February 7, 2013 / 11:26 AM / in 5 years

TEXT-Fitch revises Standard Chartered's outlook to stable; affirms 'AA-'

Feb 07 - Fitch Ratings has revised Standard Chartered plc’s (SC) and its subsidiary Standard Chartered Bank plc’s (SCB) Outlook to Stable from Negative. Their Long-Term Issuer Default Ratings (IDR) have been affirmed at ‘AA-'. A full list of rating actions is provided at the end of this comment.


The Outlook has been revised to Stable as Fitch now considers the risks attached to the group’s expansion into higher-risk markets, including mainland China, sufficiently mitigated. The group maintains robust financial flexibility which will continue to be supported by internal revenue generation. Increasing correlations between its key markets will, in Fitch’s view, continue to diminish the geographical diversification benefits of SC’s franchise. Loan concentrations, however, are actively managed as the share of lending to Asia-Pacific fell to 73% at end-H112 after having peaked at 85% at end-2005. While this level of concentration significantly exposes the bank to an economic downturn, the agency has become more comfortable that the attached risks are tightly controlled.

The IDRs of SC and its main operating subsidiary SCB reflect stringently managed, diversified and strong-performing operations. Fitch believes that the group’s strong risk culture should protect it against any unforeseen sharp asset quality deterioration. Although capital and liquidity are subject to domestic regulatory oversight and restrictions, Fitch expects that SC can generate sufficient free liquidity for reallocation within the group if necessary. Its holding company double leverage is low at about 70%.

SC’s far-reaching network is a key strength. It is a competitive advantage over domestic operating banks and a prerequisite to compete with larger global peers. The inherent complexity in its medium-sized operations is adequately managed even though its widespread presence renders the bank susceptible to external shocks, including compliance and conduct risk, geopolitical risk and risks related to convertibility and transferability of foreign currencies. Significant cross-border exposures amounted to USD196bn or 31% of total assets at end-H112 (2008: 23% at end-2008) of which China cross-border risk grew fastest to reach 7% of total assets.


SC’s and SCB’s VRs and IDRs capture the group’s resilient intrinsic strength, characterised by strong liquidity and a low overall risk appetite. The group’s earnings generation, which benefits from robust growth across Asia, remains strong and revenue growth should be sufficient to absorb USD667m one-off charges for alleged regulatory non-compliance in the US in 2012.

Fitch points to the build-up of risk from the bank’s expansion into higher-risk markets to the extent that growth may be rapid or excessive. The bank has thus far mitigated concentration risks well and there are no obvious concentrations in its large borrower list. However, its mainland China exposures will, in Fitch’s view, continue to grow. Fitch estimates that the bank’s on- and off-shore mainland China exposures stood at about USD70bn or 11% of assets at end-June 2012. The estimate is derived from publicly stated China cross-border risk (USD41bn at end-H112) and the total assets of SCB’s subsidiary in China (USD29bn).

SC’s and SCB’s ratings could be downgraded if there is a deterioration in asset quality beyond the expectations of a normal cyclical downturn in one or more of its key markets or if earnings and capitalisation are no longer considered commensurate with the group’s risks. Fitch’s tolerance for volatility at the current high rating level is low. There are no indications that significant broad-based asset quality deterioration is imminent. Weaker loan performance in UAE and India led to high non-performing loan ratios of 13.9% and 9.5% of gross onshore wholesale loans in the Middle East South Asia segment and India at end-H112, respectively (2011: 10.6% and 4.1%). The ratios would come down to 10.2% and 3.4%, respectively, if offshore loans are included. Those activities are, however, of manageable size in a group context and consequently, total impaired loans remain moderate at 1.8% of gross loans (2011: 1.6%).

SC’s consolidated capitalisation remains in line with that of peers and capitalisation across the network is solid. However, the consolidated capital position may be overstated if the flow of capital among entities is restricted. This could either be the result of tighter overseas regulation or if SC’s home regulator objects to the trapping of capital and liquidity by the various regulators in the countries SC operates in. At end-H112, SC’s consolidated core capital ratio according to Fitch’s definitions stood at 11.1%, and its tangible common equity/tangible assets was at 5.2% (2011: 11.7% and 5.5%, respectively).

SC’s access to deposit funding in the group’s main markets, in particular Hong Kong, is a rating strength which it shares with many regionally operating banks rated in the ‘AA’ category. Its low loan-to-deposit ratio of 78.6% at end-June 2012 (2011: 75.7%) enables it to maintain this strength; however, defending its deposit market shares may weigh on profitability in the absence of re-investment opportunities. Operating profit over average assets has remained steady since 2009 and, at 1.27% in H112, remains in line with that of other ‘AA-’ rated banks.

Downside risks stem from less tightly controlled risk-taking, increasing concentrations, rapidly deteriorating credit or declining group resources. The ratings are also sensitive to a decline in risk-adjusted profitability and to any damage to and eroding confidence in the SC franchise as the latter is essential to preserving access to core funding and offering international connectivity. SC’s moderate size and the inherent complexity in its business model constrain the ratings as the bank is not a leader in any of the markets it operates in.

In addition, the VR and IDRs of SC are sensitive to an adverse change in relevant factors affecting holding company notching, including high double leverage (above 120%), less prudent liquidity management, more complex group structures or regulatory/legal risk specific to the holding company. SC’s VR and IDRs are currently equalised with those of its main operating entity, SCB.


SC’s Support Rating of ‘5’ and SRF of ‘No floor’ reflect Fitch’s opinion that UK sovereign support cannot be relied upon for a holding company. SCB’s Support Rating and SRF are driven by the still extremely high probability that it would receive support from the UK government given the bank’s systemic importance internationally, notably to international trade and USD clearing. However, SCB’s Support Rating and SRF are vulnerable to global initiatives to reduce the implicit support available to banks.


Subordinated debt and other hybrid regulatory capital securities issued by SC and SCB are notched down from their common VRs to reflect varying degrees of loss severity and incremental non- performance risk under Fitch’s “Assessing and Rating Bank Subordinated and Hybrid Securities” criteria. They are primarily sensitive to any change in their VRs.

The rating actions are as follows:

Standard Chartered plc

Long-Term IDR: affirmed at ‘AA-'; Outlook revised to Stable from Negative

Short-Term IDR and debt: affirmed at ‘F1+’

Viability Rating: affirmed at ‘aa-’

Support Rating: affirmed at ‘5’

Support Rating Floor: affirmed at ‘No Floor’

Senior unsecured debt: affirmed at ‘AA-’

Dated subordinated debt: affirmed at ‘A+’

Capital securities (US853254AC43, US853254AB69, US853254AA86, USG84228AT58, XS0365481935): affirmed at ‘BBB’

Standard Chartered Bank plc

Long-Term IDR: affirmed at ‘AA-'; Outlook revised to Stable from Negative

Short-Term IDR and debt: affirmed at ‘F1+’

Viability Rating: affirmed at ‘aa-’

Support Rating: affirmed at ‘1’

Support Rating Floor: affirmed at ‘A-’

Senior unsecured debt: affirmed at ‘AA-’ and ‘F1+’

Dated subordinated debt: affirmed at ‘A+’

Upper Tier 2 notes (XS0222434200, XS0119816402) affirmed at ‘A-’

Capital securities (XS0347919457, XS0129229141): affirmed at ‘BBB+'

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