Standard Chartered PLC (STAN) Earnings Call Transcript & Summary

Perfect. Let's get started. It's a great pleasure for us here for at Goldman Sachs to welcome our next speaker, Saleem Razvi, Chief Financial Officer of Standard Chartered at Asia. By way of intro, Saleem was appointed to its current role in April 2021. Having previously joined Standard Chartered Bank in 2006 as Head of Finance. Prior to his current role, he was group Treasurer. Saleem, thank you very much for making time and joining our conferences here.

Pleasure to be here.

Let's start with a broader macro question. Just given the turbulence in the first quarter, with events around SVB and Credit Suisse, how does the world feel for you now? Are you more or less optimistic compared to how you were around 1Q in terms of performance from here?

I think, Martin, it would be fair to say we are as optimistic as we were at that time. One of the things perhaps worth remembering is you refer to the turbulence, there was probably a lot more turbulence in this part of the world than we saw in most of our footprint, which is Asia, Africa and the Middle East. So in terms of how businesses are doing, I think it's fair to say that momentum is very good. It was very strong in the first quarter. It continues to be strong in the second quarter. You'll remember that we've given this guidance at the end of the first quarter around full year income. The 8% to 10%, we said we'd be at the top of that range, we've given guidance around jaws, we had said that in terms of ROTE, we'd be approaching 10% this year. So there's no reason for us to revise any of that guidance. That remains in place.

Great. A month ago, you hosted, I joined investors seminar in Asia. And one of the key highlights was the cross-board opportunity, in particular, within Asia -- Asian corridors, and I was just wondering, what have you seen in terms of performance here recently, but particularly cross-border from China since it has obviously dropped during the zero COVID strategy?

Yes. So maybe I should start with a bit of context because most of the people, I think, in the room weren't there for the Asia seminar. So when we talk about cross-border, and this is more in the context of our CCIB business, our wholesale business, we're actually looking at 3 different categories across border business. So if I just focus on Asia, we're looking at inbound into Asia. That's the one that you're all familiar with, right? That's U.S. and European companies and institutions doing business in different parts of Asia. That's a large amount. We made $1.3 billion out of it last year. It's very high returning because it tends to be very capital-light because most of these entities meet their funding needs in their home markets. So the business we do with them is transaction banking, FX and so on. The other one, which is slightly more recent, which people are slightly less familiar with, there's intra-Asia. So as Asia grows and develops and there is greater prosperity, there is a lot more trade and investment happening intra-Asia. And the Asian countries are making a deliberate effort to reduce friction in those areas. So there are these regional agreements, which were changed to that. Now last year, we made $1.8 billion income out of that business. And it has lots of different elements. Primarily, it's North Asia investing in ASEAN and South Asia. And just to sort of give an indication of how it's going first quarter this year, our income from China into ASEAN doubled year-on-year. Our income from Korea into ASEAN was up 50% year-on-year. So those are sort of movements we are seeing. Some of it is to do with the traditional China Plus One. So whether it's Taiwan, whether it's Korea, whether it's Japan, some of the existing manufacturing, et cetera, is moving out of China, it's moving to ASEAN, it's moving to Bangladesh, it's moving to India. More interesting, we think, is China's own China Plus One, okay? And that's happening for 2 different reasons. There's a bit of geopolitics. So clearly, it's advantageous for a Chinese company to manufacture something in Indonesia. It's just far easier to export it. But the other reason and this is kind of a more profound reason is China's economy is now a relatively developed economy, right? So basic manufacturing in many parts of China is quite expensive. So if you remember, as Korea became richer and more developed, they offshored most of their basic manufacturing initially to China and now to other places. You're starting to see China do that now. For economic reasons, Chinese companies are now starting to invest in Indonesia, in Thailand, in Malaysia, in Bangladesh and even slightly surprisingly in a place like Vietnam. That transformation, right, Chinese manufacturing at the slightly middle to lower end moving out of China into other parts of Asia is going to be absolutely enormous if you compare the size of China's manufacturing base to what Korea used to be. So that's kind of the big trend that we are going to be playing into. So that's intra-Asia. And the third kind of corridor is Asia outbound. So that's Asian entity sort of buying European entities or investing elsewhere. Again, that has grown very strongly in the first quarter. It's up 60% year-on-year. So in terms of our -- sorry, that's slightly long-winded answer but in terms of our network business, not only is it growing very strongly, but there are fundamental structural reasons why it should continue to grow over a very sustained period long term.

