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Edited Transcript of STAN.L earnings conference call or presentation 1-Aug-19 7:00am GMT

Half Year 2019 Standard Chartered PLC Earnings Call

London Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Standard Chartered PLC earnings conference call or presentation Thursday, August 1, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Nigel Halford

Standard Chartered PLC - Group CFO & Director

* William Thomas Winters

Standard Chartered PLC - Group Chief Executive & Director

* Mark Nicholas Stride

Standard Chartered PLC - Global Head of Investor Relations

* Duncan Hall

Standard Chartered PLC - Regional Head, Investor Relations

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Conference Call Participants

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* Christopher Robert Manners

Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research

* Fahed Irshad Kunwar

Redburn (Europe) Limited, Research Division - Research Analyst

* James Frederick Alexander Invine

Societe Generale Cross Asset Research - Equity Analyst

* Jennifer Alexandra Cook

Exane BNP Paribas, Research Division - Analyst

* Martin Leitgeb

Goldman Sachs Group Inc., Research Division - Analyst

* Robert Ian Sage

Macquarie Research - Research Analyst

* Thomas Andrew John Rayner

Numis Securities Limited, Research Division - Analyst

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Presentation

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [1]

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Well, good morning -- good afternoon, everybody. Thanks very much for joining us. I know it's a very busy morning, so for those of you that have made it here, really appreciate that. And I think we probably have an unusually high number of people on the phone, but we'll try to keep our messages crisp.

We always try to show an advert that's a little bit relevant to what we're doing in Standard Chartered Bank. And I think the story of the entrepreneur saying that you really basically have to stick to your guns feels appropriate for us right now because we have been sticking to our guns and we're really happy that in the first half of this year, we've seen a continuation of progress against all of the strategic objectives that we set out, really all of them. And I'll say just a couple of things upfront and then turn it over to Andy to go through the -- all the details of our first half results. I'll have a few more things to say at the end and then we'll have plenty of time for Q&A.

So good progress across the board: income, up 4%; profit is up 13% on a constant currency basis. The income growth is being driven overwhelmingly by those things that we've been investing in and calling out for some time. So the focus on our unique global network and our focus on our affluent client proposition, that's something that we'll drill in on in some detail as we go through. We are on track to hit the financial targets that we set out back in February, so to exceed this 10% return on tangible equity by 2021.

The sentiments in our markets are clearly mixed right now. So we feel that we've had to navigate some challenging times and some challenging situations in the markets where we operate with a changing interest rate environment. Obviously, we crystallized last night with the Fed move together with the ongoing escalation or at least presence of U.S.-China trade tensions and the more recent protests in Hong Kong, all of which are clearly impacting sentiment, some of which are impacting the economic environment in which we operate and impacting our results.

Despite that, we have put up a good set of numbers in the first half of this year. We are convinced that we can navigate this sort of turbulence in quarters to come. Obviously, we watch it very carefully. And we're confident that we can hit this financial target that we set out back in February in 2021 to exceed 10% return on tangible equity.

But by the same token, there are some headwinds out there. We're going to watch them carefully. We're going to manage our business around the environment that we are experiencing. And we're going to continue to invest for the long term in our business. And that's key both to generate the kind of income growth with contained cost position that we've had over the past 6 months and further back, but also to give us optionality for different environments in the future as they will inevitably arise.

So quick repeat of the approach that we have taken in terms of setting out our strategic priorities, a copy from our February presentation: we're going to deliver the network, I'll be talking about that; focus on our affluent clients; we're optimizing low-returning markets, good progress across the board on that front; we're going to continue to improve our productivity; and we're going to transform through digital as well as engaging in ongoing digital business-as-usual improvement. All of this anchored in our purpose and our people, which, as an organization, we take most seriously.

Driving this 10% return on tangible equity by 2021 and 10% and above by growing income at 5% to 7% compound over the 3-year period; by keeping expenses below inflation, so substantial positive jaws, as we posted in the first half of this year; capital ratios between 13% and 14% CET1, we're smack in the middle of that range right now. If we do all this, we will be able to continue to invest heavily in our business while having surplus capital to return to shareholders, possibly doubling the dividend if we can hit these plans, as we've seen, buy back stock if that's the right way to return capital to shareholders.

So with that, I will hand over to Andy, and I'll come back up in a few moments.

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [2]

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Good. Thank you very much, Bill, and good morning to everybody. I'll just start with an overview slide that will give a sense for the shape of the numbers overall and then we'll go into some of these in a little bit more detail.

So $7.7 billion of income for the period, as Bill has mentioned. That, on a reported basis, is 1% up, but on a constant currency basis is a 4% increase. So fractionally, below the 5% to 7% medium-term guidance range, albeit as I'll come on to, actually, Q2, we were within that range.

Operating expenses on a reported basis, 3% lower than last year. On a constant currency basis, they are flat on last year. So overall, a 4 percentage point opening on the jaws during the period. That gives a pre-provisional operating profit that is up 8% during the half year. Credit impairment continues to behave extremely well. And when you put that into the mix, the underlying operating profit that we published is up 10% reported and 13% up on a constant currency basis. Below the line, we then took the final part of the U.S. settlement.

So risk-weighted assets are 5% up since the end of December, which I'll come on to later. They are flat compared with this time last year. Underlying earnings per share, up 9%. The statutory earnings per share, down slightly. That's 2 things affecting that: one, provision for regulatory matters; and the second, in the tax line, we have taken a charge of $179 million to enable some of our legal entity restructuring that I'll come on to later, which is going to give us a significant P&L boost over the next 2 or 3 years.

Dividends per share at 7%. That is formulated, so that is 1/3 of last year's full year dividend as we committed to do going forward back in February. The CET1 ratio at 13.5%. So key thing to appreciate here is that is stated after deducting 40 basis points impact of the full share buyback program. So even though we've only done half of it at the end of June, the regulatory requirement is that we've got the whole amount. So that is net of that 40 basis points. And then finally and importantly, the underlying RoTE now at 8.4%, so further increase in that. I think each -- since the first half since 2015, that has been on an improving track.

