this is the highest assessment i have got, 35 out of 40, this is a group assignment, thanks Ayu and Kin.
because i use Email to post this blog, so all the figures are missing. and this is not the final version of our assignment, because i cannot find the final version. we did write a lot...
1. Introduction
1.1 Purpose
The purpose of this report is conducting a review of Standard Chartered PLC as one of the global financial institution.
1.2 Scope
This report will discuss Standard Chartered's history, products and services, and the physical and financial performance of the financial institution. Moreover, it also explains the impact of the global crisis on the bank along with its responses to the crisis.
1.3 Methodology
Research has been gathered from published data and reports related to the bank. The financial performance ratio has been used from BankScope website and the official websites of Standard Chartered including the annual report.
1.4 Assumption
The main assumption is the readers of this report have a fair understanding on financial term used in the report.
1.5 Limitation
The limitation of this report would be the time constraint and word limit given of the report which may disallow more-in-depth analysis.
1.6 Background
Standard Chartered is one of global financial institution which operates mainly in Asia, Africa, and Europe. Standard Chartered provides a wide range of financial product and services to both individual and institutional clients. Throughout its history, Standard Chartered has gone through major developments of mergers and acquisition. During the world financial crisis, the institution was not immune to its impact but still able to survive and maintain some strategies to success in the future.
2. History of Standard Chartered PLC (SCP)
SCP is a British bank headquartered in London with operations mainly in Asia, Africa, and Europe. It was formed in 1869 through a merger of two banks: The Standard Bank of British South Africa and the Chartered Bank of India, Australia and China (Standard Chartered, 2009a).
The Standard Bank was founded by James Wilson in 1853, following the grant of a Royal Charter by Queen Victoria, and opened the first branches in Bombay, Kolkata and Shanghai in 1858. Later it expanded in Hong Kong and Singapore in 1859. Following the opening of the Suez Canal in 1869, the Standard Bank expanded in China, and played a major role in the development of trade between the West and the East (Standard Chartered, 2009a).
The Chartered Bank was founded in the Cape Province of South Africa in 1862 by John Paterson, and commenced business in Port Elizabeth, in January 1863. In 1953, the Chartered Bank had has over 600 offices in British and Africa. In 1965, it acquired the Bank of West Africa, and expanding its operations into Cameroon, Gambia, Ghana, Nigeria and Sierra Leone (Standard Chartered, 2009a).
SCP then bought Hodge Group in 1973, Midland an International Banks Limited in 1983 and UnionBank of California in 1979. Then the bank expanded its business in Europe, Argentina, Canada, America, Panama Brazil, Venezuela and Nepal. New branches opened in Taiwan and US. (Standard Chartered, 2009a)
Since 1990, Standard Chartered began to extend its business to Asia, Africa and the Middle East. Now the bank has achieved several milestones with a number of strategic alliances and acquisitions, which have extended the customer and geographic reach and broadened the product range that Standard Chartered offers. (Standard Chartered, 2009b).
Acquisition action by SCP
Year | Country | Details |
1997 | Thailand | 75% of equity of Nakornthon Bank |
1997 | Lebanon | 85 %of share capital of Metropolitan Bank |
Jul-00 | Global | Acquisition of ANZ Grindlays (USD1.34bn) |
Sep-00 | Hong Kong | Acquisition of Chase Manhattan Card Company (USD1.32bn) |
Jun-04 | Hong Kong | Acquisition of PrimeCredit |
Nov-04 | Indonesia | Acquisition of 63% stake in PermataBank by the consortium of SCP & PT Astra International Tbk (USD355m) |
Dec-04 | Global | Acquisition of ANZ's Project Finance business with assets (USD15m) |
Jan-05 | South Korea | Acquisition of Korea First Bank (USD3.3bn) |
Apr-05 | Global | Acquisition of a minority stake (6%) in Travelex as part of Apax led consortium |
Jun-05 | Vietnam | Acquisition of 8.56% stake in Asia Commercial Bank (USD22m) |
Aug-05 | Bangladesh | Acquisition of Amex Bank's Bangladesh business (USD25m) |
Sep-05 | China | Acquisition of 19.99% of China Bohai Bank (USD123m) |
Dec-05 | N/A | Acquisition of 20% stake in Fleming Family & Partners (USD78m) |
Jun-06 | Africa | Acquisition of 25% in First Africa Group Holdings Ltd |
Sep-06 | Pakistan | Acquisition of 95.37% Union Bank (USD487m) |
Sep-06 | Indonesia | Acquisition of 26% stake in PermataBank by the consortium of SCP & PT Astra International Tbk (USD193m). Total stake held in PermataBank by consortium today is 89%. |
Oct-07 | Global | Standard Chartered acquires Pembroke, an aircraft leasing, financing and management firm |
Dec-07 | Global | Standard Chartered completes acquisition of Harrison Lovegrove, a leading global oil and gas M&A advisory boutique |
Jan-08 | South Korea | Standard Chartered First Bank Korea Ltd acquires an 80% stake in South Korea's A Brain, a funds administration company |
Jan-08 | India | Standard Chartered acquires a 49% strategic stake in India's UTI Securities, a leading local broking firm. |
Source: Standard Chartered (2009b)
In Australia, the Standard Chartered has two branches in Sydney and Perth. (Standard Chartered, 2009a) Once, Standard Chartered listed in ASX in 1986, but delisted in 1991 (Delisted, 2006).
