Consolidated income statement - Standard Chartered · 2019-08-12 · 11 Taxation relating to components of other comprehensive income 10 14 2 Other comprehensive (loss)/income for

Standard Chartered Annual Report 2018236

Financial statements Financial statements

Consolidated income statement For the year ended 31 December 2018

31.12.18 31.12.17 Notes $million $million

Interest income

Interest expense

Net interest income

Fees and commission income

Fees and commission expense

Net fee and commission income

Net trading income

Other operating income

Operating income

17,264

(8,471)

8,793

4,029

(537)

3,492

1,683

821

14,789

Staff costs (7,074) (6,758)

Premises costs (790) (823)

General administrative expenses (2,926) (2,007)

Depreciation and amortisation (857) (829)

Operating expenses 7 (11,647) (10,417)

Operating proft before impairment losses and taxation 3,142 4,008

Credit impairment 8 (653) (1,362)

Other impairment

Goodwill 9 – (320)

Other 9 (182) (179)

Proft from associates and joint ventures 32 241 268

Proft before taxation 2,548 2,415

Taxation 10 (1,439) (1,147)

Proft for the year 1,109 1,268

Proft attributable to:

Non-controlling interests 29 55 49

Parent company shareholders 1,054 1,219


14,435

(6,254)

3 8,181

3,942

(430)

4 3,512

5 1,527

6 1,205

14,425

cents cents

Earnings per share:

Basic earnings per ordinary share 12 18.7 23.5

Diluted earnings per ordinary share 12 18.5 23.3

The Notes on pages 244 to 355 form an integral part of these fnancial statements.

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Consolidated statement of comprehensive income For the year ended 31 December 2018



Other comprehensive (loss)/income

Items that will not be reclassifed to income statement: 382 (238)

Own credit gains/(losses) on fnancial liabilities designated at fair value through proft or loss 394 (249)

Equity instruments at fair value through other comprehensive income 36 –

Actuarial (losses)/gains on retirement beneft obligations 30 (19) 32

Taxation relating to components of other comprehensive income 10 (29) (21)

Items that may be reclassifed subsequently to income statement: (1,189) 1,532

Exchange differences on translation of foreign operations:

Net (losses)/gains taken to equity (1,462) 1,637

Net gains/(losses) on net investment hedges 282 (288)

Share of other comprehensive income/(loss) from associates and joint ventures 33 (1)

Debt instruments at fair value through other comprehensive income/available-for-sale investments:

Net valuation (losses)/gains taken to equity (128) 369

Reclassifed to income statement 31 (233)

Cash fow hedges:

Net gains taken to equity 34 35

Reclassifed to income statement 14 7 11

Taxation relating to components of other comprehensive income 10 14 2

Other comprehensive (loss)/income for the year, net of taxation (807) 1,294

Total comprehensive income for the year 302 2,562

Total comprehensive income attributable to:

Non-controlling interests 29 34 50

Parent company shareholders 268 2,512

Total comprehensive income for the year 302 2,562

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Consolidated balance sheet As at 31 December 2018


Assets Cash and balances at central banks Financial assets held at fair value through proft or loss Derivative fnancial instruments Loans and advances to banks1

Loans and advances to customers2

Investment securities Other assets Current tax assets Prepayments and accrued income Interests in associates and joint ventures Goodwill and intangible assets Property, plant and equipment Deferred tax assets Assets classifed as held for sale Total assets

Liabilities Deposits by banks Customer accounts Repurchase agreements and other similar secured borrowing Financial liabilities held at fair value through proft or loss Derivative fnancial instruments Debt securities in issue Other liabilities Current tax liabilities Accruals and deferred income Subordinated liabilities and other borrowed funds Deferred tax liabilities Provisions for liabilities and charges Retirement beneft obligations Liabilities included in disposal groups held for sale Total liabilities

Equity Share capital and share premium account Other reserves Retained earnings Total parent company shareholders’ equity Other equity instruments Total equity excluding non-controlling interests Non-controlling interests Total equity Total equity and liabilities

57,511 87,132 45,621 61,414

256,557 125,901 35,401

492 2,505 2,307 5,056 6,490 1,047 1,328

688,762

29,715 391,013

1,401 60,700 47,209 46,454 38,309

676 5,393

15,001 563

1,330 399 247

638,410

7,111 11,878 26,129 45,118 4,961

50,079 273

50,352 688,762

13,35 13

13,14 13,15 13,15

13 20 10

32 17 18 10 21

13 13

13,16 13

13,14 13,22

23 10

13,27 10 24 30 21

28

28

29

58,864 27,564 47,031 78,188

282,288 117,025 33,490

491 2,307 2,307 5,013 7,211 1,177 545

663,501

30,945 370,509 39,783 16,633 48,101 46,379 35,257

376 5,493 17,176

404 183 455

– 611,694

7,097 12,767 26,641 46,505

4,961 51,466

341 51,807

663,501

1 Reverse repurchase agreements and other similar secured lending balances held at amortised cost of $3,815 million (31 December 2017: $20,694 million) have been included with loans and advances to banks

2 Reverse repurchase agreements and other similar secured lending balances held at amortised cost of $3,151 million (31 December 2017: $33,581 million) have been included with loans and advances to customers


These fnancial statements were approved by the Board of directors and authorised for issue on 26 February 2019 and signed on its behalf by:

José Viñals Bill Winters Andy Halford Chairman Group Chief Executive Group Chief Financial Offcer

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Consolidated statement of changes in equity For the year ended 31 December 2018

Fair value Fair value through through

Share other other capital compre- compre-

and Capital hensive hensive Parent share and Own credit Available income income Cash fow company Non-

premium merger adjustment -for-sale reserve reserve hedge Translation Retained shareholders’ Other equity controlling account reserves1 reserve reserve – debt – equity reserve reserve earnings equity instruments interests Total $million $million $million $million $million $million $million $million $million $million $million $million $million

At 1 January 2017 7,091 17,129 289 (4) – – (85) (5,805) 25,753 44,368 3,969 321 48,658 Proft after tax for the year – – – – – – – – 1,219 1,219 – 49 1,268 Other comprehensive (loss)/income – – (235) 87 – – 40 1,351 502 1,293 – 1 1,294 Distributions – – – – – – – – – – – (51) (51) Shares issued, net of expenses 6 – – – – – – – – 6 – – 6 Other equity instruments issued, net of expenses – – – – – – – – – – 992 – 992 Net own shares adjustment – – – – – – – – 10 10 – – 10 Share option expense, net of taxation – – – – – – – – 125 125 – – 125 Dividends3 – – – – – – – – (445) (445) – – (445) Other movements4 – – – – – – – – (71) (71) – 215 (50) As at 31 December 2017 7,097 17,129 54 83 – – (45) (4,454) 26,641 46,505 4,961 341 51,807 IFRS 9 reclassifcations6 – – – (83) (131) 45 – – 169 – – – – IFRS 9 re-measurements6 – – – – – 4 – – 31 35 – – 35 Expected credit loss, net – – – – 65 – – – (1,074)7 (1,009) – (8) (1,017) Tax impact – – – – (11) 5 – – 179 173 – – 173 Impact of IFRS 9 on share of joint ventures and associates, net of tax – – – – – (1) – – (51) (52) – – (52) IFRS 9 transition adjustments – – – (83) (77) 53 – – (746) (853) – (8) (861) As at 1 January 2018 7,097 17,129 54 – (77) 53 (45) (4,454) 25,895 45,652 4,961 333 50,946 Proft after tax for the year – – – – – – – – 1,054 1,054 – 55 1,109 Other comprehensive income/(loss) – – 358 – (84) 67 35 (1,158) (4)2 (786) – (21) (807) Distributions – – – – – – – – – – – (97) (97) Shares issued, net of expenses 14 – – – – – – – – 14 – – 14 Net own shares adjustment – – – – – – – – 1 1 – – 1 Share option expense, net of taxation – – – – – – – – 158 158 – – 158 Dividends3 – – – – – – – – (975) (975) – – (975) Other movements – – – – – – – – – – – 38 3 As at 31 December 2018 7,111 17,129 412 – (161) 120 (10) (5,612) 26,129 45,118 4,961 273 50,352

