Standard Chartered PLC (Holding Co.); Standard Chartered Bank (Lead Bank) Primary Credit Analyst: Fern Wang, CFA, Hong Kong (852) 2533-3536; [email protected] Secondary Contacts: Nigel Greenwood, London + 442071761066; [email protected] Shinoy Varghese, Hong Kong + 912233428445; [email protected] Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 17, 2021 1 Standard Chartered PLC (Holding Co.); Standard Chartered Bank (Lead Bank) Major Rating Factors Issuer Credit Rating BBB+/Stable/A-2 Strengths: Weaknesses: • Strong funding and liquidity profile. • COVID-19, low interest rates, and trade conflicts create could pressure credit cost and dampen • Established franchises in Asia, Africa, and the earnings. Middle East, with strong international links. • U.S.-China tensions could pose uncertainty for its • Stronger risk management and streamlining business core business markets, Hong Kong and China. lines could provide some cushion for downside risks. • Presence in emerging markets increases complexity of operations and can lead to greater volatility in earnings. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 17, 2021 2 Standard Chartered PLC (Holding Co.); Standard Chartered Bank (Lead Bank) Outlook Standard Chartered PLC The stable outlook on Standard Chartered PLC (SC PLC) reflects our expectation that the bank can navigate through a difficult market environment overshadowed by COVID-19, low interest rates, and trade conflicts. This, in our view, is due to group's focus since 2015 on cleaning up its balance sheet and strengthening its risk management. Our assessment is also underpinned by SC PLC's strong and stable deposit base, which benefits from flight to quality in times of market stress. This was evident in March 2020 amid a liquidity crunch in markets. The group's capital is marginally strong, in our view, but we consider this factor in conjunction with the bank's overall risk management capabilities. We expect the group to maintain asset quality and credit losses that are broadly comparable to its peers that are global systematically important banks (G-SIB). Downside scenario: We could lower the rating if: (1) the Standard Chartered group's capitalization deteriorates such that the group's risk-adjusted capital (RAC) ratio moves below 10% for a sustainable period and its asset quality weakens significantly against its geographically diverse G-SIB peers; or (2) the group's funding or liquidity profile weakens. Upside scenario: We believe an upgrade is unlikely over the next 24 months. We could raise the rating if: (1) the group demonstrates an ability to deliver sustainable profit at a level comparable to that of its higher-rated peers; (2) the group's RAC ratio improves significantly beyond our current projection of about 10%, leading us to conclude that the group's capitalization provides a significant buffer against possible future losses; and (3) the group maintains satisfactory asset quality in line with its peers. Standard Chartered Bank The stable outlook on Standard Chartered Bank (SCB) reflects our view that the Standard Chartered group will maintain its group credit profile over the next 12-24 months. This is based on our expectation that the group will maintain satisfactory asset quality in line with other geographically diverse G-SIBs and the group will not experience material decline in its risk-adjusted capital (RAC) over the next two years. The stable outlook also reflects our view that the group is unlikely to: (1) accumulate substantial additional loss-absorbing capacity (ALAC) that warrants a second notch of ALAC support; and (2) sustainably improve its profitability over the next 12-24 months to make its creditworthiness more clearly in line with that of peers we rate 'A+'. Downside scenario: We would lower the ratings on SCB if the downside risks we envisage for Standard Chartered PLC materialize. However, the potential for a downgrade would be limited if the group accumulates 8.5% ALAC on a sustainable basis at such time. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 17, 2021 3 Standard Chartered PLC (Holding Co.); Standard Chartered Bank (Lead Bank) Upside scenario: We believe an upgrade is unlikely over the next 24 months. We could raise the rating on SCB if the group: (1) demonstrates a business model that is diverse and well positioned for the changed regulatory and economic environment; and (2) accumulates over 8.5% ALAC on a sustainable basis. This would likely be exemplified in the situation where the group has much improved and stable earnings such that its credit strength is comparable to that of 'A+' rated peers. Rationale The rating reflects our expectation that the Standard Chartered group's increased focus in the past few years on risk-adjusted returns, asset quality, concentration risk, and careful selection of target