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116 Annual Report 2017 Strategic Report Directors’ Report Directors’ RISK REVIEW AND CAPITAL REVIEW Standard Chartered 116 Annual Report 2017 Strategic report Strategic Directors’ report Risk review and RISK REVIEW AND CAPITAL REVIEW Capital review SEEING IS BELIEVING 118 Risk index 120 Risk update Helping tackle 122 Risk profi le 160 Risk management approach avoidable blindness 183 Capital review Financial statements Financial Eleven-year-old Safi ra lives in Indonesia with her parents and family, and dreams of becoming a doctor. This dream was threatened, however, when cataracts started to affect her ability to participate in school. Access to treatment funded by Seeing is Believing (SiB) – our global initiative to tackle avoidable blindness and visual impairment – has restored Safi ra’s eyesight, and she now takes part in her lessons, and is able to ride her bike and play with her friends. Safi ra is one of thousands of children who have benefi ted from SiB’s focus on child eye health in 2017. “An estimated 19 million children information Supplementary worldwide are visually impaired, with 12 million simply requiring a pair of spectacles to correct their sight.” An estimated 19 million children worldwide are visually impaired, and of these, 12 million are simply suffering from refractive error and require a pair of spectacles to correct their sight. Seeing is Believing has committed 25 per cent of its $100 million fundraising target to treat childhood blindness and visual impairment. In 2017, SiB supported child eye health projects in Africa, China and Indonesia, and a project to reduce blindness caused by retinopathy of prematurity in India, in conjunction with the Queen Elizabeth Diamond Jubilee Trust. Donations collected from our 2017 One Hour campaign, where employees donated the equivalent of one hour of their salary to SiB programmes, was earmarked for child eye health projects and raised $347,000. 117 RISK REVIEW AND CAPITAL REVIEW Index Risk review and Capital review Annual Report Pillar 3 Risk index and Accounts Report Risk Update 120 Risk profi le Our risk profi le in 2017 122 Credit risk 123 23-75 Maximum exposure to credit risk 123 Credit quality analysis 125 ¼ Credit quality by client segment 126 ¼ Forborne loans 128 ¼ Credit quality by geographic region 130 ¼ Credit quality analysis by industry 131 Problem credit management and provisioning 133 ¼ Impairments 133 ¼ Non-performing loans by client segment 133 ¼ Non-performing loans by geographic region 135 ¼ Individual and portfolio impairment provision 136 ¼ Individually impaired loans by client segment 137 Credit risk mitigation 138 57-59 ¼ Collateral 138 ¼ Other credit risk mitigation 141 Other portfolio analysis 142 ¼ Maturity analysis by client segment 142 ¼ Industry and retail products analysis by geographic region 142 Selected portfolios 144 ¼ Debt securities and other eligible bills 144 ¼ Asset backed securities 145 72-75 Country risk 146 Market risk 147 76-81 Market risk changes 147 Mapping of market risk items to the balance sheet 149 Capital & Liquidity risk 150 Liquidity & Funding risk 150 Earnings sensitivity 157 Operational risk 158 Operational risk profi le 158 Operational risk events and losses 158 Top risks and emerging risks 159 Risk management approach Enterprise Risk Management Framework 160 Principal Risks 165 Principal Uncertainties 179 Capital Capital summary 183 11 ¼ Capital ratio 184 13 ¼ CRD IV Capital base 185 12 ¼ Movement in total capital 186 Risk weighted assets 187 13 UK Leverage ratio 189 20 Standard Chartered 118 Annual Report & Accounts 2017 Strategic report Strategic The following parts of the Risk review and Capital review form part of the fi nancial statements and are audited: ¼ From the start of the Risk profi le section (page 122) to the end of ‘Top risks and emerging risks’ in the same section (page 159), excluding: Risk section Page Asset backed securities 145 Country risk 146 Market risk changes – risks not in VaR 148 Market risk changes – backtesting 148 Directors’ report Mapping of market risk items to the balance sheet 149 Liquidity coverage ratio (LCR) 151 Stressed coverage 151 Net stable funding ratio (NSFR) 152 Liquidity pool 152 Encumbrance 153 Earnings sensitivity 157 Operational risk 158 ¼ From the start of Principal risks (page 165) to the end of ‘Capital and liquidity risk’ (page 172), excluding Country risk (page 168) RISK REVIEW AND CAPITAL REVIEW ¼ From the start of Capital Requirements Directive (CRD) IV Capital base (page 185) to the end of ‘Movement in total capital’ (page 186), excluding UK leverage ratios and risk-weighted assets (RWA) Financial statements Financial Supplementary information Supplementary 119 RISK REVIEW Risk update Risk update All risk types, both fi nancial and non-fi nancial are managed and reported in accordance with the Group’s risk management framework. 