1 Includes capital reserve of $5 million, capital redemption reserve of $13 million and merger reserve of $17,111 million

2 Comprises actuarial gain/(loss), net of taxation and share from associates and joint ventures $(4) million (31 December 2017: $50 million)

3 Comprises dividends paid net of scrip $539 million (31 December 2017: $nil) and dividends on preference shares classifed as equity and Additional Tier 1 securities $436 million (31 December 2017: $445 million). (refer Note 11)

4 Other movements of $(71) million is mainly due to issue of shares by Nepal to its non-controlling interests including premium ($19 million) as the adjustment to the carrying value of Group’s share of the issue. This is offset by other equity adjustments of $(90) million

5 Other movements of $21 million relates to issue of shares by Nepal to its non-controlling interests including premium ($12 million) as the increase in non-controlling interest. The remaining $9 million relates to an acquisition

6 As per Note 41 Transition to IFRS 9 Financial Instruments

7 The Group’s initial estimate of credit impairment provisions on adoption of IFRS 9 was $6,720 million. Following refnement of the Group’s expected loss models, the estimate of the opening credit impairment provisions has been revised down by $222 million to $6,498 million, and the net expected credit loss of $(1,296) million adjusted against retained earnings has similarly decreased by $222 million to $1,074 million

8 Mainly due to additional share capital issued by Angola subscribed by its non-controlling interests without change in shareholding percentage

Note 28 includes a description of each reserve.




Cash fow statement For the year ended 31 December 2018

Group Company

Notes 31.12.18 $million

31.12.17 $million

31.12.18 $million

31.12.17 $million

Cash fows from operating activities:

Proft before taxation 2,548 2,415 790 207

Adjustments for non-cash items and other adjustments included within income statement 34 2,635 3,241 232 615

Change in operating assets 34 (12,837) (13,625) 61 459

Change in operating liabilities 34 33,859 5,819 (462) 575

Contributions to defned beneft schemes 30 (143) (143) – –

UK and overseas taxes paid 10 (770) (915) – (14)

Net cash from/(used in) operating activities 25,292 (3,208) 621 1,842

Cash fows from investing activities:

Purchase of property, plant and equipment 18 (171) (165) – –

Disposal of property, plant and equipment 85 29 – –

Acquisition of investment in subsidiaries, associates, and joint ventures, net of cash acquired 32 – (44) – (1,000)

Dividends received from subsidiaries, associates and joint ventures 32 67 2 1,035 392

Disposal of subsidiaries 7 – – –

Purchase of investment securities (276,388) (265,186) – –

Disposal and maturity of investment securities 263,983 261,316 621 2,850

Net cash (used in)/from investing activities (12,417) (4,048) 1,656 2,242

Cash fows from fnancing activities:

Issue of ordinary and preference share capital, net of expenses 28 14 6 14 6

Exercise of share options 9 10 9 10

Purchase of own shares (8) – (8) –

Issue of Additional Tier 1 capital, net of expenses 28 – 992 – 992

Gross proceeds from issue of subordinated liabilities 34 500 – 500 –

Interest paid on subordinated liabilities 34 (602) (743) (507) (353)

Repayment of subordinated liabilities 34 (2,097) (2,984) (474) (1,249)

Proceeds from issue of senior debts 34 9,766 2,292 4,552 1,501

Repayment of senior debts 34 (7,030) (4,162) (3,141) (3,237)

Interest paid on senior debts 34 (507) (896) (355) (825)

Investment from non-controlling interests – 21 – –

Dividends paid to non-controlling interests and preference shareholders (533) (496) (436) (445)

Dividends paid to ordinary shareholders (539) – (539) –

Net cash used in fnancing activities (1,027) (5,960) (385) (3,600)

Net increase/(decrease) in cash and cash equivalents 11,848 (13,216) 1,892 484

Cash and cash equivalents at beginning of the year 87,231 96,977 15,714 15,230

Effect of exchange rate movements on cash and cash equivalents (1,579) 3,470 – –

Cash and cash equivalents at end of the year 35 97,500 87,231 17,606 15,714

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Company balance sheet As at 31 December 2018


Non-current assets

Investments in subsidiary undertakings 32 34,853 34,853

Current assets

Derivative fnancial instruments 39 9 70

Investment securities 39 11,537 12,159

Amounts owed by subsidiary undertakings 39 17,606 15,714

Taxation 12 3

Total current assets 29,164 27,946

Current liabilities

Derivative fnancial instruments 39 1,128 492

Other creditors 403 405

Total current liabilities 1,531 897

Net current assets 27,633 27,049

Total assets less current liabilities 62,486 61,902

Non-current liabilities

Debt securities in issue 39 17,202 16,169

Subordinated liabilities and other borrowed funds 27, 39 13,436 13,882

Total non-current liabilities 30,638 30,051

Total assets less liabilities 31,848 31,851

Equity

Share capital and share premium account 28 7,111 7,097

Other reserves 17,129 17,129

Retained earnings 2,647 2,664

Total shareholders’ equity 26,887 26,890

Other equity instruments 28 4,961 4,961

Total equity 31,848 31,851

The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual statement of comprehensive income and related notes that form a part of these fnancial statements. The Company proft for the year after tax is $799 million (31 December 2017: $210 million).


These fnancial statements were approved by the Board of directors and authorised for issue on 26 February 2019 and signed on its behalf by:

José Viñals Bill Winters Andy Halford Chairman Group Chief Executive Group Chief Financial Offcer

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Company statement of changes in equity For the year ended 31 December 2018

Share capital and share premium account $million

Capital and merger

reserve1

$million

Retained earnings $million

Other equity instruments

$million Total

$million

At 1 January 2017 7,091 17,129 2,764 3,969 30,953

Proft for the year – – 210 – 210

Shares issued, net of expenses 6 – – – 6

Other equity instruments issued, net of expenses – – – 992 992

Net own shares adjustment – – 10 – 10

Share option expense, net of taxation – – 125 – 125

Dividends2 – – (445) – (445)

At 31 December 2017

Proft after tax for the year

Shares issued, net of expenses

Net own shares adjustment

Share option expense, net of taxation

Dividends2

At 31 December 2018

1 Includes capital reserve of $5 million, capital redemption reserve of $13 million and merger reserve of $17,111 million

7,097 17,129 2,664 4,961 31,851

– – 799 – 799

14 – – – 14

– – 1 – 1

– – 158 – 158

– – (975) – (975)

7,111 17,129 2,647 4,961 31,848

2 Comprises dividends paid net of scrip $539 million (31 December 2017: $nil) and dividends on preference shares classifed as equity and Additional Tier 1 securities $436 million (31 December 2017: $445 million)

Note 28 includes a description of each reserve.


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Contents – Notes to the fnancial statements

Section Note Page

Basis of preparation 1 Accounting policies 244

Performance/return 2 Segmental information 246

3 Net interest income 250

4 Net fees and commission 251

5 Net trading income 252

6 Other operating income 253

7 Operating expenses 253

8 Credit impairment 254

9 Other impairment 258

10 Taxation 259

11 Dividends 263

12 Earnings per ordinary share 264

Assets and liabilities held at fair value 13 Financial instruments 265

14 Derivative fnancial instruments 289

Financial instruments held at amortised cost 15 Loans and advances to banks and customers 294

16 Reverse repurchase and repurchase agreements including other similar lending and borrowing 294

Other assets and investments 17 Goodwill and intangible assets 297

18 Property, plant and equipment 299

19 Operating lease commitments 301

20 Other assets 301

21 Assets held for sale and associated liabilities 302

Funding, accruals, provisions, contingent liabilities and legal proceedings

22 Debt securities in issue 303

23 Other liabilities 303

24 Provisions for liabilities and charges 304

25 Contingent liabilities and commitments 304

26 Legal and regulatory matters 305

Capital instruments, equity and reserves 27 Subordinated liabilities and other borrowed funds 307

28 Share capital, other equity instruments and reserves 308

29 Non-controlling interests 311

Employee benefts 30 Retirement beneft obligations 311

31 Share-based payments 316

Scope of consolidation 32 Investments in subsidiary undertakings, joint ventures and associates 320

33 Structured entities 325

Cash fow statement 34 Cash fow statement 326

35 Cash and cash equivalents 327

Other disclosure matters 36 Related party transactions 328

37 Post balance sheet events 329

38 Auditor’s remuneration 329

39 Standard Chartered PLC (Company) 330

40 Related undertakings of the Group 332

41 Transition to IFRS 9 Financial Instruments 351


Financial statementsnotes to the financial statements

Notes to the fnancial statements

1. Accounting policies

Statement of compliance The Group fnancial statements consolidate Standard Chartered PLC (the Company) and its subsidiaries (together referred to as the Group) and equity account the Group’s interest in associates and jointly controlled entities.