Yes. Yes, great. And then maybe let's just move to operating performance and in particular income in April, Standard Chartered seen at a strong start of the year in terms of income, I think it was up 13% year-on-year. And I was just wondering, starting here with the fee income side, given fee income is a big proportion of your revenues. If you could just comment in terms of what is the outlook for fee income performance in 2023 and beyond?

Okay. So with fee income in the case of Standard Chartered, we're largely talking about 2 businesses, Financial Markets and Wealth Management. So let's begin with Financial Markets. We had a very, very strong first quarter, as you said. And part of that was driven by volatility. Now 2 things have happened in the second quarter, and you'll be aware of this. Volatility has come off. So early June was the lowest VIX point in 52 weeks. So that clearly means slightly lower transaction volumes. We've also seen with some Western financial institutions they've taken a slightly more risk off at tube since the events concerning the 2 banks a few months ago. So that -- all of that means that our transaction volumes in the second quarter have been slightly lower than they were in the first quarter. Nevertheless, because it's a good mix of businesses, and there is underlying economic activity, clear in Asia, we're still doing well. So I think bottom line, in terms of second quarter versus first quarter, our income will be slightly lower. But in terms of second quarter versus second quarter last year in FM, we expect to be higher. And that's a really good outcome because remember, the second quarter last year, we had $100 million of own credit adjustments, which is not going to be repeated. So in other words, real momentum in the FM business continues to be very strong. Wealth Management?

Yes.

So with Wealth Management, again, a bit of context. First quarter '21 was really strong because the interest rate hiking cycle hadn't made much progress by then sentiment wasn't muted. Obviously, as rates continue to go up, second quarter, third quarter, fourth quarter were weaker. That was also impacted by COVID because with lockdowns in many markets, customers can actually do Wealth Management transactions at least the more lucrative ones. Now coming into this year, you have all our markets opening up, lockdowns disappearing, probably slight improvement in sentiment. And therefore, the first quarter this year was strong, although not as good as the year ago. Where we've ended up is that we have had 5 successive quarters where our Wealth Management income has declined year-on-year. But because we are in recovery mode, that is now starting to change. So second quarter this year should be better than second quarter last year, and we expect that recovery to continue through the rest of the year. Some of that -- and again, sorry, I labor this point a little bit, but I think it's worth emphasizing, some of that is just sentiment and a natural recovery and because COVID restrictions have ended. Some of it is because of the rate at which we are growing our priority customer base in the CPBB business at the moment. So first quarter this year, new customers for priority were nearly 2.5x what they used to be pre COVID in the first quarter. That's the kind of increase we've had. In terms of domestic customers, they're up 60% year-on-year in terms of new onboardings. But in terms of cross-border, they're up more than 4 times and that is effectively pent-up demand in China. Chinese people -- Mainland Chinese people being able to travel outside their borders, so opening accounts with us in Hong Kong to a lesser extent in Singapore. It's not just China, though, because in Singapore, we are seeing travelers coming in from Indonesia, Malaysia, Thailand and opening accounts there. Now it takes about 6 months for these accounts to be fully funded and people to start doing Wealth Management transactions. So the uptick we saw in February and March, it will translate into P&L third quarter this year. And the momentum I talked about has continued. So it's not at the 2.5x level compared to normal periods, but it is still at elevated levels and we think it will continue at elevated levels for quite a long time. So sorry, the point of laboring with this was the following. You will get changes in sentiment and you will therefore have movements in how much Wealth Management income we earn. But this stuff I talked about, the fact that we are adding new priority customers at such a high rate consistently, and we believe we will continue doing so for a while, means we end up with a bigger, better franchise and kind of medium to long term, that's what's going to power our Wealth Management business. So if you recall, pre-COVID, over a 10-year period, we've had an 8% to 9% CAGR for Wealth Management. Obviously, during COVID it's tapered off. Because of this growth we are getting in our client base, we are confident we can get back to that 8% to 9% CAGR track again.