So let me then go into a little bit more detail on a number of them, and I will start with the return on tangible equity. So 7.5% for the first half a year ago, now 8.4%, so up 0.9%. The big driver there is the net interest income. So strong performance across most of the interest-related products. The fees and other income is down, but this is in part that DVA moved against those that can ebb and flow over a period of time. So that is year-on-year about [$70 million] adverse, and that is the large part of that. And also, Wealth Management fees over the first quarter last year was very buoyant, and that's made the comparisons a little bit more tricky, albeit I'll come on to what's happening more recently on that in a minute.

Expenses, as I said earlier, are behaving well. It's well controlled. 64.5%, on memory, cost/income ratio, the lowest that we've had since back in 2015, that enabling the funding of investments for the future, again which I'll come on to. Impairments, I mentioned those, that is coming as benefit. Tax, slightly adverse. This is not the point I mentioned earlier. This is more that the mix of the profit have gone into slightly higher tax cost regimes rather than lower. So that is a slight drag in the period.

And then equity, finally, makes an appearance on the RoTE walk for the bank courtesy of the implant of the share buyback that did occur before the end of June. We are, absent today, about 3/4 of the way through the overall program and would expect, therefore, the remainder of the program to basically be completed over the coming weeks. So putting all that together, 8.4%, clearly accelerate without bank levy in, but nonetheless, 8.4%, the highest we've had in the first half for a good while.

So let's move then on to income. So this is a walk of the first half last year to the first half of this year. So we published the $7.6 billion a year ago. If you normalize that to the exchange rates that we have seen prevailing during the first half of this year, the equivalent number is $7.4 billion. And you can see there that essentially, the story is one or most of the product groups is contributing and slight downside, which I'll come on to, from Treasury.

So Transaction Banking, up 6% during the period, when that has been a continuing sort of engine for us. What I think is actually most noteworthy in this period is Financial Markets, which has had a great first half. So reported numbers are up 7%; on a constant FX basis, that is 10%. And actually, if one reverses out the DVA adjustment, we are more 15%, 16%. So a very strong performance in Financial Markets. Retail, up a little bit. And then the other 3, first half and first half, are fairly flat. Treasury markets is down. That is the increased payments that Treasury markets are making to our liability businesses because rate increases. And you put that altogether and you get to the $7.7 billion number for the whole of the first half.

If one does the same walk on the second quarter numbers, so this is second quarter of this year compared with second quarter of last year, a similar shape to this. So the FX adjustment, rebasing things slightly. And then most of the areas look green, the large part, the green on here. I think the one that I would call out as being a little bit different between the 2 charts is that Wealth Management, first quarter on first quarter, our income was down $70 million because of how strong the first quarter was last year. Whereas actually, second quarter on second quarter, underlying Wealth Management is [$50 million] ahead.

And also, because we have hit some of our bonus targets early, we have also booked a $28 million acceleration of our bonuses that we would normally take later in the year. So you put those 2 together, probably the biggest swing factor in terms of the second quarter performance is sitting in Wealth Management area. So overall, that gives us the quarter shape that you can see there, our highest second quarter that we've had for a while, in fact, the highest quarter that we have had for quite a while.

Now one chart, just painting the picture, in terms of client segments. So the 4 client segments all have done well. Now remember, in a sense, which I'll comment later, Central & other was a little bit of a drag. But overall, Corporate & Institutional Banking, starting on the top left, a really, really good first half to the year. So income, up 5%; costs, down at 4%; jaws opening up at 9%, and that's resulted in a profit being about 25% higher. And that has also resulted in the RoTE being in double digits, and that is the first time for quite a while we have been able to say that.

And I thought I'd be going around clockwise. Retail Banking, flatter on the top line, partly that's because of the Wealth Management's high start to the year ago, but good cost control. So grows 2% higher, and return on tangible equity continues to be the strongest of all of our client groups at around 14.5%.

Commercial Banking also has had a good half year. So the top line, up 6%; and the costs, down 8%. So overall, 14% opening up jaws there, and that has resulted in a pre-commendable doubling of the operating profit and a near doubling of the return on tangible equity. So not quite at 10% point, but certainly at 9%, way, way higher than we were at a while ago.

Private Banking, also a good story, 13% up on top line. Now the $100 million of profit there will be opened. There is $48 million benefit from the release of a previous provision, which we included in our first quarter numbers. But even if you take that out, the return on tangible equity there, noticeably higher than we've had in that business. And I think this is really good evidence of the work that's been going on over the last 2 or 3 years to reposition, replatform that business. So good news on all of those fronts.

If I now look at this in terms of which regions have contributed what, we have got here Greater China and Northern Asia on the top left. So that is a 1% reduction in year-on-year. That is slightly up if one takes a full year -- sorry, if one takes it on a constant currency basis. The overall story here, I think Hong Kong, flat on top line, but 5% up on profit. So that is its highest first half profit for 5 years. So very good cost control there. And we'd probably also call out our business in China where on a constant currency local basis, the income was up 12%. So we continue to do extremely well with a double-digit growth there last year, and that continues through into this year.

The ASEAN region, top right here, 3% up on a reported basis. That is 6% up on local currency basis. Profit, up 29%. Now that's got the benefit of provision release and it's a little bit lower when one reverses that out. But nonetheless, overall, pretty strong performance here, particularly call out India where we got 11% growth in constant currency income. Singapore operating profit, even reversing the reserve release out, is 20% up. So good performance in the ASEAN region.

Africa & Middle East, currency affected quite considerably. So top line on a U.S. dollar basis, reported basis down 3%. Actually, locally, on a constant currency basis, that was up by 3%. And profit before tax, you can see, which is up 14% over the period, less currency impacted. But nonetheless, good double-digit growth there. Particularly call out Nigeria and Pakistan, both of whom, on a constant currency basis, have increased both income and profits, 10% to 20%, which is good.

Europe & Americas, a slight tougher period. Now quite a lot of this is about the DVA adjustment, which disproportionately hits this region, and XVA as well. So the vast majority of the income reduction is those 2 factors. Origination income is actually up by 5%. I think in the period, things that are noteworthy, we are hopefully Brexit-prepared. Our business in Germany is now formally established, licensed and we have increased the staff levels in that and are fully, we hope, prepared for whatever may happen next. And we've also opened up a shared service environment center in Poland as well, which is now manned and is now starting to take activity from other parts of the world.