The parent company fnancial statements present information about the Company as a separate entity.

Both the parent company fnancial statements and the Group fnancial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee interpretations as endorsed by the European Union (EU). EU-endorsed IFRS may differ from IFRS published by the International Accounting Standards Board (IASB) if a standard has not been endorsed by the EU.

The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual statement of comprehensive income and related notes that form a part of these fnancial statements.

The following parts of the Risk review and Capital review form part of these fnancial statements:

a) From the start of Risk profle section (page 140) to the end of other principal risks in the same section (page 192) excluding:

¼ Credit quality by geographic region, (page 151)

¼ Credit quality by industry, (page 153)

¼ Forborne and other modifed loans by region (page 162)

¼ Credit-impaired (stage 3) loans by geographic region, (page 164)

¼ Industry and Retail products analysis by geographic region, (page 170)

¼ Asset-backed securities, (page 174)

¼ Country risk, (page 180)

¼ Risks not in VaR, (page 182)

¼ Backtesting, (page 182)

¼ Mapping of market risk items to the balance sheet, (page 183)

¼ Liquidity coverage ratio (LCR), (page 185)

¼ Stressed coverage, (page 185)

¼ Net stable funding ratio (NSFR), (page 186)

¼ Liquidity pool, (page 186)

¼ Encumbrance, (page 187)

¼ Interest rate risk in the banking book, (page 191)

¼ Operational risk, (page 192)

¼ Other principal risks, (page 192)

b) Capital review: from the start of ‘Capital Requirements Directive (CRD) IV capital base’ to the end of ‘Impact of IFRS 9 on CET1’, excluding capital ratios and risk-weighted assets (RWA)

Basis of preparation

The consolidated and Company fnancial statements have been prepared on a going concern basis and under the historical cost convention, as modifed by the revaluation of cash-settled share-based payments, fair value through other comprehensive income, and fnancial assets and liabilities (including derivatives) at fair value through proft or loss.

Signifcant accounting estimates and judgements In determining the carrying amounts of certain assets and liabilities, the Group makes assumptions of the effects of uncertain future events on those assets and liabilities at the balance sheet date. The Group’s estimates and assumptions are based on historical experience and expectation of future events and are reviewed periodically. Further information about key assumptions concerning the future, and other key sources of estimation uncertainty and judgement, are set out in the relevant disclosure notes for the following areas:

¼ Credit impairment (Note 8)

¼ Taxation (Note 10)

¼ Valuation of fnancial instruments held at fair value (Note 13)

¼ Goodwill impairment (Note 17)

¼ Provisions for liabilities and charges (Note 24)

¼ Retirement beneft obligations (Note 30)

¼ Investments in associates and joint ventures (Note 32)

IFRS and Hong Kong accounting requirements As required by the Hong Kong Listing Rules, an explanation of the differences in accounting practices between EU-endorsed IFRS and Hong Kong Financial Reporting Standards is required to be disclosed. There would be no signifcant differences had these accounts been prepared in accordance with Hong Kong Financial Reporting Standards.

Comparatives Prior period comparatives are presented on an IAS 39 – Financial Instruments: Recognition and Measurement basis (Refer to the 31 December 2017 audited fnancial statements for the IAS 39 accounting policies). Certain comparatives have been changed to align with current year disclosures. The main changes are in respect of IFRS 9 (see below).

Amortised cost reverse repurchase agreements and other similar lending balances have been included with Loans and advances to customers and Loans and advances to banks as appropriate.

In addition, the comparatives for commitments disclosed in Note 25 Contingent liabilities and commitments have been restated, as a result of the availability of more reliable, centralised information following the implementation of IFRS 9. The ageing of commitments is now based on residual rather than original maturity. The Risk profle has similarly been updated. These changes have not resulted in any amendments to the reported income statement or balance sheet of the Group.

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1. Accounting policies continued

New accounting standards adopted by the Group IFRS 9 Financial Instruments On 1 January 2018, the Group adopted IFRS 9 Financial Instruments, and the corresponding disclosure amendments to IFRS 7 – Financial Instruments: Disclosures. IFRS 9 has been endorsed by the EU, replaces IAS 39 and introduces; new requirements for the classifcation and measurement of fnancial instruments; the recognition and measurement of credit impairment provisions; and provides for a simplifed approach to hedge accounting.

The Group has further chosen:

¼ To continue to apply IAS 39 hedging requirements rather than those of IFRS 9. Hedging disclosures have, however, been updated to comply with new disclosure requirements

¼ To early adopt the ‘Prepayment Features with Negative Compensation (Amendments to IFRS 9)’ which was effective 1 January 2019 with early adoption permitted

¼ Not to restate comparative periods on the basis that it is not possible to do so without the use of hindsight

The Risk profle has been updated in accordance with the collateral and credit enhancement requirements of IFRS 7 Financial instruments: Disclosures, as amended for IFRS 9. The extent of collateral as a mitigant has been determined with reference to both the drawn and undrawn components of an exposure. Further, the collateral balances align to the expected credit loss methodology as this addresses the effects of collateral and other credit enhancements on the amounts arising from expected credit losses.

The new IFRS 9 accounting policies are stated in the Risk review, Note 8 Credit impairment and Note 13 Financial instruments.

Information on the transition from IAS 39 to IFRS 9 is stated in Note 41.

The Group’s initial estimate of credit impairment provisions on adoption of IFRS 9 was $6,720 million. Following refnement of the Group’s expected loss models, the estimate of the opening credit impairment provisions has been revised down by $222 million to $6,498 million, and the net expected credit loss of $(1,296) million adjusted against retained earnings has similarly decreased by $222 million to $(1,074) million. The relevant IFRS 9 disclosures in the Risk review and in Note 41 Transition to IFRS 9 Financial Instruments have been re-presented accordingly.

IFRS 15 Revenue from Contracts with Customers IFRS 15 is effective from 1 January 2018 and has been endorsed by the EU, and replaces IAS 18 Revenue. IFRS 15 is conceptually similar to IAS 18, but includes more granular guidance on how to recognise and measure revenue, and also introduces additional disclosure requirements. The Group performed an assessment of the new standard and concluded that the current treatment of revenue from contracts with customers is consistent with the new principles and there is no material transitional impact.

Going concern These fnancial statements were approved by the Board of directors on 26 February 2019. The directors made an assessment of the Group’s ability to continue as a going concern and confrm they are satisfed that the Group has adequate resources to continue in business for a period of at least 12 months from the date of approval of these fnancial statements. For this reason, the Group continues to adopt the going concern basis of accounting for preparing the fnancial statements.

New accounting standards in issue but not yet effective IFRS 16 Leases The effective date of IFRS 16 is 1 January 2019 and the standard was endorsed by the EU in November 2017. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17 Leases. Accordingly, a lessor continues to classify its leases as operating leases or fnance leases, and to account for those two types of leases differently.

The signifcant judgements in the implementation were determining if a contact contained a lease, and the determination of whether the Group is reasonably certain that it will exercise extension options present in lease contracts. The signifcant estimates were the determination of incremental borrowing rates in the respective economic environments.

