standard chartered bank...standard chartered bank (hong kong) (scbhk, a1 stable) will cease be a...

FINANCIAL INSTITUTIONS

CREDIT OPINION 27 March 2019

Update

Analyst Contacts

Srikanth Vadlamani +65.6398.8336 VP-Sr Credit Officer [email protected]

Alessandro Roccati +44.20.7772.1603 Senior Vice President [email protected]

Komaresan +65.6311.2602 Subramanian Associate Analyst [email protected]

Graeme Knowd +65.6311.2629 MD-Banking [email protected]

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Standard Chartered Bank Update following A2 senior unsecured ratings affirmation

Summary On 27 February 2019, following the proposed legal restructuring of the group, we affirmed the deposit, senior unsecured debt, and subordinated debt ratings of Standard Chartered Bank (SCB) at A1. At the same time, SCB's Baseline Credit Assessment was downgraded by one notch to baa2 from baa1.

We maintained the bank's adjusted BCA at baa1. The adjusted BCA of baa1 includes one notch of affiliate support from the group.

Post the restructing, Standard Chartered Bank(SCB) will be one of the two main operating subsidiaries of Standard Chartered PLC (SCPLC). SCPLC is the holding company as well as the listed entity of the Standard Chartered Group.

SCB’s A1 bank deposit rating incorporates a three-notch uplift from the bank's adjusted BCA of baa1. The three-notch uplift takes into account our Advanced Loss Given Failure (LGF) analysis. The ratings do not include any uplift for external support.

The downgrade of the BCA to baa2 from baa1 reflects the proposed restructuring, which will result in Standard Chartered Bank (Hong Kong) (SCBHK, A1 stable) ceasing to be a subsidiary of SCB as it will become fully owned by SCPLC. Currently SCBHK is jointly owned by SCB (51% ownership) and SCPLC (49%).

SCBHK’s credit profile is stronger than that of the overall group, and the change in ownership structure results in the standalone credit profile of SCB becoming weaker, which is the driver of the downgrade of SCB’s BCA. On a proforma basis, we estimate four of the five financial profile factors - asset quality, capital, profitability and funding – will be weaker at SCB than current metrics.

This document has been prepared for the use of Jeremy Lim and is protected by law. It may not be copied, transferred or disseminated unless authorized under a contract with Moody's or otherwise authorized in writing by Moody's.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1163325

https://www.moodys.com/credit-ratings/Standard-Chartered-Bank-credit-rating-714325



https://www.moodys.com/credit-ratings/Standard-Chartered-PLC-credit-rating-714350

https://www.moodys.com/credit-ratings/Standard-Chartered-Bank-Hong-Kong-Limited-credit-rating-600015127

mailto:[email protected]




MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 1

Rating Scorecard - Key financial ratios

SCB (BCA: baa2) Median baa2-rated banks

40%

3.9% 15.4% 0.0%

24.5% 45.2%

40%

35% 35%

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%

-5% -5% Asset Risk: Capital: Profitability: Funding Structure: Liquid Resources:

Problem Loans/ Tangible Common Net Income/ Market Funds/ Liquid Banking Gross Loans Equity/Risk-Weighted Tangible Assets Tangible Banking Assets/Tangible

Assets Assets Banking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

So

lve

ncy F

acto

rs L

iqu

idity

Fa

cto

rs

Source: Moody's Financial Metrics

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

27 March 2019 Standard Chartered Bank: Update following A2 senior unsecured ratings affirmation


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Credit strengths

» Healthy level of capital supported by low level capital consumption

» Retention of strong liquidity even after removal of Greater China and North Asia (GCNA) operations

Credit challenges

» Weak profitability, driven by high costs and weak revenue generation

» Asset quality will be structurally weaker after the removal of GCNA operations

Outlook SCB's and SCPLC's ratings carry a stable outlook, reflecting our view that the bank's credit fundamentals will remain robust over the next 12-18 months.

Factors that could lead to an upgrade The BCA could be raised if the bank's profitability were to significantly increase from current levels.

