Standard Chartered PLC
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Standard Chartered PLC
Earnings Call Analysis
Q2-2024 Analysis
Standard Chartered PLC
The company presented a robust second quarter performance, highlighted by a 7% rise in income, reaching $4.8 billion. This impressive growth has led the company to revise its income guidance for 2024 upward to over 7%. The disciplined approach to costs, which saw only a 4% increase, coupled with resilient asset quality, culminated in a 15% rise in pretax profits, totaling $1.8 billion. This strong financial momentum supports a sustainable trajectory towards higher returns.
The company announced its largest ever share buyback amounting to $1.5 billion, set to commence imminently. This move takes the pro forma Common Equity Tier 1 (CET1) ratio to 14%, underscoring the firm’s solid capital position.
Wealth Solutions played a crucial role in driving growth, particularly in non-interest income, which increased by 9%. The wealth and retail banking income saw an 11% rise, with investment product income up by 32%. The affluent assets under management (AUM) climbed to $294 billion, up 5% from the previous quarter, bolstered by $6 billion in net new sales and $7 billion in new deposits. Furthermore, the firm continues to onboard affluent clients at an impressive rate, adding 65,000 new clients in the second quarter, equating to around 10% annualized growth.
The company’s digital banking apps, Mox and Trust, saw substantial growth in customer numbers, positioning Trust to become the fourth largest domestic retail bank in Singapore by the year's end. Additionally, the sustainable finance franchise witnessed an 18% income growth in the first six months, with the goal of surpassing $1 billion in income by 2025. The firm has already mobilized over $105 billion in sustainable finance since 2021, advancing towards a $300 million target by 2030.
Delivering an ROTE of 14%, the company remains on track with its strategy of being a leading wealth manager for affluent clients and a cross-border corporate investment bank. The Fit for Growth program is expected to yield benefits through 2025 and 2026, with an aim to maintain a $12 billion cost cap by 2026. The company raised its guidance for 2024 income growth to over 7% and remains committed to steadily increasing ROTE, targeting 12% by 2026.
Operating expenses increased by 4%, driven by inflation and continued investment in growth initiatives. Despite these costs, pre-provision operating profit improved by 13% in the second quarter and 26% in the first half of the year. Credit impairment provisions were minimal at $73 million, while the company benefited from sovereign upgrades. The restructuring and other charges amounted to $250 million, primarily due to the disposal of the Zimbabwe business, but these had no impact on capital. The company’s capital efficiency remains strong with a CET1 ratio well above the target range.
Looking ahead, the company expects to achieve between $10 billion to $10.5 billion in net interest income (NII) for 2024, despite potential headwinds from U.S. dollar appreciation. The Wealth Solutions segment is poised for sustained growth, with investment product income expected to remain strong. The firm’s commitment to innovation and digital transformation across its wealth and retail banking segments, combined with a strategic focus on sustainable finance, positions it well for continued success.
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Good morning and good afternoon, everyone, and welcome to our second quarter 2024 results call. We are very pleased to have delivered a strong financial performance and are very encouraged by the progress on our established strategy. We're delivering exceptional cross-border services to the world's most sophisticated entities and individuals across our corporate and investment banking and wealth businesses.
Income of $4.8 billion was up 7% in constant currency, reflecting confidence in our performance we're upgrading our income guidance, and we now expect growth for 2024 to be above 7%.
We're maintaining strong discipline on costs, with expenses up 4%, while asset quality has remained resilient. This has resulted in underlying profit before tax of $1.8 billion, which was up 15%. Our financial momentum, together with progress on key strategic drivers, leaves us confident that we can consistently and sustainably drive towards higher returns.
With our strong capital position, we're delighted to announce our largest ever share buyback of $1.5 billion, which will start imminently. Diego will now take you through the numbers in more detail, and I will cover the progress our businesses are making before we come back for the usual Q&A. So Diego, over to you.
Thanks, Bill. Good morning, and good afternoon to everyone on the call. In my remarks, I will be comparing year-on-year on an underlying basis and speaking to constant currency unless stated otherwise. The group delivered top line growth of 7% with operating income of $4.8 billion in the second quarter, as the dynamics we saw at work in the last quarter continued into Q2. NII was $2.6 billion, up 6%. Wealth Solutions continues to drive the strong growth in non-NII, which was up 9%. Operating expenses were up 4% due to inflation and continued investment into business growth initiatives.
Pre-provision operating profit was up 13% in the second quarter and was up 26% in first half demonstrating our strong progress towards sustainably higher profitability. Credit impairment provisions were just $73 million in the quarter with the Wealth and Retail Banking charge broadly in line with the recent run rate, offset by net release elsewhere, mainly from sovereign upgrades. The $83 million charge in other impairment is primarily related to the write-off of software assets, which has no impact on capital. With modest credit impairments, pretax profits of $1.8 billion was up 15%.
Restructuring and other charges of $250 million included $174 million, primarily related to the disposal of our Zimbabwe business. The Zimbabwe charge relates to recycling of FX translation losses from reserves into the P&L and so it has no impact on our capital or TNAV. It is possible there could be similar losses, albeit smaller as we complete our market exits in the coming quarters. Taxes for the first 6 months of the year reflect an underlying effective tax rate of 30%, and we now expect the full year 2024 underlying effective tax rate to be around this level.
Our CET1 ratio is well above the target range. And as a result, we are today announcing our largest ever share buyback of $1.5 billion, which takes our pro forma CET1 ratio to 14%.
Turning now to look at our performance in more detail. Looking at the various components of income, NII was up 6% quarter-on-quarter to $2.6 billion, driven by a number of factors. There was an $84 million additional benefit from the expiry of the short-term hedge in February.