The impact of IFRS 16 on the Group is primarily where the Group is a lessee in property lease contracts. The Group has elected to adopt the simplifed approach of transition and will not restate comparative information. On 1 January 2019 the Group will recognise a lease liability, being the remaining lease payments including extensions options where renewal is reasonably certain, discounted using the Group’s incremental borrowing rate at the date of initial application in the economic environment of the lease. The corresponding right-of-use asset recognised will be the amount of the lease liability adjusted by prepaid or accrued lease payments related to those leases. Any difference will be recognised in retained earnings at the date of initial application. The balance sheet increase as a result of recognition of the lease liability and right-of-use asset as of 1 January 2019 will be approximately $1.4 billion. However, the actual impact may change as judgements and estimates are refned.

IFRIC 23 Uncertainty over Income Tax Treatments IFRIC 23 is effective from 1 January 2019 and has been endorsed by the EU. It clarifes the accounting for uncertainties in income taxes and is not expected to result in a material impact to the Group’s fnancial report.

Other amendments and clarifcations made to existing standards that are not yet effective are not expected to result in a material impact on the Group’s fnancial report.



2. Segmental information The Group’s segmental reporting is in accordance with IFRS 8 Operating Segments and is reported consistently with the internal performance framework and as presented to the Group’s Management Team. The four client segments are Corporate & Institutional Banking, Retail Banking, Commercial Banking and Private Banking. The four geographic regions are Greater China & North Asia, ASEAN & South Asia, Africa & Middle East, and Europe & Americas. Activities not directly related to a client segment and/or geographic region are included in Central & other items. These mainly include Corporate Centre costs, treasury markets, treasury activities, certain strategic investments and the UK bank levy.

The following should also be noted:

¼ Transactions and funding between the segments are carried out on an arm’s-length basis

¼ Corporate Centre costs represent stewardship and central management services roles and activities that are not directly attributable to business or country operations

¼ Treasury markets, joint ventures and associate investments are managed in the regions and are included within the applicable region. However, they are not managed directly by a client segment and are therefore included in the Central & other items segment

¼ In addition to treasury activities, Corporate Centre costs and other Group related functions, Central & other items for regions includes globally run businesses or activities that are managed by the client segments but not directly by geographic management. These include Principal Finance and Portfolio Management

¼ The Group allocated central costs (excluding Corporate Centre costs) relating to client segments and geographic regions using appropriate business drivers (such as in proportion to the direct cost base of each segment before allocation of indirect costs) and these are reported within operating expenses

Basis of preparation The analysis refects how the client segments and geographic regions are managed internally. This is described as the Management View and is principally the location from which a client relationship is managed, which may differ from where it is fnancially booked and may be shared between businesses and/or regions. In certain instances this approach is not appropriate and a Financial View is disclosed, that is, the location in which the transaction or balance was booked. Typically the Financial View is used in areas such as the Market and Liquidity risk reviews where actual booking location is more important for an assessment. Segmental information is therefore on a Management View unless otherwise stated.

Restructuring items excluded from underlying results The Group has made a provision of $900 million for potential penalties related to previously disclosed matters, namely, the US investigation relating to historical violation of US sanctions laws and regulations, the decision notice from the FCA concerning the Group’s historical fnancial crime controls and investigations relating to foreign exchange trading issues. Further details of these and other legal and regulatory matters can be found in Note 26 (on page 305).

The Group incurred net restructuring charges of $478 million in 2018 of which $375 million related to Principal Finance and included a $160 million loss in the fourth quarter in respect of the announced spin-out of the business and the sale of the majority of the Group’s related investment portfolios to a third party. A further $155 million related to planned initiatives to reduce ongoing costs and $34 million related to the Group’s ship leasing business that the Group has decided to discontinue. These gross charges were partly offset by recoveries in relation to the liquidation portfolio.

A net gain of $69 million arose following the redemption of some GBP-denominated securities.

A reconciliation between underlying and statutory results is set out in the table below:

31.12.18

Gains arising on repurchase Net gain on

Provision for of senior and businesses regulatory subordinated disposed/ Goodwill

Underlying matters Restructuring liabilities held for sale impairment Statutory $million $million $million $million $million $million $million

Operating income 14,968 – (248) 69 – – 14,789

Operating expenses (10,464) (900) (283) – – – (11,647)

Operating proft/(loss) before impairment losses and taxation 4,504 (900) (531) 69 – – 3,142

Credit impairment (740) – 87 – – – (653)

Other impairment (148) – (34) – – – (182)

Proft from associates and joint ventures 241 – – – – – 241

Proft/(loss) before taxation 3,857 (900) (478) 69 – – 2,548

31.12.17

Gains arising on repurchase Net gain on

Provision for of senior and businesses regulatory subordinated disposed/ Goodwill

Underlying matters Restructuring liabilities held for sale impairment Statutory $million $million $million $million $million $million $million

Operating income 14,289 – 58 – 78 – 14,425

Operating expenses (10,120) – (297) – – – (10,417)

Operating proft/(loss) before impairment losses and taxation 4,169 – (239) – 78 – 4,008

Credit impairment (1,200) – (162) – – – (1,362)

Other impairment (169) – (10) – – (320) (499)

Proft from associates and joint ventures 210 – 58 – – – 268

Proft/(loss) before taxation 3,010 – (353) – 78 (320) 2,415

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2. Segmental information continued

Underlying performance by client segment 31.12.18

Corporate & Institutional Retail Commercial Private Central &

Banking Banking Banking Banking other items Total $million $million $million $million $million $million

Operating income 6,860 5,041 1,391 516 1,160 14,968

Operating expenses (4,396) (3,736) (923) (530) (879) (10,464)

Operating proft/(loss) before impairment losses and taxation 2,464 1,305 468 (14) 281 4,504

Credit impairment (242) (267) (244) – 13 (740)

Other impairment (150) (5) – – 7 (148)

Proft from associates and joint ventures – – – – 241 241

Underlying proft/(loss) before taxation 2,072 1,033 224 (14) 542 3,857

Provision for regulatory matters (50) – – – (850) (900)

Restructuring (350) (68) (12) (24) (24) (478)

Gains arising on repurchase of senior and subordinated liabilities 3 – – – 66 69

Statutory proft/(loss) before taxation 1,675 965 212 (38) (266) 2,548

Total assets 308,496 103,780 31,379 13,673 231,434 688,762

Of which: loans and advances to customers including FVTPL 146,575 101,635 27,271 13,616 10,274 299,371

loans and advances to customers 104,677 101,235 26,759 13,616 10,270 256,557

loans held at fair value through proft or loss 41,898 400 512 – 4 42,814

Total liabilities 369,316 140,328 37,260 19,733 71,773 638,410

Of which: customer accounts 243,019 136,691 34,860 19,622 2,989 437,181

31.12.17




Operating expenses (4,409) (3,585) (881) (500) (745) (10,120)

Operating proft before impairment losses and taxation 2,087 1,249 452 – 381 4,169

Credit impairment (658) (375) (167) (1) 1 (1,200)

Other impairment (168) (1) (3) – 3 (169)

Proft from associates and joint ventures – – – – 210 210

Underlying proft/(loss) before taxation 1,261 873 282 (1) 595 3,010

Restructuring (275) (19) (13) (15) (31) (353)

Net gains on businesses disposed/ held for sale – – – – 78 78

Goodwill impairment – – – – (320) (320)

Statutory proft/(loss) before taxation 986 854 269 (16) 322 2,415

Total assets 293,334 105,178 31,650 13,469 219,870 663,501

Of which: loans and advances to customers 131,738 103,013 28,108 13,351 9,343 285,553


Of which: customer accounts 222,714 129,536 33,880 22,222 3,372 411,724

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Underlying performance by region 31.12.18

Greater China & ASEAN & Africa & Europe & Central & North Asia South Asia Middle East Americas other items Total

$million $million $million $million $million $million

Operating income 6,157 3,971 2,604 1,670 566 14,968

Operating expenses (3,812) (2,711) (1,810) (1,453) (678) (10,464)

Operating proft/(loss) before impairment losses and taxation 2,345 1,260 794 217 (112) 4,504

Credit impairment (71) (322) (262) (83) (2) (740)