Very, very clear. Let's move to net interest income. Obviously, strong progression for the group in terms of NIM in 1Q, but also in the previous quarter on the back of the rate hike cycle. I was just wondering what shall we expect in terms of NIM progression from here and then broad NII progression, I guess?

Okay. So in the first quarter, our NIM was 163 basis points. For the full year, we've said we expect to be at 170. And then next year, we expect to be at 175 and we kind of go into why you get that uptick. But basically, what we are seeing in the second quarter, Martin, is a slightly improved NIM compared to the first quarter and it consists of 2 or 3 sort of slightly different factors. Firstly, in our footprint, some interest rates are now higher than they were 3 months ago and some more assets have repriced at higher rates. So we're getting a NIM tailwind because of those factors. Then you've got the interest rate hedges, which are clearly and we've been public about this, they're a headwind. But within that, 60% of the short-term hedges actually rolled off in February. So this quarter, we are getting a full quarter's effect, which is again a bit of a tailwind. So all in all, second quarter more or less as we had forecast, better than the first quarter. And as we go through the rest of the year, for the sorts of reasons I've talked about, we expect the NIM to continue improving, which is how we get to 170 basis points this year. Obviously, the rate of improvement will slow down. Then what happens is that by the end of this year, all of our other short-term hedges mature and therefore, that headwind disappears, and that's one reason why we get a further NIM pickup as we go into next year. So that's why 170 basis points this year, 175 next year.

Great. Turning to expenses. Obviously, 1Q expenses were up 10%. And I was just wondering what you see in terms of cost growth going forward. So also being bearing in mind, obviously, the inflationary environment, which in Asia seems more benign than some of the developed markets.

Yes, I think that's absolutely right. So if we start with the inflationary environment, I mean, you guys are obviously familiar with what inflation levels are in the U.K. and so on. What do we see in Asia? Singapore, for example, we've seen a 5% at the moment, which is materially down from what it was 6 or 8 months ago. Korea, which is a year ago was 6.5%, 7%, is down to 3.5% now. If you look at Hong Kong and China, they are 2.3%, 2.4%. If you look at Taiwan, it's 1% plus. So yes, you're right, inflation generally in our footprint is lower than it is in the West. In terms of though what we are seeing in the second quarter, cost drivers are more or less what they were in the first quarter. The only difference you have in the second quarter is that in April, our annual pay rises kick in. And therefore, the second quarter, we expect to be higher than the first quarter because of those pay rises. For the full year, though, Martin, we have, I think, reiterated our guidance. So effectively, 9% income growth which implies -- if there are 3% jaws, it implies 7% gross growth. We don't see any reason at the moment to revise that in any way. So we're sticking with that. Our businesses, as you know, have publicly pronounced cost reduction targets, we've said we would take $1.3 billion of gross costs down over a 3-year period. We're on track to do that. So yes, 7% cost growth for the year.

Great. Great. Let's move to liquidity and just deposit funding and within that -- composition within deposit funding. And I was just wondering in terms of what you have seen recently. Obviously, a big focus on CASA, 2x deposit migration. What have you seen in the larger markets? And has most of this kind of migration, you would normally see in a rate hike cycle occurred by now?

Okay. So 2 to 3 questions there. Okay. First, in terms of total deposits, obviously, a very, very strong position at the end of the first quarter that hasn't changed. So at the end of the second quarter, we will have a very strong deposit position. We will have a very high LCR. And again, I think the earnings announcement a couple of months ago, Andy and Bill were very clear that for a while, they wanted to maintain that just for explicit signaling to the market. Okay. In terms of what's happening to the deposit base, sort of time deposit migration and so on. Let's start with the CCIB business, so transaction banking, CASA. So our experience is pre-COVID the CASA ratio used to be 60% of the total. So the rest was time deposits within CCIB. Then you had this flood of liquidity entering the markets because of what Central Banks did during COVID. And so that ratio went up to about 67% or 68%. Since then, because of the rate hikes, it's normalized. So at the end of quarter 1, it was about 59% or 60%. It continues to be around that level. One of the differences, just to be aware of, is in this part of the world and in the U.S., it's very common for companies and for individuals to use money market funds. In most of our footprint, you don't have that. And therefore, some of the deposit migration trends tend to be different. Okay. So that was CCIB. If you look at CPBB, the retail business, again, we probably started at 66%, 67% CASA ratio, pre-COVID, same thing, massive liquidity injections during COVID low interest rates. So that ratio went up to 83%. By last year and it had come down to 63%. So we've seen 20% migration during the year. First quarter this year, it was 60%. So that migration has now slowed and that's basically what we expected. So for retail CASA, I think we've said we expect to be between 55% and 65% this year and next year. We are currently at 60%. So I think what's happening is in line with our guidance. For CCIB, we had said again, 55% to 65%. We're currently at 59% to 60%. So again, what's happening is in line with our guidance. So we're not seeing anything in the market that's contrary to what we expect.

