Standard Chartered PLC

LSE:STAN

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Standard Chartered update for the first quarter of 2018. Today's call is being hosted by Andy Halford, Group Chief Financial Officer. [Operator Instructions] At this point, I would like to hand over to Andy to begin.

[Andrew Nigel Halford, Group CFO & Director]

Thank you very much, Vivienne. Good morning or good afternoon, depending upon where you have dialed in from. Hopefully, you will have had a chance to digest our interim management statement given the earlier release time. I will draw out just a few things before opening the line to questions.So overall, the main message you should take away from these first quarter results is that we are clearly on the path that we laid out in February. We said that the group should be able to deliver a compound annual growth rate in income of between 5% and 7% in the medium term, and we provided evidence of that ability in the first quarter, with every segment contributing positively.We also said we'll be able to deliver positive operating leverage, and we have done that as well, with the culture of efficiency that is being embedded into the business enabling us to generate more income from the franchise, whilst absorbing higher investment to further strengthen and improve the business.And finally, we said that this discipline would take our return on equity past 8% in the medium term. And although this is only the first quarter, and there's no bank levy, as you know, and loan impairment does tend to be lower at the start of the year, our underlying operating profit before tax improved 20% to $1.3 billion, which represents an annualized return on equity of 7.6% compared with 6.3% for the same period a year ago.Our improving profitability also enables us to further improve our resilience, another core objective of the plan laid out in 2015. Delivering more profit in a single quarter than we did for the whole of 2016 has helped increase the CET1 ratio to 13.9%.So looking at the numbers in a little bit more detail, starting with income. Our biggest region, Greater China and North Asia, continues to perform strongly, with our businesses in all 5 markets there growing income in the period and contributing to 13% top line growth for the region as a whole.I will briefly mention China since it has been in the news a lot since we published our full year results, particularly in the context of trade tariffs. While we believe a full-blown trade war between the U.S. and China would not be good for anybody, the reality is that the income we generate from financing trade close on the relatively more competitive routes between the U.S. and China/Hong Kong is not significant to the group overall. A much greater proportion of our trade finance business relates to financing China's trade with markets in the rest of the footprint. So whilst we benefit when global trade grows, we benefit in particular when China trades more actively with markets in Asia, Africa and the Middle East. Meanwhile, the team in China continues to remain focused on what it can control, delivering another quarter of improved top line and bottom line.In our second biggest region, ASEAN and South Asia, where income grew 7% year-on-year, we are seeing encouraging momentum emerging in our largest market there, Singapore, that delivered double-digit income growth, driven primarily by retail banking. In India, our retail banking performance is improving. It also grew at double-digit rate year-on-year, whilst our Corporate and Institutional business remains focused on executing the actions that will enable it to recover sustainably.So turning now to the income performance if looked at from a client segment perspective. Our retail banking business continues to perform very well and is delivering some exciting initiatives, in addition to the digital banking project in Côte d'Ivoire that Bill mentioned at the full year results, including, introducing real-time onboarding in India. This will mean new clients can now open savings accounts remotely within minutes or day -- instead of days or even weeks using their national identity number, giving them almost instant access to a full suite of digital capabilities for their transacting, investing and borrowing needs.The CEO of our Global Retail Banking business, Ben Hung, will at the end of this month present a seminar to share with you how we are investing and adapting to improve what are already very good returns from our retail business.Our other big segment, Corporate & Institutional Banking, is executing the objectives laid out last November and reiterated in February to continue to enhance its service to existing and new clients and improve the quality of its income and credit portfolio. As we had said before, not every product will develop at the same pace; but overall, CIB income grew in the first quarter at the top of its 5% to 7% medium-term target range.From a product perspective, you may recall back in February that we presented a slide that grouped our activities into 3 broad categories, reflecting their different stages of development. The first category included products where we have been focused on leveraging areas of existing and differentiated strength, namely Transaction Banking, Wealth management, Mortgages, and deposits. Income from those activities make up around half of total group income, which you may recall grew in aggregate 13% in 2017. Those businesses have continued to perform very well and grew 18% year-on-year in the first quarter.The second category about 1/4 of group income included products such as lending and credit cards and personal loans that we are still in the process of optimizing to improve returns. These actions led to suppressed income. In aggregate, income from those products was down 2% year-on-year in 2017, although up by a similar amount year-on-year in the first quarter, broadly stable, in other words, but resulting over time in a higher-quality book. Stepping back, the 5% to 7% income growth guidance we gave you in February for the group as a whole incorporates the relatively more subdued top line growth potential for these activities, whilst returns are being optimized. The rest of the group's income is generated by activities such as Financial Markets and