Standard Chartered PLC (STAN) Earnings Call Transcript & Summary

I mean the things that we're looking at quite carefully are, of course, the outright expense level. We've guided to a 57% cost-income ratio, which was part of a steady improvement in that cost/income ratio over time. That, of course, will require us to maintain consistently positive jaws in order to achieve that. That all feels achievable. So the AI dynamic is really interesting. On the one hand, I'd say most of the investment capital from our bank and others that's gone into the AI space has been productivity related. It started with code completion and coding tools, which I won't say it's a no-brainer, but it's pretty straightforward to reduce the number of coders that you have and allow the coders to focus on value-added work, which is -- by the way, the number of coders we have has increased, not decreased because we're building stuff. But clearly, they're doing less of the mundane, kind of, entry-level coding work. At the other end of the spectrum, are the revenue opportunities, probably the most obvious for us is deploying agentic AI capabilities into our wealth platform and doing that in a way that is highly supportive of our relationship managers rather than displacing our relationship managers. That's what our customers want. They want the human interface, but they want to know that they've got the best tools that AI allows, directly supporting them in terms of research and things, but through their RM where it require some interpretation or a stamp of trust. And those are the areas where we have focused most of ourselves. But as I mentioned in May and as Noel, our Head of Technology and Tanuj mentioned in their full presentation in May, we've spent the past several years building our foundation layer to be fit for purpose in the AI world. And some of that was, call it, ordinary course foundation building, but very few people have done it. We have a single core banking system across -- which is cloud-based and proprietary -- across all of our markets, we have 3 to go, which is Korea, Taiwan and Thailand. But we had completed Hong Kong at the time that we met in May and 50 other markets. So we've had no incident in any of those migrations. That and having for 2/3 of the world, our data centers in the East, we have a state-of-the-art set of data center capabilities in our case between Hong Kong and Singapore that enables the quick and safe and maybe I really underscore the safe introduction of AI tools onto a platform that is built for that environment. We'll complete the West, which is our U.K. data centers over the course of the next 12 months or 18 months or so. At that point, we'll have a really, really strong underlying infrastructure. The other thing we did though was we backed away from the 50 or 60 different use cases being developed by businesses and functions and AI into building a single AI platform. So our Service Bench, our foundation layer. We slowed things down a couple of years ago, but then came full speed at the -- towards the middle of last year. We've added, I think, 500 applications onto that AI factory in the meantime. Some of them are exactly the, kind of, code completion, technology enhancement, system testing, controls testing, financial crime compliance monitoring, et cetera, et cetera. Some are revenue enhancing, algorithmic trading enhancements, market signaling distillation. The -- I mentioned the agentic AI in the context of wealth advice. So things are accelerating. It's very exciting. Does it contribute to our cost and cost income targets? Absolutely. But there's something else going on at the same time, which is the flip side of the AI opportunities are the AI threats. Cybersecurity concerns are enormous right now. These concerns have not penetrated the banking -- we've not seen evidence of attacks on the banking sector as yet, typically because banks are the hardest to penetrate because we've invested billions of dollars to have the protections in place to prevent exactly the kind of attacks that would come in through these vulnerabilities that are being identified. But as we know, if OpenAI itself can be penetrated, if Microsoft itself can be penetrated, eventually with enough time and effort, they'll be able to penetrate a bank at some level. Our response to that, of course, is to have the AI tools ourselves. We get the question all the time, "Are you in Glasswing?", which is obviously the Anthropic Mythos test case. We are in Mythos. We are -- we have access to Mythos. We got it late, later than the Americans, but together with others outside of the U.S. But what we found is that 97%, 98% of the vulnerabilities that we and others can identify in Mythos, we had already found using other frontier models that weren't as advanced, but were advanced enough to spot these vulnerabilities. But we also see Microsoft came out a couple of weeks ago with 969 new vulnerabilities. Many of those will attach to us as they attach to anybody using Microsoft Office or Azure and just to pick a couple. And they had patches for 960, 30, they didn't. Are we going to get better at spotting these things ourselves so that we don't have to hear it from Microsoft? And when I say we, I mean the industry because I'm not aware that anybody had either identified or exploited these vulnerabilities before they were identified by Microsoft. But we don't know. We don't know. So definitely stepping up our spend on cyber in order to protect against a much more substantial threat.