markets could help the bank to navigate a very difficult operating environment overshadowed by COVID-19, low interest rates, and trade conflicts. Our assessment is also underpinned by the group's strong and stable deposit base, which benefits from flight to quality in times of market stress, particularly in Hong Kong and Singapore. This was evident in March this year when there was a U.S. dollar liquidity crunch. The group's capitalization is marginally strong, in our view, but we consider this factor in conjunction with the bank's risk management capabilities, and we expect the bank to maintain asset quality that is comparable to other G-SIB peers. The completion of Permata sale in May 2020 will improve its capital position although we expect asset quality deterioration would offset the benefits from the sale. While uncertainties remain with resurgence in COVID-19 cases in Europe, the U.S., and elsewhere, the pandemic is under better control in Greater China and North Asia (GCNA) region, which is a main revenue contributor of the group. Also, despite short-term economic uncertainty, we still see the GCNA region as the long-term growth engine for the Standard Chartered group. The group is likely to benefit from China's opening of its financial markets and the country's strong long-term economic prospects. We rate one of the group's key subsidiaries, Standard Chartered Bank (Hong Kong) Ltd. (SCBHK), one notch above SCB. This reflects SCBHK's strong credit characteristics (SCBHK's sub-group stand-alone credit profile [SACP] is 'a') and the potential for extraordinary government support from Hong Kong. This support also benefits SCBHK's rated subsidiaries, following a restructuring that put the group's Korea, Taiwan, and China subsidiaries under SCBHK in 2019. We believe this streamlining move makes more efficient use of capital and liquidity, and may deliver some benefits to net interest income by 2021. The benefits from the restructuring could slightly alleviate the hit to the group's profitability from historically low interest rates. Anchor:'bbb+' based on the weighted average of SCB's presence in the countries where it operates SCB's anchor draws on our view of the economic and industry risks in the countries where the bank operates. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 17, 2021 4 Standard Chartered PLC (Holding Co.); Standard Chartered Bank (Lead Bank) The economic risk score of '4' is based on the weighted average of SCB's private-sector loans to nonbanks in each country it operates in. About 60% of these loans are to customers in Hong Kong, Singapore, Korea, Taiwan, and the U.S. These countries have low economic risk scores of '3'. About 15% of loans are to customers in the U.K. (economic risk score of '4') and the rest are mainly to customers in China, India, the United Arab Emirates, and various countries in the Middle East and Africa (with economic risk scores of 5 or higher). Of the key countries and regions listed above, we currently see a negative trend in the U.K., UAE, and U.S. The negative trends in these markets do not drag down the weighted-average economic risk score and in turn the anchor, given the economic trends in SCB's other key markets are stable. Our assessment on the industry risk score of '3' solely reflects the regulatory framework of the U.K., where SCB domiciles and the jurisdiction responsible for the regulation of the consolidated group. We view the U.K. banking industry risk trend as stable as we incorporate the strong institutional framework and robust funding profile. Table 1 Standard Chartered PLC--Key Figures --Year ended Dec. 31-- (Mil. $) 2020* 2019 2018 2017 2016 Adjusted assets 736,556.0 715,108.0 683,706.0 658,488.0 641,973.0 Customer loans (gross)§ 279,922.0 270,624.0 254,432.0 257,327.0 238,325.0 Adjusted common equity 36,664.0 37,089.0 36,480.0 39,028.0 37,207.0 Operating revenues 8,163.0 15,646.0 14,952.0 14,601.0 13,739.0 Noninterest expenses 4,734.0 10,707.0 11,647.0 10,417.0 10,211.0 Core earnings 1,328.0 2,373.7 1,023.1 1,449.7 (431.0) *Data as of June 30. §2018, 2019 & June 2020 adjusted for Monetary Authority of Singapore (MAS) placements, which we treat as central bank deposits. Business position: Solid presence in Asia, Middle East, and Africa We expect the Standard Chartered group to maintain an adequate business position relative to peers with a comparable geographical outreach and industry dynamics. Standard Chartered group has presence in 59 markets across six continents, covering four broad business lines of retail banking, corporate and institutional banking, commercial banking, and private banking. Standard Chartered group has a solid presence in Asia and the Middle East, and is among the few international banks that has a fairly good presence in Africa, alongside Citibank and Société Generale.