So I'll move on then from that to Central & other. So if you recall, the sort of central management of the balance sheet, et cetera, resides in the center, as do some of the corporate costs. I think the story here is, on the left-hand side on a client segment basis, we have gone backwards on income about $150 million and on profits, $250 million. The largest single part of that is the higher rates that the Treasury markets team business is paying to our liability businesses. We have also got a smaller effect from IFRS 16 and an India tax refund the previous year, which is not recurring. Those are lesser issues in that, and there is an offset with hedge ineffectiveness being better year-on-year.

On the right-hand side is the same but done on a regional basis, a slightly different mix of what is in there. And the simple story there is we are about $100 million better on both the top and the bottom line, and that is primarily the hedge ineffectiveness improvement.

So let's move then on to costs and investment. So as I mentioned earlier, costs are well controlled. I think the culture of the business on the cost side has now markedly changed. $5 billion for the first half, that is on a constant basis flat year-on-year. Sometimes the income growing 4% on the same basis. We would expect cost to be slightly higher in the second half, which is the usual pattern. But nonetheless, we'd be confident that the full year cost will be below the rate of inflation. It's what we committed to doing.

And then on the bottom left, you can see the cash investment. So we're continuing absolutely to spend on digitizing the business. And I think some of the benefits of things we were doing last 2 or 3 years, Bill is going to talk about in a minute. But definitely helping to now really moving forward some of the productivity metrics within the business. So $0.7 billion spend there year-to-date, and expectation will be around the $1.6 billion level for the full year, as was the case last year and broadly as was the case the year before.

Credit quality. So 2 years ago, some of us may remember, credit quality was a bit of a problem. P&L charge on the top was near on $600 million 2 years ago first half, $300 million last year and now $254 million. Now we have the benefit of the reversal of provision in that, but nonetheless, we're running at in the first half about the $300 million level for the half year.

You can see on the bottom left the various indicators of the more difficult accounts, the stage 3 nonperformers, the early alerts, et cetera. And pretty much across the board, those are on an improving trend. But having been said, clearly, we are very watchful of what is going on in the macro environment at this stage. So we do not sit around. This is going to be something we'll keep a close eye on. But at this point in time, the credit book is behaving well and, hence, that is giving us a pretty low P&L charge by historic standards.

Balance sheet. So top part here is the assets side of the balance sheet; in the dark blue, you can see the customer lending; and in the middle blue, the other lending to other institutions. So overall, the story here on the balance sheet side, in volume terms, is 5% to 6% of volume growth over the last 12 months. So that is good. What you can see on the very top right is the yield that we're getting on those assets. On the average, it's up 40 basis points compared with the same half year a year ago.

Then on the bottom left, we've got the liabilities, so a two-part story here. The accounts we have with customers that are not interest-paying have reduced slightly in the period, so it's down 4%. And the accounts that we are paying interest on are up 5%. So when you put those 2 together and go to the chart on the top right, we are back on the average 47 basis points more for liabilities than we were this time last year, and that obviously is a large number than the 40 basis points on the assets side. However, because the assets are bigger than liabilities, the overall NIM is static at the 1.59 level.

So an area we're very focused upon and a lot of things are underway, and particularly, the legal entity restructuring that we are now large way through. That should be giving us about a $300 million benefit in 2021 or thereabouts, so things that we are actively doing to make sure that we can move this forward. We've done an update on interest rate sensitivity, so that's in the bag, but plus/minus $200 million for every 50 basis points for the banking book. And that sort of remains fairly similar to where we saw the picture when we last reported out.

So capital risk-weighted assets. As I mentioned earlier, capital is still strong. So just to walk on this chart, 14.2% is where we're at, at the end of December. We have then taken off the 40 basis points for the full buyback program, as I mentioned earlier. There's then the cost of the final U.S. resolution and the one-off tax charge, which takes it down by 20 basis points to 13.6%. And essentially, in the first half, what we have seen is underlying profit boosting it by 0.7% and the RWAs and the dividends coming off by 0.7%, 0.8%, so hence, the 13.5% that [we did] there.

And on the bottom part, we got the risk-weighted assets. So as I mentioned earlier, if you take December end as the point of comparison, which is what this chart is showing, we're up by $12 billion or thereabouts. If you go back to this time last year, we're actually flat. In the first half, the $12 billion that's on this chart is very much about the sort of [call-on] credit. So we have got the balance sheet growing, which is good business momentum. And overall, the others net out to not a lot. And this is something we're very focused upon. There are a number of efficiencies that are in the first half. There are some that's still to come in the second half. And hence, we're very comfortable with the previous statement that we would expect over time to see the risk-weighted asset growth being below that of the rate of income growth.

So final slide, just back to the framework that Bill had earlier on. In terms of the 10% return on tangible equity, we are another 90 basis points heading into that direction. Income at 4% constant currency against 5% to 7%, so fractionally lower. I mean interest in the DVA adjustment, which does swing around. If we haven't had that, we would have been at 5%, so at the bottom of the range. And I think in the second half, it will be very FX-dependent. We may be a fraction below the 5% to 7% depending upon the FX, but not too far away.

Expenses, as I said, behaving well. Those would be slightly higher in the second half, but overall for the year, below inflation, as we had indicated previously. And capital ratio at the 13.5% midpoint of the range after the $1 billion buyback impact has been deducted is, I think, a very good place to be as we go into the second half of the year.

With that, back to Bill.

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [3]

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Great. Thanks very much, Andy. I'm going to canter through just a selection of our observations about the key strategic priorities that we called out in February, again, consistent with those that we have been harping on since 2015. The punchline is we've made good progress on all of them. That's obviously driving the financial results. But some of these are leading indicators, so it's good to get in front of a few of them.

Now first, digging into some detail on that, that the key objective of ours, which is to grow our network business within our Corporate and Commercial and Institutional Banking business. So we got a measure of clients. So new clients, that speaks for itself. Next clients are those clients that we identified for targeted deepening, so people that we -- corporates that we thought we could be doing much more with because we have some relevance to them. A steady increase over 3 years, 24% in this period.