Treasury, where the performance is heavily influenced by market conditions. The plan here is over time to deliver higher returning income that is less dependent on market volatility.So to conclude on income, strong and increasingly high-quality growth in some of our segments, regions and products is offsetting the impact of the steps we are taking to fundamentally improve the others, meaning that overall we feel confident in delivering returns accretive growth this year within the 5% to 7% medium-term target range.Moving to expenses, which in total, including regulatory costs, were up 4% year-on-year or 1% on a constant currency basis, given U.S. dollar depreciation. We continue to make good progress here, having essentially absorbed both inflation and a roughly similar quantum of increased investment project expenses over the last couple of years, whilst at the same time, fundamentally repositioning the business.Looking ahead, absorbing the incremental costs of the recent dollar depreciation may prove somewhat challenging, meaning overall costs this year may be slightly higher than last year; but our focus, as you know, is on returns. And with FX movements having a broadly neutral impact on operating profit, we will not shy away from spending in areas that will give us the greatest confidence in delivering on our return on equity targets.We are seeing more and more examples of where those investments are resulting in tangible improvements. Take our investment into enhancing our capabilities and client experience in trade finance, for instance, where we have a top 3 position globally. A recent independent survey showed that we now rank #1 for client satisfaction in Asia, which is helping us to gain market share. And on the digital front, we have launched a digital bank in Côte d'Ivoire, as I mentioned earlier, and are excited at the prospect of building on the lessons we learned there to help build better digital capabilities in our other markets. Internal teams are now tackling efficiency projects with heightened energy and urgency. Of the many new operational effects in these projects that are underway, I just want to highlight a couple to give you a sense of how we're executing on our commitments to never settle and improve client experience. So in Commercial Banking, a significantly simplified client onboarding process has been rolled out to 17 markets and has led to a 30% reduction in documentation turnaround time, drawing positive feedback from clients. And in Pakistan, the team has been targeting improvements to make it easier to attract higher-quality deposits. They have reduced the onboarding turnaround time by 1/3 already, and they're cutting down the length of the application process to 1/5 of the previous size.So turning back to the results on sales and moving on to credit quality where, as you know, we have made considerable progress over the last few years. Loan impairment charges are often low in the first quarter. And this year, they were around the same level as they were in Q1 2017. As usual, I'll resist forecasting loan impairment, particularly in the light of the new IFRS 9. Like any standard, although caution is the last year, the total was more than 4 times Q1. And whilst economic conditions continued to improve, we do have a large balance sheet, and we operate in some of the most dynamic markets in the world. But nonetheless, I think loan impairment is behaving well. Credit quality overall has improved year-on-year. Gross credit-impaired loans in the ongoing business or Stage 3 exposures, as they're now called in the IFRS 9 parlance, were up 2% quarter-on-quarter, largely relating to the downgrade of some credit Grade 12 exposures. Cover ratios have remained broadly unchanged. So just a couple of observation on the balance sheet before I conclude with capital. Customer loans, i.e, those excluding loans to financial institutions, were up 3% in the first quarter or 9% year-on-year, spread broadly across the regions, with about 1/3 in Corporate Finance, 1/3 in Retail Banking and Treasury and 1/3 in reverse repos within the Financial Markets business.Customer deposits meanwhile were up 1% in the first quarter, 5% year-on-year, again, with all regions contributing. About 2/3 of the growth was in our Cash Management and Custody businesses and retail banking deposits. This is the result of our focus on attracting higher-quality sources of liquidity and has delivered a small but encouraging uptick in net interest margin compared to this time last year. The other 1/3 relates to repurchase agreements, as we helped our clients manage their own liquidity positions.Risk-weighted assets were broadly flat year-to-date, with increases in credit risk-weighted assets offset by lower operational risk RWAs.And finally, in terms of capital, as I mentioned earlier, the group CET1 ratio was 13.9% end of the first quarter, above our target range, and 26 basis points higher than at the end of 2017. Please do bear in mind, however, the outstanding loss given default issues that I flagged at the third quarter last year. We're still in discussions with the PRA. And although the exact timing nature of the expected changes to LGD floors in our internal rating space models relating to certain corporate exposures are unclear, we don't expect the impact to be material from a CET1 ratio perspective.So I'll conclude just with 2 points before I hand back to the operator to open the line for questions. Firstly, we said at the full year results in February that the path to a sustainably higher return is now clearer. Our first quarter performance shows that we are firmly on it and heading in the right direction. There are no shortcuts, but we are gathering momentum and with that gaining in confidence.Secondly, we spoke a lot at the full year results about the work we are doing around culture. This will take time, of course, but we are already behaving differently as an organization. And we are working hard to hone the edges further so that we can compete more and more effectively in the areas where we are differentiated. Our clients are telling us they are noticing a positive difference, and I suspect our competitors are starting to see that as well.So with that, I can hand back to you, Vivienne, and very happy to take any questions you have got.

