some helpful mobile provisions for specific circumstance that's like.

Central Bank kind of a reaction.

Could you, perhaps give us an idea of how.

Changes in GDP unemployment and real estate prices.

Will affect.

<unk> nine provisions.

Just given the.

Economic environment is somewhat deteriorate then that's question different real estate prices, having sensitivities would be quite helpful.

Thank you.

Got it okay.

Rapidly thinking we should've made slide 17 slide one in our pack but.

Anyway.

Sure.

So your first question I mean, there's two or three reasons why the profile of the top chart of the protocol of the Bolton Charles just 100% correlate.

The first is the top chart is a U S dollar specific and obviously we are lending in various currencies. It is not only U S. Dollar so you'd have to have the protocols are different.

Currencies et cetera to get to the full up multi currency picture.

Secondly, there is the effect of hedges rolling off and that obviously comes in at different points in time as we have evidenced.

Thirdly, you've got the issues that some of the balance sheet is contracted for certain periods of time. So when the rates do change you don't necessarily get the benefits of that immediately you'll only get it later on the subsequent re pricing. So it's sort of taking all of those into account. We've got three beta as we've done this major market level and that is why.

You call. It just extrapolate essentially from the top chart to get through to the bottom chart.

On the impairment side Youre right, we run a whole series of multi Carlo simulation models.

We update those every quarter as you would expect for our latest view on GDP and unemployment and everything like that and then we go.

And run the engines, we made sure that what comes out look sort of sense of also in occasional circumstances, but we too we do choice make it occasional if we feel that maybe the data isn't quite keeping up with more current events we.

May apply some overlay so at the most two obvious examples that is COVID-19.

It was very difficult for any mobile go and catch up with the.

Covid impacts so we have the overnight I.

I think that peaked at $450 million at one stage that is now down to 50 and over a period of time that work its way out of the system totally and then the other one is the China commercial real estate, where we have clearly talked up the provisioning on that front, just because of the sort of currency of what is happening there versus the modules, we just want to make sure.

We are as a real time as we possibly can be so as that approaches applied consistently I think it produces reasonably consistent outcomes. We certainly try to make sure that it does do and over periods of time, certainly the overlay side will come and it will go and who knows three years.

So now maybe it will be something different than that but that is broadly how we how we go about it.

Okay. Thank you very much.

Thank you.

We will now go to our next question.

Please standby.

Your next question comes from Nick <unk> from Morgan Stanley . Please go ahead. Your line is open.

Thank you very much and hopefully you can hear me and I just want to ask a little bit about the China commercial real estate and loyalty discretion on slide 18 of the pack.

I mean, you've obviously got some pretty high provision levels that I think we took about 77% covered ratio of the <unk> 13 in 2014, and yet you're still sort of cautioning that you might need to make more provisions next year. So I'm just trying to understand you said you got an angle that I'm just trying to understand what would be the event.

If it would cause you to.

Sort of have to provide more and I guess question is when do we get to a stage, where we may see some recoveries or releases on that.

Yes.

Good question, So context is slide 18.

$3 5 billion.

That compares with <unk> 300 billion of loans and advances in total so it's just over 1% of the total book. So I think that's quite important context wise.

As you can see on slide 18, we've got $1 billion of that is in the what we call. It <unk> 13 and 14, so the area that we are.

Potentially concerned boy and is used by 77% of that is covered either directly by provisioning or buy.

Collateral that we have got so it is a high proportion covered.

Things that can go wrong, the other $238 million or whatever we don't recover so theoretically but it is a high proportion of that is covered.

I guess the overlay that we've got there is slightly more against what is not in the <unk> 13 14, why are we specifically reserve, but you guys are <unk> 12, and <unk> fixture level what is in that could yet be appropriately is not visible to us at this point in time and we have got.

The overlay of 150, which gives us some cushion against that but I guess your question of what can go wrong things that at the moment look as if they are in that sort of middle bucket actually theoretically could pop up into the higher bucket at a point in time until the whole sector has fully settled we can.

Eliminate that as a possibility is that having been said I don't think in the overall scheme of our numbers that should be something which would be at all manageable.

Look at this 220 odd of total provision in the quarter pretty much all of that is the sulfur and from this issue I mean, the rest of our book has actually been almost zero.

The rest of the book is in a good shape, obviously, we keep an eye on that and obviously with interest rates rising we have to be diligent on it but I think the book is in good shape and I think to the extent that there may be possibly some more exposure in the CRE space over the next year, while the whole market settles down maybe that I do think it will be at a manageable level for us.

Okay perfect.

Randy.

So I was just going to give it a little bit more color.

There's a lot of focus on China theory, both because of the exposure itself, but also because what it says about what's going on in China more broadly.

Yes.

<unk> is the market the segment in China is so highly distress.

A bit of a buyer strike.