3. Services and Products[1]
3.1 Consumer Banking
Consumer Banking offers a broad range of products and services including Savings and Banking Services, Loans and Mortgages, Credit Cards, Insurance, Investments, International Banking and Ways-To-Pay. They set up a few kinds of the savings accounts for different customer demand, for example, My Dream Account, by which people could save for their children's future; Foreign Currency Account which allows consumers saving money in multiple foreign currencies. Consumers could easily access to money when abroad through international network. Ways-to-Pay provides an easy method to paying and receiving money, and use SWIFT to ensure cross-border transactions are safe and reliable (Standard Chartered, 2009c).
3.2 Priority Banking
Priority Banking has the advantage of enjoying customised benefits and everything will be tailored to suit individual needs. They set up a suite of world-class solutions to help meet customers' financial needs, including Convenient Banking Solutions, World-class wealth solutions and Unique Card Solutions. Consumers could have a dedicated Relationship Manager and an experienced team of specialists, "Ask Once and It's Done" Service provides a faster, simpler and differentiated banking experience. They offer consumer access to a full range of exclusive and differentiated banking channels. Seamless international banking make sure those consumers could access to for free in any place in the word. (Standard Chartered, 2009c).
3.3 Private Banking
Private banking means to build a unique package personal to someone. They have developed five main investment principles that anchor the way we interact with clients, and provides several services to suggest investment, including Cash & Cash Alternatives, Structured Products, Mutual Funds & Fund NAVs, Client-Directed Mutual Fund Portfolios, Signature Funds Portfolios, Signature Securities Portfolios and Alternative Investments (Standard Chartered, 2009c).
3.4 SME Banking
SME Banking aims to help consumer's business to achieve its fullest potential, by customized the product package, responsive services and access to expert advice. Their services includes Cash Management, SME Treasury Services, Trade Finance & Working Capital and Loans & Mortgages (Standard Chartered, 2009c).
3.5 Wholesale Banking
Wholesale Banking contains Transaction Banking, Financial Banking, Corporate Finance and Principle Finance. It has a client-focused strategy providing trade finance, cash management, securities services, foreign exchange and risk management, capital raising and corporate finance solutions, in other to provide effective solutions and services (Standard Chartered, 2009c).
3.6 Saadig Islamic Banking
Saadig Islamic Banking is based on Shariah[2] principles. An independent committee comprising three of the world's most renowned Shariah Scholars is established to make sure that Standard Chartered Saadiq products comply with the principles of Shariah. By operating Saadig Islamic Banking, Standard Chartered Saadiq has been recognized as a leading provider of Islamic Banking across the globe (Standard Chartered, 2009c). SCP can get competitive advantage from providing this kind of service. Because many large banks don't provide this kind of service.
4. Financial Strengths and Problems
4.1 Strengths
Overall, Standard Chartered performs very well for the past three years. Their strengths are shown from following ways:
4.1.1 Suitable strategies
Income and Earning per Share (EPS). The income of SCP keeps increasing since 1999 to recent year. Figure 1 below shows that SCP projected an average of $200mil growth in between 2006 and 2008. In addition, SCP shows an increase in EPS in 2006 ($170.70cents) to $173.00cents in 2007. It further reached to higher par of $174.9cents in 2008. The strong growth of SCP is due to adoption of different strategies in different areas of investment (Standard Chartered, 2008).
SCP divides its business into four regions- "Asia", "Africa", "Middle East & other South Asia" and "Americas, UK & Europe". According to the features of different areas, SCP uses different method to achieve competitive advantage. For example, income from existing businesses in the Americas, UK and Europe grows strongly. That is further boosted by the integration of American Express Bank (AEB), which improved both the Private Bank and Wholesale Banking presence, adding 17 new markets to the four regions. As for African region, income growth was boosted by the addition of new branches in Nigeria, Kenya, Uganda and Zambia. Nigeria performed particularly well, with income up 30%. Across the region, new campaigns helped drive deposit growth while Wholesale Banking benefited from the introduction of world-class, innovative products (Standard Chartered, 2008).
Figure 1: Annual Income from 1998-2008
H1 | H2 | Full Year | |
2008 | $6,987 | $6,981 | $13,968 |
2007 | $5,263 | $5,804 | $11,067 |
2006 | $4,112 | $4,508 | $8,620 |
2005 | $3,236 | $3,625 | $6,861 |
Table 2: Income from 2005 to 2008.
4.2.2 Good Corporate Governance
Share price. SCP is listed in both London and Hong Kong. For the past five years, its share price is stable except for the second half year of 2008. The share price dropped because of the global financial crisis. As compared with its peer (Citigroup), SCP's share price is relatively steady. Figure 2 shows that Standard Chartered (green) does better than Citigroup (red) during the financial crisis. This further proves that SCP has performed outstandingly due to appropriate strategy adoption. It is also due to its good corporate governance. According to O'Donovan (2003), the perceived quality of a company's corporate governance can influence its share price. That is to say, good corporate governance can make its share price steady. The board of SCP believes that strong corporate governance is essential for delivering sustainable value, enhancing a culture of business integrity and maintaining investor confidence. In pursuit of the highest standards of corporate governance, the directors confirm that the Group applies a governance approach that complies with all of the provisions of the UK Financial Reporting Council's Combined Code on Corporate Governance (the Code) and Hong Kong Listing Rules. An effective board is crucial to the success of the Group. To assess the performance of the board, its principal committees and individual directors, the Group conducts a rigorous performance evaluation each year. Also, the Group also has some sub-committee, such as audit committee, to make sure the company operates in a right and health way. (Standard Charted, 2008)
Figure 2: The chart of Share Price (Standard Chartered PLC vs. Citigroup)
4.2 financial problems
SCP also faces some financial problems, as will be described below.