2017 saw good progress towards improving the resilience of the Group’s portfolios as shown here by the key highlights from the past year Key highlights 2017 The credit quality of the corporate portfolio having less than one year until maturity (2016: has improved in 2017, evidenced by an 70 per cent). We are also collateralised for ¼ Increased granularity and scope of risk increase in the percentage of exposure to over half of the long-term sub-investment appetite metrics investment grade clients within the total grade exposure that we carry. The Group corporate book to 57 per cent (2016: holds a diverse mix of collateral with ¼ Improved credit quality of the Group’s loan 56 per cent). We have continued to manage conservative valuations. book, with continued focus on good down our liquidation portfolio assertively from Retail and Private Banking represents quality origination $3.9 billion in 2016 to $2.2 billion at the end of 41 per cent of total customer loans and 2017, which corresponds to a reduction in ¼ Total loan impairment is down by advances, a similar proportion to the end RWA of $3.0 billion. Additionally, exposures $1.4 billion in the year, a considerable of 2016. Given the focus on mortgage and on early alert reduced to $8.7 billion (2016: decrease from the elevated levels seen in wealth management products, 84 per cent $12.9 billion) driven in the main by exposures 2015 and 2016 of the book is fully secured, and the overall being regularised. We remain vigilant against loan-to-value of the mortgage portfolio ¼ The loan book is increasingly diversifi ed potential idiosyncratic and systemic threats, decreased to 47 per cent. The Retail Banking and predominantly short tenor and continue to perform regular reviews and segment continues to have little exposure stress tests of our portfolio to help mitigate ¼ Our capital and liquidity metrics remain outside its core markets. strong any risks that might arise. The Group has maintained a strong liquidity The Group remains well diversifi ed across position in 2017, although the advances-to- industry sectors, products and geographies. deposits ratio increased slightly to 69 per cent Loans to fi nancing, insurance and non-bank An update on our portfolio (2016: 68 per cent). We continue to focus on fi nancial counterparties remain the largest quality attracting a diverse funding base that spans sector concentration within the Corporate & different tenors and customer types, and Today the Group has a more clearly defi ned Institutional Banking and Commercial overall the Group remains a net provider of risk appetite, a strong liquidity position and Banking portfolios, at 27 per cent of our funding to the interbank markets. remains well capitalised. The Group has loans and advances to customers, mostly taken steps to improve its risk management to investment-grade institutions. All other Global fi nancial markets experienced low approach in part by implementing more industry concentrations are at or below volatility and average Group VaR was granular risk appetite limits and by 13 per cent. Net exposure to our top 20 19 per cent lower than the previous year at embedding ownership of risk in the front line. corporate clients as a percentage of Tier 1 $26 million (2016: $32 million), with trading The Group has targeted growth in certain capital has reduced to 50 per cent in 2017, activities remaining client driven. The largest sectors and geographies, continues to have down from 55 per cent at the end of 2016. operational risk loss recognised as at a focus on good quality origination, and has 31 December 2017 relates to the Group’s Our Corporate & Institutional Banking and actively reduced exposure to selected $17.2 million settlement of a US class Commercial Banking loan portfolios remain sectors and clients. action brought against a number of predominantly short tenor with 70 per cent banks concerning foreign exchange of loans and advances to customers benchmark rates. Key Indicators 31.12.17 31.12.16 31.12.15 Group total business Gross NPLs ($ billion) 8.7 9.7 12.8 Group ongoing business Credit grade 12 ($ billion) 1.5 1.5 0.9 Gross NPLs ($ billion) 6.5 5.9 5.2 Cover ratio 63% 69% 62% Cover ratio (including collateral) 79% 74% 71% Corporate & Institutional Banking and Commercial Banking Investment grade corporate exposures as a percentage of total corporate exposures 57% 56% 46% Loans and advances maturing in one year or less as a percentage of total loans and advances to customers 70% 70% 67% Early alert portfolio ($ billion) 8.7 12.9 12.3 Aggregate Top 20 corporate exposures as a percentage of Tier 1 capital 50% 55% 61% Collateralisation of sub-investment grade exposures maturing in more than 1 year 55% 55% 59% Retail Banking Loan-to-value ratio of retail mortgages 47% 49% 49% Standard Chartered 120 Annual Report 2017 An update on non-performing Institutional Banking ongoing business under stress such as the commodities- report Strategic loans (NPLs) decreased to 56 per cent (2016: 62 per cent) related sectors and the Diamond & Jewellery and after collateral increased to 74 per cent sector.
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