[Operator]

[Operator Instructions] Your first question comes from the line of Chris Manners from Barclays.

[Christopher Robert Manners, Co]

So just a couple questions, if I may. The first one was on the revenue lines. So obviously, year-on-year plus 7%, nice performance. And I just thought I'd ask maybe about the sustainability of a couple of the lines. When I look quarter-on-quarter, Wealth Management has done really, really well, up over 30%. And I thought I'd just maybe ask a little bit about what's going on there, and if we can -- if that's true annuity we can sort of drag across, that looks really good. And the second question was, I sort of noted your comments at the beginning of the call about costs as those -- I noted you didn't reiterate your cost guidance of 2018 being below 2015 levels. How much cost of inflation should we be thinking about this year? And I know, obviously, a part of that is going to have some FX in there, but it would be great if you could just elaborate on that a little bit.

[Andrew Nigel Halford, Group CFO & Director]

Yes. Okay. Let me do that. Wealth Management clearly has been very, very strong for us. So 28% up first quarter on first quarter, which is really good. Forward forecasting, always tricky. If it remains as high as 28%, I think we'd be absolutely delighted. But obviously, that is a high rate of growth. I think some of that has come off the back of generally rising equity prices and a fairly buoyant market. The correction that we saw in the early part of the quarter seems to be taken more as a buying opportunity by clients rather than the opposite. And I think -- so I think some of the benefit is coming from the market, some of it is definitely coming from the fact that I think we are now presenting ourselves better to our customers. And we talked back in 2015 about the investment we needed to make into sort of improved platforms, improved breadth of products. And whilst that is a process which is running out over a period of time, I think we are seeing some of the early stages of benefit coming through from that. So hopefully, we'll see good growth going forward. Whether it's quite at the same rates as we got at the moment, I don't know. But certainly, a part of the business that is running well and strongly. And on the expenses, I think sort of 3 things really. One is that we have been chomping our way through inflation headwinds, as you'd expect in the business. And if on the average, those have been sort of 3% or thereabouts over the last couple of years, 3%, 3.5%, that's a sort of $300 million, $350 million sort of headwinds that we have worked our way through. Secondly, with the increased level of investment in improving systems, there comes with that both an increased in-year outright expensing of that increase, plus some depreciation of what we capitalize. And you put those 2 together, and they're probably, in a P&L-sense, is another number of the order of sort of $300 million, which we have also basically been working our way through against a reasonably flat profile. The point I was making is that the depreciation of the dollar obviously has moved around quite a lot over the last few weeks. It's quite difficult to swallow certainly in full further depreciation of that on top of working through the inflation and the investments spend sort of expensing. And my comment is purely that at the end of the day we will do what is right for the business. And if it means that the number is a fraction higher than it was last year, then so be it. I mean I'm not talking big numbers here, but it could be a little bit higher. But it does depend upon where the FX rates go, and they've moved around quite a lot even since we last talked in February. So that is a complex there. Remember, FX overall is pretty neutral on the operating profit level, so you get the offsetting impacts of the income and expense level but fairly neutral at operating profit level. And at the end of the day, our big focus really is on doing things that are going to get a better return on equity up as fast as we possibly can do.

[Christopher Robert Manners, Co]

Okay. So it might be a few percent, but nothing drastic?

[Andrew Nigel Halford, Group CFO & Director]

I think that would be a fair summary.

[Operator]

Your next question comes from the line of Manus Costello from Autonomous.

[Manus James Macgregor Costello, Founding Partner and Managing Partner]

I just had a couple of questions, please. Following up on costs and also on NII. I'm still a little bit confused, Andy, about exactly what you're saying on costs. Are you saying that you think 2018 costs -- if FX remains where it is now, are you saying you think 2018 costs will be slightly higher than the $10.1 billion that you delivered in 2017? Because consensus is at $10.3 billion, I think, including the levies. Are you saying that, that consensus number will be consistent with what you are saying? Or should it be drifting slightly higher?

[Andrew Nigel Halford, Group CFO & Director]

I think we printed at $9.9 billion actually last year, so I'm saying it could be a little bit higher than $9.9 billion.

[Manus James Macgregor Costello, Founding Partner and Managing Partner]

Right. Okay. And on the NII, can you give us some color around what happened in NII and NIM in the quarter? And in particular, I noticed in Q2 there seems to be been quite some interesting hikes in deposit rates going on in Hong Kong. Can you give us some color on what's going on there? And how that's going to impact you?