That makes sense. Speaking of threats, et cetera. So I might take the opportunity to ask you about some of the headlines today on AML. Would you like to make a comment on that?

Sure. Yes. I mean for those of you that have read the Financial Times, the first you'll keep in mind, it's the Financial Times, and you read that whatever you want. But the -- they did some -- actually quite good investigative work. I think somebody did a data dump. So somebody leaked some documents from some investigation about a money laundering network out of Russia called A7. The headline was Standard Chartered and a few other banks were engaged somehow. We were victims or we transfer money for bad guys, which is true. Of course, we knew about this network. We identified the nodes in the network. We closed the accounts. We filed the suspicious activity reports, which no doubt helps the investigators to understand how this very sophisticated Russian money laundering network work. That's what we do. We do that all the time. We file tens -- hundreds of thousands of SARs, Suspicious Activity Reports. When we see something untowards and if we see enough of a pattern, we shut the account. This is maybe just a little bit of explanation the way things work in the financial crime space. If a party is sanctioned, we immediately are aware of that. We put it into our transaction monitoring systems. We have no transactions with sanctioned parties. It never happens, right? So if they're sanctioned, they -- somebody tries -- some sanctioned party tries to deal to us, it's blocked -- transactions ever initiated. For payments that we get through our correspondent banking network, and in these cases, I believe, are all correspondent banking situations. Our respondent bank, so it's the bank that uses us to effectively get to the some end client, they make the payment to us. We were the receiving bank in these cases. That process goes straight through. The payments are straight through process unless it's blocked because the sender is a sanctioned party. These are not sanctioned parties, right? These are respondent banks in China or elsewhere. We then review every transaction as it comes through to see if there's a pattern of payments or a pattern of beneficiaries that says to us, we should be concerned about this. If we're concerned, we file a SAR, like I say, hundreds of thousands of SARs. If we're not concerned, it goes straight through. Sometimes it requires quite an elaborate bit of data analysis to understand the patterns of money movement. Where was it coming from back in the chain? Where is it going to? Is the payment pattern unusual in some way? So it could take a day, it could take a month, it could take 6 months for us to determine enough of the fact pattern to warrant closing the account. In every one of the cases that were mentioned in the Financial Times, we've closed the account before it was ever public, before we ever had any word from investigators or OFSI or OFAC or the HKMA's financial crime surveillance authorities. So this is what we do. We did it in this case. Good for the FT who have uncovered this Russian money laundering. Why they put in the headline, "Standard Chartered, Citibank, DBS, HSBC are involved," go figure. Because you have to get to Paragraph 22 before you see where they say, well, and by the way, Standard Chartered exited all those relationships. And when they did exit, it seems that the money laundering ring circumvented someplace else, the UAE or something. Anyway, that's what we do. We're very, very happy. We're very proud of it actually. We have state-of-the-art systems. But money laundering is -- especially when you've got people who are determined to break the law, it's a tough one to catch in the first instance, but we do catch it.

That's great to hear. So capital then, we've gone through all the P&L lines. At the CMD, you've guided to a broadly even split between growth, dividends and buybacks. So starting with growth, where are you most actively deploying capital at the moment? And you've talked a lot about AI spend and resources that need to be spent on cybersecurity, et cetera. So how are you deploying that capital at the moment? And over time, how are you thinking about the balance between dividends and buybacks?

Yes. Well, I mean, there's capital and there's expense. So obviously, they're correlated, but they're not exactly the same. The expense is clearly going into our growth areas of all things cross-border and affluent. And so that's continuing to build out our FX capabilities, continuing to build out our transaction banking, with a particular focus on what's becoming quite a substantial area of activity around digital assets. As you know, we've been invested in that space for quite a while. And now we're seeing the real use cases come through in the institutional world, well beyond the crypto world. So that's -- these are areas of ongoing focus and expense accretion. In terms of capital, the -- as you mentioned before, we have seen some -- I would call it modest loan growth in a very attractive environment. More of that is showing up in our banking book than our -- sorry, in our trading book than our banking book. And more of that is transitory, i.e., they're underwriting positions rather than buy and hold. But frequently, we'll have an underwriting position where we retain a piece. So those opportunities, which are supporting the big growth in banking are interesting incremental areas to deploy capital. And of course, we're always weighing the trade-off between using capital for underlying business growth keeping in mind that the fastest-growing RWA area is actually operational risk for, kind of, all the obvious reasons. The business is growing, transaction volumes are growing. The threat environment is substantial. But we also have some loan growth, and we've had quite modest growth in markets despite the growth in the business. But we'll always look at any incremental growth of capital deployment against what we could do alternatively in terms of returning that to shareholders. Different calculation at 1.7x book than it was at 0.6x book. But nevertheless, we're very, very, very comfortable buying back our shares at this price because we think we've got quite a long way to go. So -- but it does cause us to think about how we balance buybacks versus dividends. We're 2.3% or 2.4% dividend yield right now, which we're fully aware is below the level that some income funds would be comfortable engaging. Obviously, we're at 2.4% because our share price has gone up, not because we've dropped the dividend. Would we think about how we balance that as we go through our dividend versus buyback versus organic growth? Yes, we'll consider all those things.