Network income is overall increasing 9% year-on-year. That's clearly what's driving the overall strength of the CIB income line. The network income is now 69% of our total CIB income, so again, a further improvement. A slightly different measure of a similar trend, which is capital-light income, so the percentage of income that is coming from services and fees and things of that nature that are much less consumptive of capital, up to 60% of total. This trend -- these trends are clearly what's driving the improvement in RoTE for the Corporate and Institutional Bank at 10% overall given that the network income portion of that is generating a much higher return, so at closer to 18%.

And we're being recognized for some of the things that we have focused on, like the ongoing opening up to China. Andy mentioned the strength in underlying China income. It's because we focus on being the best RMB bank, the best cross-border payments bank, the best bank at bringing international money into China. And of course, moving Chinese money out to the extent that that's what's happening. And we're being recognized in awards like the Best Global RMB Bank, something that is not an accident, something we've been very, very focused on and we'll continue to focus on.

Our affluent client business has continued to be strong. Now as I mentioned, the Wealth Management income has been subdued certainly relative to a very strong first half of last year. But the underlying drivers of the value of this business is how many clients you have, how much of their money are they leaving with us. And by that metric, we've made very good progress. So 14% increase in the number of our priority clients year-on-year.

The subset of our overall affluent population, which is Private Banking, as Andy said, repositioned that business, made some investments, and those investments are paying off. We saw the financial results that comes through and the measure of net new money as well.

When we look at the higher-returning business lines for us, Wealth Management and Deposits as a percentage of overall retail, up to 65%, steady improvement. The income coming from our affluent client base and the AUM for that affluent client base continuing to improve. Overall percentages are increasing. And again, just calling out what we mentioned in February, the return for this affluent client segment is much higher for us in part because it's much less capital consumptive, in part because we've got a real competitive advantage there. And that's driving the overall improvement in Retail and Private Banking return on tangible equity at 15%.

Next strategic objective that we set out was improving these 4 markets that have been underperforming and have been a bit of a drag on our return on tangible equity. What we said back in the quarter was that if we get all 4 of these markets right, i.e., bring them up to the level of the rest of the bank, that's 150 basis points improvement in RoTE. Actually, the first half of this year, we are on track with our progress and we're on track in all 4 countries.

So slightly different stories, as you'd expect, in each case. India, it's clearly a strong growth in operating profit coming from good income growth, very substantial cost management activities and a real leveraging of the value of our networks. So we've had a big focus on subsidiaries of international corporations operating in India, and that's been a key driver of the value of our Indian franchise. Not all of that shows up in the Indian numbers, but certainly that's where we're looking at that business.

Korea, as Andy mentioned, a little bit more challenged on the income line. Some ongoing focus on expenses, but real focus on capital management. And we were able to return about $600 million of capital from our Korean subsidiary back to the group. That's driving an improvement in RoTE despite the small drag on profit.

UAE, strong C&IB business, substantial and ongoing focus on productivity and efficiency. This is combined with some good underlying focus on growth in our markets, a good focus on our priority client segment, driving an overall 34% increase in operating profit there.

Now Indonesia, it's a C&IB trend story, although we've had good improvement in our priority client segment there, driving a 26% increase in operating profit and a substantial increase in RoTE. The focus that we mentioned back in February around better penetration of the mass market in the context of having identified Permata as a noncore investment for us, using partnerships where digital means is progressing apace. We're very excited about the prospects and look forward to sharing more of those details with you as time goes by.

Next strategic priority that we mentioned was a focus on productivity and efficiency. Just a few metrics here. When we look at the -- our percentage of our retail marketing that's going through digital channels now, we're up to 25%. The onboarding time, both across the Retail and Corporate & Institutional Banking business, down to 7 days from 16. This is just chipping away at the underlying operational inefficiencies that we've had. There's more that we can do, but we're making good progress.

Looking at a couple of productivity measures. Income per full-time equivalent employee or risk-adjusted income per full-time equivalent, now both are going the right direction, 4% and 13%, respectively. We actually prefer the risk-adjusted measure because that's giving us a real indication in how productive our front-line RMs are. But we also recognize that, that measure will be volatile from period to period as loan impairments swing from period to period. So we look at both. But clearly, with the constrained loan impairments, we're seeing good improvement in both those measures. And that will drive in the improvement in cost/income ratio, down to 65%. And we remain convinced that there is further to go, and it's a key area of focus for us.

Next strategic priority that we called out was focus on digital. What we said and what we'll continue to say is there's really 2 types of digital investment. The ongoing improvements in our business as usual, so just doing what we're doing today a little bit better, a little bit better customer experience, better cost, et cetera, et cetera. Plenty of initiatives in that regard, and that's part of what's driving the productivity improvements that we've seen. And second is the focus on business model innovation, so targeting new client segments or new markets or fundamentally different market shares or different products and services based on brand-new offerings. And we've got some made and we'll continue to make good progress on that front as well.

Just a couple of the metrics that we look at. Mobile adoption rates, going up; digital adoption, going up; potential markets Straight2 volume, going up; our Straight2Bank utilization, which is our proprietary Treasury for -- in our Commercial Banking business, now over 2/3 of our clients are accessing our proprietary portal to execute their financial needs. But on the more business model innovation side, one of the first banks to get the digital virtual banking license in Hong Kong, building that out at pace and looking forward to launching something that's really differentiated in the Hong Kong market when that comes out over the next couple of quarters.

The -- an SME platform in India that's giving our SME clients and other SMEs access to an open platform to connect to our larger C&I clients. Other products and services connect to each other. And we're now up to 8 markets where we launched our digital bank in Africa with a couple more to go between now and the end of the year. This is very exciting, and it's exceeding our expectations in terms of customer acquisition and average deposit size, something that we can continue to grow on for years to come.

We're talking about our purpose, and I'm on Page 24 for those on the phone. Our purpose and our focus on both our contributions to society with the way that we want to live our own lives within Standard Chartered Bank, these 4 areas that I've outlined across the top continue to remain key areas of focus for us. But I want to drill down for just a moment on the second, which is our focus on sustainability.

