Standard Chartered PLC (STAN) Earnings Call Transcript & Summary

Good afternoon, and good evening, everybody. Thank you for joining us for this fireside chat. I'm Jason Napier. I'm the U.K. banks analyst here at UBS. It gives us great pleasure to welcome Andy Halford, who is CFO of Standard Chartered, joining us today on a great day for capital markets. Certainly nice to see bank shares up meaningfully on vaccine trial news today. Andy, thank you so much for joining us.

A pleasure.

So we've seen a lot of evidence of investors sort of taking profits on some of the state home stock winners. We've seen Peloton and Zoom and so on falling sort of 15% today. The key question, I guess, that concerns most in the audience is whether we'll see banks as cyclical value trades starting to play a catch-up role in the market, and we'll be getting into that in our conversation today. As a reminder, for those of you on the call, this is a 30-minute Q&A session between Andy and myself. We would be delighted to accommodate your questions. If you were to e-mail them to jason.napier@ubs.com, I will do my very best to fold those into the conversation as we go. Andy, perhaps just to begin with, the market, I think quite right, is sort of fairly concerned with what medium-term returns may look like. Standard Chartered have been very clear under your management, that sort of double-digit RoTEs are what you expect from the business on a steady-state basis. But of course, this year, change in interest rates have taken their toll. How do you see things in terms of the objectives for returns in the medium term? Is that sort of a level that you aspire to? And what's going to need to happen to sort of get there?

Yes. Our view is that getting to a double-digit number should still be the art, and if possible, should still be what we're aiming for. Other banks operating in the region can do it. They do, do it. So why should we not be able to? But if it wasn't for COVID, the sad fact is that we were probably heading quite nicely up into not quite that range, but not too far away from it. And that aside, we'd be probably having a slightly different discussion today. However, that is life. That is where it's at. We -- I said a couple of weeks ago that financially, probably COVID it puts us back a couple of years in terms of getting to that number. We absolutely are focused on getting back to it. What is going to be necessary for it to happen? I think we will need to see governments getting COVID under control. Obviously, news today on vaccines is sort of helpful potentially in that regard. I think to have a lessening of the sort of U.S.-China sort of rhetoric may -- will also be helpful to the cause. And maybe the resolution last week will be also helpful to that cause. So I think 2 things have actually moved forward in quite a positive way in quite a short space of time. I think we are fortunate in the sense that some of our bigger markets, the more profitable markets are actually in Northern Asia. To some of those who are based in Europe or maybe in the U.S. It all feel still quite gloomy. But actually, in that part of the world, things definitely are feeling much more positive. And our sense is that, that should be a forerunner to what will be happening through other parts of Asia over a period of time. So at the end of COVID, there roughly will be the same number of people still living on the planet. They will still have that same aspiration to quality of life consumption. We don't see any reason why we shouldn't be seeing overall levels of international trade getting back to where they were before. And bearing in mind, even in the last 12 months, we've said we had about 5% volume growth even in the COVID era. So there is volume opportunity out there, there is just a bit of a reset of the base.

Sticking with the sort of issue of the day, if you like, and the potential good news around vaccines and so on. I guess Q3 results were much stronger than the market expected. And that was predominantly about relative lack of loan losses. Could you perhaps talk a little bit about sort of the work that you do as a firm in terms of trying to scenario a plan for what stage migration you might get and so on? Is it just a sort of a lull in the credit cycle? Or is there a potential sort of chance here that we've made really quite good progress in setting aside funds for defaults already?

So the first thing I'd say is the actions we've taken over the last 4 years or so in terms of tightening up on credit standards in terms of reducing the concentration of credit risk that we used to be running, focus upon collateral, focus upon trade insurance, et cetera, I think have stood us in good stead. They were all a little bit invisible and suddenly when you get a test like this, it actually does make you realize that we probably come into this in better shape than we had thought and certainly in better shape than we were 4 years ago. So I think that is pretty helpful. As I'm sure is the case with most of our competitors, we've had a huge spotlight over the last few months, particularly on those sectors that are obviously more vulnerable, aviation to name but one, and have gone through every client in all of those sectors by market, particular emphasis maybe on the smaller ones in each of those sectors who may not be quite as robust as some of the others. So I think we've been pretty attentive to where the problem spots could be. We've done that analysis by sector type. We've done it sort of by country. We really have cut it in quite a number of ways. Now at the end of the day, the provisioning under IFRS 9 in the first quarter, the Stage 1 and Stage 2 modeling is sort of more procyclical sort of approach to it, and we built up quite a lot of reserve in that period. We've also put on on-site about $400 million of sort of management overlay, particularly thinking about where there are moratory periods on repayments and whether maybe when people come out from moratorium period, we have stored up the problem or whether that isn't the case. So I take with that amount to put one side on the balance sheet as well that, that would hold us in a reasonably good place going forward. As we go forward, so I think Stage 3 will become more the issue. It will be the evidential problem areas rather than the theoretical model ones. And if we do find that things like the vaccine are coming through and are starting to be effective, hopefully, the duration that companies have got to sort of survive for individuals, to some extent, will be slightly less than might otherwise have been the case. And it does seem that governments generally are trying to reach out to do things to avoid precipitous insolvency and unemployment. And I think the more that they can sense that the light is at the end of the time, which isn't too far away, I would think the more inclined they will be to continue with that. So fortunately, their propensity to want to do that to avoid unemployment and social consequences, I think coincides pretty well with what actually the banks would want to happen anyway, so that actually is fewer of their businesses, their clients will have problems, and hence, will minimize the impairments for losses. So that's the sort of way we look at it. Credit migration to predict accurately is difficult. You have to sort of do it by clients, and we've got the list of the ones that we are focused upon. So far, we've actually managed to manage other aspects of the RWA. So we'll absorb some element of credit migration of an adverse nature and still ended up with the RWAs in a broadened sort of space that we'd indicated we thought they'd been earlier in the year.