Of course. We've got about 10 minutes left, so I'll take the opportunity to ask the floor for questions. There's one over there.

Quick question with respect to the -- what's your thought or view around how the risk management landscape or transformation is happening to keep speed with the pace of AI adoption and digital capabilities?

I feel like I missed the operative word, what risk management?

Just your thought around how the risk management landscape is evolving, transforming...

Generally.

To keep up with the pace of AI adoption and digital capabilities.

Yes. Well, it's -- I don't think we've changed anything in terms of our orientation. I know when I speak to our CISO, Cyber Information Security Officer, probably every other day these days and whenever there's an event or a piece of news. And I mean, going back 2 years when the frontier models, it was becoming clear that this was a new threat or at least a new form of threat. His response to me was, "What part of this do you think we haven't been preparing for, for the past 5 years?" What part of segmenting our network, layering our defenses, monitoring network traffic, like, nothing's changed. The only thing that's changed is it's happening faster. The time between the identification of a vulnerability and the ability for a bad actor to exploit that has gone from 10 to 12 days to 10 to 12 minutes as a practical matter. So what we have to do to respond to that is to have AI tools that ideally are identifying the vulnerability before the bad guys do. But if we have no edge in identifying that, then we have to assume we're going to find it at about the same time as the bad guys do, which means that we immediately have to put a mitigating action in place. And we used to -- I remember when I first joined Standard Chartered, our internal SLA for addressing a high-risk vulnerability was 4 days. Now it's 4 minutes. So -- and if we don't have a patch for the vulnerability that's been identified, which typically is going to come from a vendor or Microsoft or somebody else, then we have to put some mitigants in place in terms of monitoring the network traffic. And we have to be prepared to pull the plug on that Internet-facing whatever it is, whatever the vulnerability is embedded in, we may just have to shut that channel down. If it's -- if we're shutting down some sort of internal data communication channel, it may not matter. If we're shutting down online banking to our customers in Hong Kong, it matters. So we obviously take that very seriously. But we'll shut down a channel. If we haven't built the resiliency to fail over to something else, which in some cases, that may be the case in some cases, then we'll put the mitigants in place to address that as best we can. So nothing has changed in the risk management framework, but, kind of, everything has changed in terms of the speed that we have to respond and address these issues.

Any more questions? Well, if not, maybe I can ask you a question, maybe just stepping back on the regulatory environment because obviously, we've seen some headlines on various Chinese authorities tightening. But if you look at things like the Hong Kong's new 5-year plan, the direction of travel regarding structural themes like RMB internationalization is still very much supported by the government. So maybe from your perspective, why do you think we are seeing a slight disconnect in some of these things?