Other impairment (110) 6 – 17 (61) (148)

Proft from associates and joint ventures 205 26 – 3 7 241

Underlying proft/(loss) before taxation 2,369 970 532 154 (168) 3,857

Provision for regulatory matters – – – (50) (850) (900)

Restructuring (106) 105 (100) (8) (369) (478)

Gains arising on repurchase of senior and subordinated liabilities – – – 3 66 69

Statutory proft/(loss) before taxation 2,263 1,075 432 99 (1,321) 2,548

Net interest margin 1.44% 2.06% 3.03% 0.47% 1.58%

Total assets 269,765 147,049 57,800 201,912 12,236 688,762

Of which: loans and advances to customers including FVTPL 130,669 81,905 29,870 56,927 – 299,371


Of which: customer accounts 196,870 96,896 29,916 113,499 – 437,181

31.12.17




Operating expenses (3,681) (2,654) (1,819) (1,407) (559) (10,120)

Operating proft/(loss) before impairment losses and taxation 1,935 1,179 945 194 (84) 4,169

Credit impairment (141) (653) (300) (107) 1 (1,200)

Other impairment (81) (12) (3) (16) (57) (169)

Proft/(loss) from associates and joint ventures 229 (22) – – 3 210

Underlying proft/(loss) before taxation 1,942 492 642 71 (137) 3,010

Restructuring 35 (161) (33) (25) (169) (353)

Net gains on businesses disposed/ held for sale – 19 – – 59 78

Goodwill impairment – – – – (320) (320)

Statutory proft/(loss) before taxation 1,977 350 609 46 (567) 2,415

Net interest margin 1.36% 1.92% 3.34% 0.51% 1.55%

Total assets 257,692 148,467 59,166 185,345 12,831 663,501

Of which: loans and advances to customers 126,739 82,579 29,602 46,633 – 285,553


Of which: customer accounts 186,517 95,310 31,797 98,100 – 411,724

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Additional segmental information (statutory) 31.12.18



Net interest income 3,470 3,164 863 297 999 8,793

Net fees and commission income 1,496 1,579 284 192 (59) 3,492

Other income 1,640 298 243 29 294 2,504


31.12.17



Net interest income 3,225 3,006 802 286 862 8,181

Net fees and commission income 1,471 1,626 285 182 (52) 3,512

Other income 1,827 271 242 32 360 2,732


31.12.18



Net interest income 3,351 2,561 1,493 692 696 8,793

Other income 2,799 1,431 1,112 987 (333) 5,996


31.12.17



Net interest income 2,950 2,402 1,619 692 518 8,181

Other income 2,663 1,468 1,145 904 64 6,244


31.12.18

Hong Kong Korea China Singapore India UAE UK US $million $million $million $million $million $million $million $million

Net interest income 1,854 672 648 1,049 646 365 294 243

Other income 1,893 337 171 499 290 272 534 424

Operating income 3,747 1,009 819 1,548 936 637 828 667

31.12.17

Hong Kong Korea China Singapore India UAE UK US $million $million $million $million $million $million $million $million

Net interest income 1,564 625 540 965 577 394 428

Other income 1,823 340 163 470 406 339 314 517

Operating income 3,387 965 703 1,435 983 733 742

158

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3. Net interest income

Accounting policy Interest income for fnancial assets held at either fair value through other comprehensive income or amortised cost, and interest expense on all fnancial liabilities held at amortised cost is recognised in proft or loss using the effective interest method.

Interest income and expense on fnancial instruments held at fair value through proft or loss is recognised within net interest income using the effective interest method, with the exception of fair value elected structured notes and structured deposits for which all gains and losses are recognised within trading income.

The effective interest method is a method of calculating the amortised cost of a fnancial asset or a fnancial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the fnancial instrument or, when appropriate, a shorter period, to the net carrying amount of the fnancial asset or fnancial liability. When calculating the effective interest rate, the Group estimates cash fows considering all contractual terms of the fnancial instrument (for example prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Where the estimates of cash fows have been revised, the carrying amount of the fnancial asset or liability is adjusted to refect the actual and revised cash fows, discounted at the instruments original effective interest rate. The adjustment is recognised as interest income or expense in the period in which the revision is made.

Interest income for fnancial assets that are either held at fair value through other comprehensive income or amortised cost that have become credit-impaired subsequent to initial recognition (stage 3) and have had amounts written off, is recognised using the credit adjusted effective interest rate. This rate is calculated in the same manner as the effective interest rate except that expected credit losses are included in the expected cash fows. Interest income is therefore recognised on the amortised cost of the fnancial asset including expected credit losses. Should the credit risk on a stage 3 fnancial asset improve such that the fnancial asset is no longer considered credit-impaired, interest income recognition reverts to a computation based on the rehabilitated gross carrying value of the fnancial asset.

31.12.18 31.12.17 $million $million

Balances at central banks 364 287

Loans and advances to banks 2,293 1,955

Loans and advances to customers 10,527 8,845

Listed debt securities 1,913 928

Unlisted debt securities 1,227 1,501

Other eligible bills 849 836

Accrued on impaired assets (discount unwind) 91 83

Interest income 17,264 14,435

Deposits by banks 811 891

Customer accounts 5,764 3,859

Debt securities in issue 1,129 756

Subordinated liabilities and other borrowed funds 767 748

Interest expense 8,471 6,254

Net interest income 8,793 8,181

Of which from fnancial instruments held at:

Amortised cost 12,255 10,861

Fair value through other comprehensive income/ available-for-sale investments 2,845 2,657

Fair value through proft or loss 2,164 847

Held-to-maturity – 70

Interest income 17,264 14,435

Of which from fnancial instruments held at:

Amortised cost 7,384 6,128

Fair value through proft or loss 1,087 126

Interest expense 8,471 6,254

Net interest income 8,793 8,181

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4. Net fees and commission

Accounting policy Fees and commissions charged for services provided or received by the Group are recognised on an accrual basis when the service has been provided or signifcant act performed.

Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retained no part of the loan package for itself, or retained a part at the same effective interest rate as for the other participants.

The Group can act as trustee or in other fduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement beneft plans and other institutions. The assets and income arising thereon are excluded from these fnancial statements, as they are not assets and income of the Group.

The determination of the services performed for the customer, the transaction price, and when the services are completed depends on the nature of the product with the customer. The main considerations on income recognition by product are as follows:

Transaction Banking The Group recognises fee income associated with transactional Trade, Cash Management and Custody activities at the point in time the service is provided. The Group recognises income associated with Trade contingent risk exposures (such as letters of credit and guarantees) and periodic Custody activities over the period in which the service is provided.

Payment of fees is usually received at the same time the service is provided. In some cases, letters of credit and guarantees issued by the Group have annual upfront premiums, which are amortised on a straight-line basis to fee income over the year.

Financial Markets and Corporate Finance The Group recognises fee income at the point in time the service is provided. Fee income is recognised for a signifcant non-lending service when the transaction has been completed and the terms of the contract with the customer entitle the Group to the fee. Fees are usually received shortly after the service is provided.

Syndication fees are recognised when the syndication is complete. Fees are generally received before completion of the syndication, or within 12 months of the transaction date.

Wealth Management Commissions for bancassurance activities are recorded as they are earned. These commissions are received within a short time frame of the commission being earned.

Target-linked fees are accrued over the period in which the target is met, provided it is assessed as highly probable that the target will be met. Cash payment is received at a contractually specifed date after achievement of a target has been confrmed.

Upfront and trailing commissions for managed investment placements are recorded as they are confrmed. Income from these activities is relatively even throughout the period, and cash is usually received within a short time frame after the commission is earned.

Retail Products The Group recognises most income at the point in time the Group is entitled to the fee, since most services are provided at the time of the customer’s request.

Credit card annual fees are recognised at the time the fee is received since in most of our retail markets there are contractual circumstances under which fees are waived, so income recognition is constrained until the uncertainties associated with the annual fee are resolved. The Group defers the fair value of reward points on its credit card reward programmes, and recognises income and costs associated with fulflling the reward at the time of redemption.