Factors that could lead to a downgrade SCB’s BCA could be downgraded if it’s asset quality were to materially deteriorate again. Moody’s could also downgrade the BCA if profitability falls to 2016 levels, without the prospect of a swift recovery.

A change in SCPLC's BCA would likely affect all the ratings assigned to SCB. In addition, Moody’s could downgrade SCB's deposit and senior debt ratings if the volume of junior instruments outstanding decreases significantly, reducing the amount of loss protection available to more senior instruments.

Key indicators

Exhibit 2

Standard Chartered Bank (Consolidated Financials) [1] 12-172 12-162 12-152 2014 2013 CAGR/Avg.3

Total Assets (GBP billion) 451 468 388 - - 7.74

Total Assets (EUR billion) 508 548 527 - - -1.84

Total Assets (USD billion) 610 578 572 - - 3.24

Tangible Common Equity (GBP billion) 32 33 25 - - 13.64

Tangible Common Equity (EUR billion) 36 39 34 - - 3.54

Tangible Common Equity (USD billion) 44 41 37 - - 8.84

Problem Loans / Gross Loans (%) 3.1 3.7 4.8 - - 3.95

Tangible Common Equity / Risk Weighted Assets (%) 15.4 15.2 12.3 - - 14.36

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 18.0 20.5 29.1 - - 22.55

Net Interest Margin (%) 1.5 1.4 1.7 - - 1.55

PPI / Average RWA (%) 1.5 1.2 1.3 - - 1.46

Net Income / Tangible Assets (%) 0.3 0.0 -0.3 - - 0.05

Cost / Income Ratio (%) 71.7 74.0 73.5 - - 73.15

Market Funds / Tangible Banking Assets (%) 24.5 25.9 23.7 - - 24.75

Liquid Banking Assets / Tangible Banking Assets (%) 45.2 46.0 45.9 - - 45.75

Gross Loans / Due to Customers (%) 77.7 76.6 75.3 - - 76.55

[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scale of reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented. Source: Moody's Financial Metrics



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Profile On 26 February 2019, Standard Chartered (the group) announced a plan to change the legal organization structure of the group. Based on the announced plan, Standard Chartered Bank (Hong Kong) (SCBHK, A1 stable) will cease be a subsidiary of SCB as it will become fully owned by SCPLC. Currently SCBHK is jointly owned by SCB (51% ownership) and SCPLC (49%). Further, the group's subsidiaries in Korea, China and Taiwan, which were hitherto held by SCB, will be held directly by SCBHK.

The management expects the reorganization will lead to better liquidity and capital management for the overall group by way of better leveraging its strong funding franchise in Hong Kong.

Exhibit 3

Proposed changes to corporate entity structure GCNA operations will be under SCBHK

1. Proposed hub entity structure is subject to approvals and consents from respective regulatory bodies; 2. Proposed GCNA hub entities will initially include banking subsidiaries in Hong Kong, China, Korea and Taiwan but not include SCB banking branches in Japan,Macau and Taiwan Source: The bank

Detailed credit considerations Asset quality will be stable, though structurally weaker after removing GCNA operations After deteriorating in 2015, SCB’s asset quality has stabilized as the group proactively recognized legacy credit issues while significantly de-risking its loan book over the last two years.



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https://www.moodys.com/credit-ratings/Standard-Chartered-Bank-Hong-Kong-Limited-credit-rating-600015127


Nevertheless, the loan book composition of SCB after removing GCNA operations will be riskier than that of the group. It will have a much higher share of corporate & investment banking (CIB) loans compared to the overall group. The overall group loan composition

benefits from a higher share of low risk retail mortgage loans in GCNA. The share of mortgage exposure was 43%1 in GCNA, compared to the 29% of the overall group.

Historical asset quality performance of SCB (after removing GCNA operations) has also been poorer than that of the overall group, with this differential being particularly stark over 2014-16 when the bank was going through significant asset quality stress. Between 2014-2016 the group's impaired loan ratios (as a % of gross) loans averaged 10% for Africa and Middle East, and 4% for ASEAN and South Asia, much higher than the 1% recorded for GCNA. That said we expect asset quality to be structurally better than the historical track record, given the changes in the underwriting standards that the bank has made. The bank's will focus on its higher credit quality network business clients going forward.