4.2.1 Dubai's debt problems
The biggest and latest problem is Dubai's debt problems. In the midst of a global financial crisis, Dubai's real estate market encounters declined after a six-year boom. On November 25, 2009, the Dubai government announced that Dubai World and Nakheel requests to all financial providers to reschedule its repayments to at least 30 May 2010. Financial providers including SCP fears of the massive default that could cause more financial pain just as the global economy is starting to recover (Marquez, 2009). Some of the world's largest banks, including HSBC, SCP, Royal Bank of Scotland and Lloyds Banking Group have joined with bondholders in organizing their response to Dubai World's request for restructuring over $26 billion in debt (americanbankingnews, 2009). According to early estimates from analysts at Goldman Sachs, SCP could face losses of $177 million. This has hit SCP's share price in Hong Kong (fell 5.8%) (Marquez, 2009). The Table 3 shows that the share price decreases dramatically from 25th November to 27th November, and has a little increase after 30th November. So far, for Standard Chartered, the impact of Dubai crisis is unclear. But this is a big problem for the Group, and needs to be solved as soon as possible.
Date | Highest | Lowest | Closing Price |
24/11/2009 | 215.00 | 211.60 | 213.20 |
25/11/2009 | 214.40 | 211.20 | 213.40 |
26/11/2009 | 210.40 | 201.60 | 203.00 |
27/11/2009 | 194.80 | 185.00 | 185.50 |
30/11/2009 | 195.90 | 192.50 | 193.20 |
01/12/2009 | 192.50 | 190.10 | 191.30 |
02/12/2009 | 200.20 | 197.90 | 199.70 |
Table 3: Share price of Standard Chartered
4.2.2 Globalisation
SCP has over 1,600 branches and outlets located in 75 countries (58 countries in 2006). (Standard Chartered, 2006- 2008). In 2008, Asia provided more than 70% of the Group's income and over 80% of its operating profit (Standard Chartered, 2008). This doesn't sound good for the Group's development. SCP doesn't really diversify its operation well in terms of globalisation. Figure 3 shows that SCP's concentration mostly in Asia region may place the Group at stake if there's Asian Financial Crisis to come. However, as a large global bank, SCP also needs to consider how to increase and expand its market share (power) in some developed areas, like US and Europe.
Figure 3: Operating Income by Region
Source: Standard Chartered PLC Annual Report, 2008
Asia consists of majority of emerging markets, as compared to the West is yet to be developed and 'step-by-step' approach should be taken. There are problems in Asian markets, like none to low level of transparency and deregulation. SCP should deal with these deficiencies carefully to prevent attacks like Asian Financial Crisis 1997 from happening again.
5. Performance Analysis
Financial statements will be adopted in this section to analyse finance performance of SCP for the past 5 years. Financial ratios are used to determine the asset quality, capital, profitability and liquidity position of SCP.
5.1 Asset Quality Ratios
5.1.1 Impaired Loans/Gross Loans
| <><> | 2004 | <><> | 2005 | <><> | 2006 | <><> | 2007 | <><> | 2008 | <><> | |
SCP | <><> | 3.97 | <><> | 2.36 | <><> | 1.95 | <><> | 1.39 | <><> | 1.52 | <><> |
Citigroup Inc | <><> | 1.36 | <><> | 0.87 | <><> | 0.75 | <><> | 1.17 | <><> | 4.91 | <><> |
HSBC Holdings PLC | <><> | 1.81 | <><> | 1.52 | <><> | 1.56 | <><> | 1.83 | <><> | 2.65 | <><> |
Table 4 Impaired loan to Gross loan ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 1: Impaired loan to Gross loan ratio
Source: BankScope Database (2009) Updated December, 2009
Impaired Loans/Gross Loans ratio show how much loans where payment are unlikely to be made in accordance with contract term. As shown in Graph 1, from 2004 until 2007 SCP shows decline trend in this ratio. However, in 2008 the ratio slightly increases from 1.39 (2007) to 1.52 (2008) due to GFC. Consequently, the impaired loan has increase by $511mil (Standard Chartered, 2008). During the 2008 credit crunch, SCP shows the lowest ratio compared to its peers. Citigroup has the highest ratio of impaired loans to gross loans which is 4.91 while HSBC's ratio is 2.65.
5.1.2 Loan Loss reserve/Gross loans
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 2.36 | 1.52 | 1.53 | 1.16 | 1.11 |
Citigroup Inc | 2.05 | 1.68 | 1.32 | 2.07 | 4.27 |
HSBC Holdings PLC | 1.88 | 1.51 | 1.54 | 1.92 | 2.52 |
Table 5: Loan Loss reserve/ Gross loans
BankScope Database (2009) Updated December, 2009
Graph 2: Loan Loss reserve/ Gross loans
Source: BankScope Database (2009) Updated December, 2009
Loan loss reserve/gross loans ratio indicates the percentage of the total portfolio has been set aside but not charged off. Higher ratio indicates the poorer quality of loan portfolio and vice versa (Samad, 2009). Graph 2 shows that SCP's ratio declines continuously for past five year performance from 2.36 in 2004 to 1.11 in 2008. While its peer, Citibank and HSBC has an increase ratio form year to year and have a high ratio in 2008 of 4.27 and 2.52 respectively. In comparison, SCP has a good quality of loan portfolio compare to its peers by having a low loan loss reserve to gross ratio. The significant spread of ratio in between SCP and its peers is because SCP's target investment market is mildly hit as compared to its peers which had impacted deeply by GFC.
5.2 Capital Ratios
Capital adequacy has been adopted by many banks for risk management. This is because capital requirements are being set aside by the bank to act as a buffer to risks that bank exposed to.