There was also a $112 million increase from improvement in treasury, asset and liability mix, offset by higher pass-throughs in CIB and lower volumes. Average interest-earning assets were down 4% in the quarter, primarily due to a reduction in treasury.
Looking forward to the remainder of the year, we continue to expect NII of $10 billion to $10.5 billion in 2024. Whilst the higher for longer environment has reduced headwinds from rates since the start of the year, lower volumes and higher deposit pass-through rates in CIB have held back NII.
We show our latest currency weighted forward curves in the appendices on Slide 27. It is worth noting that we expect an NII headwind from U.S. dollar appreciation of around $100 million in 2024 versus 2023, but we are not adjusting our guidance for this.
Now turning to our engines of non-NII growth. Wealth Solutions had a very strong second quarter, up 27%. You will see that we are now disclosing our Wealth Solutions income broken down into investment products and bancassurance with investment products income growing strongly in the second quarter, up 32%.
Global Markets was down 7%, given the comparison with a particularly strong second quarter last year in macro trading, whilst credit trading was up 46%. Global Banking was up 11%, driven by higher origination and distribution volumes continuing from the strong performance in the first quarter.
We have continued to maintain discipline in managing expenses, which were up 4% year-on-year. This was driven by inflation of around 3% and investment into growth initiatives, primarily to support our higher returning businesses in CIB and our affluent wealth proposition.
This included hiring relationship managers for affluent clients in WRB and sector-focused expertise in our coverage teams in CIB. We expect the quarterly cost run rate to tick up slightly in the remainder of the year following our investment spend profile, which, as usual, is weighted towards the second half of the year.
We remain committed to delivering on the absolute cost cap of $12 billion in 2026, which implies a 3% CAGR from the 2023 level. The targeted savings from the Fit for Growth program are expected to be realized through 2025 and 2026. As a result, cost growth will be higher in 2024, but lower in the next 2 years. We expect a small part of the cost to achieve of around $200 million to be incurred in 2024 with the majority of the $1.5 billion to fall into next year and a meaningful tail into 2026.
I I'll now give you some more color on the progress we are making in our Fit for Growth program. Our colleagues at all levels are embracing the opportunity to transform the bank. We've identified over 200 individual projects so far, and these projects deliver benefits ranging from a few hundred thousand dollars all the way to tens of millions of dollars.
80% of the projects individually delivered less than $10 million in estimated annual benefits, which reduces execution risk. The program will simplify standardize and digitize the bank in 4 different ways: Process simplification, organizational design, service delivery enhancement and technology simplification.
Let me give you a few examples of what is happening on the ground. We will remove over 100 applications across the group in a massive technology simplification drive. We are building and enhancing our digital client service experience in WRB, which we expect will meaningfully reduce average call handling time.
And back in April, we announced the removal of the regional dimension of the organization, leading to more streamlined decision-making. Through these projects, we will fundamentally improve our productivity, make the organization a better place to work for our employees and enhance our clients' experience.
Turning now to credit impairment, which was down $73 million year-on-year. CIB had a net release of $35 million, benefiting from sovereign upgrades and low levels of new impairments. In the China commercial real estate portfolio, there was a reduction in management overlay and total exposure in the second quarter primarily due to repayments. In WRB, the impairment charge of $146 million remains broadly in line with recent run rates. The action we have taken in Mox has led to a further reduction in the provisions for Ventures, which held to $15 million.
Our high-risk assets were broadly flat in the quarter. And once we have been in a period of higher for longer rates for some time, we're not seeing any new significant signs of stress emerging across the group. Touching briefly now on the balance sheet.
We have seen marginal underlying growth in loans and advances to customers in the quarter, up $1 billion. The positive momentum that we saw in Global Banking in the first quarter continued. Our price discipline in mortgages led to a reduction in WRB assets of $1 billion.
We continue to expect low single-digit percentage growth in underlying customer loans this year. Customer deposits were up $10 billion on an underlying basis in the quarter. CIB and others increased $4 billion mainly in CASA balances, in part, reversing the temporary outflows that we saw at the end of the first quarter. And WRB deposits increased $6 billion with CASA balances broadly unchanged.
Turning to capital. Risk-weighted assets of $242 billion declined $10 billion or 4% quarter-on-quarter. Underlying asset growth in CIB was offset by a reduction in WRB and the impact of treasury-related activities. Improvement in asset quality, mainly from sovereign upgrades led to a $3 billion reduction.
As previously guided, market risk RWA were down $2 billion in the quarter. Looking forward, we continue to guide to low single-digit percentage growth in overall RWA for full year 2024, as we expect client activity to continue to improve.
Our CET1 ratio for the quarter of 14.6% is well above the target range, driven by profit accretion and the positive impact of lower RWA. The $1.5 billion share buyback we announced today will take our pro forma CET1 ratio to 14%. We remain committed to sharing the group's success with our shareholders.
And as you can see on Slide 12, since the full year 2023 results, we have announced $2.7 billion of shareholder distributions. This includes $2.5 billion in share buybacks and a 2024 interim dividend of $230 million with an interim dividend per share of $0.09, up 50% year-on-year.
As a result of the series of share buybacks we have executed, our share count is down 17% since 2021. The tangible net asset value per share is up $0.54 in the quarter, and we have provided a more detailed breakdown of the TNAV walk in the appendices on Slide 30. Lastly, turning to our guidance. As Bill mentioned at the beginning of the call, we are upgrading our income guidance for 2024 to above 7% growth. All other key points of guidance remain unchanged. We still expect ROTE to increase steadily, targeting 12% in 2026 and to progress thereafter.
With that, I'll hand back to Bill to give you an update on the performance of our business segments.
Let's first take a look at performance at each business in turn, starting with Corporate and Investment Banking. CIB income was down 1% overall. Within this, Transaction Services was flat year-on-year but Global Banking delivered a strong performance, up 11%. This was driven by higher origination and distribution volumes.
