SCB ARA 2014 strategic report
Performance highlights
2
Chairman’s statement
3
Group Chief Executive’s review
5
Our strategy
8
Our business model
Key performance indicators
9
10
Risk management
12
Governance overview
16
Directors’ remuneration overview
18
Business environment
20
People
23
Sustainability
26
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Our business
30
The Group in 2014
35
Financial review
41
Operating and
financial review
Operating and financial review
CONTENTS
Strategic report
Group overview
Group overview
Strategic report
Performance highlights
Executing our refreshed strategy
Operating income 2 $million
Normalised return on equity1 %
Profit before taxation 2 $million
(2)%
12.8
18,783
18,777
6,851
18,334
6,064
11.2
2012
2013
(30)%
(30)%
7 .8
4,235
2012
2014
Total assets $billion
2014
2013
2012
Normalised earnings per share1 cents
2013
2014
Dividend per share 3 cents
0%
8%
225.2
726
674
84.0
86.0
86.0
2012
2013
2014
204.0
631
(28)%
145.9
2012
2013
2014
2012
Operating income by client segment $million
Commercial Clients
1,182
Operating income by product group $million
32.8%
Private Banking Clients
612
18,334
Others4
2,004
57.4%
Corporate &
Institutional
Clients
10,531
Retail
Products
4,840
9.3%
26.4%
10.9%
Corporate
Finance
2,487
1. Standard Chartered uses non-generally accepted accounting principles (GAAP)
measures, where these are not deined under International Financial Reporting
Standards (IFRS) or they have been adjusted. Normalised earnings are deined
in the Glossary on page 332 and in note 14 to the inancial statements
2. Operating income includes own credit adjustment (OCA) beneit of $106 million and
$100 million for 2013 and 2014 respectively. Proit before taxation for 2013 and 2014
include OCA and goodwill impairment. 2014 also includes $300 million in respect of
the civil monetary penalty. 2012 included $667 million due in respect of settlements
with the US authorities
Standard Chartered Annual Report 2014
North East
Asia
1,459
4.7%
Greater
China
5,540
6.7%
30.2%
8.0%
18,334
10.0%
10.1%
20.7%
Transaction
Banking
3,802
Financial
Markets
3,500
Americas
861
Europe
1,234
Africa
1,829
18,334
13.6%
19.1%
2
Operating income by region $million
Wealth
Management
1,701
3.3%
6.5%
Retail
Clients
6,009
2014
2013
MENAP
1,843
20.2%
10.1%
ASEAN
3,713
South Asia
1,855
3. Represents the recommended inal dividend per share for the respective years
together with the interim dividend per share declared and paid in those years.
Further details are set out in note 13 to the inancial statements
4. Others include Lending and Portfolio Management ($1,026 million), Asset and
Liability Management ($653 million) and Principal Finance ($325 million)
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“2014 was a challenging year and our
performance was disappointing, but it
was also a year when we took decisive
action to refocus our strategy and to
reposition the Group for the future”
Sir John Peace
Chairman
●●
Proit before taxation, goodwill impairment,
own credit and the civil monetary penalty
was down 25 per cent to $5.2 billion
●●
Statutory proit before taxation was down
30 per cent to $4.2 billion
●●
Income excluding own credit adjustment fell
2 per cent to $18.2 billion
●●
Normalised earnings per share declined
28 per cent to 145.9 cents
Normalised earnings per share
Dividend per share
145.9 cents
86.00 cents
2013: 204.0 cents
2013: 86.00 cents
2014 was a challenging year and our performance
was disappointing, but it was also a year when we took
decisive action to refocus our strategy and to reposition
the Group for the future.
The Board continues to believe that there are signiicant
opportunities for the Group in the medium to long term across
our footprint, and that is why we have been careful not to take
any knee-jerk actions that may damage the long-term
prospects of the business.
However, at the same time, we need to be mindful that there
are signiicant factors impacting our current performance which
cannot be ignored: the imperative to build capital levels across
the industry; the need for ongoing investment in enhancing
our systems and processes associated with conduct and
compliance; and the need to change the shape of our
business to it the demands of the current economic and
regulatory landscape.
As a consequence of this, the Board has recently endorsed a
number of priority areas. The irst of these was to provide clarity
on our governance, leadership and succession plans, and we
are going further by highlighting a number of other priorities:
taking steps to build on our capital levels, enhancing our return
on equity and continuing to improve our conduct and
compliance capabilities.
The Board is determined to reshape the business to restore the
Group’s performance and to fully realise the opportunities in our
markets. At the same time, we are determined to continue to
raise the bar on conduct and compliance to ensure that Here
for good, our brand promise, is irmly embedded in the DNA
of the Group worldwide.
Whilst we are comfortable with our current capital position,
the Board does want to improve our capital trajectory, so we
are taking actions around risk-weighted assets, cost reductions
and business disposals, all of which are aimed at strengthening
both our Common Equity Tier 1 ratio and our trajectory
going forward.
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3
Strategic report
Group overview
Chairman’s statement
Resolved to restore shareholder value
Chairman’s statement
We believe that we have identiied strong levers to manage
capital accretion over time and therefore the Board is
recommending a inal dividend for 2014 of 57.20 cents, resulting
in a total annual dividend of 86.00 cents, which is the same
level of dividend per share as 2013.
We are therefore conident that we are taking the right actions
to restore shareholder value.
I would like to thank our clients and shareholders for their
support during 2014 and, above all, our great people for their
hard work and ongoing commitment to Standard Chartered.
For several years, we have signiicantly increased the amount
paid out to shareholders by way of dividend, while at the same
time consecutively reducing the amount paid out in bonuses,
despite increasing staff numbers over this period. In 2014, we
are again proposing to pay out more to our shareholders by
way of dividends than we pay out in bonuses.
Sir John Peace
Chairman
This disciplined approach to managing variable compensation
has created signiicant competitive pressures in some of our key 4 March 2015
markets. We are, of course, mindful of the external sentiment
in some markets on bankers’ pay, and conscious of our
disappointing performance in 2014, but it is essential that we
remain able to pay competitively in the markets where we
operate and where wage inlation, on average, is around
5 per cent.
Our people are much sought after by our competition, and
we are acutely conscious of the importance of retaining and
attracting the best talent as we look to execute on our strategy.
It also goes without saying that, consistent with past practice,
we will only reward our people for good performance as well as
for their good behaviours.
Taking all these factors into account and relecting on our
performance in 2014, the bonus pool is down on 2013 by
9 per cent, and 27 per cent lower than in 2011. In light of the
disappointing performance of the Group, those executive
directors on the PLC Board throughout the year came to the
conclusion that they should show leadership by not taking any
variable compensation for 2014.
I would like to take this opportunity to thank Peter Sands on
behalf of the Board for the immense contribution he has made
to the success of the Group over the past 13 years, both as
Group Chief Executive and as Group Finance Director. Since he
became Group Chief Executive in 2006, the Group has more
than doubled in size and has been consistently proitable.
Peter’s leadership and insight, over a period of huge change
and challenge for the entire industry, ensure that he leaves the
Group well placed to achieve its full potential as one of the
world’s leading inancial institutions.
I would also like to thank Jaspal Bindra for his very considerable
contributions to the business over the past 16 years, and the
other long-serving Board members who are stepping down this
year and who have done so much to help position this great
bank for the future.
We are extremely fortunate to have Bill Winters, one of the most
accomplished and respected bankers in the world today, taking
over as Group Chief Executive from Peter in June to drive the
Group’s next chapter of growth. Bill brings substantial inancial
experience from leading a very successful global business, and
has an exceptional understanding of the global regulatory and
conduct environment. He is also a proven leader with a strong
track record in nurturing and developing talent. I am thrilled that
Bill is joining the Group at this strategically important time and
we wish him well in his new role.
4
Standard Chartered Annual Report 2014
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“The drivers of economic growth
in our markets remain immensely
strong, and the demand for
inancial services is rising rapidly”
Peter Sands
Group Chief Executive
2014 was a tough year, our performance was
disappointing and we are acutely aware of the impact of
this for you, our shareholders. We faced a perfect storm:
negative sentiment towards emerging markets, a sharp
drop in commodity prices, persistently low interest rates
and surplus liquidity, low volatility, and a welter of
regulatory challenges.
As a result, we saw intense pressure on margins and volumes,
a signiicant uptick in impairment and a sharp increase in
regulatory related cost. Of course, it was not all about external
factors. Some of the decisions we took in the past look less
good now than they did at the time, such as Korea, which in
2014 made a loss before tax of $145 million. Not everything we
did was as well executed as it should have been, for example,
the upgrade of our transaction surveillance systems back in
2007 – shortcomings here ultimately resulted in the civil
penalty of $300 million that we paid in August 2014.
We have taken a range of actions in response to the way our
world has changed. We have overhauled our strategy, making
it sharper and more focused. We have reconigured the
organisation to align it better with our strategic priorities.
We have attacked our cost base. We have redeployed capital.
We have disposed of, or are in the process of disposing of,
15 underperforming and non-strategic businesses. We have
de-risked portfolios and segments, such as unsecured lending
or correspondent banking, and we have stepped up the pace
of our programme to raise the bar on conduct. While some of
these changes actually made our 2014 performance worse,
since we sacriiced income or increased investment, I am
conident that the way we are reshaping the Group will get us
back to a trajectory of sustainable, proitable growth, delivering
returns above our cost of capital and driving the share price.
I should make clear that we are not counting on the world to
do us favours. While we do expect a gradual return to a more
normal interest rate environment, and this year we have already
seen more volatility in currency markets, we are not counting on
headwinds turning to tailwinds to boost our performance. We
are focused on the levers we control, the things we can do, to
improve returns and return to growth.
Our performance priorities are clear. First, we must dispel the
concerns about capital, hence the clear target of achieving a
Common Equity Tier 1 (CET1) ratio of 11 to 12 per cent in 2015
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and thereafter. Second, we must improve returns, hence we
are setting a target return on equity of over 10 per cent in the
medium term, so that we are delivering sustainably above our
cost of capital. This will take a bit of time to achieve, not least
because the actions we are taking to strengthen the CET1
ratio make this more dificult. Each of these elements its into
an overall agenda of action, all of which is captured in the
scorecards of the individual client and product groups,
functions and geographies across the Group.