[Andrew Nigel Halford, Group CFO & Director]

Yes. So overall, the NIM for the business nudged ahead a little bit further. So quarter-on-quarter not huge but another couple of basis points. That's a not dissimilar rate of progression and progress that we have seen over the preceding 3 or 4 quarters. And that is clearly good. It is in a positive direction, whereas you can go back several years prior to that when the opposite was happening. Thematically, it is pretty similar in sort of root cause to what we said before with improved margins on the deposit side and slightly weakening margins -- I'm generalizing, but slightly weaker margins on the lending side but the net of the 2 coming out positive. A lot of focus on quality of deposits and where we can get the best balance of lowest costs versus stickiness. We know the cost of funding, we've said this before, is a little bit high compared with some of our competitors. Part of that is because we will have a smaller mix of retail maybe in our business than some of them do, which is just sort of a fact of life. But nonetheless, with the treasury team, the business is putting a lot of time into looking at quality of the deposits, looking at how much from a regulatory point of view we're having to hold in sort of central banks, et cetera, making sure that we are optimizing those 2. The interest rate movements, particularly in Hong Kong, has been sort of interesting. And obviously, that has been something which has moved around during the quarter. We've had a little bit of benefit from that in the Hong Kong numbers. And I guess all eyes are on that as we move forwards to see what the HIBOR/LIBOR gap is as we move forward. But the Hong Kong business, I think the region is 13% up. And actually, the Hong Kong business was very similar in its growth during that period. So I think overall now as a sort of takeaway that the direction of travel is a positive one. It is bit by bit. It is not changing massively overnight. But with the focus we are putting on, particularly the quality of the funds and the costs of the funds, I'd hope that we can be keeping up of that momentum and seeing some improvement as we continue to move forwards.

[Manus James Macgregor Costello, Founding Partner and Managing Partner]

And you're not worried about recent hikes in deposit rates then? I mean they seem to be quite sharp from what I can see from headline numbers.

[Andrew Nigel Halford, Group CFO & Director]

Yes. I mean, certainly, we have seen more increase recently than we have done before. We are at the moment reasonably comfortable with sort of passing that on, and that is not hitting us too much. But you are quite right, there has been more competition and more pricing, and everybody obviously is looking for good sources of funding.

[Operator]

Your next question comes from the line of Ronit Ghose from Citi.

[Ronit Ghose]

It's Ronit from Citi. Just to follow-up, Andy, on the margin trend and the NII trend. So you're saying it's up quarter-on-quarter a couple of basis points. But to pick up on Manus' question, do you think that trend is sustainable going forward? Or are we seeing a break in the series in Q2? Are you seeing a material pickup in deposit competition so that we shouldn't assume that this kind of gentle pickup in margins continues? Linked to that, can I have a question, please, on the cash management revenues? Those look like they're up 25% year-on-year. There's obviously been strong volume increase. But can you just talk a little bit around volumes versus margins in the corporate cash management business? And my final question on revenues is on Wealth. The Wealth Management revenues that are up 28% year-on-year, can I just -- can you just sort of break out a little bit more with color in terms of how much of that is market moves, just generally Hong Kong, other markets being strong versus, but how much of that's organic, say STAN specific. So the alpha versus beta components, if you like.

[Andrew Nigel Halford, Group CFO & Director]

Yes. Okay. So we are sort of too early really in the second quarter to be able to confidently give a view as to where the second quarter is going to come out on the NIMs. I mean all I would say is that we are now in, I don't know, the fourth or fifth quarter where we have seen just gently a slight improvement on the NIMs. And therefore, we are clearly wanting to whatever we can do to maintain that momentum. The increased interest rates is clearly a feature in this, but it was a feature in the first quarter as well, and we still have managed to get the 2 NIMs through that. So I'd be hopeful we can maintain. I would hope that we can slightly continue to improve, but obviously, it's one that we have to tread our way through as we go forwards. On the cash management side, it has been a mixture of increase in overall deposit levels, customer account balances, which has gone up fairly, fairly strongly in the period. So we have seen that go up, I think, nearly 20% over that period of time. And then some of it is the margin improvement that we have seen there as well. So that clearly has been very, very helpful to the business.On Wealth Management, we have got assets under management up about $8 billion year-on-year and about $2 billion since the end of December. So clearly, improved sort of volumes coming through from that. Part of that is clearly markets increasing, but I think a reasonable part of it also is better productivity from our own team. We have spent a lot of time, particularly in the private bank, with looking at sort of the client interface and how we can improve the product range. So it's good to see that level of improvement coming through. We obviously will see how we go forwards with equity markets and the buoyancy or not of those over the balance of the year. But I think collectively the things we're doing there has clearly been pretty impactful within the quarter.