Global Markets was down 7% in the face of a particularly strong comparator in the second quarter of last year, especially in episodic income. What's important, however, is that flow income continues to grow and was up 8% in the quarter from higher rates and credit trading.
One of the great strengths of our Global Markets business is that it is largely comprised of recurring income. Over recent years, we've expanded the product offering across fixed income currencies and commodities becoming more important to key clients and counterparties. As you can see on Slide 16, such recurring flow income has been growing strongly since 2019 with a 9% CAGR. This has been driven by a combination of platform enhancements, improved product capability and strategic focus across clients and geographies, examples of which you can see plotted on the chart.
The next slide looks at our CIB cross-border business in more detail. Cross-border income now accounts for the largest part of CIB at 62%, compared to 50% in 2019. It's also been growing at a faster pace than the rest of CIB with an 11% CAGR since 2019. It delivers premium returns with an income RORWA of 9.7% in the first half of the year, 160 basis points higher than the overall CIB.
And it is broad-based in terms of product mix. Transaction Services is the largest part, but the network also drives cross-border global markets as well as Global Banking income. Moreover, our cross-border business is uniquely positioned to capture the opportunities arising from increasing fragmentation of supply trade and investment flows. For example, almost 1/3 of our cross-border income is intra-Asian, and we've seen particularly strong growth in income from China to ASEAN, up 11% in the first half.
Turning now to Wealth and Retail banking income, which was up 11%, driven by a very strong performance in Wealth Solutions. Investment product income was 32% with broad-based growth across products and markets. Affluent AUM of $294 billion, was up 5% versus Q1 driven by Wealth net new sales of $6 billion and $7 billion of new deposits. Our Wealth Solutions product line is almost all non-net interest income, with just a small amount of NII from Wealth lending products.
I'd remind you that the substantial NII generated from affluent deposits is reported in the deposits product line. When considered in aggregate, the affluent client franchise is extraordinarily valuable. We continue to onboard high levels of affluent new-to-bank clients with a further 65,000 added in the second quarter, equivalent to around 10% annualized growth.
Now let's take a longer-term perspective on our Wealth Solutions business. Since 2016, wealth AUM has grown at a 9% CAGR. We saw strong growth up to 2021, followed by a slowdown during the COVID years. We've now accelerated growth once more driven by several factors. We're investing in new relationship managers, which were up 9% year-on-year and at the same time, improving RM productivity. We're continuing to innovate new product offerings across our footprint with best-in-class capital market solutions for our clients. And we're also providing a fully integrated digital wealth platform with personalized advice.
We know that our wealth and affluent offerings are of interest to investors, and we plan to host a seminar later this year to provide you with more color on this business. Turning now to the progress we've made in the Ventures segment. We continue to see strong growth in customer numbers in Mox and Trust. We currently have around 600,000 customers in Mox and around 800,000 in Trust. It's on track to be the fourth largest domestic retail bank in Singapore by customer numbers by the end of this year. Both Mox and Trust are rated as the top digital banking apps in the Apple Store in their respective markets.
In SC Ventures, we've raised $55 million of external funds across 2 ventures in 1 fund at attractive multiples to our original cost in what continues to be a challenging environment. Lastly, we continue to see strong momentum in our sustainable finance franchise. Income in the first 6 months of the year was up 18%, and we remain on track to deliver over $1 billion of income by 2025. We've mobilized more than $105 billion of sustainable finance since the beginning of 2021, making good progress as we advance towards our $300 million target by 2030.
On the broader sustainability agenda, we continue to make progress on our net 0 ambitions. And in May, we announced the commitment that by 2025, we'll set a methane emission baseline and interim 2030 target. In the first 6 months of the year, we also launched an innovative Adaptation Trade Finance Facility to protect businesses against extreme weather events.
So to conclude, the group delivered a strong performance in the first half of the year, with income up 13% generating an ROTE of 14%. We've been executing well on our strategy of being a cross-border corporate investment bank and leading wealth manager for affluent clients. The Fit for Growth program is progressing well, with the benefit expected through 2025 and 2026.
Our capital position remains strong, and today, we've announced our largest ever share buyback of $1.5 billion. With this strong start to the year and confidence in our diverse franchise, we're upgrading our income guidance and now expect to grow above 7% in 2024. We have the right strategy, business model and ambition to deliver our 2026 target of 12% ROTE and to progress thereafter.
So with that, I'll hand back to the operator, and Diego and I will be happy to take questions.
[Operator Instructions] And your first question comes from the line of Robin Down from HSBC.
Can I ask you about a couple of the targets that you've got? Firstly, the income target of greater than 7%. If my math is correct, you're hitting the interest income target for the full year to do 7% revenue growth would require the noninterest income to be down H2 -- on H2. Is that something you can give us a bit of color on? I'm guessing you've built a bit of momentum within the Wealth Management business and a very easy comparator in '23 Q4.
So I'm just trying to get a gauge for how far above 7% we might be still thinking about here. And the second question, I guess, was slightly linked to that. But just the RWA guidance, I think you touched on it in the presentation. But given the sort of big shift down we've had in Q2 and the kind of lack of loan growth out there, I'm slightly surprised to see you're still targeting single-digit RWA growth. Again, I wonder if you could give us a bit more color there, whether there's any kind of regulatory changes or model changes you're expecting within that?
Great. Thanks, Rob. Good afternoon, everybody. Thanks for joining us. I'll go straight to Diego for both those questions.
Excellent. So on the income, think about it this way, Robin. We have 10% growth of the income ex-notable items in the first half. If you put yourself anywhere on the metabolic rate that we always talk about, our 5% to 7% during the second half, you land north of 7%. How much north of 7% will depend on a number of things which by the way, are linked in part to your second question, to which I will get in a second. But that's the way to think about it. There is a little bit of seasonality in the second half.