Capital
On capital, we start from a strong position. In terms of our
CET1 ratio, at 10.7 per cent on an end-point basis, we have
a 200 basis points (bps) buffer relative to known regulatory
requirements. We weathered the Bank of England stress
tests comfortably. We are strongly placed from a leverage
and Total Loss Absorbing Capacity perspective.
However, we understand market concerns about forward
trajectory given the uncertainties about how regulatory
requirements will evolve. Although it is impossible to be
deinitive, a combination of risk-weighted assets (RWA) inlation
and escalating expectations do point to a continuing upward
drift in requirements. That is why we have put such focus on
capital accretion, so that we can absorb regulatory changes
and fund growth, while also improving the CET1 ratio. We
accreted some 50bps in 2014, 20bps in the irst half and 30bps
in the second half. To achieve this, we cut some $9 billion of
low-returning RWA, largely from Corporate & Institutional
Clients, and saved another $2 billion from disposals.
We now plan to pull these levers even harder. Over the next
two years, we plan to cut a further $25 to 30 billion of RWA
from low-returning client relationships and underperforming
businesses. We are making good progress on this already. By
taking these actions we are conident that we can achieve our
target CET1 ratio of 11 to 12 per cent in 2015 and thereafter.
Costs
In 2014, we kept a tight grip on costs. Headline expenses went
up 5 per cent, but more than half of this increase was due to the
UK bank levy and restructuring costs attached to the very cost
actions we are taking. Underlying expenses went up less than
3 per cent, driven largely by increased spend on regulatory and
5
Strategic report
Group overview
Group Chief Executive’s review
Taking action to deliver sustainable,
proitable growth and improved returns
Group Chief Executive’s review
conduct priorities. In November, we announced a $400 million
target for cost savings in 2015. We are more than on track to
achieve this target, and the $400 million number relates to our
underlying business, so it excludes cost saved from business
exits and disposals. Combined with the impact of such actions,
we are on track for savings to headline costs exceeding
$600 million in 2015.
The progress we have made in attacking the cost base
underpins our conidence in achieving $1.8 billion in cost
savings over the period from 2015 to 2017. Some of the
remaining savings will come from the full-year impact of actions
we have already taken, for example our decision to exit equities,
which will give us $100 million of savings in 2016. Some will be
the result of further peripheral-business exits or withdrawals
that we are currently pursuing, but most will be from achieving
sustainable eficiency improvements in our big markets and
core business activities.
We are stepping up the pace of digitisation, automating and
re-engineering key processes and standardising technology
platforms. For example, the only way we will get the
cost-income ratio in the Retail Clients segment down to our
target of 55 per cent is through accelerated digitisation of
products, channels and internal processes. And the only way
we can manage the ever-increasing complexity of regulation
eficiently is through technology, so we are not cutting back
on technology investment, but actually increasing this in order
to achieve sustainable improvements in productivity.
Asset quality
It should be no surprise that impairment increased in 2014.
GDP growth in key markets has been slower, commodity prices
fell sharply, and we faced some speciic challenges in particular
markets, such as the Personal Debt Rehabilitation Scheme
(PDRS) in Korea and fraud in China. Of course, we could have
fared better. With hindsight, there were clients and situations
we should have avoided, but we were never going to be entirely
immune to the shift in the credit environment. The actions we
have taken to de-risk are having an impact – in India, in China,
in our commodities book, and in our unsecured portfolio in the
Retail Clients segment. There are still many uncertainties in our
markets, but I am very comfortable with our provisioning and
with the shape and quality of the book.
In the Retail Clients segment, while impairment remains at an
elevated level, the indicators suggest some improvement, most
notably in Korea. Looking at the early data for this year, PDRS
ilings are now less than half of what they were six months ago.
In the Corporate & Institutional Clients and Commercial Clients
segments, the signals are more mixed, but most of what we are
dealing with now, and provisioning for, are accounts that have
been troubling for some time. The inlow of new problem
accounts into early alerts, credit grade 12 or non-performing
loans has slowed. While it would certainly be premature to
call the peak, we do not see signs of further deterioration.
The underlying drivers of economic growth in our markets – demographics,
urbanisation and investment in infrastructure – remain immensely strong
Income growth
In the Retail Clients segment, the priority has been to get cost
down, shift the focus to more afluent clients and accelerate
digitisation, as well as to de-risk from a conduct and credit
perspective. It is all about getting the platform in more robust
shape to support sustainable growth. Retail Clients’ income
was up 2 per cent year-on-year in 2014, but up 5 per cent in the
second half of 2014 compared to the second half of 2013,
driven by Wealth Management and the shift towards more
afluent Priority and Business clients. These will continue to be
the key drivers of income growth. Indeed, we aim to increase
the percentage of income from Priority and Business clients to
43 per cent in 2015 from 38 per cent in 2014.
In the Private Banking Clients segment, income growth was
4 per cent on a headline basis, or 6 per cent excluding
disposals. We see Private Banking Clients as a steady and
sustainable source of growth, although at this stage it is
obviously very small in the overall scheme of the Group.
In 2015, we are looking at on-boarding some 2,000 new clients,
achieving double-digit assets under management growth.
The Commercial Clients segment is also quite small, but
represents another huge opportunity, and after a year of
restructuring and remediation, with income down 22 per cent,
our priority for 2015 is to get back to a growth trajectory,
strengthening the front line, leveraging the network and growing
the client base. We are aiming for around 3,000 new-to-bank
clients in 2015.
Given that the Corporate & Institutional Clients segment
contributes around 60 per cent of the Group’s income, this is
the crux of the issue. Income fell 2 per cent in 2014, impacted
by a combination of de-risking and RWA actions, as well as
pressure on margins and the impact of low commodity prices
and low volatility. This overall picture disguises some areas
The annualised income impact of the exits and disposals in
2014 and those planned for 2015 is some $450 million, although of strong growth. Institutional investors, for example, saw
18 per cent income growth at attractive returns in 2014. This
this depends on the timing of the completion of certain
transactions. We will strip this out of our reporting of underlying is a big opportunity. As for Corporates, right now it is all about
improving return rather than income growth per se, and
performance for 2015. On top of this, de-risking and RWA
achieving this is all about leveraging the network and deepening
savings in 2014, and the $25-30 billion of incremental RWA
savings we plan for 2015 and 2016, will create a further drag on relationships to drive non-funded income – hence our focus on
increasing the number of markets and products per client. In
income, offset by our ability to redeploy into more attractively
2015, we are looking to take the product-client ratio from 6.3 in
returning assets.
2014 to over 6.5, and the market-client ratio from 2.8 in 2014 to
6
Standard Chartered Annual Report 2014
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Step back from the segments and look at our markets, and
the scale of the income opportunity is evident. Despite all the
turbulence and shifts in sentiment, the underlying drivers of
economic growth – demographics, urbanisation and investment
in infrastructure – remain immensely strong, and the demand
for inancial services is rising rapidly. Our challenge is to capture
these opportunities in a disciplined, return-focused way to
drive shareholder value.
Conduct
We have launched a comprehensive programme called Raising
the Bar on Conduct, which encompasses every aspect of
conduct, and touches every person in the Group. We recognise
that we cannot claim to be Here for good unless we make every
effort to ensure that good conduct informs every interaction and
is embedded in every decision we make – from strategy to
client on-boarding, product design and remuneration. Among
the more critical elements of this programme, I would highlight:
●●
●●
●●
Our Financial Crime Risk Mitigation Programme, which
encompasses over 50 separate projects and initiatives to
remediate and reinforce our controls and capabilities in this vital
arena. This is a massive multi-year investment programme.
Playing a stronger role in the ight against inancial crime
is a strategic imperative for Standard Chartered
To complement stronger controls, we are de-risking our client
portfolios. For example, we have exited a signiicant number
of our correspondent banking relationships, mainly in Latin
America and Central Europe. We have also exited around
70,000 small and medium-sized enterprise relationships over
the past 18 months, and we are putting strict limits on the
types of new client that we are prepared to take on in certain
geographies and sectors
We have launched a comprehensive programme called Raising the
Bar on Conduct, which touches every person in the Group
I will leave Standard Chartered proud of what we have achieved
and conident about what the future holds for this extraordinary
institution. In Bill Winters, I have a successor just right for the
task. I am delighted to be passing the baton on to a banker
of such calibre, to a leader of such strengths. Bill will inherit
a bank with a superb client franchise, a unique network and
an exceptionally strong balance sheet. Perhaps even more
importantly, he will inherit a fantastic team of people –
professional and collaborative, and truly believing in, and
committed to being, Here for good.
I would like to take this opportunity to say thank you to
our clients, and to all the people of Standard Chartered.
The past couple of years have been pretty tough, but we have
demonstrated resilience and an ability to adapt and reinvent.
I know that Standard Chartered will once again show the
world what a great bank this is.
To reinforce our governance, we have established a
Board-level Financial Crime Risk Committee, with a
combination of experienced independent non-executive
directors and expert advisors
Conclusion
The actions we have taken, and are taking, on capital, cost, risk
and conduct are all part of a package. We are reshaping the
Group to respond to the way our world has changed. We are
reshaping the Group to ensure we can fulil our aspiration to
bank the people and companies driving trade, investment and
the creation of wealth across Asia, Africa and the Middle East.
And we are reshaping the Group to get back to sustainable,
proitable growth, delivering returns above our cost of capital.
Peter Sands
Group Chief Executive
4 March 2015
This will be my last review for the Annual Report and Accounts,
and it is obviously one of the more challenging sets of numbers
I have had to explain. In my 13 years at the Group, I have seen
lots of ups and downs. Standard Chartered today is very
different from the bank I irst joined as Finance Director in 2002.
That year we made about $1 billion in proits, and in 2006,
the year I became Group Chief Executive, we made about
$3 billion. Since then, of course, we have navigated the global
inancial crisis, roughly doubled in size, and confronted all sorts
of new challenges. The world of banking has changed far more
dramatically than most people realise, and it is only part way
through a fundamental transformation.