Yes. I -- It was marked I thought that your Stage 3s and early alerts and stage 12 loans were actually down a touch. I mean, to be stable this far perhaps it's just because we're working from home and that the crisis feels as old as it is, but it has been some time in the making, and one would have thought that we should be starting to get a reasonable picture of underlying credit strength in those sorts of disclosures.

Yes, I think so. Although there's no absolute foresight in terms obviously what happens over the coming months. And I'm sure there will be 1 or 2 bumps in the road as that happens. But they know now a little bit more what governments are doing with airlines, the extent which they're stepping in and supporting those. That adds a bit more knowledge compared to what we had a few months ago. So passage of time definitely has helped. I think we've got closer to some clients as well, where they have got more challenges to be able to actually talk to them and actually try to work out jointly a way forward rather than just finding out, suddenly one day that there's a really big problem. So behavior, that's also probably helped. But there's lots of surprising things. The height of capital in the banking sector at the time of peak stress is nothing like what stress test would have you believe. But that's a different story.

We will definitely come on to that in a moment. And before we do that, can we talk a little bit about the revenue outlook? We'll do NIM and then financial markets, if that's okay. So NIM, I think, guided to fall a little and then perhaps to go sideways, perhaps even recover. Although I do note that you're doing quite a lot on the mix of lending. And so just your take really on where NIM goes in the near-term and sort of whether there is a net positive outlook for what you're doing in the mix of business and the spreads that you demand from customers on forward business.

Yes. We had the NIM come down quite a lot over the course of this year, most pronounced in the second quarter, which was largely sort of repricing the treasury book post the interest rate reductions in the U.S. It came down 5 basis points further between the second and third quarters. And what we've said is that we expect to come down a little bit more over the balance of this year into the start of next year, but not hugely so. Most of the book has repriced. We've got some assets that are slightly longer tenure, which obviously will reprice in their own time. But the majority of the book will have reprice around the end of the year, which is why we're reasonable -- reasonably comfortable making that statement. Clearly, we have been very focused, particularly upon the liability mix, and we have progressively had a higher proportion of the mix there from current accounts and from operating accounts and businesses. That is more cost effective. It is a reasonably sticky source of cost as well of liability funding as well. So the more we can do with that, the more we will continue to do. We did some legal entity restructuring a couple of years ago, which progressively over a period of time, that is also giving us some benefit. And wherever we can do, we'll obviously look at asset pricing to see whether there is any opportunity on that front. So it's a sort of multifaceted approach, but we certainly hope we're not too far away now from the trough.

And then turning to sort of financial markets. Clearly, across you and your -- and the peer group, you've seen very good market trading conditions. But I think the sense that you shared at Q3 was a sort of year-to-date run rate was the sort of level that you'd like to hold on to, my sense partially as payback for some of the investment and broadened product set that you now make available. Was that right? And how does that square with the expectation that Q4 is going to be slower just as a sort of a seasonal matter?

Yes. So our financial markets business, I think, maybe up until about 3 years ago, I think was lagging a bit, other banks. And we knew that we needed to pick up the pace. We made quite a number of changes managerially. We made quite a number of changes system wise. We extended the product range. And I think if you look back now over the last probably 8 quarters or so, we've actually had a much stronger engine running in financial markets. So this year has not been a sort of one-off blip. It has actually been a progression from quarters previously. Now that having been said the first 2 quarters of the year for us, for other banks as well, was particularly strong with significant volatility out there, which was very, very helpful. As we move forward, we are comfortable that the engine is working well. It will be dependent to some extent on market volatility. Every quarter, it's got its own twists and turns, U.S. elections, whatever this quarter. But our sense is that there is still a period of sort of uncertainty ahead and therefore, volatility is not going to be disappearing anytime soon. We still see things that we can do actually with penetration in both the financial markets products into our client base. We've got different levels of penetration in different parts of the world, and we still see opportunities to actually get some of those normalized. So we're sort of saying, overall, we think the sort of runway we had this year is something which we should aspire, too, next year. Q4 is always a little bit slower. Some people will back off the Christmas or whatever it is at the end of the period. So we understand that, but it will affect next year as well as it will affect this year. So that should normalize as well in that sense.

Okay. Wealth has also been doing kind of remarkably well. And I guess it might be useful to draw the distinction between the retail piece, which is the vast majority of those revenues and what the work you'll be doing in the private bank. I wonder whether you could just talk about the sort of base you're building there and the extent to which, I don't know, COVID may have depressed face-to-face sort of activity. It feels from a statistical perspective that the retail piece is driven by the level of the Hang Seng and the volumes of trade there. But I just wonder whether you could sort of split out what you see the drivers of those businesses being, and again, whether that's something you could build on into 2021.