Yes, of course, I would expect, as always. I would clearly say that with the kind of leading indicators that we have for Wealth Management, the performance we have turned out, the strength of our flow business in markets, definitely, non-net interest income is not going to be down year-on-year in the second half. That is linked to the RWA question, in the sense, not a matter of changes in regulatory or otherwise, although we continue to be labor while waiting for Basel 3.1 clarity, which we hope will come shortly after the summer, hopefully.
But the issue here is we are rate-related in some way. We need to see that credit demand of which we've seen some encouraging signs with a $5 billion of underlying customer loans and advances we have added during the first half continued to show its effect. We believe it is entirely possible and those green shoots seem to indicate that we are moving in that direction. We are leaning into 150 clients in trade, as we have indicated before and we are seeing the results of that.
We remain confident that it can be done, but it undoubtedly requires a little bit of tailwinds from the market. So the other thing that I would say also remember, we don't need strictly -- I mean, we don't need to grow RWA to grow income. I think markets performance is a good example, but there are many examples of that in our originate-to-distribute activities also.
Excellent. Thanks, Robin. Can we take the next question, please?
Your next question comes from the line of Andrew Coombs from Citi.
Two questions, please, especially just on the large buyback. It looks like that's been partly funded by the 4% RWA reduction Q-on-Q. And some of those items are largely unlikely to repeat that sovereign upgrade so forth. So I guess 2 parts to the question is, one is why are you keeping the greater than 5 billion cumulative distribution guidance when you've already done a 2.5 buyback this year? And secondly, would you think the buyback is larger today than you'd expect to do going forward because of the RWA reduction that you've seen?
And then the second question is just on treasury optimization, that continues and if anything has accelerated this quarter, so perhaps you could just give us a feel for where we are in that process, how far through that treasury optimization we are and what the incremental benefit potentially is going forward from here as well?
Andrew, thanks for the question. The -- obviously, we're happy with the capital outturn for the quarter at 14.6% pre-buyback and that does reflect ongoing optimization. It reflects some tailwinds as well, some of the sovereign upgrades, as you mentioned. I won't say they can't be repeated. A number of our sovereign clients are still very lowly rated. But that said, these aren't things that we're predicting in the ordinary course. But what we said consistently is that we'll operate within -- dynamically within our 13% to 14% range and that we will return surplus capital above that range.
We've done that consistently. We're doing that again in the first half of this year, and we'll continue to do that. So if we outperform, for whatever reason, profit outperformance or RWA optimization -- outperformance that will create a surplus capital that will return, it's -- that's straightforward. And we'll assess each quarter and each period as the facts come in. Diego, anything you like to add? And I'll take up the treasury question.
No, nothing to add, I would say, on the first. On the second, look, optimization is a never-ending game. We will continue to optimize RWAs because that's what banks in 2024 have to do. So that will continue. I -- before on previous calls, we've discussed the concept of RWA density. I mean do we plan to affect radically our RWA density going forward? Absolutely not. But optimization has to continue, and we have the opportunity to do it.
We optimize 22.5 billion of RWAs in the 2.5 years of the early years of the previous plan. It is going to be less, but it is going to be an ongoing activity. We do not need it strictly speaking in order to fuel our buybacks, but obviously, it contributes and it's an important part of what we do.
Good. Next question, please.
Your next question comes from the line of Aman Rakkar from Barclays.
I had a 2-part question on markets and then one on NII, if I may. On markets, I just wanted to kind of check in what happened in the quarter. I think you -- Diego issued intra-quarter guidance that it might be flat markets year-on-year. So I think actually to have printed down 7% year-on-year constant currency, you must have had a very, very weak June so any color you can give us there would be helpful.
The kind of second part of that question then would be just your response to that kind of operating environment because I think my understanding is that part of the average interest earning assets being down Q-on-Q, as you effectively kind of allocating to trading assets to kind of bolster that line item. So, yes, can you just give us a bit more color on how you've responded to what looks like a difficult kind of end to Q2 and whether that's persisted into Q3 would be really helpful.
And then the second question is around net interest income. So you kind of note that you've reduced your downside sensitivity, which is great to see on an expanded structural hedge program. Yes, just keen to know whether there's more capacity for you to increase this hedge from here, and if there's a chance for you to kind of meaningfully reduce your downside sensitivity further from here?
Thanks very much. So nothing particularly concerning in markets in Q2. The -- what we had was a lack of episodic income. And as we called out as transparently as we possibly can, we got 2 major subdivisions of our business, the flow business, which continues to perform extremely well. We gave a longer-term time series in the investor presentation to -- given an indication just how consistent that's been over time. So volatile from quarter-to-quarter, but a very good 9% compound growth over the past 5 years.
And I think if you went back further, we don't have all that data further back, but if you went back further, you see similar trends. And then we've had episodic which is much more volatile. Obviously, it's a function of market events, but also one-off client transactions. And we had a particularly strong episodic quarter in the second quarter of last year, and a particularly weak episodic quarter in the second quarter of this year.
Nothing at all concerning in terms of the structure of the business or the environment for that matter. It's kind of performing the way that we would expect, which is we'll -- when the opportunities are there, we're in a good position to seize them. And when they're not, we don't. I'll note that July has started fine. So there were no particularly adverse operating trends in June, and there are no adverse operating trends in July either. So all in all, I think that there's really not too much more to say about markets in the second quarter.
To the point that trading assets have grown at a time when average interest earning assets in other locations have been a bit weaker, we definitely don't allocate capital to the trading book to massage the numbers. We book assets in the trading book, if they're attractive to be booked there and if we have attractive opportunities and if it suits our business strategy. And so we're perfectly happy to book assets into our trading book. We're perfectly happy to book assets into our banking book, if that's where they belong.