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7
Strategic report
Group overview
over 3. We are also focusing on non-inancing income, targeting
an increase in the current proportion of 41 per cent to more
than 43 per cent. These metrics are the key to driving good
income growth that lifts our return on RWA in this segment.
Our strategy
What guides us
Our ambition
The world’s best international bank
Our strategy
We bank the people and companies driving investment,
trade and the creation of wealth across Asia, Africa
and the Middle East
Our brand promise
Here for good
Our aspirations
Relationships
Build trusted relationships with the people,
companies and institutions shaping our
markets’ future
Trade
Become the undisputed leader in commercial
payments and inancing for and in Asia, Africa
and the Middle East
Investment
Play a leading role in facilitating investment
and deepening inancial markets
Wealth
Be recognised as a leader in growing and
protecting our clients’ wealth
Relevant scale
Establish suficient scale and balance sheet
and franchise strength to be relevant and
inluential in our key markets
Our values
Courageous
We take measured risks and stand up for
what is right
International
We value diversity and collaborate across the
network
Responsive
We deliver relevant, timely solutions for clients
and customers
Creative
We innovate and adapt, continuously
improving the way we work
Trustworthy
We are reliable, open and honest
Our commitments
Colleagues
A great place to work, enabling individuals
to grow and teams to win
Society
A force for good, promoting sustainable
economic and social development
8
Standard Chartered Annual Report 2014
CONTENTS
Investors
A distinctive investment, delivering
consistently superior performance via
disciplined growth
Regulators
A responsible partner with exemplary
governance and ethics
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Banks play a crucial role in economies by facilitating payments
and converting short-term deposits into long-term inancing.
Through these activities we take on and manage risk. Read
more about Standard Chartered’s approach to risk on pages
12 to 15, with details of our allocation of risk-weighted assets to
client segments on pages 120 and 121.
As an international banking group focused on Asia, Africa and
the Middle East, we serve a wide range of clients from
individuals and small and mid-sized businesses to large
companies and inancial institutions, helping them to build,
grow and protect their wealth. Read more about our business
on pages 30 to 34.
We have a clear strategy and in 2014 reorganised our business
to help us better support our clients and meet our aspirations.
Read more about our strategy on page 8.
Our business model is focused on sustainable value creation
We build deep relationships
with our clients
We add value for our clients
by using our distinctive strengths
●●
●●
And provide solutions that meet
their evolving needs
We ensure that the value is sustainable
by focusing on three key priorities
●●
●●
Through these activities, we generate income,
proits and return on equity
And create long-term value for
a broad range of stakeholders
●●
●●
Brand – we have a 150-year history
in some of the world’s most dynamic
markets and our Here for good brand
promise captures what we stand for
●● Capital – we are strongly capitalised
and highly liquid, allowing us to support
our clients for the long term
●● Local depth – we draw upon deep local knowledge
and experience in the markets in which we operate
●● Network – we collaborate to support clients across our
client segments, product groups and geographies
●● People – our diverse and inclusive workforce is committed
to the highest standards of conduct and integrity
Retail Clients
– individuals and small businesses
●● Private Banking Clients
– high net worth individuals
●● Commercial Clients
– mid-sized companies
●● Corporate & Institutional Clients
– large companies and inancial institutions
Retail Products – deposits, savings,
mortgages, credit cards and personal
loans, and other retail banking products
●● Wealth Management – investment,
portfolio management, and advice and
planning services
●● Transaction Banking – cash management, transactions,
securities holdings and trade inance products
●● Corporate Finance – inancing, strategic advice, mergers
and acquisitions, and equity and principal inancing
●● Financial Markets – investment, risk management and
debt capital services
Income
– net interest income, fee income and
trading income
●● Proits
– income gained from providing our
products and services minus expenses,
impairment and taxes
●● Return on equity
– proit generated relative to the equity invested
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Being a responsible company
– managing our operations to deliver
long-term value for our stakeholders
●● Contributing to sustainable
economic growth
– ensuring that our core business of
banking supports sustainable growth
and job creation
●● Investing in communities
– working with local communities to
promote social and economic development
Clients – enabling individuals to grow
and protect their wealth, and helping
businesses to invest, trade and expand
●● Shareholders – delivering long-term
sustainable value for investors
●● Employees – providing a great place
to work
●● Society – supporting growth and job creation, delivering
inancial innovation and helping to address the most
pressing challenges facing the communities in which
we work
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9
Strategic report
Group overview
Our business model
How we create value
Key performance indicators
Delivering value to shareholders and clients
1 Deliver consistently superior performance via disciplined growth
Normalised return on equity2
%
Normalised earnings per share1
cents
Aim
To deliver earnings per share
(EPS) growth.
225.5
197.0
204.0
198.0
(28)%
145.9
2010
2011
2012
2013
14.1
12.2
12.8
11.2
Analysis
EPS declined 28 per cent
compared to 2013, relecting
a challenging market
environment and signiicant
restructuring actions.
(30)%
7.8
2010
2014
2011
2012
2013
2014
Aim
To deliver return on equity
of over 10 per cent in the
medium term while balancing
the long-term objective of
having strong yet eficient
levels of capital.
Analysis
Returns declined 30 per cent
compared to 2013, relecting
a challenging market
environment and signiicant
restructuring actions.
2 Build trusted relationships with clients
Retail Clients
Net Promoter Score (NPS)
relative to market average 3
Aim
To increase customer
satisfaction with our products
and services and to become
the bank that clients
recommend.
+5
+4
Corporate & Institutional Clients
depth of client relationships 4
Average
Average
products
markets
per client
per client
7%
6.3
5.9
8%
2.8
2.6
Analysis
Our relative global NPS in
2014 was four points above
the market average.
2013
2014
Analysis
We continued to drive deeper
and broader client use of our
products and markets.
2013
3 Maintain balance sheet strength to
18.4
4.4
17.6
17.4
17.0
3.9
4.0
16.7
4.8
5.4
2.2
1.9
1.7
11.8
11.8
11.7
1.3
10.9
0.8
10.5
2011
2012
2013
2014
2010
Basel II
Core Tier 1/CET1
10
CRD IV
Other Tier 1
Tier 2
Aim
To maintain a strong capital
base and accrete capital
to a Common Equity Tier 1
(CET1) ratio of between 11
and 12 per cent in 2015
and thereafter.
Analysis
The Group remains strongly
capitalised, with a transitional
CET1 ratio of 10.5 per cent, or
10.7 per cent on an end-point
basis. The Group has continued
to manage its balance sheet
proactively and with discipline,
focusing on deployment of
risk-weighted assets.
Standard Chartered Annual Report 2014
2014
2013
2014
4 Be recognised as a leader in growing and
support our aspirations
Capital ratios5
%
Aim
To leverage our network
and product capabilities to
increase the average number
of markets and products
per client.
protecting our clients’ wealth
Private Banking Clients 6
Total AUM
($billion)
Number of clients
new to segment
3%
60.0
1,658
58.4
(21)%
1,310
2013
2014
CONTENTS
2013
Aim
To grow and deepen client
relationships and add new
clients.
Analysis
We added 1,310 new clients
compared to 1,658 in 2013
and increased assets under
management (AUM) by
3 per cent.
2014
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Total Scope 1, 2 and 3 Greenhouse Gas emissions/$million
operating income7 Tonnes CO2 equivalent/$million operating income
17.40
15.84
(7)%
Analysis
We reduced Greenhouse Gas emissions relative to operating
income for the past three years. Starting in 2014, we have
included Scope 3 emissions arising from air travel in the KPI.
Air travel emissions data is collected from 41 countries and
based on seating class and distance lown.
14.79
2012
2013
Aim
To reduce Greenhouse Gas emissions arising from
our operations.
2014
6 A great place to work, enabling individuals to grow and teams to win
Aim
To continually align the aspirations of our people with those
of the Group, encouraging a performance-oriented culture
and a place where people love to work.
My Voice employee survey gap score 8
4.5
4.0
Expected
employee experience
4.42
Employee experience
delivered by the Group
4.06
0.36
Analysis
Using a new employee survey, My Voice, we are gaining an
understanding of our core strengths and opportunities to
improve, including a new gap score. In 2014, our overall My
Voice gap score was 0.36. Areas that need attention include
collaboration and clarity around growth opportunities and
career paths. Strong scores were registered for the Group’s
brand, strategy and culture, with particularly positive results
on individual commitment, conduct and job engagement.
3.5
3.0
1. Normalised earnings per share
This KPI is calculated as proit attributable to ordinary shareholders of the Group
as normalised for certain one-off or irregular items – as deined in the Glossary –
divided by the weighted average of the shares in issue during the year
Source: this measure is reported in note 14 of the Group’s audited inancial
statements
2. Normalised return on shareholders’ equity
This KPI is calculated as the normalised proit attributable to ordinary shareholders
as a percentage of average ordinary shareholders’ equity
Source: this measure is derived from information within the Group’s audited inancial
statements, being normalised earnings (note 14) as a percentage of average
shareholders’ equity (excluding preference shares)
3. Retail Clients: relative Net Promoter Score (NPS)
‘Net Promoter Score’ and ‘NPS’ are trademarks of Satmetrix Systems Inc., Bain &
Company, and Fred Reichheld. Standard Chartered uses Bain methodology
recalibrated for inancial services to calculate NPS. In 2014, we began to move to
a new methodology, progressively changing our sampling periods and method to
create greater transparency, and benchmarking our NPS against the overall market.
NPS gauges customer support for the retail banking products and services we
provide. We ask our customers “How likely are you to recommend Standard
Chartered to a friend or colleague?” and apply a 10-point scale where 10 is most
likely. We then derive the NPS by subtracting the percentage of detractors (those
who score zero to six) from the percentage of promoters (those who score nine to
10). NPS operates on a scale from –100 (all detractors) to +100 (all promoters)
Source: Market Probe & RFI Customer Satisfaction Survey (20 markets on average
each year). The survey uses interviews completed in 2014
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4. Corporate & Institutional Clients depth of relationships
Average number of markets and products per client
Source: Standard Chartered data
5. Capital ratios
The components of the Group’s capital are summarised on page 119.