5.2.1 Tier 1 Ratio | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 8.60% | 7.70% | 8.40% | 8.80% | 10.10% |
Citigroup Inc | 8.70% | 8.79% | 8.59% | 7.12% | 11.92% |
HSBC Holdings PLC | 8.90% | 9.00% | 9.40% | 9.30% | 8.30% |
Table 6: Tier 1 Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 3: Tier 1 Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 3 indicates that SCP had a fall in its core capital ratio fall by 0.90% to 7.70% in2005. In contrast, both peer groups have increment of Tier 1 Ratio by a small margin. It is however, SCP's decline in Tier 1 Ratio doesn't really affect the capital adequacy requirement. According to Basel Accord, core capital (requirement) must equal or exceed 4%of weighted-risk asset under stress scenario to buffer against credit risk (Sinkey, 2002). And SCP has almost double of it since 2005. Tier 1 ratio for SCP had been in increasing trend thereafter and reached 10.10% in 2008. This shows that SCP is aware of various risks (exchange rate, market, operational and political risks) that the group exposes as it has operations around the globe. This is especially when Subprime Mortgage Crisis 2008 occurs, SCP was able to sustain due to its high maintenance of Tier 1 Ratio. Moreover, most of SCP's investments and offshore centres are well diversified and its setup platforms are robust as enjoys growth and its focus regions[3] are less immune to turmoil and rather resilient. As for Citigroup Inc, its Tier 1 ratio surged up ever since 2007. This[C1] is because Citigroup was bail-out by Federal of $20bn for the attack of subprime crisis which leads to high level of Tier 1 Ratio (Ellis, D., 2008). HSBC's suffered great loss from US subprime crisis of $15.6bn (BBC News, 2008). This pulls down HSBC's ratio to 8.30% in 2008. In conclusion, SCP performs well for the past 5 years and there're sufficient core capitals to buffer against credit risk.
5.2.2 Total Capital Ratio | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 15.00% | 13.60% | 14.30% | 15.20% | 15.60% |
Citigroup Inc | 11.80% | 12.02% | 11.65% | 10.70% | 15.70% |
HSBC Holdings PLC | 12.00% | 12.80% | 13.50% | 13.60% | 11.40% |
Table 7: Total Capital Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 4: Total Capital Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 4 illustrates that total capital ratio[4] of SCP considered as well-capitalized with a CAR of higher than 10%. The Group's ratio however, fell by 1.40% to 13.60% in 2005 and rises up to 15.60% in 2008. The lowest level ratio for SCP in 2005 is considered acceptable because the economy's relatively stable at time. As new Basel Accord (Basel II) is implemented in November 2005, more risks are to be considered, especially, market risk and operational risk (Eun & Resnick, 2009). Hence, total capital ratio set aside rises every year. With strategic selection on places for investments, SCP's past 5 year performances have been above average given the risk exposed in US subprime loan crisis[5]. HSBC's ratio plunged down to 11.40% in 2008. This is because of the hit of the GFC and less capital for risks buffer. However, the ratio's higher than required[6]. Citigroup's capital ratio rose up to 15.70% in 2008 due to Federal's bailout, hence Citigroup was able to set aside more capital reserves against risk exposure.
5.2.3 Equity/Total Assets | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 6.84% | 5.73% | 6.54% | 6.50% | 5.22% |
Citigroup Inc | 7.49% | 7.63% | 6.50% | 5.44% | 7.43% |
HSBC Holdings PLC | 7.75% | 7.16% | 6.72% | 5.75% | 3.97% |
Table 8: Equity/ Total Assets ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 5: Equity/ Total Assets
Source: BankScope Database (2009) Updated December, 2009
Graph 5 indicates a plunge of SCP's Equity/Total Assets (TE/TA) by 1.11% to 5.73% in 2005. This is where the equity ratio is less than asset. The Group's investing more liquid assets rather than put as reserve to earn uncertain profit. However, as United Kingdom implemented Basel II, more equity are required to set aside to act as buffer against risks causing the rise of TE/TA to peak of 6.54% and 6.50% respectively in 2006 and 2007. With two years of conservative banking operations, the Group started with aggressive investment, especially during the subprime crisis[7]. Based on SCP's Pre-close Trading Statement as at November, 2008, even though there's mild impact hit by subprime crisis on the Group, its focus continents were performing well, and projecting profits for every consecutive half-year reports[8] (Standard Chartered, 2008). This leads to increase in Net Profit Margin too. However, the Group's asset liquidity may be slightly constrained. For HSBC, TE/TA has been plunging down throughout the past 5 years, showing that HSBC is committed to invest more of its liquid assets than keeping it as reserve. High level of liquid asset investment for HSBC has caused the bank hit badly by US subprime crisis. For Citigroup, its fluctuation is significant. Its TE/TA has been plunging down 5.44% in 2007. Citigroup is one of the banks that deeply hit by the subprime crisis and needed bailout from Federal as the bank is too big to fail[9] (Ellis, 2008). Citigroup had more 'unprofitable' liquid asset to set aside to stabilise the bank's health.
5.3 Profitability/ Operational Ratios
5.3.1 Net Interest Margin[10]
| <><> | 2004 | <><> | 2005 | <><> | 2006 | <><> | 2007 | <><> | 2008 | <><> | |
SCP | <><> | 2.64 | <><> | 2.76 | <><> | 2.52 | <><> | 2.46 | <><> | 2.27 | <><> |
Citigroup Inc | <><> | 3.72 | <><> | 2.97 | <><> | 2.59 | <><> | 2.59 | <><> | 2.89 | <><> |
HSBC Holdings PLC | <><> | 2.69 | <><> | 2.44 | <><> | 2.21 | <><> | 1.92 | <><> | 1.87 | <><> |
Table 9: Net Interest Margin
Source: BankScope Database (2009) Updated December, 2009
Graph 6: Net Interest Margin
Source: BankScope Database (2009) Updated December, 2009
Net Interest Margin (NIM) indicates how well management employed the earning asset base compare to its debt situation. Graph 6 shows the SCP's highest NIM ratio is 2.76 in 2005 and slightly decrease to 2.27 in 2008. The decreasing in 2008 is due to interest rate slump during GFC (Standard Chartered, 2008). Citigroup and HSBChave highest NIM, 3.72 and 2.69 respectively in 2004 and also have decreasing NIM in 2008 to 2.89 for Citibank and 1.87 for HSBC. GFC in 2008 affecting the growth in saving become lower and the wholesale funds become more expensive thus resulting in decreasing net interest income (Samad 2009). In comparison, SCP has a higher NIM than HSBC but lower than Citigroup.