We're early adopters of the UN Sustainable Development Goals. We were early sponsors. We have developed our sustainability framework across all of the SDGs and we'll continue to. We try to be thought leaders and we try to take concrete actions that make a difference. Thought leadership come in the form of things like the sustainability white paper that we launched earlier this year where we talked about the ways that we could usefully measure, monitor and then ultimately reduce the greenhouse gas emissions not just with Standard Chartered Bank, but of all of our clients. And we put a thoughtful exposition out. It's extremely well-received by NGOs, by our colleague banks, peer banks where we've had extensive consultations with each other and with governments and with the clients and with our own staff. So a high level of engagement that we think will advance all of our ability to hit the -- those agreements that most countries in the world are striving for right now, and we want to make sure they are part in that.

But we're doing concrete things as well. We have the first sustainable deposits that we launched. We're raising quite a bit of money into this. Basically, you get deposits in only be on lend for sustainable underlying projects, properly audited, et cetera, et cetera. Sustainability bonds where the interest rate or the yield fluctuates as a function of the degree to which the issuer has met the sustainability objectives that they've set out. These are the kinds of things that we will do on an ongoing basis. Green bonds, blue bonds to protect the maritime waters around the Seychelles. Those sorts of things.

I drill on it because it's exciting and it's a core part of our purpose. And I can tell you, to generate the kind of financial results that we are consistently generating now, this steady improvement, yes, I know we have further to go, you need to have employees and clients that really want you to win. And this kind of thing makes me and our colleagues really want to win, which is why I take your time this morning to go through something like that.

So just to wrap it up. Now I'm really happy with the start to the year. We are steadily accomplishing the strategic objectives and taking out the strategic objectives that we set out. It's showing through in the financials. We're fully aware that we're operating in a tricky environment right now. Our first half results were despite of some challenging market environments, not because of or accidental. And we know that things could get choppy from here. We're keeping a close eye on the evolution of interest rates, the rate cut last night and then the prospect of future rate cuts is an incremental headwind. But we think we can navigate around that and continue to hit the financial targets that we set.

The ongoing tension between U.S. and China, both trade and security, presents the prospective headwinds. It's already having an impact on economic sentiment. Keep a very close eye on that. And to the extent that bits or pieces of our business model need to adjust, we will be most comfortable doing that. And of course, we're thinking about it a lot. But in some of this volatility or some of this challenge also comes some opportunity. To the extent that supply chains are being reconfigured, they are reconfiguring into the markets where we have a very strong presence. And we would expect to get some benefit from that sort of activity as it's ongoing, as we have.

So all in all, we feel good about where we are today. We feel comfortable maintaining this strong pace of investment. And we look forward to continuing to produce the progress that we have first half of this year.

So thanks very much, and Andy and I will now take some questions.

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Questions and Answers

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [1]

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[Outside conference calls], we've got one microphone this time, so I will definitely go around. Martin, starting with you.

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [2]

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Martin Leitgeb from Goldman Sachs. If I could ask maybe 3, and the first one on Hong Kong and just what's happening there. So how would you assume that -- I mean the GDP growth wasn't that slower. And also, just in terms of Wealth Management confidence, business confidence, what could you expect in back to be in the Hong Kong business? If the situation as of now were to continue unchanged, how big a concern is that?

The second question, just in terms of revenue progression, to understand better revenue progression from here. The $300 million impact arising from legal entity restructuring, which I think you mentioned is largely complete now, how is that phased over the next 3 years? Would you expect a material contribution already for the second half of this year? Or is it more to come through in a gradual way?

And the third question is a bit more broader just in terms of the digital bank rollout you have in Africa. If you were to compare the capabilities of the digital bank to the capability of one of your branch-based representations, how similar the product and offering you have? Is it broadly comparable? Or the digital bank offer has a significantly reduced product offering?

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [3]

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Okay. I'll take a stab at the first and third. Andy will add color and deal with the second. So we're watching the events in Hong Kong very closely. It's turning for sure. I was there last week. Hong Kong is a tremendously resilient place, but this is clearly preoccupying the population because it's material. I mean what's going on is material and it's uncertain how it's going to be resolved. The direct impact on our business has been very limited so far. So we've had some branch closures around the side of protests, not material in terms of impact on our business. I'd say that there's a subdued sentiment in the market, which is -- which contributed to the slowdown in growth in Wealth Management, as we've seen in other times of uncertainty, be it market or, in this case, specific to Hong Kong. So we're watching it. Clearly, it's not material as yet, but nor do we think that the protests are done as yet. And I think this will carry on for some time.

So we're obviously standing behind our clients and our colleagues in Hong Kong very firmly. And I think this is carrying on for sure, but there's an element of heaviness in the market which is inevitable, I think, given the magnitude of what's going on. But if you just look through history at the obstacles in Hong Kong as an economy and as a society have overcome pretty much every 5 years, if you think of the financial crisis, SARS, et cetera. Hong Kong copes well with stress and recovers well after stress. So we have absolutely no concern about the way that Hong Kong will recover. But we watch with concern as we see the events unfolding day to day.

The digital bank question, I mean the short story is once fully rolled out -- and we've been rolling this out over 18 months. It started in Côte d'Ivoire, and most recent was in Zambia and Botswana. We'll have Nigeria between now and the end of the year. The -- once fully rolled out, the functionality is everything you can do in a branch other than the physical movement of cash, the physical handling of cash. So it's a full service bank on your mobile phone. The -- there are some incremental products and services, lifestyle options or connections through to reward programs or, again, sort of travel opportunities or entertainment opportunities that you wouldn't normally do in a branch. So it's sort of a branch plus.

And I'd say, there's a phasing period. So things like the full range of Wealth Management products will be available on the mobile banking app over time. It's well flagged and we got clear plans in each case, but it's not all there on day 1. But the intention is to be able to do anything you can do in a branch on the phone. And to do most of it, self-direct it rather than getting on the phone and then accessing a contact center or something like that.

The virtual bank that we're building in Hong Kong is intended to be all that, plus a lot more. So it's -- because we've got 2 very strong partners, Hong Kong Telecom and PCCW and Ctrip, which is the largest online travel service in the world, we want to make sure that we're not just leveraging our banking services and the banking services that we're building, but also the products and services available from our partners in an integrated way. So it becomes much more of a platform for consumers than a mobile banking app. Obviously we have to build it and roll it out and then we can declare victory, but we're very excited about what we're doing right now.