The Tier ratios are measured by the ratio of respective capital to risk-weighted
assets; the 2010-2013 ratios are calculated on a Basel II basis, and the 2014 ratios
on a Basel III transitional basis
Source: this measure is reported in the Capital section on pages 118 to 125
6. Private Banking Clients
Represents total AUM for Private Banking Clients, and the gross number of clients
added to the segment during the year
Source: Standard Chartered data
7. Total Scope 1, 2 and 3 Greenhouse Gas emissions
The emissions within our reporting inventory correspond to a reporting period
of 1 October 2013 to 30 September 2014 to allow suficient time for independent
assurance to be gained. Accordingly, the operating income used in this inventory
corresponds to the same period rather than calendar year used in inancial
reporting, consistent with international carbon reporting practice
Source: Standard Chartered data
8. My Voice employee survey
The gap score represents the difference between the importance that our
employees attribute to the employee experience across 40 measures, and their
perception of how well the Group is delivering in these areas. Maximum gap
score 5, with 0 being the target
Source: Standard Chartered My Voice engagement survey
11
Strategic report
Group overview
5 Protect the environment, contributing to sustainable economic and social development
Risk management
Our risk proile remains in line with our strategy
We manage our risks to build a sustainable franchise in
the interests of all our stakeholders. The Group has a
deined Risk Tolerance Statement, approved by the
Board, which is an expression of the maximum level of
risk we are prepared to take. This plays a central role in
the development of our strategy and policies. We have a
well-established risk governance structure and we
closely manage our risks to maintain the Group’s risk
proile in compliance with the Risk Tolerance Statement.
Our risk proile is aligned to our business strategy and risk
tolerance. It is consistent with our business model and the core
business activities we undertake in the markets in which we
operate. We have low exposure to asset classes and segments
outside our core markets and target customer base. Our balance
sheet is highly liquid and diversiied across a wide range of
products, industries, geographies and client segments, which
serves to mitigate risk. We review and adjust our underwriting
standards and limits in response to observed and anticipated
changes in the external environment and the evolving
expectations of our stakeholders.
This section provides a high-level overview of our risk proile,
risk management framework, Risk Tolerance Statement and
principal uncertainties.
Further details are set out in Risk and Capital review on
pages 64 to 117
Risk proile
Highly diversiied
and short tenor
portfolio
●●
●●
●●
●●
●●
●●
●●
Strong capital and
liquidity position
Robust risk
governance
structure and
experienced
senior team
No single industry concentration represents more than 16 per cent of loans and advances to
customers in the Corporate & Institutional Clients and Commercial Clients segments
The loan portfolio remains predominantly short-dated, with 65 per cent of loans and advances to
customers in the Corporate & Institutional Clients and Commercial Clients segments maturing in
under one year
Our top 20 corporate exposures have reduced as a percentage of Common Equity Tier 1 capital,
and continue to be highly diversiied, with each, on average, spread across seven markets and
ive industries
Over 40 per cent of the corporate portfolio is investment grade, and this mix is improving
We hold a diverse mix of collateral, valued conservatively. Over half of our sub-investment grade
corporate portfolio is collateralised
40 per cent of customer loans and advances are in Retail Products; the unsecured portion of the
portfolio is down from 21 per cent to 19 per cent in 2014, relecting the continued de-risking of the
unsecured book. The overall loan-to-value ratio on our mortgage portfolio is less than 50 per cent
●●
We have low exposure to asset classes outside our core markets
●●
We remain well capitalised and our balance sheet remains highly liquid
●●
We have a strong advances-to-deposits ratio
●●
We remain a net provider of liquidity to interbank markets
●●
Our customer deposit base is diversiied by type and maturity
●●
We have a substantial portfolio of liquid assets that can be realised if a liquidity stress occurs
●●
●●
●●
●●
●●
●●
12
Our balance sheet remains resilient and well diversiied across a wide range of geographies, client
segments, industries and products which serves to mitigate risk
We have a clear Risk Tolerance Statement which is aligned to the Group’s strategy; it is approved by
the Board and informs the more granular risk parameters within which our businesses operate
We continuously monitor our risk proile to ensure it remains within our risk tolerance, and regularly
conduct stress tests
We review and adjust our exposures, underwriting standards and limits in response to observed and
anticipated changes in the external environment and expectations
We have a very experienced senior risk team and our risk committees are staffed by the Group’s most
senior leaders
We have a robust risk management framework that assigns accountability and responsibility for the
management and control of risk
We maintain a consistent and highly selective approach to large corporate credit underwriting
Standard Chartered Annual Report 2014
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Standard Chartered PLC Board
– Strategy
– Risk Tolerance Statement
Standard Chartered Bank Court
Board committees
Group Asset and Liability Committee
Group Risk Committee
Risk types
– Capital
– Liquidity
Risk types
– Credit
– Country cross-border
– Market
– Pension
– Operational
– Reputational
Roles and responsibilities
not constrained by functional, business or geographic
boundaries. The second-line control functions must be
independent of the businesses they control, to ensure that
the necessary balance in risk/return decisions is not
compromised by short-term pressures to generate revenues.
The major risk types are deined on the next page
Roles and responsibilities for risk management are deined under
a Three Lines of Defence model. Each line of defence describes
a speciic set of responsibilities for risk management and control:
●●
●●
First line of defence: all employees are required to ensure
the effective management of risks within the scope of their
direct organisational responsibilities. Business, function and
geographic heads are accountable for risk management in
their respective businesses and functions, and for countries
where they have governance responsibilities
Second line of defence: risk control owners, supported
by their respective control functions, are responsible for
ensuring that the Group’s risk proile is contained within
its risk tolerance. The scope of each risk control owner’s
responsibilities is deined by a given type of risk and is
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●●
Third line of defence: the independent assurance provided
by the Group Internal Audit function. Its role is deined and
overseen by the Audit Committee
The Group Chief Risk Oficer directly manages a Risk function
that is separate from the origination, trading and sales functions
of the businesses. The Group Chief Risk Oficer also chairs the
Group Risk Committee and is a member of the Court.
13
Strategic report
Group overview
In 2014, the Group continued to face external challenges such as $585 million. This increase is primarily in the Corporate &
slower economic growth in its core markets of China and India
Institutional and Commercial Clients segments.
and a sustained fall in the prices of a number of commodities.
Further details are set out in the Risk overview section on
These are, in effect, a continuation of themes from 2012 and
pages 58 to 63
2013. The Group has been disciplined in its approach and in
taking risk-mitigating actions during this period in anticipation of
Risk management framework
a potential sustained downturn or dislocation in these markets.
Effective risk management is fundamental to being able to
The Group’s loan impairment has increased by $524 million,
generate proits consistently and sustainably, and is thus a central
or 32 per cent, to $2.1 billion. Over 40 per cent of the Group’s
part of the inancial and operational management of the Group.
loan impairment arises in the Retail Clients segment, which
has shown signs of stabilisation through 2014 and, while still
Ultimate responsibility for the Group’s strategy, for setting our
elevated, is 5 per cent lower in the second half. Corporate &
Risk Tolerance Statement and for the effective management of
Institutional Clients and Commercial Clients loan impairment
risk rests with the Board. The Standard Chartered Bank Court
increased by $558 million to $1,203 million, compared to 2013.
(the ‘Court’), which comprises the group executive directors
This represents 69 basis points (bps) (2013: 36 bps) of average
and other senior executives, is the highest executive body
customer loans and advances, an elevated level for 2014, in the of the Group. The Court has overall accountability for risk
context of a prolonged slowdown in the Group’s core markets
management and delegates authority for the management
of China and India, and in Commodities. Non-performing loans of risk to the Group Risk Committee and the Group Asset
(net of individual impairment provisions) are higher by
and Liability Committee.
Risk management
Risk tolerance and strategic alignment
The management of risk lies at the heart of our business. One
of the main risks we incur arises from extending credit to clients
through our trading and lending operations. Through our risk
management framework we manage risks Group-wide, with the
objective of maximising risk-adjusted returns while remaining
within our risk tolerance. Our primary risk types are set out in
the table below, with an explanation of how they arise from our
business. We recognise that a single transaction or activity may
give rise to multiple types of risk exposure, and we use risk
types to ensure comprehensive and consistent identiication
and control of risks, wherever they may arise.
Risk type
How this arises from our business
Credit
Arises principally from lending, or from other
inancial commitments from clients or third
parties. Lending and helping clients manage their
inancial risks is core to our banking services
Potential for loss due to failure of counterparty
to meet its obligations to pay the Group in
accordance with agreed terms
Country cross-border
Potential for loss due to the inability to obtain
payment from clients or third parties on their
contractual obligations, as a result of certain
actions taken by foreign governments, chiely
relating to convertibility and transferability of
foreign currency
Market
Potential for loss of earnings or economic value
due to adverse changes in inancial market
rates or prices
Liquidity
Potential that the Group does not have
suficient inancial resources in the short term
to meet its obligations as they fall due, or can
access these inancial resources only at
excessive cost
Operational
Potential for loss resulting from inadequate or
failed internal processes, people and systems
or from the impact of external events, including
legal risks
Reputational
Potential for damage to the Group’s franchise,
resulting in loss of earnings or adverse impact
on market capitalisation as a result of
stakeholders taking a negative view of the
Group or its actions
Pension
Potential for loss due to having to meet an
actuarially assessed shortfall in the Group’s
pension schemes
Capital
Potential for actual or opportunity loss from
sub-optimal allocation of capital or increase in
cost of capital
Risk Tolerance Statement
Arises from activities involving lending or
transactions across borders or in a currency
other than the currency in which the transaction
is booked. Providing funds across borders and
currencies facilitates trade and cross-border
investment and is a core part of our service
The Group manages its credit and country
cross-border exposures following the
principle of diversiication across products,
geographies, client segments and industry
sectors
Arises predominantly from providing clients
access to inancial markets, facilitation of which
entails taking moderate market risk positions.