5.3.2 Cost to Income ratio[11]
| <><> | 2004 | <><> | 2005 | <><> | 2006 | <><> | 2007 | <><> | 2008 | <><> | |
SCP | <><> | 52.94 | <><> | 55.55 | <><> | 55.65 | <><> | 56.67 | <><> | 57.84 | <><> |
Citigroup Inc | <><> | 64.76 | <><> | 55.38 | <><> | 59.45 | <><> | 76.18 | <><> | 142.62 | <><> |
HSBC Holding PLC | <><> | 51.31 | <><> | 50.64 | <><> | 50.68 | <><> | 51.14 | <><> | 51.52 | <><> |
Table 10: Cost to Income Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 7: Cost to Income
Source: BankScope Database (2009) Updated December, 2009
Graph 7 shows SCP's cost to income ratio relatively stable during five year performance but it slightly decrease from 2007-2008. The increase is probably due to covering the impact of GFC thus enhanced its management cost. Comparing with Citigroup and HSBC, SCP is well below Citigroup but above HSBC. Citigroup has the worst ratio which indicates that their management were unable to manage their cost efficiently. Consequently, SCP is more efficient and profitable than Citigroup and less efficient than HSBC.
5.3.3 Return on average assets (ROAA)[12]
| <><> | 2004 | <><> | 2005 | <><> | 2006 | <><> | 2007 | <><> | 2008 | <><> | |
SCP | <><> | 1.10 | <><> | 1.09 | <><> | 0.98 | <><> | 1.00 | <><> | 0.92 | <><> |
Citigroup Inc | <><> | 1.24 | <><> | 1.65 | <><> | 1.27 | <><> | 0.18 | <><> | -1.41 | <><> |
HSBC Holdings PLC | <><> | 1.11 | <><> | 1.14 | <><> | 1.00 | <><> | 0.97 | <><> | 0.27 | <><> |
Table 11: Return on Average Assets
Source: BankScope Database (2009) Updated December, 2009
Graph 8: Return on Average Assets
Source: BankScope Database (2009) Updated December, 2009
ROAA is a indicator of a bank's financial performance and managerial efficiency. It measures how competent the bank's management is in allocating asset into net profit (Samad, 2009). A high ROAA ratio shows a higher profitability of the bank. SCP shows a stable ROAA from 2004-2006. In 2007 CP's ratio begin to increase to 1 and decline to 0.92 in 2008. SCP's efficiency in using their assets to generate income is decreasing mainly as its net profit was reduced. Comparing with Citigroup and HSBC, SCP has a better ROAA during 2007-2008 which indicates that they could've use their assest to generate income efficiently than its peer. Yet, for Citigroup, ROAA is negative because the firm incur a huge loss in 2008 (Citigroup, 2009).
5.3.4 Return on average equity (ROAE)[13]
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 16.1 | 17.6 | 15.84 | 15.39 | 15.91 |
Citigroup Inc | 16.38 | 22.11 | 18.49 | 3.06 | -22.67 |
HSBC Holdings PLC | 14.37 | 15.35 | 14.51 | 15.71 | 5.52 |
Table 12: Return on Average Equity
Source: BankScope Database (2009) Updated December, 2009
Graph 9: Return on Average Equity
Source: BankScope Database (2009) Updated December, 2009
ROAE shows the amount of the net profit can cover the amount of equity, how the bank efficiently used the amount of equity to make profit. SCP shows a significant ROAE ratio during five year performance. SCP's ROAE is 15.91 in 2008 and have the best performance in 2005 with ROAE of 17.60. SCP's likely to have a stable ROAE which means they have a stable economic performance even during GFC. Moreover, Citigroup also shows a high ROAE during 2004-2006 with a highest ratio of 22.11 in 2005. However, ROAE decreased dramatically in 2007 to 3.06 and -22.67 in 2008. The negative ROAE indicate that Citigroup had a loss during 2008 financial year. HSBC also had a significant ratio around 15 during 2004-2007 but the ratio decrease dramatically to 5.52 in 2008. In comparison, SCP's ROAE performance is better than Citigroup and HSBC.
5.4 Liquidity Ratios
5.4.1 Interbank Ratio | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 114.64% | 121.90% | 80.30% | 136.65% | 145.99% |
Citigroup Inc | N/A | N/A | N/A | N/A | N/A |
HSBC Holdings PLC | 167.63% | 178.85% | 177.49% | 175.46% | 116.35% |
Table 13: Interbank Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 11: Interbank Ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 11 shows that SCP's Interbank Ratio (IR) increased from 2004 to 2005 (121.90%) and plunged down to 80.30% in 2006. The significant fall in IR occurred as a result of a series of acquisition by the Group[14]. These acquisition activities requires huge sum of funds, hence, the Group could have borrowed funds with total of $12,699mil as at 31st December, 2006from banks and issue Medium Term Notes to acquire these potentially generating high cash flow firms (Standard Chartered, 2006). Thereafter, SCP had its IR surged up to145.99% in 2008. This shows that SCP loans more funds to other banks more than the Group borrows. This is because most of the acquisitions of the Group in Middle East, Africa and Asia are generating profit[15] which positioned the Group to be net placer in the market (Standard Chartered, 2008). This literally means that the Group has higher liquidity to siphon any uncertain events[16].