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [4]

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And on the legal entity stuff, I mean it sort of sounds a bit boring but it's quite profound. I think our legal structure has been very U.K.-centric over multiple decades. And yet all liquidity pools are clearly based in Northern Asia and Southern Asia and in the U.K. So what we have been doing is starting to reorientate our legal structures around where the major trading activities are. A third major impact of that is our Singapore business which used to operate in part out of that Singaporean legal entity and in part as a branch of our U.K. business is now wholly operating as 1 legal entity in Singapore. That means we don't have to comply with 2 different sets of liquidity rules. We can now look at things in the aggregate and that gives us a liquidity flexibility. Secondly, our Hong Kong business we've repositioned it in our China business so that the 2 are full of subsets of each other and that has only just happened. But again, over a period of time, that gives us considerable opportunity to look at liquidity in a more flexible way. And we would intend that particularly I think next year and going into 2021, we would see the benefits of that $300 million a year of interest cost reduction happening. So small amount this year, but this will be much more next year and the year after.

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Jennifer Alexandra Cook, Exane BNP Paribas, Research Division - Analyst [5]

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Jenny Cook from Exane. Can I just first ask on income trajectory and the kind of balancing act you're playing between the benefit you're expecting from previous interest rate rises and also sensitivity going forward? If I look at it, (inaudible) has come down a little bit. So how are you expecting that to kind of play through now? And then secondly, if I look at consensus and cost we've got H2 up on H1 by around 7%. Is that consistent with your view of costs up slightly H-on-H?

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [6]

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It's always difficult to go and sort of ex out preexisting interest rate in the system and the roll-on affect from new changes across 60 markets and so it's complicated. And our estimate of the approximate impact of 50 basis point movement in either direction is not too dissimilar to where we've been before. So we said about 180 on reductions and 210, I think, on increases. So as we move forward -- now back in February clearly there was more expectation from interest rates, they're slightly up over a period of time. Clearly, the view at the moment is that, that probably is slightly optimistic and that we would expect more to see interest rate reduction over a period of time. But I think what we've seen in the first half is a steady NIM. What we've seen in the first half is volumes going up 5%, 6% and given that the business I think for the reasons we've just shown is now starting to get out together, our market shares are quite low in many of the markets in which we're in. I think we should be able to see that NIM staying reasonably sort of constant, the $300 million we just talked about should be helpful in that regard and actually making sure we keep the balance sheet momentum going as we move forward.

On the cost front, I won't comment on whether it's 6% or 7% or 5% or whatever. And I think that we have had a good first half on costs, the control there is good. It is effective. And what we're saying is second half typically will be a little bit higher partly because the investment spend, approximately half of which we expense through the P&L, a half we capitalize is second half higher than first half. That has been the pattern for many years. And therefore, we'd expect a little bit more cost there. And second half has got the full year impact of payroll changes which happened sort of at the end of the first quarter. So that also is a reason why the second half would understandably be a little bit higher. But overall, we'd be comfortable sitting here today, standing here today that for the full year the cost increase would be below the rate of inflation which is what we've said back in February is our intent over the next several years. And I think important to understand even within that, there's a considerable amount of investing for the future and the absorbing of the cost of that, that is going on, that is not new. We've been doing that last 2 or 3 years, but we have been eking out a lot of underlying cost in order to be able to fund that future investment, so the digital things that Bill was talking about.

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Thomas Andrew John Rayner, Numis Securities Limited, Research Division - Analyst [7]

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It's Tom Rayner from Numis. I have a couple please. First on RWAs, Andy, I've noticed you tend to mention now RWA growth below revenue growth. But I was wondering to sort of ask about the commitment of the 2% per annum over time. Because clearly we're running a little bit ahead of that in the first half. I just wondered if you could sort of reconcile as to how we go from the last 6 months to that sort of average growth over the next year or 2. The second is just on the NIM. Obviously, stable half year on half year, but if you look at the Q1, Q2 breakdown there's quite a bit of volatility in there. I think it's 1.6 jumped up to 1.62 because of the trading-related stuff which I think other banks might actually strip out of their NIM. So I just wondered, is your comment about the stability on the half on half, I mean is that taking any sort of market-related volatility into accounts as well, so that is a genuine stable trend that we're seeing?

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [8]

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Yes. So 2 good questions. So in February on the RWAs, we said -- sort of think of the story in 2 parts. We do believe that we can grow the balance sheet and that will produce a level of increase in RWAs over a period of time. But secondly, there are some things that we can do which will help to take some of the pressure off that. So a specific example, yesterday, we've announced the Principal Finance business that we have been negotiating for a long period of time is finally legally completed. And that takes a chunk of RWAs off the books in the second half. We said that we have put the Permata business in non-core. And over a period of time, we'll see where we go with that but that's a significant amount of RWAs. So I think the way I look at it at the moment is that the growth in line roughly with income is what we've seen in the first half, but there are efficiency opportunities, the exact timing of which may not have been the first half, but we do still see happening over the next several quarters going forward. So hence, that sort of 2% number is one that we are definitely comfortable with.

NIM story, you are quite right. It's a little bit more complicated. So in the period, the trading book assets had a good return. We had some cross-currency swap cost actually in our other income line, not in our net interest income line. If you take that into account, then the overall NIM stayed in the 1.59-type range. We are going to have a look at it as your question says other banks might have exed that out, and so it's something we'll have a look at over a period of time. But I think it is right to ex it out because it is associated with what has given us a little bit of a kicker, we need to look at the two on a net basis. And on a net basis, I'm sort of saying that, that sort of 1.58, 1.59 which we've had now for a number of quarters seems to be a reasonably settled pattern.

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Robert Ian Sage, Macquarie Research - Research Analyst [9]

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Robert Sage from Macquarie. 2 questions quite differently. The first one of which, I was very impressed by the jaws performance under a slightly weaker revenue print in the first half. My question really is -- just one in principle, which is that if you were to actually find that your revenue growth is say below 5%, a little bit below 5% over the next 3 years on average, do you still think that the RoTE goal of 10% in 2021 would be still deliverable potentially under that scenario. The second, very minor question, you mentioned Permata is non-core, I was just wondering whether you give any update at all in terms of what may or may not be happening on that situation?