In turn that prices will fall.

As a result.

Prospective buyers or echo buyers are relatively sidelined as cash flows are down even for high quality companies with high quality projects that don't have heavy development agenda is.

And so the entire sector is feeling that now theres been quite a bit of policy support for the sector, but it has not turned the tide as yet so I think as Andy said, we're taking a cautious approach I'm extremely comfortable with the level of provisioning right now.

But we've taken a cautious approach in terms of both provisioning also guiding to outlook because the sentiment in the sector has not yet turned in.

And if it doesn't turn yes, it is possible that the.

The challenge creeps up the <unk>.

All of these stack into into what we look at today is much higher quality.

Borrowers with low loan to values and good cash flow coverage.

But the pressures the pressures there and Thats why I think we just have to acknowledge that until that turns will probably continue to hit a note of caution on that sector.

In terms of how thats spilling over to the broader China market. Obviously, there is a huge amount going on in China right now with the combination of the leadership adjustments and changes.

The policy pronouncements and uncertainty about the precise direction of travel.

But and obviously some material uncertainty around when.

The restrictive coli policies are relaxing and lifted.

We're seeing those in and then we've seen a very clearly in our business is a very good steady growth in our business.

Both onshore and offshore growing very nicely.

Good ongoing.

Advances in ads on the consumer credit side through the partnerships that we've arranged an outright.

Good prospects on the low side of that clearly impacted by by the market environment.

So the sentiment that is.

And the negatives and the commercial real estate sector is not shared across the rest of the portfolio.

That for us is quite encouraging.

And back to Unix.

Yes, no no. That's very helpful. Thank you and just linked to that I mean, I know you've hardly made any provisions outside of out in the sovereign exposures, but offer any areas that you're sort of just focusing on our balance, especially given that sort of continued slower GDP growth in China.

And sort of areas that potentially could come up as risk areas.

We we scan across markets.

In a more fragile economies, obviously, we give more focus to that.

At this point in time, there is nothing that I would particularly call out.

There are no sort of across the board areas real concern interest rate pricing, obviously can put some pressure on some corporate so we just need to be alert to more highly geared corporates.

At this point in time, the overall book doesn't seem to be behaving okay.

Okay perfect. Thank you very much.

I am completely with endy.

You would expect.

There's been a lot of pain in the in the leveraged finance sector.

We are a meaningful leverage finance player, but we've avoided the.

But we avoided losses I.

I guess in that dramatically more subtle about it.

That's that's really good it means I think we're in a good position to take advantage of some opportunities that could come up.

Is that market settles out.

But.

Apart from the people that are exposed structurally to higher interest rates or a strong U S dollar and thats, primarily the sovereigns in our case.

Sovereigns in.

Companies are closing into sovereigns that were not seeing any.

The acute signs of stress.

Okay, great. Thank you.

Thank you.

We will now move to our next question.

Please standby.

Your next question comes from the line of high demand from <unk>. Please go ahead.

No no.

Morning, Greg.

On impairment.

From downgrades.

And obviously for the.

For the reasons, you have outlined Appalachian USAA's direct et cetera.

All that how much more are you worried that might be coming in terms of suffering.

In the market that you operate.

Number one on the second question is.

It's another quarter of automated reduction is from efficiency actions in <unk>.

She is sort of delivered for three quarters now.

Can I ask you to go into a bit more details about exactly what actions you've taken.

Just to help us understand the sustainability of them of the IOP reduction.

Hello.

Yes. Thank you.

We've put a <unk>.

Slide and we secure work your way through the back of the slide is slide 19 actually gives us a bit more detail on the.

The sulfur and that we have been particularly.

<unk> weather has been downgrades and I think as we see at the moment.

That is the.

This sort of situation.

We will obviously, we will see how some countries <unk> referred to time, but.

At this point in time that is.

Is sort of where we're at.

And the situation that we see.

On your other question on the <unk>, we said.

At the start of the third.

Actually reducing the low returning risk weighted assets was going to be a key part, particularly for our corporate business.

That sort of sits alongside the need to get the income return on a risk weighted assets in our corporate business.

I think we've actually made some really good progress on that in pretty pretty short order. So.

I think the income return on the risk weighted assets, we were below 5% at the start this year and <unk>, 6%.

Year to date number is $6 three so we've gone the huge way up that curve.

Good.

And then in terms of the risk weighted asset reduction we'd said.

22 billion out by 2024, and we've actually done very nearly half of.

The nine month point in a three year period so.

Do think that.

We're not just sort of talking about things we are doing these things.

That is being achieved by being more thoughtful about the returns that we are prepared to accept on new business and sometimes we will decline to be involved if we don't think the returns are quite high enough.

Sometimes it is on preexisting.

<unk> point, when we can rotate other times it will be actually about managing VR Wi numbers themselves all the different ways that we can secure those get collateral et cetera.