5.4.2 Liquid Assets/ Customers & ST Funding | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 3.86 | 22.32 | 16.57 | 33.31 | 32.40 |
Citigroup Inc | 65.47 | 60.39 | 62.29 | 68.94 | 64.07 |
HSBC Holdings PLC | 36.98 | 49.65 | 56.14 | 61.58 | 53.90 |
Table 14: Liquid Asset/Customers & ST Funding
Source: BankScope Database (2009) Updated December, 2009
Graph 12: Liquid Asset/Customers & ST Funding
Source: BankScope Database (2009) Updated December, 2009
According to Bunda and Desquilbet (2003) states that Liquid Asset/Customers & ST Funding ratio indicates percentage of customers and ST funds are able to be met by bank if there's sudden withdrawal.
Graph 12 illustrates that SCP had the ratio increased for the past 5 years even though has the lowest percentage as compared to peer in overall. The Group did increase its trading in debt securities and equity trading. The Group has invested approximately 33.22% of certificate of deposits in2006 and its Non-Performing Loans was greatly decreased from $940mil in 2005 to $591mil in 2006. This shows that liquid assets were stable in 2006. However, deposit & ST funds (liabilities) rose approximately 25%[17] grew relative higher than the growth of liquid assets in 2006. For instance, the level of loan to banks and cash in central bank has decreased by 9.11% and 4.08% respectively. Another finding is that the Group's investment securities (liquid assets) has decreased by 34.10% approximately in 2006 as compared to corresponding 2005 (Standard Chartered Annual report 2006). This leads to a fall in the ratio in 2006. It however surged up later to par of 32% in 2008. This is on the other hand is due to slow growth of deposit & ST funds of 29.31% in 2008, while the Group injected investment securities, cash in central bank, derivates financial instrument and loans to banks by extra 25.45%, 57.90%, 62.38%, 24.08% respectively in 2008 as compared to corresponding 2007. This literally means that the Group has more liquid and indirectly means that the Group is less possibly to run insolvency. Both peers are relatively performing stable in this ratio, especially Citigroup. This could be due to the continuous guidance of Federal Reserve on the bank as a condition to obtain the bailout of $20bn in 2008.
5.4.3 Net Loans/ Total assets | |||||
2004 | 2005 | 2006 | 2007 | 2008 | |
SCP | 49.05 | 52.15 | 52.85 | 46.77 | 40.04 |
Citigroup Inc | 38.31 | 40.79 | 37.59 | 38.50 | 35.81 |
HSBC Holdings PLC | 52.57 | 49.27 | 46.66 | 41.69 | 36.91 |
Table 15: Net Loan to Total Asset ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 13: Net Loan to Total Asset ratio
Source: BankScope Database (2009) Updated December, 2009
Graph 13 indicates that SCP had ratio rose to peak in 2006 (52.85%) and plunged down to 40.04% in 2008. The ratio rose in between 2004 and 2006 because the Group had tied itself into loan issuance, especially on corporate and commercial loans and other consumer loans while total asset's relatively high, $266,047mil (Standard Chartered Annual Report 2006). The plunge of ratio after 2006 is mainly due to the decrease in net loans rate as compared to total assets (TA). While loan to banks is 31.72% (2008) higher than 2007, overall loans fell by 9.78% and 12.91% respectively in 2007 and 2008 while TA had growth of 23.4% and 31% respectively in 2007 and 2008. The magnitude of increase for TA higher than net loans components and drags the ratio down. The fall in net loans since 2007 is rather due to the impact of credit crunch crisis which initiated in US, where global banks are reluctant to issue loans unless pass the credit assessment. This literally means that loan doesn't play significant role for TA the Group invested, hence more liquid the bank is. As for the peers, ratio projected is rather straightforward. They too suffered from the credit crunch crisis, especially Citigroup, which hit the most in the subprime crisis had its loan level kept lowest the possible and had huge provision for impairment and Non –Performing Loans. As for HSBC, its trend is rather stable as the bank is large is capitalization and its loss in US market ($5.8bn hit) is greatly offset by its other operations in the rest of the world (Quinn, 2007).
6. Subprime Crisis and Credit Crunch on SCP
The subprime crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in US. The crisis has its roots since late 1990s and became apparent in 2007. It has resulted adverse consequences to both financial institutions and markets around the world (Murphy, 2008).
Numerous banks and companies, including SCP suffered from subprime crisis (disregard of size and market capitalisation), especially in "Americas, UK and Europe" region. The operating income of this region was only $452mil, decreased by 22% in 2007 as compared to corresponding 2006 (Standard Chartered, 2007). The main contribution of SCP's credit crunch impact is its Structured Investment Vehicle (SIV), Whistlejacket. According to Treanor (2008), losses from the sub-prime turmoil were $300m, of which $116m was the result of Whistlejacket. However, due to SCP focus on emerging markets, such as Asia and Middle East, its revenue growth remains strong and it can offset the loss from the crisis. These markets are usually benefiting from high oil prices, large trade surpluses, increased income from tourism and heavy investments in construction and infrastructure building so that the bank can earn more profit. During the crisis, the operating income in Middle East and Other South Asia was $1,428m, increase 33% and in Africa it was $116m, increased 24% (Standard Chartered, 2007).