Also arises in the non-trading book from the
requirement to hold a large liquid assets buffer of
high-quality liquid debt securities, and from the
translation of non-dollar denominated assets,
liabilities and earnings
The Group should control its trading portfolio
and activities to ensure that market risk
losses (inancial or reputational
2
Chairman’s statement
3
Group Chief Executive’s review
5
Our strategy
8
Our business model
Key performance indicators
9
10
Risk management
12
Governance overview
16
Directors’ remuneration overview
18
Business environment
20
People
23
Sustainability
26
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Our business
30
The Group in 2014
35
Financial review
41
Operating and
financial review
Operating and financial review
CONTENTS
Strategic report
Group overview
Group overview
Strategic report
Performance highlights
Executing our refreshed strategy
Operating income 2 $million
Normalised return on equity1 %
Profit before taxation 2 $million
(2)%
12.8
18,783
18,777
6,851
18,334
6,064
11.2
2012
2013
(30)%
(30)%
7 .8
4,235
2012
2014
Total assets $billion
2014
2013
2012
Normalised earnings per share1 cents
2013
2014
Dividend per share 3 cents
0%
8%
225.2
726
674
84.0
86.0
86.0
2012
2013
2014
204.0
631
(28)%
145.9
2012
2013
2014
2012
Operating income by client segment $million
Commercial Clients
1,182
Operating income by product group $million
32.8%
Private Banking Clients
612
18,334
Others4
2,004
57.4%
Corporate &
Institutional
Clients
10,531
Retail
Products
4,840
9.3%
26.4%
10.9%
Corporate
Finance
2,487
1. Standard Chartered uses non-generally accepted accounting principles (GAAP)
measures, where these are not deined under International Financial Reporting
Standards (IFRS) or they have been adjusted. Normalised earnings are deined
in the Glossary on page 332 and in note 14 to the inancial statements
2. Operating income includes own credit adjustment (OCA) beneit of $106 million and
$100 million for 2013 and 2014 respectively. Proit before taxation for 2013 and 2014
include OCA and goodwill impairment. 2014 also includes $300 million in respect of
the civil monetary penalty. 2012 included $667 million due in respect of settlements
with the US authorities
Standard Chartered Annual Report 2014
North East
Asia
1,459
4.7%
Greater
China
5,540
6.7%
30.2%
8.0%
18,334
10.0%
10.1%
20.7%
Transaction
Banking
3,802
Financial
Markets
3,500
Americas
861
Europe
1,234
Africa
1,829
18,334
13.6%
19.1%
2
Operating income by region $million
Wealth
Management
1,701
3.3%
6.5%
Retail
Clients
6,009
2014
2013
MENAP
1,843
20.2%
10.1%
ASEAN
3,713
South Asia
1,855
3. Represents the recommended inal dividend per share for the respective years
together with the interim dividend per share declared and paid in those years.
Further details are set out in note 13 to the inancial statements
4. Others include Lending and Portfolio Management ($1,026 million), Asset and
Liability Management ($653 million) and Principal Finance ($325 million)
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“2014 was a challenging year and our
performance was disappointing, but it
was also a year when we took decisive
action to refocus our strategy and to
reposition the Group for the future”
Sir John Peace
Chairman
●●
Proit before taxation, goodwill impairment,
own credit and the civil monetary penalty
was down 25 per cent to $5.2 billion
●●
Statutory proit before taxation was down
30 per cent to $4.2 billion
●●
Income excluding own credit adjustment fell
2 per cent to $18.2 billion
●●
Normalised earnings per share declined
28 per cent to 145.9 cents
Normalised earnings per share
Dividend per share
145.9 cents
86.00 cents
2013: 204.0 cents
2013: 86.00 cents
2014 was a challenging year and our performance
was disappointing, but it was also a year when we took
decisive action to refocus our strategy and to reposition
the Group for the future.
The Board continues to believe that there are signiicant
opportunities for the Group in the medium to long term across
our footprint, and that is why we have been careful not to take
any knee-jerk actions that may damage the long-term
prospects of the business.
However, at the same time, we need to be mindful that there
are signiicant factors impacting our current performance which
cannot be ignored: the imperative to build capital levels across
the industry; the need for ongoing investment in enhancing
our systems and processes associated with conduct and
compliance; and the need to change the shape of our
business to it the demands of the current economic and
regulatory landscape.
As a consequence of this, the Board has recently endorsed a
number of priority areas. The irst of these was to provide clarity
on our governance, leadership and succession plans, and we
are going further by highlighting a number of other priorities:
taking steps to build on our capital levels, enhancing our return
on equity and continuing to improve our conduct and
compliance capabilities.
The Board is determined to reshape the business to restore the
Group’s performance and to fully realise the opportunities in our
markets. At the same time, we are determined to continue to
raise the bar on conduct and compliance to ensure that Here
for good, our brand promise, is irmly embedded in the DNA
of the Group worldwide.
Whilst we are comfortable with our current capital position,
the Board does want to improve our capital trajectory, so we
are taking actions around risk-weighted assets, cost reductions
and business disposals, all of which are aimed at strengthening
both our Common Equity Tier 1 ratio and our trajectory
going forward.
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3
Strategic report
Group overview
Chairman’s statement
Resolved to restore shareholder value
Chairman’s statement
We believe that we have identiied strong levers to manage
capital accretion over time and therefore the Board is
recommending a inal dividend for 2014 of 57.20 cents, resulting
in a total annual dividend of 86.00 cents, which is the same
level of dividend per share as 2013.
We are therefore conident that we are taking the right actions
to restore shareholder value.
I would like to thank our clients and shareholders for their
support during 2014 and, above all, our great people for their
hard work and ongoing commitment to Standard Chartered.
For several years, we have signiicantly increased the amount
paid out to shareholders by way of dividend, while at the same
time consecutively reducing the amount paid out in bonuses,
despite increasing staff numbers over this period. In 2014, we
are again proposing to pay out more to our shareholders by
way of dividends than we pay out in bonuses.
Sir John Peace
Chairman
This disciplined approach to managing variable compensation
has created signiicant competitive pressures in some of our key 4 March 2015
markets. We are, of course, mindful of the external sentiment
in some markets on bankers’ pay, and conscious of our
disappointing performance in 2014, but it is essential that we
remain able to pay competitively in the markets where we
operate and where wage inlation, on average, is around
5 per cent.
Our people are much sought after by our competition, and
we are acutely conscious of the importance of retaining and
attracting the best talent as we look to execute on our strategy.
It also goes without saying that, consistent with past practice,
we will only reward our people for good performance as well as
for their good behaviours.
Taking all these factors into account and relecting on our
performance in 2014, the bonus pool is down on 2013 by
9 per cent, and 27 per cent lower than in 2011. In light of the
disappointing performance of the Group, those executive
directors on the PLC Board throughout the year came to the
conclusion that they should show leadership by not taking any
variable compensation for 2014.
I would like to take this opportunity to thank Peter Sands on
behalf of the Board for the immense contribution he has made
to the success of the Group over the past 13 years, both as
Group Chief Executive and as Group Finance Director. Since he
became Group Chief Executive in 2006, the Group has more
than doubled in size and has been consistently proitable.
Peter’s leadership and insight, over a period of huge change
and challenge for the entire industry, ensure that he leaves the
Group well placed to achieve its full potential as one of the
world’s leading inancial institutions.
I would also like to thank Jaspal Bindra for his very considerable
contributions to the business over the past 16 years, and the
other long-serving Board members who are stepping down this
year and who have done so much to help position this great
bank for the future.
We are extremely fortunate to have Bill Winters, one of the most
accomplished and respected bankers in the world today, taking
over as Group Chief Executive from Peter in June to drive the
Group’s next chapter of growth. Bill brings substantial inancial
experience from leading a very successful global business, and
has an exceptional understanding of the global regulatory and
conduct environment. He is also a proven leader with a strong
track record in nurturing and developing talent. I am thrilled that
Bill is joining the Group at this strategically important time and
we wish him well in his new role.
4
Standard Chartered Annual Report 2014
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“The drivers of economic growth
in our markets remain immensely
strong, and the demand for
inancial services is rising rapidly”
Peter Sands
Group Chief Executive
2014 was a tough year, our performance was
disappointing and we are acutely aware of the impact of
this for you, our shareholders. We faced a perfect storm:
negative sentiment towards emerging markets, a sharp
drop in commodity prices, persistently low interest rates
and surplus liquidity, low volatility, and a welter of
regulatory challenges.
As a result, we saw intense pressure on margins and volumes,
a signiicant uptick in impairment and a sharp increase in
regulatory related cost. Of course, it was not all about external
factors. Some of the decisions we took in the past look less
good now than they did at the time, such as Korea, which in
2014 made a loss before tax of $145 million. Not everything we
did was as well executed as it should have been, for example,
the upgrade of our transaction surveillance systems back in
2007 – shortcomings here ultimately resulted in the civil
penalty of $300 million that we paid in August 2014.
We have taken a range of actions in response to the way our
world has changed. We have overhauled our strategy, making
it sharper and more focused. We have reconigured the
organisation to align it better with our strategic priorities.
We have attacked our cost base. We have redeployed capital.
We have disposed of, or are in the process of disposing of,
15 underperforming and non-strategic businesses. We have
de-risked portfolios and segments, such as unsecured lending
or correspondent banking, and we have stepped up the pace
of our programme to raise the bar on conduct. While some of
these changes actually made our 2014 performance worse,
since we sacriiced income or increased investment, I am
conident that the way we are reshaping the Group will get us
back to a trajectory of sustainable, proitable growth, delivering
returns above our cost of capital and driving the share price.
I should make clear that we are not counting on the world to
do us favours. While we do expect a gradual return to a more
normal interest rate environment, and this year we have already
seen more volatility in currency markets, we are not counting on
headwinds turning to tailwinds to boost our performance. We
are focused on the levers we control, the things we can do, to
improve returns and return to growth.
Our performance priorities are clear. First, we must dispel the
concerns about capital, hence the clear target of achieving a
Common Equity Tier 1 (CET1) ratio of 11 to 12 per cent in 2015
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and thereafter. Second, we must improve returns, hence we
are setting a target return on equity of over 10 per cent in the
medium term, so that we are delivering sustainably above our
cost of capital. This will take a bit of time to achieve, not least
because the actions we are taking to strengthen the CET1
ratio make this more dificult. Each of these elements its into
an overall agenda of action, all of which is captured in the
scorecards of the individual client and product groups,
functions and geographies across the Group.