Fees and commissions income 4,029 3,942

Fees and commissions expense (537) (430)

Net fees and commission 3,492 3,512

Total fee income arising from fnancial instruments that are not fair valued through proft or loss is $1,478 million (31 December 2017: $1,067 million) and arising from trust and other fduciary activities is $144 million (31 December 2017: $130 million).

Total fee expense arising from fnancial instruments that are not fair valued through proft or loss is $143 million (31 December 2017: $74 million) and arising from trust and other fduciary activities is $27 million (31 December 2017: $22 million).

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4. Net fees and commission continued 31.12.18



Transaction Banking 1,066 12 223 – – 1,301

Trade 448 12 163 – – 623

Cash Management and Custody 618 – 60 – – 678

Financial Markets 206 – 25 – – 231

Corporate Finance 181 – 21 – – 202

Lending and Portfolio Management 57 – 13 – – 70

Principal Finance (14) – – – – (14)

Wealth Management – 1,167 2 190 – 1,359

Retail Products – 403 – 2 – 405

Treasury – – – – (22) (22)

Others – (3) – – (37) (40)

Net fees and commission 1,496 1,579 284 192 (59) 3,492

31.12.17



Transaction Banking 1,044 12 221 – – 1,277

Trade 450 12 160 – – 622

Cash Management and Custody 594 – 61 – – 655

Financial Markets 167 – 26 – – 193

Corporate Finance 207 – 19 – –

Lending and Portfolio Management 36 – 15 – – 51

Principal Finance 17 – – – – 17

Wealth Management – 1,171 4 180 – 1,355

Retail Products – 441 – 2 – 443

Treasury – – – – (20) (20)

Others – 2 – – (32) (30)

Net fees and commission 1,471 1,626 285 182 (52) 3,512

Upfront bancassurance consideration amounts are amortised on a straight-line basis over the contractual period to which the consideration relates. Deferred income on the balance sheet in respect of these activities is $886 million (31 December 2017: $970 million). The income will be earned evenly over the next 10.5 years (31 December 2017: 11.5 years).

5. Net trading income

Accounting policy Gains and losses arising from changes in the fair value of fnancial instruments held at fair value through proft or loss are included in the income statement in the period in which they arise.

Income is recognised from the sale and purchase of trading positions, margins on market making and customer business and fair value changes.


Net trading income 1,683 1,527

Signifcant items within net trading income include:

Gains on instruments held for trading 1,756 1,716

Losses on fnancial assets mandatorily at fair value through proft or loss (104) –

Gains on fnancial assets designated at fair value through proft or loss 11 167

Gains/(losses) on fnancial liabilities designated at fair value through proft or loss 30 (202)

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6. Other operating income

Accounting policy Operating lease income is recognised on a straight-line basis over the period of the lease unless another systematic basis is more appropriate.

Dividends on equity instruments are recognised when the Group’s right to receive payment is established.

On disposal of fair value through other comprehensive income fnancial instruments, the cumulative gain or loss recognised in other comprehensive income is recycled to the proft or loss in other operating income/expense.

When the Group loses control of the subsidiary or disposal group, the difference between the consideration received and the carrying amount of the subsidiary or disposal group is recognised as a gain or loss on sale of the business.


Other operating income includes:

Rental income from operating lease assets 573 670

Gains less losses on disposal of fair value through other comprehensive income/available-for-sale investments (31) 235

Net gain on sale of businesses 9 28

Net gain on derecognition of investment in associate – 64

Dividend income 25 46

Gains arising on repurchase of senior and subordinated liabilities1 69 –

Other 176 162

821 1,205

1 On 14 June 2018, Standard Chartered PLC repurchased in part, £245.7 million of its £750 million 4.375 per cent senior debt 2038 and £372.5 million of its £900 million 5.125 per cent subordinated debt 2034. On the same date, Standard Chartered Bank repurchased in part, £95.1 million of its £200 million 7.75 per cent subordinated notes (callable 2022). This activity resulted in an overall gain of £69 million for the Group. Please refer to Note 27

7. Operating expenses

Accounting policy Short-term employee benefts: salaries and social security expenses are recognised over the period in which the employees provide the service. Variable compensation is included within share-based payments costs and wages and salaries. Further details are disclosed in the Directors’ remuneration report (pages 91 to 125).

Pension costs: contributions to defned contribution pension schemes are recognised in proft or loss when payable. For defned beneft plans, net interest expense, service costs and expenses are recognised in the income statement. Further details are provided in Note 30.

Share-based compensation: the Group operates equity-settled and cash-settled share-based payment compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. Further details are provided in Note 31.


Staff costs:

Wages and salaries 5,439 5,047

Social security costs 171 159

Other pension costs (Note 30) 365 357

Share-based payment costs 166 152

Other staff costs 933 1,043

7,074 6,758

Other staff costs include redundancy expenses of $153 million (31 December 2017: $85 million). Further costs in this category include training, travel costs and other staff related costs.

The following table summarises the number of employees within the Group:

31.12.18 31.12.17

Business Support services Total Business Support services Total

At 31 December 38,621 46,781 85,402 40,636 45,385 86,021

Average for the year 39,929 46,339 86,268 41,806 44,988 86,794

The Company employed nil staff at 31 December 2018 (31 December 2017: nil) and it incurred costs of $5 million (31 December 2017: $5 million).

Details of directors’ pay and benefts and interests in shares are disclosed in the Directors’ remuneration report (pages 91 to 125).

Transactions with directors, offcers and other related parties are disclosed in Note 36.

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7. Operating expenses continued 31.12.18 31.12.17 $million $million

Premises and equipment expenses:

Rental of premises 374 379

Other premises and equipment costs 395 427

Rental of computers and equipment 21 17

790 823

General administrative expenses:

UK bank levy 324 220

Provision for regulatory matters 900 –

Other general administrative expenses 1,702 1,787

2,926 2,007

Depreciation and amortisation:

Property, plant and equipment:

Premises 86 85

Equipment 94 85

Operating lease assets 304 328

484 498

Intangibles:

Software 363 320

Acquired on business combinations 10 11

857 829

Total operating expenses 11,647 10,417

The UK bank levy is applied on the chargeable equities and liabilities on the Group’s consolidated balance sheet. Key exclusions from chargeable equities and liabilities include Tier 1 capital, insured or guaranteed retail deposits, repos secured on certain sovereign debt and liabilities subject to netting. The rate of the levy for 2018 is 0.16 per cent for chargeable short-term liabilities, with a lower rate of 0.08 per cent generally applied to chargeable equity and long-term liabilities (i.e. liabilities with a remaining maturity greater than one year). The rates will be gradually reduced over the next two years, from 1 January 2021 they will be 0.10 per cent for short-term liabilities and 0.05 per cent for long-term liabilities. In addition, the scope of the bank levy will be restricted to the balance sheet of UK operations only from that date.

8. Credit impairment

Accounting policy Signifcant accounting estimates and judgements The Group’s expected credit loss (ECL) calculations are outputs of complex models with a number of underlying assumptions. The signifcant judgements in determining expected credit loss include:

¼ The Group’s criteria for assessing if there has been a signifcant increase in credit risk; and

¼ Development of expected credit loss models, including the choice of inputs relating to macroeconomic variables

The calculation of credit impairment provisions also involves expert credit judgement to be applied by the credit risk management team based upon counterparty information they receive from various sources including relationship managers and on external market information. Details on the approach for determining expected credit loss can be found in the Credit risk section, under IFRS 9 Methodology (page 174).

Estimates of forecasts of key macroeconomic variables underlying the expected credit loss calculation can be found with in the Risk review, Key assumptions and judgements in determining expected credit loss (page 175).

Expected credit losses Expected credit losses are determined for all fnancial debt instruments that are classifed at amortised cost or fair value through other comprehensive income, undrawn commitments and fnancial guarantees.

An expected credit loss represents the present value of expected cash shortfalls over the residual term of a fnancial asset, undrawn commitment or fnancial guarantee.