Will actually manage the risk weight, but nonetheless still gives us the.

The income return.

We also said that we would move a little bit more towards financial institutions.

Lastly income returned to slightly higher on that again.

Been happening over periods of time I.

I think the financial institution income was about 41% of the corporate income now that is 44%. So it's still a collective of bolt with is that I think really has been.

They are making a difference and it's great to see the focus of that within the business actually really started to come through and also coming through in terms of the return on tangible equity.

We are getting a third quarter in the corporate bank 17, 5% royalty.

<unk> is clearly a great print and significantly up.

On the 10% of a year okay.

Okay. Thank you so I'm back on Golden exposures, though.

Although the Pakistan and Ghana as your lung cancer are you broadly comfortable with the other markets you are.

Operating and then.

It's under control.

Yes.

Okay. Thank you.

Thank you.

I will now hand back full webcast questions.

Thank you Sharon.

I'll now turn to a couple of questions from the webcast and Tony for you Andy Miller with Chris from Autonomous. Please your question.

First question is thanks for the helpful of new disclosure on China, CRE, you have taken 25% losses on the Hong Kong booked CRE exposure.

Where do you think this could bottom out given the current outlook.

And the second part of his question is on cost.

Two potential is plus 8% to 10% revenue growth.

Plus victim HSN portfolio of credit Suisse.

Okay.

So taking those in turn and I think I will be repeating slightly what I said before.

China commercial real estate, we have provisioned to what we think is unapproved level at the end.

The third quarter.

Bill and I have said is that it's still a movie that is still playing out and therefore won't totally eliminate the prospect there could be some more provisioning over periods of time, but we do think it is going to be at a manageable level and that it.

It should not be something that will cause nature.

<unk>.

In terms of the income on the costs, 810% you will take your own views as to sort of where in that range. You think we can get to.

Of the NIM guidance and then the other income obviously proving your view on that as I said on the jaws, 2% is what we had said that we would seek to do.

Over the period.

If we can get the jaws slightly higher than two I would like to do that and by inference that remains the cost increase would be a bit lower than it would be at the 2% level.

But directionally I think we've got a couple of years ahead of us where there should be good jaws progression and indeed, you need to see that in order to get to a 10% royalty in this business.

Ah Reconfirming absolutely at the 10% we think is there for the taking and 24 if not earlier.

It's very consistent with that.

Thank you Andy.

The next question is from Robin down from HSBC.

Coming back to a question on margins and slide 17 again as.

As mentioned earlier it looked like ex hedges, you're signaling a margin for 2020 480 basis points.

That's assuming the hedges disappear entirely but will the structural hedges not remain a drag in 2024 with a longer duration.

Make up half of the current hedge drag to NIM.

So the 180 number we talked about again directional just to stress that.

What we will see is the short term hedges rolling off during that period now obviously over the next two two and a half years, we will form views as to whether there is any more short term that we need to do to replace it.

We did think clearly that certainly asset management will be at much higher rates.

And the projections that do include the assumption that longer term structural hedging does continue in place and that will be a feature for the longer term, which is implicit in the word structural so it does go back to that in.

Thank you Andy and how do you get back to Sharon again to take a couple of more phone questions.

Thank you.

We'll take our next question now.

Okay.

Yeah.

And your next question comes from the line of Andrew Coombs from Citi. Please go ahead. Your line is open.

Good morning to follow up sorry to touch on that on the same ground.

With regard to global structural hedge you said thats greater than $16 billion.

You expect that to grow further in notional going forward and perhaps you could just discuss deterioration of that hedge Greg split on a short term hedge.

Can you just add some color around the generation of the structural hedge.

And then the second question just going back to Chinese commercial real estate.

<unk> now increased to 153 million.

Can you just provide us an idea of the sensitivity of that.

Relative to decline the declines in commercial real estate prices.

How does the sensitivity what cap rate 10 percentage points for example, thank you.

Okay, Andrew say structural 16 billion.

We feel the aggregate cost of hedging is of a volume.

Not that we are comfortable with the overall duration profile, where okay. So and we will keep monitoring, but I'm not expecting significant changes.

In that regard.

Structural hedging tends to be more and this was a solid 10 10 year period, whereas the short term by definition is much shorter and we've shown.

The duration of that in that.

The CRE provisioning listen we run as I said earlier lots of models in this.

The overlays are to try to take account of where we think that things have moved a little bit quicker than the data that would be in the multiples. So it is slightly more judgmental its not as simple as that.

X percent reduction market prices gets a y percent change in credit impairments outlook, but I would just reiterate that I think we are provision to an appropriate level at this point in time, we can't rule out that being some more charges, but I do think that there will be a manageable level and I'll just repeat again the point.

This is about 1% of our total exposure group wide.