Capital
On capital, we start from a strong position. In terms of our
CET1 ratio, at 10.7 per cent on an end-point basis, we have
a 200 basis points (bps) buffer relative to known regulatory
requirements. We weathered the Bank of England stress
tests comfortably. We are strongly placed from a leverage
and Total Loss Absorbing Capacity perspective.
However, we understand market concerns about forward
trajectory given the uncertainties about how regulatory
requirements will evolve. Although it is impossible to be
deinitive, a combination of risk-weighted assets (RWA) inlation
and escalating expectations do point to a continuing upward
drift in requirements. That is why we have put such focus on
capital accretion, so that we can absorb regulatory changes
and fund growth, while also improving the CET1 ratio. We
accreted some 50bps in 2014, 20bps in the irst half and 30bps
in the second half. To achieve this, we cut some $9 billion of
low-returning RWA, largely from Corporate & Institutional
Clients, and saved another $2 billion from disposals.
We now plan to pull these levers even harder. Over the next
two years, we plan to cut a further $25 to 30 billion of RWA
from low-returning client relationships and underperforming
businesses. We are making good progress on this already. By
taking these actions we are conident that we can achieve our
target CET1 ratio of 11 to 12 per cent in 2015 and thereafter.
Costs
In 2014, we kept a tight grip on costs. Headline expenses went
up 5 per cent, but more than half of this increase was due to the
UK bank levy and restructuring costs attached to the very cost
actions we are taking. Underlying expenses went up less than
3 per cent, driven largely by increased spend on regulatory and
5
Strategic report
Group overview
Group Chief Executive’s review
Taking action to deliver sustainable,
proitable growth and improved returns
Group Chief Executive’s review
conduct priorities. In November, we announced a $400 million
target for cost savings in 2015. We are more than on track to
achieve this target, and the $400 million number relates to our
underlying business, so it excludes cost saved from business
exits and disposals. Combined with the impact of such actions,
we are on track for savings to headline costs exceeding
$600 million in 2015.
The progress we have made in attacking the cost base
underpins our conidence in achieving $1.8 billion in cost
savings over the period from 2015 to 2017. Some of the
remaining savings will come from the full-year impact of actions
we have already taken, for example our decision to exit equities,
which will give us $100 million of savings in 2016. Some will be
the result of further peripheral-business exits or withdrawals
that we are currently pursuing, but most will be from achieving
sustainable eficiency improvements in our big markets and
core business activities.
We are stepping up the pace of digitisation, automating and
re-engineering key processes and standardising technology
platforms. For example, the only way we will get the
cost-income ratio in the Retail Clients segment down to our
target of 55 per cent is through accelerated digitisation of
products, channels and internal processes. And the only way
we can manage the ever-increasing complexity of regulation
eficiently is through technology, so we are not cutting back
on technology investment, but actually increasing this in order
to achieve sustainable improvements in productivity.
Asset quality
It should be no surprise that impairment increased in 2014.
GDP growth in key markets has been slower, commodity prices
fell sharply, and we faced some speciic challenges in particular
markets, such as the Personal Debt Rehabilitation Scheme
(PDRS) in Korea and fraud in China. Of course, we could have
fared better. With hindsight, there were clients and situations
we should have avoided, but we were never going to be entirely
immune to the shift in the credit environment. The actions we
have taken to de-risk are having an impact – in India, in China,
in our commodities book, and in our unsecured portfolio in the
Retail Clients segment. There are still many uncertainties in our
markets, but I am very comfortable with our provisioning and
with the shape and quality of the book.
In the Retail Clients segment, while impairment remains at an
elevated level, the indicators suggest some improvement, most
notably in Korea. Looking at the early data for this year, PDRS
ilings are now less than half of what they were six months ago.
In the Corporate & Institutional Clients and Commercial Clients
segments, the signals are more mixed, but most of what we are
dealing with now, and provisioning for, are accounts that have
been troubling for some time. The inlow of new problem
accounts into early alerts, credit grade 12 or non-performing
loans has slowed. While it would certainly be premature to
call the peak, we do not see signs of further deterioration.
The underlying drivers of economic growth in our markets – demographics,
urbanisation and investment in infrastructure – remain immensely strong
Income growth
In the Retail Clients segment, the priority has been to get cost
down, shift the focus to more afluent clients and accelerate
digitisation, as well as to de-risk from a conduct and credit
perspective. It is all about getting the platform in more robust
shape to support sustainable growth. Retail Clients’ income
was up 2 per cent year-on-year in 2014, but up 5 per cent in the
second half of 2014 compared to the second half of 2013,
driven by Wealth Management and the shift towards more
afluent Priority and Business clients. These will continue to be
the key drivers of income growth. Indeed, we aim to increase
the percentage of income from Priority and Business clients to
43 per cent in 2015 from 38 per cent in 2014.
In the Private Banking Clients segment, income growth was
4 per cent on a headline basis, or 6 per cent excluding
disposals. We see Private Banking Clients as a steady and
sustainable source of growth, although at this stage it is
obviously very small in the overall scheme of the Group.
In 2015, we are looking at on-boarding some 2,000 new clients,
achieving double-digit assets under management growth.
The Commercial Clients segment is also quite small, but
represents another huge opportunity, and after a year of
restructuring and remediation, with income down 22 per cent,
our priority for 2015 is to get back to a growth trajectory,
strengthening the front line, leveraging the network and growing
the client base. We are aiming for around 3,000 new-to-bank
clients in 2015.
Given that the Corporate & Institutional Clients segment
contributes around 60 per cent of the Group’s income, this is
the crux of the issue. Income fell 2 per cent in 2014, impacted
by a combination of de-risking and RWA actions, as well as
pressure on margins and the impact of low commodity prices
and low volatility. This overall picture disguises some areas
The annualised income impact of the exits and disposals in
2014 and those planned for 2015 is some $450 million, although of strong growth. Institutional investors, for example, saw
18 per cent income growth at attractive returns in 2014. This
this depends on the timing of the completion of certain
transactions. We will strip this out of our reporting of underlying is a big opportunity. As for Corporates, right now it is all about
improving return rather than income growth per se, and
performance for 2015. On top of this, de-risking and RWA
achieving this is all about leveraging the network and deepening
savings in 2014, and the $25-30 billion of incremental RWA
savings we plan for 2015 and 2016, will create a further drag on relationships to drive non-funded income – hence our focus on
increasing the number of markets and products per client. In
income, offset by our ability to redeploy into more attractively
2015, we are looking to take the product-client ratio from 6.3 in
returning assets.
2014 to over 6.5, and the market-client ratio from 2.8 in 2014 to
6
Standard Chartered Annual Report 2014
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Step back from the segments and look at our markets, and
the scale of the income opportunity is evident. Despite all the
turbulence and shifts in sentiment, the underlying drivers of
economic growth – demographics, urbanisation and investment
in infrastructure – remain immensely strong, and the demand
for inancial services is rising rapidly. Our challenge is to capture
these opportunities in a disciplined, return-focused way to
drive shareholder value.
Conduct
We have launched a comprehensive programme called Raising
the Bar on Conduct, which encompasses every aspect of
conduct, and touches every person in the Group. We recognise
that we cannot claim to be Here for good unless we make every
effort to ensure that good conduct informs every interaction and
is embedded in every decision we make – from strategy to
client on-boarding, product design and remuneration. Among
the more critical elements of this programme, I would highlight:
●●
●●
●●
Our Financial Crime Risk Mitigation Programme, which
encompasses over 50 separate projects and initiatives to
remediate and reinforce our controls and capabilities in this vital
arena. This is a massive multi-year investment programme.
Playing a stronger role in the ight against inancial crime
is a strategic imperative for Standard Chartered
To complement stronger controls, we are de-risking our client
portfolios. For example, we have exited a signiicant number
of our correspondent banking relationships, mainly in Latin
America and Central Europe. We have also exited around
70,000 small and medium-sized enterprise relationships over
the past 18 months, and we are putting strict limits on the
types of new client that we are prepared to take on in certain
geographies and sectors
We have launched a comprehensive programme called Raising the
Bar on Conduct, which touches every person in the Group
I will leave Standard Chartered proud of what we have achieved
and conident about what the future holds for this extraordinary
institution. In Bill Winters, I have a successor just right for the
task. I am delighted to be passing the baton on to a banker
of such calibre, to a leader of such strengths. Bill will inherit
a bank with a superb client franchise, a unique network and
an exceptionally strong balance sheet. Perhaps even more
importantly, he will inherit a fantastic team of people –
professional and collaborative, and truly believing in, and
committed to being, Here for good.
I would like to take this opportunity to say thank you to
our clients, and to all the people of Standard Chartered.
The past couple of years have been pretty tough, but we have
demonstrated resilience and an ability to adapt and reinvent.
I know that Standard Chartered will once again show the
world what a great bank this is.
To reinforce our governance, we have established a
Board-level Financial Crime Risk Committee, with a
combination of experienced independent non-executive
directors and expert advisors
Conclusion
The actions we have taken, and are taking, on capital, cost, risk
and conduct are all part of a package. We are reshaping the
Group to respond to the way our world has changed. We are
reshaping the Group to ensure we can fulil our aspiration to
bank the people and companies driving trade, investment and
the creation of wealth across Asia, Africa and the Middle East.
And we are reshaping the Group to get back to sustainable,
proitable growth, delivering returns above our cost of capital.
Peter Sands
Group Chief Executive
4 March 2015
This will be my last review for the Annual Report and Accounts,
and it is obviously one of the more challenging sets of numbers
I have had to explain. In my 13 years at the Group, I have seen
lots of ups and downs. Standard Chartered today is very
different from the bank I irst joined as Finance Director in 2002.
That year we made about $1 billion in proits, and in 2006,
the year I became Group Chief Executive, we made about
$3 billion. Since then, of course, we have navigated the global
inancial crisis, roughly doubled in size, and confronted all sorts
of new challenges. The world of banking has changed far more
dramatically than most people realise, and it is only part way
through a fundamental transformation.