A cash shortfall is the difference between the cash fows that are due in accordance with the contractual terms of the instrument and the cash fows that the Group expects to receive over the contractual life of the instrument.

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8. Credit impairment continued

Measurement Expected credit losses are computed as unbiased, probability-weighted amounts which are determined by evaluating a range of reasonably possible outcomes, the time value of money, and considering all reasonable and supportable information including that which is forward-looking.

For material portfolios, the estimate of expected cash shortfalls is determined by multiplying the probability of default (PD) with the loss given default (LGD) with the expected exposure at the time of default (EAD). There may be multiple default events over the lifetime of an instrument. Further details on the components of PD, LGD and EAD are disclosed in the Credit risk section. For less material Retail Banking loan portfolios, the Group has adopted simplifed approaches based on historical roll rates or loss rates.

Forward-looking economic assumptions are incorporated into the PD, LGD and EAD where relevant and where they infuence credit risk, such as GDP growth rates, interest rates, house price indices and commodity prices among others. These assumptions are incorporated using the Group’s most likely forecast for a range of macroeconomic assumptions. These forecasts are determined using all reasonable and supportable information, which includes both internally developed forecasts and those available externally, and are consistent with those used for budgeting, forecasting and capital planning.

To account for the potential non-linearity in credit losses, multiple forward-looking scenarios are incorporated into the range of reasonably possible outcomes for all material portfolios. For example, where there is a greater risk of downside credit losses than upside gains, multiple forward-looking economic scenarios are incorporated into the range of reasonably possible outcomes, both in respect of determining the PD (and where relevant, the LGD and EAD) and in determining the overall expected credit loss amounts. These scenarios are determined using a Monte Carlo approach centred around the Group’s most likely forecast of macroeconomic assumptions.

The period over which cash shortfalls are determined is generally limited to the maximum contractual period for which the Group is exposed to credit risk. However, for certain revolving credit facilities, which include credit cards or overdrafts, the Group’s exposure to credit risk is not limited to the contractual period. For these instruments, the Group estimates an appropriate life based on the period that the Group is exposed to credit risk, which includes the effect of credit risk management actions such as the withdrawal of undrawn facilities.

For credit-impaired fnancial instruments, the estimate of cash shortfalls may require the use of expert credit judgement. As a practical expedient, the Group may also measure credit impairment on the basis of an instrument’s fair value using an observable market price.

The estimate of expected cash shortfalls on a collateralised fnancial instrument refects the amount and timing of cash fows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, regardless of whether foreclosure is deemed probable.

Cash fows from unfunded credit enhancements held are included within the measurement of expected credit losses if they are part of, or integral to, the contractual terms of the instrument (this includes fnancial guarantees, unfunded risk participations and other non-derivative credit insurance). Although non-integral credit enhancements do not impact the measurement of expected credit losses, a reimbursement asset is recognised to the extent of the expected credit losses recorded.

Cash shortfalls are discounted using the effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired instruments (POCI) on the fnancial instrument as calculated at initial recognition or if the instrument has a variable interest rate, the current effective interest rate determined under the contract.

Instruments Location of expected credit loss provisions

Financial assets held at amortised cost Loss provisions: netted against gross carrying value1

Financial assets held FVOCI – Debt instruments Other comprehensive income (FVOCI expected credit loss reserve)2

Loan commitments Provisions for liabilities and charges3

Financial guarantees Provisions for liabilities and charges3

1 Purchased or originated credit-impaired assets do not attract an expected credit loss provision on initial recognition. An expected credit loss provision will be recognised only if there is an increase in expected credit losses from that considered at initial recognition

2 Debt and treasury securities classifed as fair value through other comprehensive income (FVOCI) are held at fair value on the face of the balance sheet. The expected credit loss attributed to these instruments is held as a separate reserve within other comprehensive income (OCI) and is recycled to the proft and loss account along with any fair value measurement gains or losses held within FVOCI when the applicable instruments are derecognised

3 Expected credit loss on loan commitments and fnancial guarantees is recognised as a liability provision. Where a fnancial instrument includes both a loan (i.e. fnancial asset component) and an undrawn commitment (i.e. loan commitment component), and it is not possible to separately identify the expected credit loss on these components, expected credit loss amounts on the loan commitment are recognised together with expected credit loss amounts on the fnancial asset. To the extent the combined expected credit loss exceeds the gross carrying amount of the fnancial asset, the expected credit loss is recognised as a liability provision

Recognition 12 months expected credit losses (stage 1) Expected credit losses are recognised at the time of initial recognition of a fnancial instrument and represent the lifetime cash shortfalls arising from possible default events up to 12 months into the future from the balance sheet date. Expected credit losses continue to be determined on this basis until there is either a signifcant increase in the credit risk of an instrument or the instrument becomes credit-impaired. If an instrument is no longer considered to exhibit a signifcant increase in credit risk, expected credit losses will revert to being determined on a 12-month basis.




Signifcant increase in credit risk (stage 2) If a fnancial asset experiences a signifcant increase in credit risk (SICR) since initial recognition, an expected credit loss provision is recognised for default events that may occur over the lifetime of the asset.

Signifcant increase in credit risk is assessed by comparing the risk of default of an exposure at the reporting date to the risk of default at origination (after taking into account the passage of time). Signifcant does not mean statistically signifcant nor is it assessed in the context of changes in expected credit loss. Whether a change in the risk of default is signifcant or not is assessed using a number of quantitative and qualitative factors, the weight of which depends on the type of product and counterparty. Financial assets that are 30 or more days past due and not credit-impaired will always be considered to have experienced a signifcant increase in credit risk. For less material portfolios where a loss rate or roll rate approach is applied to compute expected credit loss, signifcant increase in credit risk is primarily based on 30 days past due.

Quantitative factors include an assessment of whether there has been signifcant increase in the forward-looking probability of default (PD) since origination. A forward-looking PD is one that is adjusted for future economic conditions to the extent these are correlated to changes in credit risk. We compare the residual lifetime PD at the balance sheet date to the residual lifetime PD that was expected at the time of origination for the same point in the term structure and determine whether both the absolute and relative change between the two exceeds predetermined thresholds. To the extent that the differences between the measures of default outlined exceed the defned thresholds, the instrument is considered to have experienced a signifcant increase in credit risk.

Qualitative factors assessed include those linked to current credit risk management processes, such as lending placed on non-purely precautionary early alert (and subject to closer monitoring).

A non-purely precautionary early alert account is one which exhibits risk or potential weaknesses of a material nature requiring closer monitoring, supervision, or attention by management. Weaknesses in such a borrower’s account, if left uncorrected, could result in deterioration of repayment prospects and the likelihood of being downgraded. Indicators could include a rapid erosion of position within the industry, concerns over management’s ability to manage operations, weak/deteriorating operating results, liquidity strain and overdue balances among other factors.

Credit-impaired (or defaulted) exposures (stage 3) Financial assets that are credit-impaired (or in default) represent those that are at least 90 days past due in respect of principal and/or interest. Financial assets are also considered to be credit-impaired where the obligors are unlikely to pay on the occurrence of one or more observable events that have a detrimental impact on the estimated future cash fows of the fnancial asset. It may not be possible to identify a single discrete event but instead the combined effect of several events may cause fnancial assets to become credit-impaired.

Evidence that a fnancial asset is credit-impaired includes observable data about the following events:

¼ Signifcant fnancial diffculty of the issuer or borrower;

¼ Breach of contract such as default or a past due event;

¼ For economic or contractual reasons relating to the borrower’s fnancial diffculty, the lenders of the borrower have granted the borrower concession/s that lenders would not otherwise consider. This would include forbearance actions (pages 160 to 162);

¼ Pending or actual bankruptcy or other fnancial reorganisation to avoid or delay discharge of the borrower’s obligation/s;

¼ The disappearance of an active market for the applicable fnancial asset due to fnancial diffculties of the borrower;

¼ Purchase or origination of a fnancial asset at a deep discount that refects incurred credit losses

Irrevocable lending commitments to a credit-impaired obligor that have not yet been drawn down are also included within the stage 3 credit impairment provision to the extent that the commitment cannot be withdrawn.