Is that also the case for deposit beta in terms of what you have seen and how you're thinking about them going forward?

Yes, yes, absolutely. So if you look at our sort of top CPBB markets, the top 4 markets, for example, the average beta since the start of the rate hiking cycle is about 37%. And we've guided to 30% to 45%. On the CCIB side, we are at 61% since the hiking cycle started, and we'd actually guided to 60% to 80%. So at the moment, we're generally doing slightly better than we had forecast.

Let's move to asset quality. And I mean, asset quality and credit outlook in Asia generally, seems to be largely benign despite a much higher rate environment. I was just wondering how do you see asset quality in particular obviously was relevant for Standard Chartered, China Commercial Real Estate, Pakistan and Sri Lanka.

Yes, yes, absolutely. So look, you're right, it does generally seem benign, obviously, because interest rates have been high for a while. And may remain elevated for a while. As you can imagine, we're doing a lot of what ifs and stress tests and so on to see whether there are any weak spots anywhere that we need to guard against. But at the moment, we are not seeing anything that particularly concerns us. In terms of China Real Estate, we've taken $850 million, $860 million of provisions so far. Within that, there's $170 million general overlay the rest is specific. We have a $3.4 billion China Real Estate portfolio. Of that, $1.1 billion is non-performing. That is covered 81% to 82% between provisions and collateral. So I think we are -- we're adequately provided against that. In terms of the performing portfolio, which is roughly $2.3 billion, we've got $170 million-ish overlay sort of provide us a bit of a buffer. In terms of what's happening in the market, things have broadly stopped getting worse. So the Chinese government put in a lot of support measures for property companies, which means that their situation is now not getting worse. It is, however, not getting materially better either. And we think it will only start to get better when people in China actually start buying property again. That hasn't happened yet, that will probably take a while. It's only when they start buying properties again that the property companies become healthier on a sustained basis. We think we are at least 12 months away from that happening. So things not getting worse, but in terms of potential write-backs and so on, we are some way away from that. In terms of sovereign risk, you talked about the countries. So Pakistan, Sri Lanka, Ghana, we've taken $280 million of provisions against those. You remember though, Martin, that at quarter 1, we actually wrote some back for Sri Lanka and Ghana because they both completed their IMF agreements Pakistan hasn't defaulted yet. We have significantly reduced the balance sheet there. So in case there is a default, the capital and ECL impact is actually very, very manageable, not material. The one thing I would say for all of these 3 is the following. Given the sort of markets we're in, we have great opportunities, but we obviously also sometimes have quite high risks. So we have to watch things closely. So what we've done in all these 3 cases is, we actually realized quite early on the things we're getting stressed. And therefore, we started cutting our exposure and we started cutting our balance sheet. So since the start of '21 until first quarter this year, we cut our exposures in these 3 markets by 55%. So it's not merely that you sit there and watch as things get worse, we actually reduce our exposure so that if nonperformance happens, the consequences are very, very manageable.

Great. Let's move to capital. And first, maybe a regulatory framework. Obviously, the fragility in the system in the U.S. and parts of Europe. I was just wondering; would you expect any changes to the regulatory framework or any thoughts?