At the same time, our assessment of asset risk also factors in potential market risk, given the meaningful financial markets business of the bank.

The one notch negative adjustment to lower the asset quality to baa3 from baa2 is to factor in the higher risk profile of the loan book as well as market risk.

Capital to remain a key strength despite weak profitability Capital will remain stable. While the bank’s internal capital generation is very low given its weak profitability, its low Risk Weighted Asset (RWA) growth outlook will support organic capital accretion.

Nevertheless, SCB’s Common Equity Tier 1 (CET 1) ratio will be lower than the overall group CET1 ratio of 14.2% (YE 2018) after removal of GCNA operations. However it will still remain healthy between 12-13% over the next 12-18 months, and will remain a key credit strength.

The two notches of negative adjustment to lower the capital score to a2 from a1 is to factor in the lower level of capital following the removal of GCNA operations.

Profitability weakened by higher cost income ratio and a higher level of credit costs compared to GCNA operations The bank's profitability should pick-up on account of positive operating leverage materializing. However, given our expectation of revenue growth of only around 5-7%, this will be a gradual improvement.

Structurally, SCB’s profitability will be weaker after the removal of GCNA operations. The group's Return on Average Assets (RoAA) was very low at 0.2% in 2018, after recording losses in the last two years. In 2018, the group's underlying (before restructuring costs) profit before tax to total average assets was 0.9% in GCNA, much higher than the 0.4% ex-GCNA.

The low profitability in ex-GCNA regions is a function of relatively higher credit costs (loan loss provisions to gross loans) and operating expenses. The cost income ratio in the ex-GCNA region averaged 72% in 2018 higher than the 62% in GCNA. Loan loss provisions to gross loans over 2018 was also much higher at 40bps in the ex-GCNA region against the 5bps in GCNA. While the ex-GCNA credit costs are higher than in GCNA, we do not see the sustainable level of credit costs reducing from current levels as they are already low.

The three notches of positive adjustments on the ba3 profitability score are to factor in the gradual improvement as positive operating leverage comes through.

Strong liquidity will remain, while funding franchise to be materially weaker after removal of GCNA operations The share of market funds will be higher in SCB (ex-GCNA operations) compared to the group as most of the market funding is done out of financial centers such as London. Further the quality of deposits at SCUK is materially inferior to that of the overall group.

A smaller proportion of SCB's deposits following the restructuring will be retail deposits, as a majority of retail deposits are held in the group's GCNA operations. We incorporate a three notch negative adjustment to lower the funding structure score to ba2 to account for this inferior deposit quality.



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Nevertheless, Liquidity will continue to remain a key credit strength for SCB following the restructuring. While a part of its role as the liquidity center of the group will be diminished following the removal of Hong Kong operations, it will still retain a significant part of the overall group liquidity. As a result we do not incorporate any adjustments from the macro adjusted score of a1.

Macro Profile of Strong in line with SCB's expected loan distribution The Macro Profile for SCB is based on the expected loan distribution after removing GCNA operations. This approach is consistent with how we determine the Macro Profile for SCPLC.

A significant proportion of the assets held in geographies such as the United Kingdom and the Americas are high quality liquid assets which carry low risk-weights. It’s because of this dynamic that a difference in asset distribution and RWA distribution arises. RWA distribution is a much better proxy for risk distribution, and is broadly mirrored in SCB’s loan distribution

Support and structural considerations Loss Given Failure (LGF) analysis SCB is subject to the EU's directive on bank recovery and resolution, which we consider to be an operational resolution regime.

We assume residual tangible common equity at 3% and post-failure losses at 8% of tangible banking assets, a 25% runoff in junior wholesale deposits, and a 5% runoff in preferred deposits. We assign a probability of 25% to deposits, in preference to senior unsecured debt.

The balance sheet at failure, which forms the basis for our advanced LGF analysis, includes the combined balance sheet of SCPLC and SCB. At the same time, we exclude deposits and assets owned by the group's overseas subsidiaries, given that they lie outside the scope of the UK authorities.