[Ronit Ghose]

Can I just have a quick follow-up on the capital point, please? You mentioned that operational risk RWAs went down, if I heard you correctly. Could you just tell us a little bit more what that was, and why -- what drove that? And on the LGD floors, before I think we were being guided about 30 basis points impact on the higher LGD floors. Shall we assume like close to sort of 0 to 5 basis points or like very little now? Or just anything more on that will be great as well.

[Andrew Nigel Halford, Group CFO & Director]

Right. Questions 4 and 5. Ops risks is done on a sort of trailing average revenue linked basis. So it's a sort of mathematical consequence of the way that it is put into the numbers, obviously, with the agreement with the regulators it's the standard way of doing it. So there's nothing particular to read into that. Loss given default, yes, I mean we'd indicated that the previous changes there had been sort of 30 bps or so. I would be hopeful that what we are still discussing would be lower than that, but it's still a little bit difficult to know. We haven't got the final numbers agreed, but our sense is that this should be a little bit more modest maybe than the changes that we booked in the latter part of last year.

[Operator]

Your next question comes from the line of Jason Napier from UBS.

[Jason Clive Napier]

Three, please. Andy, just starting with Corporate Finance. From distant past disclosures, it was a business that, I think, was quite heavy in terms of net interest income and lending. And I think you flagged that about 1/3 of year-to-date loan growth was in this business. But it's really far more volatile than I guess we'd have expected within that context. What a normal quarter for Corporate Finance look like? And any color you might provide on where you think that's going to pan out in future periods will be helpful, if you can. Secondly, Financial Markets, when you produced, full year results were up double-digit and ended sort of up 2% year-on-year in the final analysis. So I was just wondering if there's anything to flag as perhaps depressing the results in March despite volatility was down and the like. So I just wonder what the prospects were for the business producing flat Financial Markets revenues for the quarters that remain. And then lastly, gratifying to see sort of progress on regulatory expenses in the quarter. I wonder whether there's sort of any prospect for that number remaining around these levels or perhaps improving further. There is obviously no shortage of things to deal with, although I do appreciate there were some big projects in 2017.

[Andrew Nigel Halford, Group CFO & Director]

Yes. Okay. Thanks, Jason. So take those in turn. Corporate Finance does tend to be a little bit lumpy. When M&A occurs and when people actually sort of pull the trigger on things, it does move around a little bit. What is a normal level of income? I guess if you look back over several quarters, we sort of have a 3 50-ish, 3 75-ish sort of type income level. And the first quarter was a little bit lower than that. And I think the sort of volatility that was in the equity markets on some of the deal flow there did cause some people just to sort of pause a little bit and think a bit about timing. The order book actually remains strong. We have got a good pipeline there. So it's not one that I am sort of concerned by. But equally, as we disclosed at the back of the IMS, if you look back over a number of quarters, we have been as low as 3 20, we have been as high as 4 70. So it does move around over a period of time. But I think the key is that the order book remains very strong, and certainly, the relationships with clients on the Corporate Finance side remains very good.Financial Markets, there is nothing particular to call out. There was more volatility self-evidently in the first part of the quarter than in the latter part of the quarter. And as we move forwards, but this is nothing new, I think the performance of that business to some extent will be influenced by just sort of how volatile markets are or are not over a period of time. We did make some leadership changes there a year ago. We have been focused upon a number of initiatives to improve that part of business. We remain focused on those. We would like -- it's a -- in terms of return on capital, it's a good business. The volatility, obviously, is something which in part is outside our control, but the focus over a period of time to try to make it slightly less volatile and make sure that the returns focus is very much continuing. So we'll sort of see how that goes. Regulatory expenses, yes, having them down slightly is a novel concept. Obviously, it was only slightly. And last year, as we did call out at the year end, we had a number of quite big regulatory programs which landed in the back end of last year. So I think, as I said in February, I'd sort of be hopeful that in the, certainly in the near term, that we're sort of around the peak on the regulatory expenses. Clearly, everything we can do to get those down we will do, but we need to do the right thing and make sure that all these programs are operating to the levels and the standards which we would expect.

[Jason Clive Napier]

If I may, just coming back to Corporate Finance. My sense in the past was that sort of structured lending and in some cases longer duration lending was a chunk of that. Would you be comfortable giving a broad sense as to how much of revenues is net interest income versus other or kind of annuity versus other?

[Andrew Nigel Halford, Group CFO & Director]

I haven't got that split in front of me, and it's not the split that we sort of typically provide.