Loss provisions against credit-impaired fnancial assets are determined based on an assessment of the recoverable cash fows under a range of scenarios, including the realisation of any collateral held where appropriate. The loss provisions held represent the difference between the present value of the cash fows expected to be recovered, discounted at the instrument’s original effective interest rate, and the gross carrying value of the instrument prior to any credit impairment. The Group’s defnition of default is aligned with the regulatory defnition of default as set out in European Capital Requirements Regulation (CRR178) and related guidelines.

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Expert credit judgement For Corporate & Institutional, Commercial and Private Banking, borrowers are graded by credit risk management on a credit grading (CG) scale from CG1 to CG14. Once a borrower starts to exhibit credit deterioration, it will move along the credit grading scale in the performing book and when it is classifed as CG12 the credit assessment and oversight of the loan will normally be performed by Group Special Assets Management (GSAM).

Borrowers graded CG12 exhibit well-defned weaknesses in areas such as management and/or performance but there is no current expectation of a loss of principal or interest. Where the impairment assessment indicates that there will be a loss of principal on a loan, the borrower is graded a CG14 while borrowers of other credit-impaired loans are graded CG13. Instruments graded CG13 or CG14 are regarded as non-performing loans, i.e. stage 3 or credit-impaired exposures.

For individually signifcant fnancial assets within stage 3, GSAM will consider all judgements that have an impact on the expected future cash fows of the asset. These include: the business prospects, industry and geo political climate of the customer, quality of realisable value of collateral, the Group’s legal position relative to other claimants and any renegotiation/ forbearance/ modifcation options. The difference between the loan carrying amount and the discounted expected future cash fows will result in the stage 3 credit impairment amount. The future cash fow calculation involves signifcant judgements and estimates. As new information becomes available and further negotiations/forbearance measures are taken the estimates of the future cash fows will be revised, and will have an impact on the future cash fow analysis.

For fnancial assets which are not individually signifcant, such as the Retail Banking portfolio or small business loans, which comprise a large number of homogenous loans that share similar characteristics, statistical estimates and techniques are used, as well as credit scoring analysis.

Retail Banking clients are considered credit-impaired where they are more than 90 days past due. Retail Banking products are also considered credit-impaired if the borrower fles for bankruptcy or other forbearance programme, the borrower is deceased or the business is closed in the case of a small business, or if the borrower surrenders the collateral, or there is an identifed fraud on the account. Additionally, if the account is unsecured and the borrower has other credit accounts with the Group that are considered credit-impaired, the account may be also be credit-impaired.

Techniques used to compute impairment amounts use models which analyse historical repayment and default rates over a time horizon. Where various models are used, judgement is required to analyse the available information provided and select the appropriate model or combination of models to use.

Expert credit judgement is also applied to determine whether any post-model adjustments are required for credit risk elements which are not captured by the models.

Modifed fnancial instruments Where the original contractual terms of a fnancial asset have been modifed for credit reasons and the instrument has not been derecognised (an instrument is derecognised when a modifcation results in a change in cash fows that the Group would consider substantial), the resulting modifcation loss is recognised within credit impairment in the income statement with a corresponding decrease in the gross carrying value of the asset. If the modifcation involved a concession that the bank would not otherwise consider, the instrument is considered to be credit-impaired and is considered forborne.

Expected credit loss for modifed fnancial assets that have not been derecognised and are not considered to be credit-impaired will be recognised on a 12-month basis, or a lifetime basis, if there is a signifcant increase in credit risk. These assets are assessed to determine whether there has been a signifcant increase in credit risk subsequent to the modifcation. Although loans may be modifed for non-credit reasons, a signifcant increase in credit risk may occur. In addition to the recognition of modifcation gains and losses, the revised carrying value of modifed fnancial assets will impact the calculation of expected credit losses, with any increase or decrease in expected credit loss recognised within impairment.

Forborne loans Forborne loans are those loans that have been modifed in response to a customer’s fnancial diffculties. Forbearance strategies assist clients who are temporarily in fnancial distress and are unable to meet their original contractual repayment terms. Forbearance can be initiated by the client, the Group or a third-party including government sponsored programmes or a conglomerate of credit institutions. Forbearance may include debt restructuring such as new repayment schedules, payment deferrals, tenor extensions, interest only payments, lower interest rates, forgiveness of principal, interest or fees, or relaxation of loan covenants.

Forborne loans that have been modifed (and not derecognised) on terms that are not consistent with those readily available in the market and/or where we have granted a concession compared to the original terms of the loans are considered credit-impaired if there is a detrimental impact on cash fows. The modifcation loss (see Classifcation and measurement – Modifcations) is recognised in the proft or loss within credit impairment and the gross carrying value of the loan reduced by the same amount. The modifed loan is disclosed as ‘Loans subject to forbearance – credit-impaired’.

Loans that have been subject to a forbearance modifcation, but which are not considered credit-impaired (not classifed as CG13 or CG14), are disclosed as ‘Forborne – not credit-impaired’. This may include amendments to covenants within the contractual terms.




Write-offs of credit-impaired instruments and reversal of impairment To the extent a fnancial debt instrument is considered irrecoverable, the applicable portion of the gross carrying value is written off against the related loan provision. Such loans are written off after all the necessary procedures have been completed, it is decided that there is no realistic probability of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the credit impairment loss decreases and the decrease can be related objectively to an event occurring after the credit impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised credit impairment loss is reversed by adjusting the provision account. The amount of the reversal is recognised in the income statement.

Loss provisions on purchased or originated credit-impaired instruments (POCI) The Group measures expected credit loss on a lifetime basis for POCI instruments throughout the life of the instrument. However, expected credit loss is not recognised in a separate loss provision on initial recognition for POCI instruments as the lifetime expected credit loss is inherent within the gross carrying amount of the instruments. The Group recognises the change in lifetime expected credit losses arising subsequent to initial recognition in the income statement and the cumulative change as a loss provision. Where lifetime expected credit losses on POCI instruments are less than those at initial recognition, then the favourable differences are recognised as impairment gains in the income statement (and as impairment loss where the expected credit losses are greater).

Improvement in credit risk/curing A period may elapse from the point at which instruments enter lifetime expected credit losses (stage 2 or stage 3) and are reclassifed back to 12-month expected credit losses (stage 1). For fnancial assets that are credit-impaired (stage 3), a transfer to stage 2 or stage 1 is only permitted where the instrument is no longer considered to be credit-impaired. An instrument will no longer be considered credit-impaired when there is no shortfall of cash fows compared to the original contractual terms.

For fnancial assets within stage 2, these can only be transferred to stage 1 when they are no longer considered to have experienced a signifcant increase in credit risk.

Where signifcant increase in credit risk was determined using quantitative measures, the instruments will automatically transfer back to stage 1 when the original PD based transfer criteria are no longer met. Where instruments were transferred to stage 2 due to an assessment of qualitative factors, the issues that led to the reclassifcation must be cured before the instruments can be reclassifed to stage 1. This includes instances where management actions led to instruments being classifed as stage 2, requiring that action to be resolved before loans are reclassifed to stage 1.

A forborne loan can only be removed from the disclosure (cured) if the loan is performing (stage 1 or 2) and a further two-year probation period is met.

In order for a forborne loan to become performing, the following criteria have to be satisfed:

¼ At least a year has passed with no default based upon the forborne contract terms

¼ The customer is likely to repay its obligations in full without realising security

¼ The customer has no accumulated impairment against amount outstanding

Subsequent to the criteria above, a further two-year probation period has to be fulflled, whereby regular payments are made by the customer and none of the exposures to the customer are more than 30 days past due.


Net credit impairment against proft on loans and advances to banks and customers 607 1,365

Net credit impairment against proft or loss during the period relating to debt securities 7 20

Net credit impairment relating to fnancial guarantees and loan commitments 39 (23)

Credit impairment1 653 1,362

1 No mat

Documents

Consolidated income statement - Standard Chartered · 2019-08-12 · 11 Taxation relating to components of other comprehensive income 10 14 2 Other comprehensive (loss)/income for