Yes. I think you're right that the headlines are the headlines, and they came in waves. We saw the crackdown on the -- what would appear to be illegally operating Hong Kong-based securities companies that didn't have a license to operate in China, but were harvesting lots of money through third-party agents in the Mainland into their accounts in Hong Kong, right? Well, they were identified, sanctioned, fined. They're still there, but I'm sure they're much more careful about the way they go about their activity. We have a bank in Mainland China. The majority of the clients that opened up with us in Hong Kong or Singapore already have an account with us in Shenzhen or Beijing or Shanghai. So that's -- we've never done things the wrong way in terms of opening up accounts offshore China vis-a-vis the onshore authorities. So there was no change in our activity. There's no change in our protocols. And we actually saw a slight increase in the levels of activity. I think because clients were probably a little bit wary of going with some of these other companies. That's normalized subsequently normalized, but still at quite a high level. There's a crackdown on various offshore disclosure and tax issues, in particular, offshore trust. This to me is normal stuff in a maturing economy. And of course, China has the same fiscal pressures that everybody else. And they say, "Okay, we're perfectly willing" I don't know if they're happy or unhappy, but perfectly willing to have their citizens diversify their wealth holdings across a range of instruments. There are capital controls internally, currency controls internally. So if they're going to get diversification, it's going to be offshore. They clearly are comfortable with that trend. But they do want people to pay taxes on the things that they're obliged to pay taxes on. In some cases, the tax rules are unclear. They clarify them. In some cases, there was active avoidance, the trust structures in particular. No material impact on our business. We've never organized or oriented ourselves to tax avoidance or certainly not tax evasion. And our trust business is relatively small, and that trust business itself has a small proportion of Mainland Chinese customers. So no material impact for us. But when you string the things together, you think you could think, it looks like they're cracking down on offshore money. But at the same time, the instruments and tools that they're putting in place around the internationalization of the RMB, the substantial issuance of RMB-denominated bonds offshore China, typically in Hong Kong, the active promotion of payment platforms that will have the effect of encouraging the deployment of RMB and a diversity of -- diversification of other currencies offshore, that's all happening. So I think it'd be safe to say that we're not concerned at all. But of course, we have to watch because it's a -- China is gradually relaxing its capital controls. They're gradually relaxing their currency restrictions. They're gradually increasing the attractiveness of the RMB as an international currency of trade and investment. They're creating or allowing for a portfolio or collection of RMB instruments to be to be created offshore. Thankfully, these are all things that are right in our sweet spot. And I mean, dare I be mercantilist about it, too, we make a lot of money. As China opens up in this way, we are the primary -- we're the leading RMB bank in the world. And I'd say that's recognizing that there are other big banks that might make a similar claim. Every indication is that we are at the cutting edge of the internationalization of the RMB. You may ask, "Is that going to get you in trouble with the U.S.?" I think not because the way we're going about this business is highly responsibly. So when the EU or the U.K. or the U.S. imposes a sanction on some party that may have some Chinese connection, we impose that sanction. We filed the SARs. We engage. So I think we're seen as a force for good by all sides. And we're keeping in mind that the United States still buys a lot of product that has -- either comes directly or indirectly from China. And those trading relationships need to remain strong and strong enough that the two presidents are meeting together this week. So yes, overall, I would say, keep a watchful eye, but there's nothing that we're seeing that's concerning.

Okay. Any last-minute questions for Bill? If not, then we are almost out of time. So I -- oh, there is one.

Carlo Moccia from Bank of America. We've seen that in Europe, the ECB has recently launched its digital euro through the wholesale banking channel. Do you see any governments in the countries that you operate in following suit? And if so, is that a threat or an opportunity for you?

It's an opportunity, I think, everywhere. I think you know our view that the money will go digital one way or another faster or slower. And Europe and the U.K. have been pretty slow in terms of adoption. The U.K., as you know, is not adopting at a government level. The EU said, "We're only adopting at a government level." So it's been difficult for stablecoins to operate in the same way in the EU as they had elsewhere and -- or in some other markets. So I think the wholesale digital euro, it's good. It's extremely well designed. It's consistent with the regulatory format in Europe, MiCA. And there will be take up over time. But I think it will be sitting side-by-side with U.S. dollar stablecoins and perhaps other countries' digital currencies. China, of course, has had a central bank digital currency for some time. It's not actively used, but it is used on -- let's say, for example, on their mBridge platform, which is central bank to central bank. And they've got a new platform of which we are a pilot member as well that's bilateral, but still central bank to central bank. So I think central bank issued digital currencies have a place in the armory of tools that people will use to move money. I think we can assume that they'll be safe and well regulated. And we can also assume that they're not going to be as flexible or agile in terms of adapting to customer needs, which is why we will have privately issued stablecoins. We're issuing stablecoins in Hong Kong. And we're finding hundreds of use cases. And we just got the license 2 months ago. We're up and running now with the initial transactions, hundreds and hundreds of use cases in the crypto world, which is where stablecoins are native, but also in terms of cross-border trade, cross-border payments, treasury operations. So I'm very optimistic about there being a plethora of digital -- forms of digital money that will work for different people in different circumstances. Central bank digital currency has one place.

Great. And we're almost out of time now. Thank you very much, Bill, for joining us today.

Thank you for having me.