[Operator]

Your next question comes from the line of Martin Leitgeb from Goldman Sachs.

[Martin Leitgeb, Analyst]

I have 1 clarification, please, on earlier comments on cash management and your strong performance there and then 2 questions tied to capital. And the first question is, I just wanted to -- whether you could comment on how you are performing in terms of market shares both in Cash Management and Trade Finance, whether you have seen any shift to any regaining of market share from some of your core markets and that's contributing to your strong performance, in particular within Cash Management. My second question is on capital. And you reported a Core Tier 1 ratio of 13.9%, which I believe already include some form of accrual for a dividend for the year. You also allude that, I think, the impact from LGD floors on corporate institutions, if I read it right, is potentially somewhat less than you initially thought. And I was just wondering if I compare it to your last capital guidance of a 12% to 13% CET1 target range, where do you think do you need to be over the next couple of years in terms of Core Tier 1 ratio? Does that target range still hold? Or could you potentially foresee a scenario under which maybe stress test driven or similar you would need to be somewhat above that level? And my last question is on dividend and scope for dividend. And obviously, with full year results, you indicated a wish to pay out an increasing portion of your earnings to shareholder going forward. And I was just wondering given your progress on capital and some of your peers comment on the aim for distributions whether you could give a little bit more color on how we should think of scope for dividend, potential share buybacks, interim dividend and so forth.

[Andrew Nigel Halford, Group CFO & Director]

Yes, good questions. So Martin, let me just take those again in order. Cash Management market share is a little bit difficult to determine, partly because the sort of data we have on others is either time lagged or not necessarily hugely precise. What we do believe is that in terms of bidding to put Cash Management platforms into new clients is that we do have a well above average success rate on those bids, which suggests that we must be doing quite a lot of things right. We are very focused with our clients on whether we have got all of the operating accounts in their group or whether there's a greater share that we can take. And the collective of that clearly has had a good and a favorable impact upon the outcome. So our sense is that we are probably slightly gaining share, but empirical evidence that absolutely prove it is probably a little bit more difficult to come by.And on the capital, yes, you are right. The 13.9% does have an estimate of a dividend accrual in there. That is done at the half year and the full year on the actual dividend basis and on the first quarter and third quarter on the sort of proxy basis, which is the way that we've normally done it and the way we agree it with the regulators.I think that we're happy operating at a bit above the range, just because things like Basel III, IV, whatever it's called, was out there. There is still quite a lot of detail yet to be filled in on those. And although there is some time before it gets inflated, the rate of progress on clarifying national discretion is pretty glacial. So just a little bit mindful that there are things in that domain that we need to factor into our thinking, and therefore running a little bit cautious makes some sense. As you say, we'll have another stress test over the balance of this year. And whilst we did okay on that last year, it would be good to get the comfort, but the steps we are taking at the moment are continuing to head us in a good direction on that. So I think for the moment, we'll leave the ranges where they are. And if we're running a bit higher than them, then so be it, but it's just cautious. Thirdly, dividend. Clearly, as you know, we'll look at that at the half year, not at the quarter stage. The fact that profitability is improving, the fact that CET1 ratio is improving, I guess will be helpful ingredients as the Board gets its mind around what to do for the interim dividend, which we'll announce late July when we do the half year results.

[Operator]

Your next question comes from the line of Tom Rayner from Exane.

[Thomas Andrew John Rayner]

Just on the sort of currency effects in the first quarter. Obviously, in terms of the impact on the growth rate, it's having a bigger impact on your costs than revenue. And I guess that's because of the dollar-sterling movement and the mix of where your cost sits. And I'm not sure that is the correct interpretation. But just trying to get a sense that when you sort of adjust for that and look at some of the one-offs, such as the large treasury gain in Q1 last year, which you're sort of suggesting we strip out. I mean, the jaws on the headline level looked about 2%; but you could adjust them all the way to maybe positive 6%, 7% x currency, x that one-off. And I'm just trying to get a sense what you think the real sort of underlying momentum is at the moment. Taking all these issues into account, how confident are you that as you move through the year on the jaws or into next year maybe more importantly?

[Andrew Nigel Halford, Group CFO & Director]

Gosh, a sort of complicated question. So let's take the first part of it. The income line is to some extent slightly less affected by the translation effects of FX because some of the lending is done in dollars in different countries, and some of the countries have got currencies that are fixed to the dollar as well. And therefore, there is a degree of cushioning that happens on the bigger top line in terms of FX effects, whereas the expenses line doesn't have so much of the dollar denomination or the dollar linkages. But it does have a slightly higher proportion of costs, for instance, that are, to take an example in the U.K. And therefore once translated back into dollars, we see a proportionately bigger impact upon the expenses. However, the expenses are evidentially a lesser number than income. And when you put the income and the expenses together actually at the OP level, it does not make a lot of difference. So that, and I don't know whether that explains it. But that's sort of the very high level on -- very high level on the FX.