But it's driven by what makes sense for the business, not by trying to generate a particular set of numbers in a quarter. I just wanted to frankly completely disabuse anyone of that notion, thought actually hasn't crossed our mind. But maybe for the third quarter Diego, we can look at some of these games, certainly not what was going on in Q2.
I would say that also, we have proven -- I think this quarter proves another important point, which is we have grown the market balance sheet because there was demand from our customers. We have not necessarily grown. Actually, we have shrunk market risk-weighted assets, which proves to you that we can make good business and produce good income without necessarily leaning into the risk-weighted asset part of that equation. And that's important. By the way, that's a trend that, as Bill has mentioned, continues well into July.
And also in July, I would call out the fact that Wealth Management is continuing on exactly the same trends, as it has done during Q1 and so for the banking business where the pipeline is building. So all good on that front. On your second question, shall I take it?
Please.
So yes, we have reduced net interest income sensitivity. It's something we flagged before. The pace at which we are doing it is even faster than what we were thinking, frankly, at the beginning of this year. We have found ways of finding capacity in terms of the hedges which are, if any, maybe that's another aspect of that RWA optimization and optimization activity that we do furiously.
And today, I would say that we will probably put in 2024 as many hedges -- as many new hedges as we put in 2023. And in 2023, we put on $16 billion of hedges. So we are now at $51 billion. It will grow during the course of the year. It will continue to reduce the sensitivity to net interest income. And it's something that we will continue to work on also in the years come. So all good from that point of view.
Maybe we're just expanding a bit dig on the fact that we're focusing on currency by currency. And that has been somewhat a determiner of how fast as we can go.
Very much so. And as we have pointed out in the past, we face limitations sometimes competing possibilities in terms of accessing certain currencies from a derivative point of view, but we have been managing very dynamically both our [indiscernible] portfolio and to an extent our fair value through OCI and that allows us to really optimize the margin, some of the less liquid currencies and we have managed to put on hedges there, too.
Good. Next question, please.
Your next question comes from the line of Joseph Dickerson from Jefferies.
Congrats on the great set of results in the buyback number. Just a quick question. I know it's a relatively small revenue line for you, but it's nevertheless, actually quite fungible with the rest of your business, which is the securities and prime services line, seems to have a bit of a step-up in the quarterly run rate in the second quarter. And I'm wondering if that's something -- is that, in your view, can continue? Or was it just certain business activity in the quarter that drove that? That's my first question.
And then my second question is on Ventures where if I look the client liabilities are up, it looks about half this year on half last year, about 2x, and you referred to some of that in the slides on Ventures, but I see that the revenue is down. So at what point do we inflect on the revenue performance in Ventures, given some of the client franchise momentum you're seeing in the likes of Trust and Mox?
Good. Thanks, Joseph. Let me take the second question first. Diego can take the securities and prime question. So Ventures obviously is dominated certainly in the lines you're mentioning by Mox and Trust. We've had good steady growth in client numbers, which is obviously the best way the indicator we could have. That leads directly to growth and liability numbers. We've had good steady growth numbers and assets in Trust, obviously, started later and is behind in terms of asset growth, but the trends are all very positive.
Mox, as you may recall, we had strong asset growth. We ventured into higher risk portions of the Hong Kong market. We made mistakes, and we took -- had a substantial spike in loan impairments. We pulled back substantially. We have no new issues with -- I should say, no issues out of the ordinary with the existing origination portfolio, but we definitely slowed down the rate of overall growth in the portfolio as we corrected for the underwriting errors that we've made that led to that spike and loan impairments. The underlying trend, we're still perfectly comfortable with.
Obviously, we've learned lessons about what we expose ourselves to in terms of fraud and credit loss when you're the easiest to use digital bank in a market that's new to digital banking. And I'm sorry to say that we learned that lesson in the hard way. I'm happy to say that it was small in the overall scheme of things, and it benefits our broader business, starting with Mox, but the broader business in terms of lessons learned very, very substantially.
So in terms of the inflection point, I think, we're well past the inflection point in terms of that particular episode of higher credit losses and the underlying loan and liability growth continues unabated from here with ongoing projections of getting to good profitability in the medium term for both those banks. Diego, do you want to pick up the securities and prime?
On security services, as you say, not the largest of lines, but one in which we are really focused and one in which we'll be making serious investments in the past few years. No one-offs. It's the kind of business. By the way, that doesn't lend itself as much to one-offs. It's a steady recurrent source of revenues.
It's a matter of leaning more into it. Bear in mind that in many cases, we are one of the very few and in some cases, almost the sole provider of those kinds of services in some of the markets where we operate. It's 1 of the 2 embodiments of the power of our local presence and the unique opportunities that it offers us.
It's a business that has always been run in close conjunction with our markets business. It is even more so in the last few quarters. And we think that it's a business that has still a long way to go in terms of growth, and we have some ambitious targets there.
Good. Can we take the next question, please?
Your next question comes from the line of Edward Firth from KBW.
I just had 2 questions. One was really about Hong Kong and I guess the environment there. And if I take us back a couple of years ago, we were all getting very excited about the opening up of China, et cetera. And it doesn't appear to have come through really at all. And I'm just wondering when you look forward, what should we look for as the sort of key catalysts, which might regenerate that environment might start getting some of the excitement in Hong Kong, but perhaps we had pre-pandemic.
I don't know whether it's something about interest rates, whether it's something about regulations? What is the environment that you would be thinking, yes, this is exactly what we need or what are the catalysts. So that's my first question. And then the second question, I was just thinking about your return targets that's 10% growing to 12%.