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7
Strategic report
Group overview
over 3. We are also focusing on non-inancing income, targeting
an increase in the current proportion of 41 per cent to more
than 43 per cent. These metrics are the key to driving good
income growth that lifts our return on RWA in this segment.
Our strategy
What guides us
Our ambition
The world’s best international bank
Our strategy
We bank the people and companies driving investment,
trade and the creation of wealth across Asia, Africa
and the Middle East
Our brand promise
Here for good
Our aspirations
Relationships
Build trusted relationships with the people,
companies and institutions shaping our
markets’ future
Trade
Become the undisputed leader in commercial
payments and inancing for and in Asia, Africa
and the Middle East
Investment
Play a leading role in facilitating investment
and deepening inancial markets
Wealth
Be recognised as a leader in growing and
protecting our clients’ wealth
Relevant scale
Establish suficient scale and balance sheet
and franchise strength to be relevant and
inluential in our key markets
Our values
Courageous
We take measured risks and stand up for
what is right
International
We value diversity and collaborate across the
network
Responsive
We deliver relevant, timely solutions for clients
and customers
Creative
We innovate and adapt, continuously
improving the way we work
Trustworthy
We are reliable, open and honest
Our commitments
Colleagues
A great place to work, enabling individuals
to grow and teams to win
Society
A force for good, promoting sustainable
economic and social development
8
Standard Chartered Annual Report 2014
CONTENTS
Investors
A distinctive investment, delivering
consistently superior performance via
disciplined growth
Regulators
A responsible partner with exemplary
governance and ethics
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Banks play a crucial role in economies by facilitating payments
and converting short-term deposits into long-term inancing.
Through these activities we take on and manage risk. Read
more about Standard Chartered’s approach to risk on pages
12 to 15, with details of our allocation of risk-weighted assets to
client segments on pages 120 and 121.
As an international banking group focused on Asia, Africa and
the Middle East, we serve a wide range of clients from
individuals and small and mid-sized businesses to large
companies and inancial institutions, helping them to build,
grow and protect their wealth. Read more about our business
on pages 30 to 34.
We have a clear strategy and in 2014 reorganised our business
to help us better support our clients and meet our aspirations.
Read more about our strategy on page 8.
Our business model is focused on sustainable value creation
We build deep relationships
with our clients
We add value for our clients
by using our distinctive strengths
●●
●●
And provide solutions that meet
their evolving needs
We ensure that the value is sustainable
by focusing on three key priorities
●●
●●
Through these activities, we generate income,
proits and return on equity
And create long-term value for
a broad range of stakeholders
●●
●●
Brand – we have a 150-year history
in some of the world’s most dynamic
markets and our Here for good brand
promise captures what we stand for
●● Capital – we are strongly capitalised
and highly liquid, allowing us to support
our clients for the long term
●● Local depth – we draw upon deep local knowledge
and experience in the markets in which we operate
●● Network – we collaborate to support clients across our
client segments, product groups and geographies
●● People – our diverse and inclusive workforce is committed
to the highest standards of conduct and integrity
Retail Clients
– individuals and small businesses
●● Private Banking Clients
– high net worth individuals
●● Commercial Clients
– mid-sized companies
●● Corporate & Institutional Clients
– large companies and inancial institutions
Retail Products – deposits, savings,
mortgages, credit cards and personal
loans, and other retail banking products
●● Wealth Management – investment,
portfolio management, and advice and
planning services
●● Transaction Banking – cash management, transactions,
securities holdings and trade inance products
●● Corporate Finance – inancing, strategic advice, mergers
and acquisitions, and equity and principal inancing
●● Financial Markets – investment, risk management and
debt capital services
Income
– net interest income, fee income and
trading income
●● Proits
– income gained from providing our
products and services minus expenses,
impairment and taxes
●● Return on equity
– proit generated relative to the equity invested
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Being a responsible company
– managing our operations to deliver
long-term value for our stakeholders
●● Contributing to sustainable
economic growth
– ensuring that our core business of
banking supports sustainable growth
and job creation
●● Investing in communities
– working with local communities to
promote social and economic development
Clients – enabling individuals to grow
and protect their wealth, and helping
businesses to invest, trade and expand
●● Shareholders – delivering long-term
sustainable value for investors
●● Employees – providing a great place
to work
●● Society – supporting growth and job creation, delivering
inancial innovation and helping to address the most
pressing challenges facing the communities in which
we work
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9
Strategic report
Group overview
Our business model
How we create value
Key performance indicators
Delivering value to shareholders and clients
1 Deliver consistently superior performance via disciplined growth
Normalised return on equity2
%
Normalised earnings per share1
cents
Aim
To deliver earnings per share
(EPS) growth.
225.5
197.0
204.0
198.0
(28)%
145.9
2010
2011
2012
2013
14.1
12.2
12.8
11.2
Analysis
EPS declined 28 per cent
compared to 2013, relecting
a challenging market
environment and signiicant
restructuring actions.
(30)%
7.8
2010
2014
2011
2012
2013
2014
Aim
To deliver return on equity
of over 10 per cent in the
medium term while balancing
the long-term objective of
having strong yet eficient
levels of capital.
Analysis
Returns declined 30 per cent
compared to 2013, relecting
a challenging market
environment and signiicant
restructuring actions.
2 Build trusted relationships with clients
Retail Clients
Net Promoter Score (NPS)
relative to market average 3
Aim
To increase customer
satisfaction with our products
and services and to become
the bank that clients
recommend.
+5
+4
Corporate & Institutional Clients
depth of client relationships 4
Average
Average
products
markets
per client
per client
7%
6.3
5.9
8%
2.8
2.6
Analysis
Our relative global NPS in
2014 was four points above
the market average.
2013
2014
Analysis
We continued to drive deeper
and broader client use of our
products and markets.
2013
3 Maintain balance sheet strength to
18.4
4.4
17.6
17.4
17.0
3.9
4.0
16.7
4.8
5.4
2.2
1.9
1.7
11.8
11.8
11.7
1.3
10.9
0.8
10.5
2011
2012
2013
2014
2010
Basel II
Core Tier 1/CET1
10
CRD IV
Other Tier 1
Tier 2
Aim
To maintain a strong capital
base and accrete capital
to a Common Equity Tier 1
(CET1) ratio of between 11
and 12 per cent in 2015
and thereafter.
Analysis
The Group remains strongly
capitalised, with a transitional
CET1 ratio of 10.5 per cent, or
10.7 per cent on an end-point
basis. The Group has continued
to manage its balance sheet
proactively and with discipline,
focusing on deployment of
risk-weighted assets.
Standard Chartered Annual Report 2014
2014
2013
2014
4 Be recognised as a leader in growing and
support our aspirations
Capital ratios5
%
Aim
To leverage our network
and product capabilities to
increase the average number
of markets and products
per client.
protecting our clients’ wealth
Private Banking Clients 6
Total AUM
($billion)
Number of clients
new to segment
3%
60.0
1,658
58.4
(21)%
1,310
2013
2014
CONTENTS
2013
Aim
To grow and deepen client
relationships and add new
clients.
Analysis
We added 1,310 new clients
compared to 1,658 in 2013
and increased assets under
management (AUM) by
3 per cent.
2014
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Total Scope 1, 2 and 3 Greenhouse Gas emissions/$million
operating income7 Tonnes CO2 equivalent/$million operating income
17.40
15.84
(7)%
Analysis
We reduced Greenhouse Gas emissions relative to operating
income for the past three years. Starting in 2014, we have
included Scope 3 emissions arising from air travel in the KPI.
Air travel emissions data is collected from 41 countries and
based on seating class and distance lown.
14.79
2012
2013
Aim
To reduce Greenhouse Gas emissions arising from
our operations.
2014
6 A great place to work, enabling individuals to grow and teams to win
Aim
To continually align the aspirations of our people with those
of the Group, encouraging a performance-oriented culture
and a place where people love to work.
My Voice employee survey gap score 8
4.5
4.0
Expected
employee experience
4.42
Employee experience
delivered by the Group
4.06
0.36
Analysis
Using a new employee survey, My Voice, we are gaining an
understanding of our core strengths and opportunities to
improve, including a new gap score. In 2014, our overall My
Voice gap score was 0.36. Areas that need attention include
collaboration and clarity around growth opportunities and
career paths. Strong scores were registered for the Group’s
brand, strategy and culture, with particularly positive results
on individual commitment, conduct and job engagement.
3.5
3.0
1. Normalised earnings per share
This KPI is calculated as proit attributable to ordinary shareholders of the Group
as normalised for certain one-off or irregular items – as deined in the Glossary –
divided by the weighted average of the shares in issue during the year
Source: this measure is reported in note 14 of the Group’s audited inancial
statements
2. Normalised return on shareholders’ equity
This KPI is calculated as the normalised proit attributable to ordinary shareholders
as a percentage of average ordinary shareholders’ equity
Source: this measure is derived from information within the Group’s audited inancial
statements, being normalised earnings (note 14) as a percentage of average
shareholders’ equity (excluding preference shares)
3. Retail Clients: relative Net Promoter Score (NPS)
‘Net Promoter Score’ and ‘NPS’ are trademarks of Satmetrix Systems Inc., Bain &
Company, and Fred Reichheld. Standard Chartered uses Bain methodology
recalibrated for inancial services to calculate NPS. In 2014, we began to move to
a new methodology, progressively changing our sampling periods and method to
create greater transparency, and benchmarking our NPS against the overall market.
NPS gauges customer support for the retail banking products and services we
provide. We ask our customers “How likely are you to recommend Standard
Chartered to a friend or colleague?” and apply a 10-point scale where 10 is most
likely. We then derive the NPS by subtracting the percentage of detractors (those
who score zero to six) from the percentage of promoters (those who score nine to
10). NPS operates on a scale from –100 (all detractors) to +100 (all promoters)
Source: Market Probe & RFI Customer Satisfaction Survey (20 markets on average
each year). The survey uses interviews completed in 2014
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4. Corporate & Institutional Clients depth of relationships
Average number of markets and products per client
Source: Standard Chartered data
5. Capital ratios
The components of the Group’s capital are summarised on page 119.