SCB's instruments ratings are based on the group's forecast liability structure as of end-2021, and are consequently notched off the group's notional BCA of baa1.

SCB's long-term deposit and senior unsecured debt ratings of A1 in particular reflect group's unique corporate profile and liability structure. This structure features a substantial amount of securities that could be bailed in during a resolution to the benefit of more senior creditors. As a result the expected loss for depositors and senior creditors in resolution is reduced.

SCB's Baa2 subordinated debt rating reflects our Advanced LGF analysis, which indicates a moderate loss given failure.

After factoring in the forward-looking issuance plan of the bank, the volume of subordinated debt and the volume of loss-absorbing capital junior to it are lower than what had been previously factored into their rating. This has driven the downgrade of the subordinated debt rating.

SCB's Baa3(hyb) junior subordinated debt ratings reflect (1) our Advanced LGF analysis, which indicates a high loss given failure; and (2) an additional notching to capture the risk of differential probabilities of default across different instruments.

Government support considerations SCB's ratings are based solely on its adjusted BCA and our LGF analysis. These ratings do not include any uplift for external support.

The current policy direction in the UK clearly suggests that the Government of United Kingdom (Aa2 stable) is unlikely to provide extraordinary support to banks in times of need. Moreover, aside from its headquarters in the UK, the group does not operate a material retail business in the country, thereby making it even less likely that the government would extend support to the group.

While SCB does operate in other jurisdictions with more supportive regulatory approaches, we would expect any support provided to be ring-fenced to the group's local operations in those jurisdictions. Consequently, while we include market-specific systemic support in the ratings of a number of SCB's subsidiaries and affiliates, such support is not taken into account in rating the UK-incorporated SCB.

Counterparty Risk (CR) Assessment Counterparty Risk (CR) Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default, and (2) apply to counterparty obligations and contractual commitments



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https://www.moodys.com/credit-ratings/United-Kingdom-Government-of-credit-rating-788250


rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

SCB's CR Assessment is positioned at A1(cr)/P-1(cr) The CR Assessment is positioned three notches above SCB's BCA of baa1, based on the buffer against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than the expected loss; therefore, we focus purely on subordination and take no account of the volume of the instrument class.

Counterparty Risk Ratings (CRR) Moody’s Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions.

SCB's CRR is positioned at A1(cr)/P-1(cr) In assigning CRRs to SCB and its branches, our approach starts with the banks' adjusted Baseline Credit Assessment (BCA) and uses the agency’s existing advanced LGF approach that takes into account the level of subordination to CRR liabilities in the bank's balance sheet and assumes a nominal volume of such liabilities.

The CRR for the rated bank subsidiaries and branches of SCB are three notches higher than the adjusted BCA. Although SCB is likely to have more than a nominal volume of CRR liabilities at failure, this has no impact on the ratings because the significant level of subordination below the CRR liabilities at SCBalready provides the maximum amount of uplift allowed under our rating methodology.

In our view secured counterparties to banks typically benefit from greater protections under insolvency laws and bank resolution regimes than do senior unsecured creditors, and that this benefit is likely to extend to the unsecured portion of such secured transactions in most bank resolution regimes. We believe that in many cases regulators will use their discretion to allow a bank in resolution to continue to honor its CRR liabilities or to transfer those liabilities to another party who will honor them, in part because of the greater complexity of bailing in obligations that fluctuate with market prices, and also because the regulator will typically seek to preserve much of the bank’s operations as a going concern in order to maximize the value of the bank in resolution, to stabilize the bank quickly, and to avoid contagion within the banking system. CRR liabilities at SCB and its rated branches therefore benefit from the subordination provided by more junior liabilities, including all unsecured debt obligations at SCPLC and SCB.



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Methodology and scorecard About Moody’s Bank Scorecard Our scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.