[Thomas Andrew John Rayner]

I was more interested in the growth rates, if it's having a differential effect on the growth rates, so it's slowing your revenue growth down by 2% but your costs down by 4%. So I appreciate costs is a smaller number, but I was sort of thinking more of the sustainable floors issue.

[Andrew Nigel Halford, Group CFO & Director]

Yes, but that is part of it because more of the income is dollar linked than is the case with the expenses. So that is sort of why the maths of that happens. I think that...

[Thomas Andrew John Rayner]

If you back that out, then the underlying would look better. That's my point is whether you think the underlying x that currency effect is actually 6% or 7%?

[Andrew Nigel Halford, Group CFO & Director]

Well, what I was gonna say was that ...

[Thomas Andrew John Rayner]

I'm sorry, I'll stop interrupting, sorry.

[Andrew Nigel Halford, Group CFO & Director]

No, no, no. What I was going to go on and say was that there are different mixes of income at the expense level. Got it. That's always been the case. The fact it's relatively neutral at the OP level I think is probably the more important thing. I could go and do a deep diagnostic on individual component but probably come back to saying that OP level actually doesn't make a lot of difference. I think if you take what's underlying here, there are not many one-offs in here. We had the benefit that you have referred to, which we put in the IMS, in the early part of last year on treasury markets income in the early part of first quarter last year. That clearly helped last year and therefore has slightly depressed the percentage growth rates in this period. The first quarter this year hasn't got anything in particular that I'd call out as particularly unusual. But we did say that our confidence that the 5% to 7% range on the top line should hold good for this year is what we reiterate. And we got a first quarter that's there with one particular mix of FX versus underlying. No doubt the mix will change a little bit over time. But I think in that sort of corridor is clearly the art of the possible as we move into the second quarter.

[Operator]

Your next question comes from the line of Robin Down from HSBC.

[Robin Down, Co]

I've got a couple of questions. Firstly, just to come back to the sort of guidance, I guess, you're giving and the consensus. So the 5% to 7% revenue growth, just to be clear, that was a medium-term target. But you're saying that should also apply for this year. Because I think consensus at the moment has something like -- more like 8.3% revenue growth penciled in. And likewise, on the costs side, if I look at consensus for costs this year, ex bank levy, it's up a little under 1% versus 2017. Are you effectively saying that could be a little bit low? So that's kind of sort of question 1. I mean, question 2, just really coming back to what Manus was talking about in terms of deposit market in Hong Kong. It does appear to have become very interesting since the end of March, I think, when you and Bank of China moved your rates higher. But I guess you had certain assumptions built into your interest rate sensitivity back then. I think you said 50 basis points was worth $330 million. Now I'm just wondering given there's a much stronger pass-through that seems to be taking place in Hong Kong to depositors, whether that sensitivity has changed, whether the 50 basis points translation to $330 million still kind of holds. And then just the final thing. We've gone through virtually every revenue line, so might as well complete it. The treasury looks quite strong in the first quarter. I guess that's partly kind of interest rate benefits coming through. But can you just confirm that there aren't any gains going in there again this quarter?

[Andrew Nigel Halford, Group CFO & Director]

Right. I'm not sure whether that's a 2 or a 3 or a 4-part question, but let me have a go.

[Robin Down, Co]

Five, sorry.

[Andrew Nigel Halford, Group CFO & Director]

Five. Okay, all right. So 5% to 7% was and remains medium-term guidance. And implicit within that is that it will move around a bit over time. It will have different mix effects of currency and underlying. But on the average, that's sort of where we're trying to get to. And I think what I'm trying to say here is that we have got off to a good start this year, and there is no reason to believe that we shouldn't be in that territory. If we can be above it, that will be great. But certainly, the start would be very supportive of that being consistent with that medium-term aspiration. On the costs side, I'm just saying that absorbing the inflationary costs and the extra project expense is something we can do. And that additionally, absorbing FX depreciation going against us, on top of that, becomes more difficult. And hence, I would expect that we could be slightly higher than last year's numbers if we continue to see a sort of current FX -- dollar FX rates applying. On the currency effects -- sorry, interest rate effects, 50 bps, $330 million. We update that from time to time. There is nothing we've seen in the first quarter that would cause us to significantly change that. And in fact, we've had that sort of direction of number out there for over a year. Obviously, as we go through a full quarter, having seen a bit more of what's happening in Hong Kong, we will be updating our own internal sort of calculations to see whether it is behaving roughly as we expect it or not. And I'm sure at the half year, we'll provide a bit more update on it, but it's not something at the moment that seems to me to be significantly outside of that range. And then on Treasury, you're right. Interest rate increases have slightly helped there. There is nothing else in there that is unusual or inflating those numbers that I would have any reason to call out.