In addition, SCP performs better in 2008 than 2007. Because SCP has a strong capitalisation and liquidity it is able to sustain from the crisis and performed favourably:
· Profit before taxes rose 27% to $4.04bn
· Income increased 28% to $11.07bn
· Normalised earnings per share climbed 16% to 197.6 cents (Standard Chartered, 2008)
All these fact and number strongly affirm that SCP has limited or indirect exposure to US subprime crisis. Although there is no serious adverse consequence on SCP during the subprime crisis, the outlook is unclear (Chaudhry, 2008). Hence, SCP is taking actions to avoid possible exposures such as market and credit risks to the crisis.
Firstly, as a global bank, SCP enjoys a strong funding and liquidity profile by continuing to provide important protection in wholesale funding markets. It has diverse deposit base that constituted 68% of total funding, and maintains a high level of readily liquefiable assets that exceed its wholesale borrowings. Also, it has demonstrated its funding capacity during the recent credit market turmoil and remains a net lender to the interbank market. (Asian Banker, 2008)
Secondly, liquid asset can cushion the Group from the impact of possible further economic gloom and financial crisis. As accordance to Basel II, SCP begins to raise its capital base by:
· Planning to raise $3.59bn[18] through rights issue in Africa, Asia and the Middle East in order to help it to boost its capital base (Treanor, 2007).
Thirdly, to deal with the loss from Whistlejacket, SCP has exchanged $140mil of its capital notes investment in Whistlejacket for pro-rata slice of its asset, with an earning of $70mil[19] (Treanor, 2008).
Finally, by hiring excellent talented professionals enables SCP having opportunities to deepen the relationships with their customers, hence, attracting more deposits and ST funding (Standard Chartered, 2008).
7. Conclusion
During the GFC, SCP has sufficient capital reserves to buffer risks that the Group has exposed to and therefore incur losses just like other financial institutions did. However, SCP's major investments focus in Africa, Middle East and Asia has lifted its profit during GFC with favourable financial position, despite of paying losses in US subprime crisis. Nevertheless, its involvement into syndicate loans with other global financial institutions on Dubai World might results bad debt if rescheduling of debt repayment doesn't work. Due to speculation of ideas, its share price has decreased by 5.8%[20].
To take-up opportunity, SCP has offered different types of banking products and services cater to different clients in the focus regions where these countries are lacking of credible bankers like SCP with efficient operations and strive towards transparency which will reduce leverage, risks on investments and high compliance to regulations.
With collaboration to the aim of working for high efficiency and building stronger foundation in its investments, SCP has carried out various strategic moves, such as acquisitions such as towards AEB and issue right issues to expand its market power and capitalisation.
To further enhance its operations and improve its performance, some future plan is considered such as offering new product for customers beneficial, and formation of new securities company in Asia, Middle East, Africa, North America and Europe.
Bibliography
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Americanbankingnews, (2009), European Banks, including HSBC, Standard Chartered, Royal Bank of Scotland and Lloyds, Join Forces on Dubai Debt Restructuring, Retrieved December 17 2009, http://www.americanbankingnews.com/2009/12/01/european-banks-including-hsbc-lon-hsba-standard-chartered-lon-stan-royal-bank-of-scotland-lon-rbs-and-lloyds-lon-lloy-join-forces-on-dubai-debt-restructuring
BankScope. (2009, December 13). World banking Information Source. Retrieved from BankScope Database.
BBC News, (2008), HSBC in new sub-prime writedown, Retrieved December 12 2009, http://news.bbc.co.uk/2/hi/business/7395425.stm
Chaudhry S., (2008), RPT-CORRECTED-Standard Chartered appoints new S.Africa CEO, Retrieved December 13 2009, http://www.reuters.com/article/idUSLQ50142320081126
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CNN, 2008, Global 500: 20 money losers, Retrieved December 12 2009, Retrieved December 16 2009, http://money.cnn.com/galleries/2009/fortune/0907/gallery.G500_money_losers_fortune.fortune/4.html
Donovan G, (2003), A Board Culture of Corporate Governance, Corporate Governance International Journal, Vol 6 Issue 3 (2003)
Delisted, (2006), STANDARD CHARTERED BANK AUSTRALIA LIMITED (SCB), Retrieved December 19 2009,http://www.delisted.com.au/Company/7714
Ellis D., (2008), Citi dodges bullet, Retrieved December 12 2009, http://money.cnn.com/2008/11/23/news/companies/citigroup/index.htm
Marquez J., (2009), Asian stocks tumble amid Dubai fears, dollar slump, Retrieved December 12 2009, http://www.usatoday.com/money/markets/2009-11-27-world-stocks-friday_N.htm
Murphy C., (2008), The Subprime Crisis: What Happened and What Should Be Fixed? Retrieved December 12 2009, http://www.lbjjournal.com/subprimecrisiswhat
Quinn J., (2007), HSBC hit by sub-prime crisis, Retrieved December 12 2009, http://www.telegraph.co.uk/finance/markets/2816291/HSBC-hit-by-sub-prime-crisis.html
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Standard Chartered. (2008), Annual Report 2008. Retrieved from http://files.shareholder.com/downloads/stanchar/801868924x0x286875/2A512061-99E1-4518-86AE-8202871E0EFF/standard_chartered_ara_2008.pdf
Standard Chartered. (2007), Annual Report 2007. Retrieved from http://files.shareholder.com/downloads/stanchar/801868924x0x286877/028A9D79-1DC3-4D7A-9C96-21BE4CC7DE32/2007_ARA.pdf
Standard Chartered. (2006), Annual Report 2006. Retrieved from http://files.shareholder.com/downloads/stanchar/801868924x0x86990/92923503-1C9E-4A7B-829A-E35F05B9DE8A/2006_ARA.pdf
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Appendices
Appendix 1
Banking Services | ||
Consumer Banking | Savings and Banking Services | My Dream Account Payroll Account Women's Account e$aver Marathon Saving Account Foreign Currency Account |