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [10]

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Yes. Let me pick those up. There are several moving parts, as you know, to the RoTE income cost, and RWAs being probably the third one not in your question. So I think if we were to find the top line was tougher, then it isn't all about costs. There is quite a lot that we can and are doing on the RWA front as well. Bill gave some examples of the proportion of what we call capital-light activity, it's a big focus in the CIB business to be doing more that is not so capital-intensive. Our history has been one of being relatively capital-intensive compared with other banks and that is something we're trying to move away from. So I think there are different levers that we can move. Within the cost there is a degree of investment which to some extent is discretionary, and I'd say that, that is a short term, long term sort of balance to what is the right thing to do there. We are spending much more in investment now than was the case 4 years ago and prior. We prefer to be able to keep that pace up because we believe that is the right thing to do to position the bank and there is more that we can do sensibly, keeping the balance sheet growth to make sure the top line is moving as we would intend it to be, we will do that. But we can pull RWA levers as well. And Permata, there is no news. We will update if there was a change in the status.

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Mark Nicholas Stride, Standard Chartered PLC - Global Head of Investor Relations [11]

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We do have some questions on the line, so I'm just going to hand it to my colleague who's going to read one of them out.

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Duncan Hall, Standard Chartered PLC - Regional Head, Investor Relations [12]

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Hello. So these are people that have -- there's a few of the sell-side that have joined -- plus we've got Barclays announcing today as well -- so some people have taken the opportunity to join via the website. There's a question from -- it's been asked by a number of people -- but I'll attribute it to Ronit because he's been very active on this.

So Ronit Ghose, Citi. 13.5 percent, middle of your 13% to 14% CET1 range. You're most of the way through your $1 billion buyback. What are the plans for further buybacks? Is that now a next year event? And are they now more dependent on inorganic things like disposals?

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [13]

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We've said 13% to 14% is where we want to sit over the medium term. And I think it's important to note that actually we do mean that being in that range is where we want to be. Prior to February, we have actually sat above our target range for the previous 3 years consistently and that isn't what we're saying now. We're saying 13% to 14% seems good and being in that range is fine. So at the end of the first half, evidentially we have landed spot on the button in the middle of that range and that is after we have done the buyback. Now as we move forwards, this is very much about 3 things. One, what is the natural profit progression of the business and how much that moves forwards and creates capacity. Second is what business opportunities there are out there that we would actually prefer to invest that in so that we can grow the business. And thirdly, to the extent that both of those have been satisfied and we are still potentially outside of that range, then we would look at that point in time at doing further buybacks at that point in time. So won't be pinned down on particular dates or whatever, but we're aware -- well aware that part of getting the RoTE is going to be pulling the e-lever as well as the returns lever and we'll do that thoughtfully over a period of time when we see it is appropriate.

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Fahed Irshad Kunwar, Redburn (Europe) Limited, Research Division - Research Analyst [14]

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I'm Fahed Kunwar from Redburn. Just one quick factual question. The 6% Q-on-Q constant currency, if I strip out the DVA, is the DVA all in the second quarter? So will that be higher, quite materially higher ex DVA, or I've got that wrong? Then on the funding cost side, I always find it strange your funding cost also high considering where your loan to deposit ratio is, particularly versus your peers. When your funding costs -- I assume your funding cost has now come down to $300 million. Does that mean you can optimize your risk weights organically more as well because you can go after lower risk-weighted balance sheet accounts, so that allow you to go after more balance sheet-light assets. Is that the right way of thinking about it, i.e., it's a double benefit to that reduction in your funding costs? And then just falling U.S. rates, I think in your appendix you mentioned dovish central bank as a tailwind? You talked about it as a headwind. I always slightly struggle whether that's a negative or positive for you guys because obviously dollar liquidity doesn't get sucked out of Asia if rates are rising in the U.S., but you do get a margin hit. So kind of taking both things into consideration, is the more dovish Fed positive or negative for you guys in the rounds?

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [15]

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Let me take the first two, maybe. So the DVA was a slight hit in the first quarter and a slight benefit in second quarter. So it is part of the reason why the first quarter to second quarter improvement happened. However, that having been said, as I mentioned earlier, we're about $70 million higher I think on second quarter income than first quarter. If you actually look at it by product line, the biggest increases in Wealth Management which is about $50 million. And $30 million of the $50 million is the bonus that we have taken early, which is good, we've hit the targets there. And then the rest is sort of $20 million of underlying improvement in Wealth Management. And then you can see sort of $20 million improvements in Retail and Transaction Banking. So it's fairly well spread across the piece. So I'd say you're right, the DVA has had an effect in there but it's sort of one of several moving parts between the two principles.

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Fahed Irshad Kunwar, Redburn (Europe) Limited, Research Division - Research Analyst [16]

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So does the 6% include the Q2 year-on-year benefit of DVA?

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [17]

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Yes. Yes, it does. Your second point, clearly the lower the cost of our funds, the more competitive we can be on pricing. And so long as we've got a given level of risk, it does enable us to be more competitive on pricing. So there is a double benefit and that is, in part, clearly why we are doing what we are doing to try to get the cost of funds down to levels that actually will enable us to be more competitive with margin. And to the extent we can do that, hopefully, with the marginal business that we can get without affecting the riskiness of the book which we will not go and reduce. But yes, it should give us a little bit of opportunity.

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [18]

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The question is are -- is the dovish Fed a good thing or a bad thing for us? On balance, it's a headwind. It's a negative. The -- our margins and economics are directly affected by lower rates. Obviously, that's U.S. dollars. And amongst other things, it's very important to see how Hong Kong rates are responding to U.S. rates, right? Because we've seen over the past couple of years, they don't move in lockstep. So that's a separate variable. And then we have a number of other currencies that were especially -- that aren't directly related to dollars at all, to varying degrees. So -- and the sensitivities we give are for a 50 basis point across the board change in rates, not a specific change just in U.S. dollars. On balance, we have to think of it as a headwind that we will incrementally have to overcome at this point. Always important to ask the question why is the Fed dovish? Is it because economic growth is slowing? That's clearly an incremental negative, if that's the case. Not so much evidence of that. Obviously there's been some slowing, but that's not the -- what seems to be preoccupying the Fed was -- preoccupying the Fed is that inflation is stubbornly low. And that -- the low inflation in and of itself doesn't have an impact on us, certainly not to the same extent as slower economic growth does. So on balance, we see this as a manageable headwind, but a headwind.