Okay. So look at a couple of things. Firstly, on balance, regulators acted quite decisively and quite quickly in both instances. And that clearly -- whatever else may have happened, that clearly avoided the risk of a global contagion. So that's a really good thing. And regulators acting very quickly and decisively going forward will be needed and will continue to be a good thing. In terms of where regulators will end up with their thinking and changes and measures and so on and so forth, your guess is as good as mine. I just say 2 things. The first one, what the events show is that regulation for different tiers of banks should probably be harmonized. Some of the problems that happen may not have happened in the way they did if that had been the case. Also, regulation between banks and nonbank financial entities needs to be harmonized. So that's the first thing. The second thing, and this is something that Bill Winters has said a number of times as well. One of the things that can be done to really instill confidence in the market, is if there is clarity on how much liquidity a Central Bank will be able to provide against the good quality assets that a bank has got. At the moment, banks don't have that clarity, the market doesn't have that clarity. But for example, if you knew that in any kind of stress, a bank could pledge 70% or 80% of its assets to the Central Bank with their 20% or 30% haircut. So in other words, a massive injection of liquidity without any stigma at all, I think that would be hugely helpful in calming nerves and avoiding a panic. And of course, if there are good quality assets being taken on at a haircut, then it is not a cost to the Central Bank or the taxpayer either. So I think it would be really good if we could move in that direction.

Great. Let's move to capital return. Obviously, capital return has been a key focus for the group. And I was just wondering given your own grow markets, how do you balance the decision between returning capital versus the decision to reinvest, in particular, obviously, the return and profitability of the group is heading towards 10% and above imminently from your targets. And also the capital distribution targets by '24 look eminently doable. How do you think about these 2 kind of opposing goals in terms of growth and capital return?

Okay. So I'm glad you said the targets look imminently doable because we've said $5 billion of returns over 3 years. We're at $2.8 billion, given the $1 billion we announced some time ago, the buyback that's in progress. So yes, it is imminently doable. It's been brought about by 2 things, right? It's been brought about by the fact that we've managed our RWA very, very frugally. So there's been $26 billion of RWA optimization since the beginning of last year. That's been one element and the other element has just been increased profitability. Those 2 areas of focus will continue. And therefore, we think that we will continue to accrete a lot of capital. Now in terms of how we make our decisions around what we do with that capital, I guess there are 3 clear candidates. Do we return it to shareholders? Do we invest it organically? Do we invest it inorganically? I've talked about earlier in the conversation about the opportunities in Asia and how wonderful those opportunities they are and how long term they are. And clearly, we would want to inject some capital into sort of monetizing those opportunities. But remember that by their very nature, they tend to be relatively capital light. When you're looking at this business across corridors in CCIB, it generally tends to be FM. It tends to be transaction banking and so on. Very little of it is capital-intensive lending. Similarly, if you look at the CPBB space, the priority customers I was talking about. What are you doing with them? You're doing Wealth Management and you're taking deposits. You're not generally lending the money. So I think just because of the nature of the opportunity that's available to us, Martin, and because of where we are positioned, we can actually achieve quite strong growth in these markets without using up too much capital. We clearly will use some, but not enormous amounts of capital. And therefore, I think kind of a paradigm where we continue to accrete capital and continue to have reasonable distributions to shareholders that will continue. But obviously, at every stage when we make this decision. And as we go through this year, it will be the dynamic you compare the sort of impact of returning to shareholders versus investing yourself versus inorganically.

Great. Somewhat related to that is obviously the potential disposal of the aviation book. And I think there have been some headlines on the news recently. I was just wondering what will happen with the capital freed up from that disposal lift if there's any initial thought.

Okay. So we almost go back to the previous question that you asked. So just again, as a reminder, we are looking at freeing up roughly 1% of the group's RWA is roughly $2.5 billion RWA, which clearly corresponds to a capital number. And to the extent there's a profit on that sale, that will be more capital. That will go into our sort of capital return dynamic. Now I would say that when we did our planning for how much capital we'd be returning to shareholders over this period, some of this was already factored in. But as I said earlier, we will go at it quarter-by-quarter. What's our capital position, what are the capital requirements over the next few months, how much turbulence do we need to keep the buffer against and then we make a decision about when we return.

Great. Final question from my side is on your 2 digital banks. During the Investor seminar you showcased both Central Banks, Mox in Hong Kong and Trust in Singapore. I was just wondering if you could just speak a bit more broadly about the digital approaches and then obviously in term of folks in terms of P&L contribution going forward dynamics.