I mean you're already making 14%. It doesn't feel like those are particularly ambitious. And I get the sort of headwinds around the impairments possibly and lower rates. But, yes, just any thoughts you've got about the sort of 12% longer-term target and the extent to which there might be a potential to increase that over time?
Good. I'll take the first pass, and I know Diego will have color to add. I recognize your comments about Hong Kong, but I must say I don't share the sentiment. To us, Hong Kong is super exciting and something about strong profit growth, increasingly powerful wealth management center, increasingly important China offshore banking center generating record income and record profits, all feels pretty good to me. And there's nothing about the trends that we've seen post-pandemic or otherwise that suggested that's going to stop anytime soon.
It's obviously been a very important driver together with Singapore of the growth in our wealth business, which is I think, increasingly driving the earnings growth of the bank together with everything that we do with cross border. So I think overall, Hong Kong is in good shape. Now that said, it's taken on a different complexion over the past couple of years post-pandemic and post the changes in relationship vis-a-vis China. It's ever more the offshore financial center for China. And I think all the policy actions and rhetoric coming out of trying to support that view.
China itself -- you mentioned when are we going to get the excitement around opening up and China is opening up. It's opening up very fast. And that's what's driving our very, very substantial income in profit growth in China, is everything that's cross-border in and out of China. So it's payments, it's financial markets and risk management activity. It's capital raising, both money going into China, and money coming out of China, whether it's belt and road related or sustainability related. All of those areas are generating very good strong growth for Standard Charter Bank. And it's on the back of China opening up.
A lot of that opening up activity is going through Hong Kong. And so we fill that probably. So while I think if we focus a lot on some of the press narrative, you might think that Hong Kong is in the doldrums. And in terms of domestic economic activity to some extent, it is. In terms of the domestic real estate market, it's sluggish for sure. That has relatively little impact on our business day to day. What drives our earnings and profits are China opening up and a lot of that opening up happening through Hong Kong, both of which we're perfectly positioned for.
On the ROTE guidance, we said 12% -- in excess of 12% -- actually, well, 12% by 2026, progressing from there. And we don't think 12% is the end state for what this bank can deliver. I think this bank can deliver returns substantially in excess of cost of capital, as that settles in itself over time. And all I can tell you is we're doing everything that we can in our performance in the first half of this year. I think, make it clear that we're making good progress on delivering returns that are substantially in excess of our cost of capital over that period of time. So the 10% and the 12% are milestones along the way. It's by no means the totality of our mission. Diego?
Can I have the boring CFO comment, I mean, this is first half ROTE. Second half is always slower, and we have the bank levy in there. So I mean -by all means, perish the thought that we wouldn't be optimistic, but we also need to realize some key characteristics of the business in the 2 halves.
Good. Next question.
[Operator Instructions] and your next question is from the line of Amit Goel from Mediobanca.
So 2 for me. Firstly, just on payments and liquidity within CIB, I see that's kind of ticked down again a little bit. Just curious what you think the dynamics are for that business going forward? I think you have invested into it so just wanted to understand that a bit better. .
And secondly, just coming back on Ventures. And just curious in terms of how confident you are in terms of that business becoming ROTE-accretive by 2026. And essentially, how significant is that within your plans to get to the 12% ROTE. If that business isn't quite as profitable, where are the main areas of offset that you would see within the plan?
Good. Thanks, Amit. I'll take the second question and then hand over to Diego for the first. The -- our guidance remains unchanged in terms of achieving a return that's accretive to the group in 2026. And that will come through a combination of increasing profitability or, I should say, establishment of profitability in Ventures, in Mox and Trust in particular, but then increasing once we've reached that breakeven point, combined with an ongoing series of asset sales of one description or other.
So we sold over the past couple of years, 4 ventures, I guess, and raised capital in another 5, all at a significant premium to our carrying value. And it's not that we're building businesses with a view to selling them off at a gain 3, 4, 5 years later, we're very happy to do that. We're building businesses that -- where we think we've got a competitive insight.
We've got either a competitive advantage in terms of the bank's position or we've got some insight about a customer behavior or a problem that gives us an edge in terms of building a venture or attracting partners or both.
Once we built it, and along the way, we're looking constantly at whether that venture belongs inside the bank, alongside the bank or is best owned by somebody else. We're not a venture capitalist. So when we sell something, we're probably going to sell it at an earlier stage in its evolution than a typical venture capitalist would.
But we will have benefited from the fact that we've got some strategic advantage from the outset that allows us to invest wisely in these ventures. So we've been at this business now for 5 years. We had our first monetization 2 years ago. We had several last year, and we'll have several more this year, partial or whole generating capital gains.
And those capital gains, obviously, are capital gains and that they contribute to our overall 12% ROTE and then in excess of that. So I hope that's clarified a little bit. We'll provide more detail on the Ventures portfolio, as we continue to mature the portfolio. But your question is, are we confident? The answer is yes, we're confident. Maybe, Diego, you want to pick up the -- cash.
Payments and liquidity. So first of all, it's obviously somewhat rate dependent in terms of an answer, but what we are laser focused on is obviously the pass-through rates and we've been managing them as aggressively as we can. We have been helped by the addition of new products, by increasing digitization of a lot of the activities that we are doing with clients that obviously help us on the margins. .
But it's clear that we are watching. We are at an inflection point where it's difficult to make great predictions about pass-through rates other than if they -- when they reverse, there will be 2 factors at play: One, time lag, which will happen in the first few quarters after the reversal. We're probably more or less there in terms of this starting to happen.
And the second, of course, we will be -- it will be dependent a little bit on the level of competition. As I said, a lot of focus on this, as we recognize that this is a very important part of our overall proposition to our clients.
Next question, please.
Your next question comes from the line of Guy Stebbings from BNP Paribas.