And although the prickly one at this point in time, it is sort of 1%, it's not it's not bigger than that.

Okay. Thank you very much.

Thank you.

We will now go to our last question.

Please standby.

And your last question today on the phone lines comes from Yafei Tian from Citi. Please go ahead. Your line is open.

Thank you for taking my question I really have more.

Peter a question around asset quality guidance that you have for future yet.

Getting to the 35.

Given the very uncertain macro outlook, yes, it'd be 30 to 35.

No.

And Nathan.

If there is any shock events.

And also secondly.

Compared to probably a Colgate, yes, you have seen or maybe the <unk>.

Average that we have seen in some of the historical.

So what gives me the confidence in that 30 to 35.

Credit cost guidance, along with that question is around the outlook in the Abbott Libre.

How much further optimization in Nashville.

Hi, Scott.

Low single digit.

Diabetes at this point.

That's D C.

Migration driving.

Hi, Thank you.

Yes, okay.

So.

The 30 to 35 listen a forward forecast being credit impairment is not easy.

If you actually look at it from a distance.

Expected far larger credit impairment charges than we actually incurred and actually in many senses. The cost to US was the business was on the low interest income low interest rates rather than on the credit side.

The 30 to 35 is derived from looking back over multiple time series in the past and seeing what happened, but it is not a precise science. Some of those time periods had slightly different interest rates. The ones. We've got now and that clearly is a relationship between the height of the rate and the amount of impairment. The one site we have got.

<unk> nine that has come in which wasn't around during some of the reference points, but overall when we look at the book, we look at what we've done to tighten our credit control procedures.

For years recently, the fact that the book is behaving well at this point in time, we feel that that 30 to 35 range is a reasonable range and.

We are operating quite well it flows at the moment, but we think it is a reasonable estimate as to where we might end up.

On the <unk>, we've taken the $10 billion out so far year to date.

We continue to push on those whether we'll be able to do quite that same rate and the balance I don't know, but thats certainly is more that we can do that and also this is not a single year push and this is something that we will be driving over the full three year period, and I suspect well beyond the three year period.

So I do think that there is opportunity with the <unk> overall the credit so the adverse mix if you like on credit more been about the sulfur ends and the writing service offerings than they have actually been about report.

So over periods of time, we will see what happens there, but let's not judge the spice sort of western.

Standards, but in a lot of the Asian markets, We've got actually the economic outlook as Bill said right upfront is is looking quite encouraging and probably more encouraging than some of the multiple leave living in some more western parts of the world.

Thank you.

Well I think with that we.

Have come to the end of questions. So thank you very much for your questions certainly.

Certainly encouraged by the third quarter and slightly upping our guidance on the income this year and upping the NIM guidance for next year and reassessing the 10% 2024, if not earlier hopefully all the main messages that you will take away. Thank you very much indeed for your time.

Thank you.

That concludes the presentation for today. Thank you all for participating you may now disconnect.

Okay.

Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

[music].

Okay.

[music].

Okay.

Hum.

[music].

Okay.

[music].

Yes.

[music].

Sure.

Yes.

<unk>.

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Yes.

Sure.

Okay.

Thanks.

[music].

Sure.

Yes.

Okay.

Thanks.

Yes.

Okay.

Yes.

Okay.

Thanks.

[music].

Okay.

Yes.

Sure.

Yes.

Okay.

[music].

Okay.

Yes.

Yeah.

Yes.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

[music].

Sure.

Okay.

[music].

Okay.

Sure.

Yes.

Okay.

[music].

Thanks.

Sure.

[music].

Yes.

Please.

Okay.

Sure.

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

[music].

Yes.

Yeah.

[music].

Okay.

Yeah.

Sure.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Great.

Yes.

Okay.

Uh huh.

Yes.

Sure.

Thanks.

Okay.

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Sure.

[music].

Thank you.

Yes.

Sure.

Great.

Yes.

Okay.

Yes.

Sure.

Yes.

<unk>.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Thanks.

Yes.

Sure.

Yes.

Thanks.

<unk>.

Yes.

Okay.

Sure.

Yes.

Please.

Yes.

Yeah.

Yes.

[music].

Thank you.

Okay.

Yes.

Okay.

[music].

Yes.

Sure.

Okay.

Thank you.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Thanks.

Okay.

Yes.

Okay.

Thanks.

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

<unk>.

Okay.

Thank you.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Thanks.

Yes.

Okay.

Yes.

Okay.

Thanks.

[music].

Yes.

Hum.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Thanks.

Okay.

Yeah.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Thank you.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

[music].

Sure.

Yes.

Hum.

Tom.

Yes.

Sure.

Yes.

Okay.

Sure.

[music].

Okay.

Yes.

Okay.

Yes.

Q3 2022 Standard Chartered PLC Earnings Call

Request a DemoDemo

SCB

Standard Chartered

Earnings