Okay. I'll do the best I can, although both of these banks are relatively nascent. So yes, so Mox is our digital bank in Hong Kong. Trust is the digital bank in Singapore. So let's start with Mox. We're hoping to break even in 2024. And then after that, to significantly improve profitability and ROTE. Why is that? So in Hong Kong, we have roughly 450,000 customers in Mox. There are 8 digital banks. Mox is the largest in terms of customer assets. It's the second largest in terms of customer deposits. Levels of customer engagement are very high. So on average, our customers use 3.2 products and services with us, 1/3 of our customers use more than 4. And if you're a digital bank, 4 is kind of the indicator that you've become someone's main operating bank. So that applies to 1/3 of the customers. The demographic is also very interesting. We bank 1 in 5 of all under 30s in Hong Kong. In terms of how much our products are used as an example of credit cards. On average, our customers use our credit card 15 times a month. So usage is really good. Now turning to the cost and income dynamics, you effectively have a really efficient tech stack. What that means is that your cost of onboarding is very low, but more critically, your cost of ongoing customer maintenance is vanishingly small. So what's happened over the last year, Martin is, in Mox, our cost has remained flat, our income has grown 8x or switch it around differently on an annualized basis during the last year, our cost to serve per customer has fallen by a factor of 4. Our income per customer has risen by a factor of 4 and again, that's because you get this wonderful operating leverage because having effectively a fixed cost base. So as we onboard more customers, we deepen our relationship with them. We're very confident next year we'll break even. And once that happened, any other customer activity we do falls pretty much straight to the bottom line, so operating profit and ROTE. So that's why we have the confidence that once we've broken even get to really good returns of -- on tangible equity. Trust in Singapore is slightly more nascent. We only started it in September. So we -- it's not really meaningful to talk about cost and income trends. Although structurally, it will be very similar to Mox. But look, since September, we've onboarded 500,000 customers, that's 1/10 of the population of Singapore in just that short period. And again, in terms of customer engagement levels, very, very high. 83% of our customers use our credit card. When they do, they use it 15 times a month. Our app has a rating of 4.8 on the App Store. So it's, I think, the joint highest-rated digital banking app in Asia, along with the Mox app, actually. So again, in terms of customer penetration and the early indications we are doing really well. In terms of operating leverage, you'll have the same dynamic as I described with Mox. So I think we are very confident in terms of rapid improvement. Can I just mention one other because there are these 2 experiments that we are doing with Mox and Trust and it will be interesting to see which other markets we can port these 2. But there's another kind of experiment we are doing in Indonesia. So remember, Indonesia is quite a difficult market to tackle through traditional means, right? It's 17,000 islands, it's 270 million people. So our approach is we have developed a banking -- sort of banking platform that can be plugged in to an existing commercial platform. So there's this entity called Bukalapak in Malaysia. People buy and sell things on the entity. You have 2 million vendors; you have 110 million buyers. And these are staggering numbers, right? So on that commercial platform, we've plugged our banking app and we effectively provide banking services. If you are using that platform, it's much easier for you to make payments, get receipts, borrow money if you're using our banking functionality, right? We started this very, very recently. We've only launched 1 or 2 products so far through this platform. We have 200-odd thousand customers. It's growing very rapidly. Again, because it's all digital, it costs $1.47 to onboard a customer, right? Given there are 110 million people on this platform, just what is possible for us, you can just imagine. And once this is really working in Indonesia, you then have the interesting question of which are the other populous Asian markets that you can port it to? And obviously, doing it a second time would be much, much quicker and more efficient than it was doing in the first time. So there are a number of these quite interesting digital experiments. We are sort of going through in various parts of Asia. And depending on how they work, we learn from them, we port them to other markets. We can do it much more cheaply. We can do it much more quickly. Really exciting space.

Great. Great. Saleem, thank you very much. We have almost run out of time. I think we can make time for one question, if there is one from the audience. But otherwise, if there's no questions, Saleem, thank you very much again for making time and speaking to investors.

Thank you, Martin. Real pleasure.

Thank you.