Loans and Mortgages | Personal loans Mortgages | |
Credit Cards | Credit Cards | |
Insurance | Life Insurance Savings and Retirement Planning Insurance Health and Medical Insurance Home Insurance Motor Insurance Travel Insurance | |
Investments | Investment Advisory Services Retail FX products Mutual Funds | |
International Banking | Global Recognition For You And Your Family Designated International Banking Centres Worldwide Pre-Arrival Account Opening Global Link – One Click Access To Your Worldwide Accounts Free International Fund Transfers Free Worldwide ATM/Debit Card Network Emergency Cash Services Foreign Exchange Discounts At Travelex Worldwide International Financial Solutions – Local And Offshore | |
Ways-To-Pay | ||
Priority Banking | Convenient Banking Solutions | |
World-Class Wealth Solutions | ||
Property Investment Solutions | ||
Unique Card Solutions | Priority Banking ATM/Debit Card Priority Banking Visa Infinite Credit Card | |
Private Banking | Working With You | |
Investments | Cash & Cash Alternatives Structured Products Mutual Funds & Fund NAVs Client-Directed Mutual Fund Portfolios Signature Funds Portfolios Signature Securities Portfolios Alternative Investments | |
Other Services | Fiduciary Services Insurance Credit Facilities Collateralised Trading Programme Daily Banking Credit Cards Philanthropy | |
SME Banking | Cash Management | Current Account Savings Account Time Deposits Remittances and Bank Drafts Investment Services ATM Services Phone Banking Services Straight2Bank Standard Chartered Online Facsimile Banking Cash Deposit Machines Cheque Deposit Machines Courier Service Cheque Deposit Box Consolidated Statements |
SME Treasury Services | ||
Trade Finance & Working Capital | Import Services Export Services Express Trade Cross-border financing | |
Loans & Mortgages | SME Mortgages BusinessPower Business Installment Loan | |
Wholesale Banking | Transaction Banking | Our Credentials Cash Management Trade Services Securities Services Client Access |
Financial Markets | Equities Commodities Foreign Exchange Rates & Credit Capital Markets Structured Products E-Channels | |
Corporate Finance | Corporate Advisory Equity Corporate Finance Structured Finance Structured Trade Finance and Financing Solutions Project & Export Finance | |
Principal Finance | Corporate Private Equity Real Estate Infrastructure Alternative Investments Selected Investments | |
eCommerce | Straight2Bank Straight2Bank Stream | |
Cross Border Network | ||
Research | Global Research | |
Saadig Islamic Banking | Personal Banking | Standard Chartered Saadiq Personal Banking |
Wholesale Banking | Standard Chartered Saadiq Wholesale Banking | |
Appendix 2
SCP's completion of acquisition on American Express Bank Limited (AEB), a wholly owned subsidiary of American Express Company, with operations in 47 countries in February 2008 with intention to integrate the Group with AEB's specialization in Financial Institutions and Private Banking business. In addition, the Group also entered into a put and call option agreement with American Express Company, exercises in 18 months from the acquisition of AEB, to purchase 100 per cent of American Express International Deposit Corporation at a purchase price equivalent to its net asset value at the time of exercise. AEB is expected to generate higher profit for SCP as its goodwill as at December 2008 was $396mil (Standard Chartered Annual Report 2008).
[1] Look into Appendix 1 for summarised table.
[2] Shariah refers to the legal framework within which the public and private aspects of life which are regulated for those living in a legal system based on Islamic principles.
[3] Regions that SCP focuses are Africa, Middle East and Asia.
[4] (Core Capital + Supplementary Capital)/(Assets (weighted by credit type) + Credit risk equivalent (weighted by counterparty type))=Total Capital Ratio
[5] This supports given by public authorities represents a positive factor in the long term debt and deposit ratings and also provides SCP with more than adequate capital that they can use to firmly protect themselves against any adverse movements and unexpected fluctuations, thus ensuring the stability, liquidity and solvency of the business.
[6] Capital adequacy requirement required set by Basel Committee is 8.0% (Eun & Resnick, 2009)
[7] According to Bunda and Desquilbet (2003), the Group prefers to involve the bank into risky investment projects than having more 'unprofitable' liquid assets in order to increase or maintain the overall return on bank's equity.
[8] Knowing that the global economy's under turmoil, the Group took the opportunity in the uncertain economics and emerged into the markets, and markets that the Group emerged had prospect growth higher than the West (Standard Chartered, 2008)
[9] $20bn bailout and guidance on allocating more equity than investing into liquid assets has survived Citigroup.
[10] Net interest margin = Net Interest Income (annualized) / Average Interest Earning Assets
[11] Cost to income = Total Expense / Total Income
[12] ROAA = Net income after taxes / Total average assets
[13] ROE = Net income after taxes / Equity
[14] Acquisition are acted on Hsinchu International Bank in Taiwan worth $1.2bn, 95.37% on Union Bank (USD487m) in Pakistan, acquisition of Korea First Bank (USD3.3bn), 25% in First Africa Group Holdings Ltd, and acquired Pembroke, a globally well-known aircraft leasing, financing and management firm in 2006.
[15] SCP 2008 Annual Report states that its acquired business generates operating income of $7mil to the Group as at 31st December 2007. Moreover, the Group acquired the remaining minority interest of Hsinchu for $43mil and generated additional goodwill of $34 million in 2008
[16] Appendix 2
[17] Deposits & ST funds 2006/Deposits & ST funds 2005= $173,615mil/$138,765mil =25%
[19] The earning is calculated after taken against loss of $116mil as a result of negative fair value adjustment in 2007.
[20] Although this figure could be different from SCP listed in FTSE, the figure is showing the same impact that Dubai World's possible default on SCP's share prices.
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