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Rating methodology and scorecard factors

Exhibit 4

Standard Chartered Bank Macro Factors Weighted Macro Profile Strong 100%

Factor Historic Initial Expected Assigned Score Key driver #1 Key driver #2 Ratio Score Trend

Solvency Asset Risk Problem Loans / Gross Loans

Capital

3.9% baa1 ← → baa3 Long-run loss performance

Market risk

TCE / RWA 15.4% a1 ← → a2 Capital retention Expected trend

Profitability Net Income / Tangible Assets 0.0% b3 ↑ ba3 Expected trend Return on assets

Combined Solvency Score baa2 baa2 Liquidity Funding Structure Market Funds / Tangible Banking Assets 24.5% baa2 ← → ba2 Deposit quality Term structure

Liquid Resources Liquid Banking Assets / Tangible Banking Assets 45.2% a1 ← → a1 Stock of liquid assets Quality of liquid assets

Combined Liquidity Score a3 baa2 Financial Profile baa2

Business Diversification 0 Opacity and Complexity 0 Corporate Behavior 0

Total Qualitative Adjustments 0 Sovereign or Affiliate constraint: Aa2 Scorecard Calculated BCA range baa1-baa3 Assigned BCA baa2 Affiliate Support notching 1 Adjusted BCA baa1

Balance Sheet is not applicable.



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Debt class De Jure waterfall De Facto waterfall Notching LGF Assigned AdditionalPreliminary Instrument Sub- Instrument Sub- De Jure De Facto Notching LGF notching Rating volume + ordination volume + ordination Guidance notching Assessment

subordination subordination vs. Adjusted

BCA Counterparty Risk Rating -- -- -- -- -- -- -- 3 0 a1 Counterparty Risk Assessment -- -- -- -- -- -- -- 3 0 a1 (cr) Deposits -- -- -- -- -- -- -- 3 0 a1 Senior unsecured bank debt -- -- -- -- -- -- -- 3 0 a1 Dated subordinated bank debt -- -- -- -- -- -- -- -1 0 baa2 Junior subordinated bank debt -- -- -- -- -- -- -- -1 -1 baa3 (hyb)

Instrument class Loss Given Additional Preliminary Rating Government Local Currency Foreign Failure notching Notching Assessment Support notching Rating Currency

Rating Counterparty Risk Rating 3 0 a1 0 A1 A1 Counterparty Risk Assessment 3 0 a1 (cr) 0 A1 (cr) --Deposits 3 0 a1 0 A1 A1 Senior unsecured bank debt 3 0 a1 0 A1 A1 Dated subordinated bank debt -1 0 baa2 0 -- Baa2 Junior subordinated bank debt -1 -1 baa3 (hyb) 0 Baa3 (hyb) --[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Financial Metrics



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Ratings

Exhibit 5 Category Moody's Rating STANDARD CHARTERED BANK

Outlook Stable Counterparty Risk Rating A1/P-1 Bank Deposits A1/P-1 Baseline Credit Assessment baa2 Adjusted Baseline Credit Assessment baa1 Counterparty Risk Assessment A1(cr)/P-1(cr) Senior Unsecured A1 Subordinate Baa2 Jr Subordinate -Dom Curr Baa3 (hyb) Other Short Term (P)P-1

PARENT: STANDARD CHARTERED PLC

Outlook Stable Baseline Credit Assessment baa1 Adjusted Baseline Credit Assessment baa1 Senior Unsecured A2 Subordinate Baa2 Jr Subordinate Baa3 (hyb) Pref. Stock Non-cumulative Ba1 (hyb)

STANDARD CHARTERED AG

Counterparty Risk Rating (P)A1/(P)P-1 Bank Deposits (P)A1/(P)P-1 Baseline Credit Assessment baa1 Adjusted Baseline Credit Assessment baa1 Counterparty Risk Assessment A1(cr)/P-1(cr) Issuer Rating (P)A1 ST Issuer Rating (P)P-1

STANDARD CHARTERED BANK (SINGAPORE) LIMITED

Outlook Stable Counterparty Risk Rating Aa3/P-1 Bank Deposits A1/P-1 Baseline Credit Assessment a3 Adjusted Baseline Credit Assessment a3 Counterparty Risk Assessment Aa3(cr)/P-1(cr) Issuer Rating A1 ST Issuer Rating P-1

Source: Moody's Investors Service

Endnotes 1 All figures relating to GCNA and other regional exposures are estimated from the group's annual report and data supplement.



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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1163325



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