[Operator]

Your next question comes from the line of Anil Agarwal from Morgan Stanley.

[Anil Kumar Agarwal, Managing Director]

I just had a question on funding environment in Asia. I know there have been a few question on Hong Kong dollar side. But if I look at U.S. dollar deposits, they are actually contracting. And savings account in U.S. dollar is contracting, seems to be contracting quite meaningfully. I think even Standard Chartered is offering 2.5% on a 1-year U.S. dollar deposit. So when does this start becoming a problem for the corporates in Asia? Are they showing any incipient signs of issues because funding costs for the corporate should be going up quite meaningfully or margins should be coming under pressure?

[Andrew Nigel Halford, Group CFO & Director]

Not seen any huge effects there. As I said earlier, there has been some competitiveness on sort of interest rates, and banks probably nudging up just slightly what they are offering to attract deposits. But notwithstanding that, we've managed to slightly improve margin overall. So I wouldn't call out anything sort of outside the normal cut and thrust, albeit the rate rises a little bit more than we've seen in previous quarters.

[Operator]

Your next question comes from the line of Edward Firth from KBW.

[Edward Hugo Anson Firth, Analyst]

I just had a -- well, I guess one question to do with profitability and your profitability targets. Because you are talking about 8% in the medium term, but you're delivering, what, 7.6% in the first quarter. So I mean are you basically saying that there will be pluses and minuses going forward but this is -- we're there or thereabouts now that the restructuring program is pretty much done? I guess that's the first question. And then just slightly related to that. Just coming back to Martin's questions about dividend. I mean if you're looking at 5% to 7% of revenue growth, it sounds like it's not going to be much upside on the margins. So if you're only delivering 8% return, it seems to me that if you've got 5% to 7% growth you're not going to have a lot of upside or a lot of free cash, if you like, for dividends. Is that fair?

[Andrew Nigel Halford, Group CFO & Director]

Well, let me start at the ROE one. This is a quarter which will be higher than the average for the year, which was the case last year, because there is no bank levy charge and loan impairments are typically lighter in the first quarter. So if you think to last year, we had a 6%-plus ROE for the quarter. The overall year ROE was just below 4%. So I think you just need to reflect upon the fact that a good first quarter is helpful, but the year average is likely to be lower than that. Secondly, it is the year average that we are after improving, and that is still not at the 8% level, and we know that we need to get it to the 8% level and way above it. And therefore, there is still some way to go. So I think we're trying to say that there is good evidence that we are on the right track, that we should be able to get there over a not too long period, but we are not there yet. And the other thing I'd probably take away probably from the first quarter is that we do have the ability to put more income through this business off its current cost base. And therefore the ability as we get the top line moving to do that in a well-leveraged way, I think is good evidence from the first quarter numbers that we can do that.On the dividends, it is a mixture of how much capital do we want to hold above the sorts of minimum levels that we have set ourselves and also regulators are happy with. And we are very focused upon getting the ROE up. And we are very clear that investors have been patient with us, indeed having dipped their hands into their pockets a couple of years ago, that they would now like to see some of that money coming back. And the Board are clear that to the extent we can do then we will be increasing the dividend, as we said we would do earlier. The fact that profits are up 20% does help in that regard. The fact that profits are 20% and the CET1 ratio is strong also helps.

[Edward Hugo Anson Firth, Analyst]

And so just coming back. I mean if you're steady state is, broadly speaking, 8% returns and you're growing at 5% to 7%, then just self-evidently the maths tells me there's not much available for dividend. Is that fair?

[Andrew Nigel Halford, Group CFO & Director]

No. It depends on the cost efficiency. You're picking a top line and a bottom line without the bit in the middle. And if we can leverage the costs effectively, and we believe we can do, and if you look at most of the consensus, that is sort of saying that we should be able to get more margin or operational leverage through the business. And secondly, it's not that we are going to say when we get the 8% on a full year basis that the job is done. We do know that we need to be nudging it up over and above that over a period of time, but 8% won't be the end stopping ground.All right. I think with that we have concluded the questions. So thank you very much for joining the call. I would hope you will take away that this is bang on plan. It's what we said we're going to do. We're getting on and doing it. And it's a nice start to the year, but obviously, we still have another 9 months ahead of us. Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may all now disconnect.