A quick follow-up on RWAs and then a second question. So on RWAs, I think it was Robin that asked a question earlier, just to really understand how much visibility you have in that pickup in the second half implicit in the guidance? Is this more sort of uncertain regulatory headrooms, a possible uptick in organic loan growth and thus may be quite conservative [indiscernible] or are there more mechanical headwinds that we should be mindful of?
And then the second question was on China CRE, which I guess reassuring isn't much of a focus today and far less of a residual concern now than perhaps at times in the past, but it's still an area we get lots of questions from investors on. So maybe you could just give us a bit more of an update on what you're seeing there conviction on coverage levels in the context of latest developments?
Good. Thanks very much, Guy. I'll take the CRE question and Diego will pick the RWA question. You're right. We don't have a lot of residual exposure to China real estate. We're about 90% provided on the core part of that portfolio. And we don't see any material increase in risk in the non-distressed part of the portfolio.
The dynamic in the market remains challenging. Prices are still dropping in a number of markets, although there are some signs of stabilization in the Tier 1 and 2 markets in particular in residential. But the challenges are there.
It's -- the impact that we see from China real estate at this point in terms of impact on our business day to day has much more to do with the consequence of this long malaise in the property market, which is a lower confidence than would otherwise be the case.
So we know that that consumers are holding back on spending. Businesses are holding back on investing because it feels that we have not bottomed out in terms of property prices. The government has introduced a steady series of both fiscal policy and monetary actions to try to reinstate confidence, as we all noted and commented they've not panicked and they've not gone over the top in any way.
Some have argued that they've not gone far enough. That's what makes the market. There's a good debate on either side of that. Even today, the Chinese authorities have rolled out another sort of moderate stimulus activities in terms of policies and other economic actions. And I think we can continue to see some level of support in terms of policy focus to make sure that whatever correction is left to come in that market is done in a way that doesn't destabilize the market.
But until the market turns around and we hit that inflection point, I don't think we're going to see the jump in confidence, which then in turn drives business investment and gets GDP growth reignited obviously, then flowing through to the consumer.
So the malaise, we feel it in our domestic business. We see it in our business with SMEs and consumers. There's no material increase in delinquencies, but we see slower activity, slower pace of loan origination and early signs of some credit stress, which is completely consistent with the broader economic picture.
It doesn't all come from property market, but the property market is certainly a major contributor to that. And the sooner we can hit the bottom and bounce back up, the better off the Chinese economy will be, as I commented earlier, not only do we not have a lot of direct residual exposure to the distress sector, we are much more exposed to the pace of opening up in China, which itself is moving at quite a good pace. So this is not something that we're super pre-occupied with. Although as major players in China, we watch it very, very carefully. Diego, anything to add on RWAs?
So on RWAs, first of all, there is lots of optimism here and there are no reasons to be concerned. There are no model headwinds. There are no regulatory headwinds other than the fact that we are waiting for Basel 3.1. But if anything, I would contend we have taken a pretty conservative approach like in other fields to guiding on this particular topic.
So hopefully, we will see some upside to that. So nothing mechanical. It's a story of growth, obviously, grow to a certain extent, rate dependent. But I think that one of the things that we have proven with this quarter is that we are very, very proactive.
So we were -- we have engines of capital generation that's not withstanding we do continue to optimize. And when we get the results that we get like this quarter in which we've done a lot of work and we've benefited from a number of positive tailwinds, we then return capital to our shareholders. So I think that as a package, that's the way to look at our risk-weighted assets going forward.
Your next question comes from the line of Gurpreet Sahi from Goldman Sachs. .
So 2 quick ones. First is on loan growth. Mortgage is a big chunk of our book. And so I'm wondering what we are seeing and what would make us grow in that area, especially in Hong Kong, Korea and Singapore. In Hong Kong, particularly cost of funds for the industry has come down slightly. So does that improve the spread for us to kind of -- and loan yields have held constant. So does that improve the spread enough for us to enter into the market? Or are we concerned around credit risk, et cetera.
And then second, on the software -- CIB software impairment, I acknowledge it does not impact the cash earnings or the capital. But how much are we expecting to do over the foreseeable future? Because as much as we have done in the first half is what consensus had in other impairments for 3 years. So any guidance there would be helpful.
Good. Let me pass both those 2 questions to Diego right away.
So on loan growth and mortgages, a different story for the different geographies. Singapore is doing fine, a smaller part of our mortgage book. Korea, we are self-selecting away from writing much business there, a combination of competitive pressures, some government directives affecting the industry and also the slightly lower value in terms of mortgages in Korea in terms of driving the other business. You're absolutely right, Gurpreet, yes, it is getting better in Hong Kong.
We are coming closer, but we're not quite yet there to restart writing in meaningful sizes in that market, although the conditions are improving. We use mortgages these days as a leading to Wealth Management relationships, but we have other ways in other levers. And you have seen, for example, in the growth of some of the retail term deposits that we have other ways of attracting customers with attractive propositions...
If I could just add, Gurpreet, you asked whether there were credit concerns, the short answer is no. That's not a consideration in terms of our market share. We see no credit issues in the existing portfolio and have no concerns about originating new mortgages from a credit perspective. It's all about margin.
Definitely. And on software CIB, yes, we would expect more to come. It's a bit difficult to put a number on it. We'll be updating you in the quarters to come.
Your next question comes from the line of Nick Lord from Morgan Stanley. .
Two questions. First is just on credit charge. I mean, obviously, I think, pretty clear guidance of what was happening on the retail bank side. You obviously benefited from very low charges even at sort of a write-off or write-backs in the wholesale bank. So are we expecting sort of a similar trend in the second half? And therefore, can we expect a loan loss charge significantly below about 30 to 35 basis points for the full year?