The Tier ratios are measured by the ratio of respective capital to risk-weighted
assets; the 2010-2013 ratios are calculated on a Basel II basis, and the 2014 ratios
on a Basel III transitional basis
Source: this measure is reported in the Capital section on pages 118 to 125
6. Private Banking Clients
Represents total AUM for Private Banking Clients, and the gross number of clients
added to the segment during the year
Source: Standard Chartered data
7. Total Scope 1, 2 and 3 Greenhouse Gas emissions
The emissions within our reporting inventory correspond to a reporting period
of 1 October 2013 to 30 September 2014 to allow suficient time for independent
assurance to be gained. Accordingly, the operating income used in this inventory
corresponds to the same period rather than calendar year used in inancial
reporting, consistent with international carbon reporting practice
Source: Standard Chartered data
8. My Voice employee survey
The gap score represents the difference between the importance that our
employees attribute to the employee experience across 40 measures, and their
perception of how well the Group is delivering in these areas. Maximum gap
score 5, with 0 being the target
Source: Standard Chartered My Voice engagement survey
11
Strategic report
Group overview
5 Protect the environment, contributing to sustainable economic and social development
Risk management
Our risk proile remains in line with our strategy
We manage our risks to build a sustainable franchise in
the interests of all our stakeholders. The Group has a
deined Risk Tolerance Statement, approved by the
Board, which is an expression of the maximum level of
risk we are prepared to take. This plays a central role in
the development of our strategy and policies. We have a
well-established risk governance structure and we
closely manage our risks to maintain the Group’s risk
proile in compliance with the Risk Tolerance Statement.
Our risk proile is aligned to our business strategy and risk
tolerance. It is consistent with our business model and the core
business activities we undertake in the markets in which we
operate. We have low exposure to asset classes and segments
outside our core markets and target customer base. Our balance
sheet is highly liquid and diversiied across a wide range of
products, industries, geographies and client segments, which
serves to mitigate risk. We review and adjust our underwriting
standards and limits in response to observed and anticipated
changes in the external environment and the evolving
expectations of our stakeholders.
This section provides a high-level overview of our risk proile,
risk management framework, Risk Tolerance Statement and
principal uncertainties.
Further details are set out in Risk and Capital review on
pages 64 to 117
Risk proile
Highly diversiied
and short tenor
portfolio
●●
●●
●●
●●
●●
●●
●●
Strong capital and
liquidity position
Robust risk
governance
structure and
experienced
senior team
No single industry concentration represents more than 16 per cent of loans and advances to
customers in the Corporate & Institutional Clients and Commercial Clients segments
The loan portfolio remains predominantly short-dated, with 65 per cent of loans and advances to
customers in the Corporate & Institutional Clients and Commercial Clients segments maturing in
under one year
Our top 20 corporate exposures have reduced as a percentage of Common Equity Tier 1 capital,
and continue to be highly diversiied, with each, on average, spread across seven markets and
ive industries
Over 40 per cent of the corporate portfolio is investment grade, and this mix is improving
We hold a diverse mix of collateral, valued conservatively. Over half of our sub-investment grade
corporate portfolio is collateralised
40 per cent of customer loans and advances are in Retail Products; the unsecured portion of the
portfolio is down from 21 per cent to 19 per cent in 2014, relecting the continued de-risking of the
unsecured book. The overall loan-to-value ratio on our mortgage portfolio is less than 50 per cent
●●
We have low exposure to asset classes outside our core markets
●●
We remain well capitalised and our balance sheet remains highly liquid
●●
We have a strong advances-to-deposits ratio
●●
We remain a net provider of liquidity to interbank markets
●●
Our customer deposit base is diversiied by type and maturity
●●
We have a substantial portfolio of liquid assets that can be realised if a liquidity stress occurs
●●
●●
●●
●●
●●
●●
12
Our balance sheet remains resilient and well diversiied across a wide range of geographies, client
segments, industries and products which serves to mitigate risk
We have a clear Risk Tolerance Statement which is aligned to the Group’s strategy; it is approved by
the Board and informs the more granular risk parameters within which our businesses operate
We continuously monitor our risk proile to ensure it remains within our risk tolerance, and regularly
conduct stress tests
We review and adjust our exposures, underwriting standards and limits in response to observed and
anticipated changes in the external environment and expectations
We have a very experienced senior risk team and our risk committees are staffed by the Group’s most
senior leaders
We have a robust risk management framework that assigns accountability and responsibility for the
management and control of risk
We maintain a consistent and highly selective approach to large corporate credit underwriting
Standard Chartered Annual Report 2014
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Standard Chartered PLC Board
– Strategy
– Risk Tolerance Statement
Standard Chartered Bank Court
Board committees
Group Asset and Liability Committee
Group Risk Committee
Risk types
– Capital
– Liquidity
Risk types
– Credit
– Country cross-border
– Market
– Pension
– Operational
– Reputational
Roles and responsibilities
not constrained by functional, business or geographic
boundaries. The second-line control functions must be
independent of the businesses they control, to ensure that
the necessary balance in risk/return decisions is not
compromised by short-term pressures to generate revenues.
The major risk types are deined on the next page
Roles and responsibilities for risk management are deined under
a Three Lines of Defence model. Each line of defence describes
a speciic set of responsibilities for risk management and control:
●●
●●
First line of defence: all employees are required to ensure
the effective management of risks within the scope of their
direct organisational responsibilities. Business, function and
geographic heads are accountable for risk management in
their respective businesses and functions, and for countries
where they have governance responsibilities
Second line of defence: risk control owners, supported
by their respective control functions, are responsible for
ensuring that the Group’s risk proile is contained within
its risk tolerance. The scope of each risk control owner’s
responsibilities is deined by a given type of risk and is
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●●
Third line of defence: the independent assurance provided
by the Group Internal Audit function. Its role is deined and
overseen by the Audit Committee
The Group Chief Risk Oficer directly manages a Risk function
that is separate from the origination, trading and sales functions
of the businesses. The Group Chief Risk Oficer also chairs the
Group Risk Committee and is a member of the Court.
13
Strategic report
Group overview
In 2014, the Group continued to face external challenges such as $585 million. This increase is primarily in the Corporate &
slower economic growth in its core markets of China and India
Institutional and Commercial Clients segments.
and a sustained fall in the prices of a number of commodities.
Further details are set out in the Risk overview section on
These are, in effect, a continuation of themes from 2012 and
pages 58 to 63
2013. The Group has been disciplined in its approach and in
taking risk-mitigating actions during this period in anticipation of
Risk management framework
a potential sustained downturn or dislocation in these markets.
Effective risk management is fundamental to being able to
The Group’s loan impairment has increased by $524 million,
generate proits consistently and sustainably, and is thus a central
or 32 per cent, to $2.1 billion. Over 40 per cent of the Group’s
part of the inancial and operational management of the Group.
loan impairment arises in the Retail Clients segment, which
has shown signs of stabilisation through 2014 and, while still
Ultimate responsibility for the Group’s strategy, for setting our
elevated, is 5 per cent lower in the second half. Corporate &
Risk Tolerance Statement and for the effective management of
Institutional Clients and Commercial Clients loan impairment
risk rests with the Board. The Standard Chartered Bank Court
increased by $558 million to $1,203 million, compared to 2013.
(the ‘Court’), which comprises the group executive directors
This represents 69 basis points (bps) (2013: 36 bps) of average
and other senior executives, is the highest executive body
customer loans and advances, an elevated level for 2014, in the of the Group. The Court has overall accountability for risk
context of a prolonged slowdown in the Group’s core markets
management and delegates authority for the management
of China and India, and in Commodities. Non-performing loans of risk to the Group Risk Committee and the Group Asset
(net of individual impairment provisions) are higher by
and Liability Committee.
Risk management
Risk tolerance and strategic alignment
The management of risk lies at the heart of our business. One
of the main risks we incur arises from extending credit to clients
through our trading and lending operations. Through our risk
management framework we manage risks Group-wide, with the
objective of maximising risk-adjusted returns while remaining
within our risk tolerance. Our primary risk types are set out in
the table below, with an explanation of how they arise from our
business. We recognise that a single transaction or activity may
give rise to multiple types of risk exposure, and we use risk
types to ensure comprehensive and consistent identiication
and control of risks, wherever they may arise.
Risk type
How this arises from our business
Credit
Arises principally from lending, or from other
inancial commitments from clients or third
parties. Lending and helping clients manage their
inancial risks is core to our banking services
Potential for loss due to failure of counterparty
to meet its obligations to pay the Group in
accordance with agreed terms
Country cross-border
Potential for loss due to the inability to obtain
payment from clients or third parties on their
contractual obligations, as a result of certain
actions taken by foreign governments, chiely
relating to convertibility and transferability of
foreign currency
Market
Potential for loss of earnings or economic value
due to adverse changes in inancial market
rates or prices
Liquidity
Potential that the Group does not have
suficient inancial resources in the short term
to meet its obligations as they fall due, or can
access these inancial resources only at
excessive cost
Operational
Potential for loss resulting from inadequate or
failed internal processes, people and systems
or from the impact of external events, including
legal risks
Reputational
Potential for damage to the Group’s franchise,
resulting in loss of earnings or adverse impact
on market capitalisation as a result of
stakeholders taking a negative view of the
Group or its actions
Pension
Potential for loss due to having to meet an
actuarially assessed shortfall in the Group’s
pension schemes
Capital
Potential for actual or opportunity loss from
sub-optimal allocation of capital or increase in
cost of capital
Risk Tolerance Statement
Arises from activities involving lending or
transactions across borders or in a currency
other than the currency in which the transaction
is booked. Providing funds across borders and
currencies facilitates trade and cross-border
investment and is a core part of our service
The Group manages its credit and country
cross-border exposures following the
principle of diversiication across products,
geographies, client segments and industry
sectors
Arises predominantly from providing clients
access to inancial markets, facilitation of which
entails taking moderate market risk positions.
Also arises in the non-trading book from the
requirement to hold a large liquid assets buffer of
high-quality liquid debt securities, and from the
translation of non-dollar denominated assets,
liabilities and earnings
The Group should control its trading portfolio
and activities to ensure that market risk
losses (inancial or reputational