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Christopher Robert Manners, Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research [19]

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It's Chris Manners from Barclays. Just a couple of questions for me. The first one was on your greater TRIM and RoTE target, because I mean when you constructed that, that was actually based on a 40 basis points cost of risk and 25 bps cost of risk in the quarter is pretty low. And we do have more dovish central banks, maybe that's going to help your customers in debt servicing. So is there any chance or any sensitivity you can give us if you were to have a lower cost of risk? And you've done a lot of work restructuring how you lend and taking the risk down, maybe we're getting more prudent as well. The second question was just on Basel III.1, and I guess you're still expecting 5% to 10% RWA inflation, fully loaded. Will that actually allow you to bring down your capital range, once that RWA inflation comes through, 13% to 14%?

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [20]

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I'll take the first one. We didn't -- we weren't explicit about 40 basis points, that's the guide that we can -- we don't know what the through-the-cycle credit cost is going to be for Standard Chartered. But it felt lower than the guidance that the bank has given in the past and much lower than our experience in the past for the reasons that you mentioned which is we have a fundamentally different approach to underwriting credit risk and managing that risk. Of course, we're encouraged by the increasingly low or lower credit cost. But there is nothing that we've seen and certainly not directly the result of 25 or 50 or 100 basis points of U.S. dollar rates, it makes us think, yes, we're structurally lower in terms of credit impairments. Now, it may turn out that that's the case, and we're happy if it is. I think we've been cautious in terms of assessing the sensitivity to interest rates on the part of our clients. But we wouldn't change our guidance in terms of what we feels like an appropriate through-the-cycle credit cost.

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Christopher Robert Manners, Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research [21]

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So as I say for the rest of this year and how we think about the phasing, I remember in the past Standard Chartered used to talk about sort of long quarters and short quarters and things like this. And obviously Q1 was a short quarter and had a 10 basis point charge. Should we be expecting sort of a longer quarter in Q4 or...

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [22]

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Yes. I'm not sure about the long quarter -- in fact, you're talking about -- we have more time to review the book for the full year results.

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Andrew Nigel Halford, Standard Chartered PLC - Group CFO & Director [23]

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Yes. I mean, we typically have had because of the longer period of review before we close books at slightly higher charge in the fourth quarter. And the flip of that tends to be the first quarter. It tends to be a bit lower. It's not, as you know, because the quarter is longer, it's just our period of review is a bit longer, just to be clear. Basel III.1 or is it IV or is it III.5? I don't know. So our estimate is around 5% to 10% uplift as you have said. That will be effective 2022. So it is just outside of the sort of core period that we are guiding to, albeit obviously we will manage our capital to make sure that we are in the right space at the point in time. Assuming that there isn't Basel III.3, III.7 and IV.2 in the making at that point in time, then once we have got the higher level, then obviously we will be working from that, and as we generate more returns then hopefully we can work it down. But I think we have -- our guidance takes into account that the expectation for that is sort of uplift that we would see in that time period.

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James Frederick Alexander Invine, Societe Generale Cross Asset Research - Equity Analyst [24]

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It's James Invine here from SocGen. Can I ask a question about your 4 target markets please? You've already mentioned some of the capital you've taken out of Korea. But where -- how much capital can you take out of those markets? Because if I look at the local legal entity accounts, they've all got pretty generous core Tier 1. And does the amount of capital you can take out of that market reflect where you may choose to land within your group 13% to 14% target?

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [25]

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The short answer on the second part of the question is not so much. But there's an element of excess cost, surplus capital requirements in a local market that contributes to the buffer that we need above what would otherwise land for our CET1. But it's not enormously material. And look, what we would love to be able to do is to deploy that capital that we've got in each of the markets. And they are -- certainly in markets like Indonesia or India, there are opportunities to deploy that capital. We have been and we want to continue to. Korea was most substantially, excessively capitalized and returning a substantial amount was a real step in the direction in terms of getting that right size. I would say the U.A.E. is some place in between. But broadly we like to use the capital that we've got in these markets. And then not have any impact to our group ratios. It'll take some time to be able to get there.

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Mark Nicholas Stride, Standard Chartered PLC - Global Head of Investor Relations [26]

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We've got one on the line. Okay. Last question, I think, unless anyone has a burning desire afterwards.

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Duncan Hall, Standard Chartered PLC - Regional Head, Investor Relations [27]

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Okay. So this is the final question. This is from Manus Costello at Autonomous. You said markets had a great first half. Obviously, we've heard from Roberto about that business in May, but do you think this is a run rate that you can maintain? Or are there any exceptional conditions that you want to call out?

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [28]

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I don't think there was anything exceptional in the first half. But we know it's a volatile business. And it's a -- of our business plans. It will remain volatile. It's been volatile to the upside. But what's important is the structural improvements that we've made to that business over the past 2 or 3 years. So essentially a new team, a clear focus on those things that differentiates Standard Chartered Bank which is our extraordinary local market access in [40] markets around the world, where in some cases we are enjoying a very substantial market share. But at the same time we have invested heavily in G10 currencies for information, digitization, algorithmic trading, things of that nature. So we are able to hold our own, vis-à-vis any of the bigger financial markets or FICC shops in G10 markets. And we absolutely excel in local markets. And we've completely shifted our focus into those areas where we can make a big difference. We've also fundamentally repositioned the credit trading business to be consistent with our much more substantial focus on originating and distributing credit risk more broadly. So that's seen an improvement in financial result, also strategically much more valuable for us and for our clients because of our access to credit markets and credit products that they would find difficult to access otherwise. So yes, I think there are some structural improvement but we can't be blinded to the fact that there's an element of market sentiment and risk management that will be volatile.

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Unidentified Company Representative [29]

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Okay. That's it from the room. I think that's it for the questions. Thank you very much.

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William Thomas Winters, Standard Chartered PLC - Group Chief Executive & Director [30]

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Thank you very much.

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Unidentified Company Representative [31]

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Thank you.