And then secondly, on costs, I mean, again, you give guidance for how positive cost income jaws. Obviously, they're quite wide in the first half, and that's quite wide guidance. So I just wonder if you could give us a little bit of flavor of what could happen if I'm thinking on cost on a Q-on-Q basis. You spoke about investment spend going up in the second half. We obviously have the bank levy. But are there any other sort of major moving parts in the cost line in the second half of the year?
Good. Thanks very much, Nick. The -- we've obviously had about as benign environment as we could hope for on the corporate side. Retail, as you say, is pretty much in line with expectations and with recent history, nothing much to comment on there. On the CIB side, the -- we've obviously benefited from some releases, and we've had no material losses. Along the way, having had a spate of sovereign default a couple of years ago, the countries in which we operate that were on the watch list, have generally improved.
That obviously is not an impairment question, but it's an avoided impairment question, if we could put it that way. So -- but we also know the credit and credit losses, in particular, come episodically. And while we see nothing, that's at all concerning in the portfolio right now, certainly nothing that we haven't shared perfectly transparently.
We're not going to change our guidance on through-the-cycle expected cost of credit based on a good first half of the year. You're asking about the second half of the year, if we saw anything that was particularly concerning, we'd be calling it out now or you'd see it in our Stage 2 and Stage 3 impairment numbers.
And obviously, you've noticed that there's nothing there to have a particular concern. So I'll let you draw your own conclusions, but the overall credit environment is quite benign. Diego, you'll have some more thoughts on that and I'm sure on cost?
Sure. The only thing on the credit charges is -- I mean, our 30 to 35 bps guidance, remember, is always through the cycle, right? I mean it gets higher, but it also gets lower. We're clearly in a period of lower and long mates they saw. On the jaws, just 2 considerations. One, do not overread too much into our calling for some phasing in the second half of the year because we didn't want you to read too much into that phasing not having happened in the first part of the year. We are talking literally about a few tens of millions of dollars. So it's not a big number.
And as a consequence, I would say, really no major moving parts and positive jaws are an important mantra for us, which I would reiterate are important only on a yearly basis, not on a quarterly basis and only on a full group basis and not on single segment basis.
That was the end of the audio questions. I will now hand over to Manus for web questions.
We have a couple of questions online. The first question comes from Katherine Lei at JPMorgan. Katherine asks, please, can you give us an update on your Bohai Bank investment given the recent news highlighting the risk from smaller banks in China and Bohai's loan disposal in July.
Yes. Thanks, Katherine. So Bohai, as you know, it's a bank that we helped to set up over 20 years ago. We treated account for -- on an associate basis, so we accumulated profits over that entire period. We've taken substantial impairments over the past couple of years. We are very comfortable with the carrying value of the bank at this point relative to our outlook for earnings. Diego, if you comment on the specific impairment considerations. But obviously, we look at that regularly.
The -- while the profitability of the bank has been under pressure, there's -- the market price is quite low. It's very thinly traded. So it's hard to read too much into that, but it is what it is. And the market has been concerned about asset quality.
So to be able to execute this asset swap, where there's a prospective transfer of underperforming assets for assets which are more straightforward to value, that doesn't in and of itself, create value, but certainly, in and of itself creates some clarity around the carrying value of our position.
So overall, it doesn't change the strategy of the bank. It doesn't change our interaction with the bank, but it does provide the kind of reassurance that the market was looking for. And I think probably the Chinese regulators are also looking for that this bank has a stable financial footing, which we will continue to participate in and contribute to in every way that we can. Anything you want to add on that one?
Nothing. We've run -- obviously, we've run the latest news through our value news model. We've been conservative for quite a few quarters. We have a number of overlays there. There was no need for any adjustment.
Thanks. And our last question comes from Grace Dargan at Barclays. Grace asks, what is a normalized level of growth to expect from Wealth Solutions from here? To what extent is this business experiencing a super normal growth rate or catch-up post-lockdowns in Hong Kong and elsewhere?
So we're not going to provide new guidance, but let me give a bit of context. So this business has grown broadly in the market, and Standard Charter has been broadly in line with the market for the better part of a decade in high single digits, 8%, 9%, 10%. It's somewhat volatile quarter-to-quarter, depending on market sentiment, market environment.
Obviously, we had a substantial downturn during COVID for a bunch of obvious reasons, both investor sentiment and inability to visit branches, which, in particular, in China and Hong Kong is a relevant distribution channel. But the growth rate has picked back up again since the opening up of Hong Kong and China and the rest of the world.
Are we in a super normal growth period? I don't think so. I think this is a structural growth opportunity. And I think our growth should accelerate at a rate that's faster than the market. Why? Because when we've established ourselves as a leading cross-border and affluent bank in everything that we do, we have a differentiated proposition as the only one of the top wealth managers in Asia that is completely open architecture.
We are a distributor of choice for the best asset managers in the world because they want to see how effective we are, but to recognize that we're not offering a competing product off our own books, I think we've got a brand that is -- that lovely combination of a strong, solid heritage-type brand but also a brand that's increasingly seen as a very innovative bank.
We're very innovative in wealth and wealth solutions in terms of our digital connectivity and the products and services that we provide. And obviously, there's a broader halo effect that comes from the success of our venture segment and many of the innovations that are happening inside our businesses.
So I don't think the current growth we're experiencing is super normal. I think it is benefiting from a relatively benign environment for market sentiment. But I think we can also expect to outperform ourselves relative to what should be a good market because of the investments that we've been making and the position that we enjoy today. Diego?
I would just add that the confidence that we have is underscored by the fact that we have increased the level of disclosure we are giving you about this business. We have shown you that -- we've shown you more on our assets under management, or on our net new sales or our net new money on the split between investment products and bancassurance.
The objective is to really drive home. The fact that we have really diversified the source of revenues even within this segment. And that is one of the things that gives us strong confidence to achieve the results that Bill outlined.
Good. So if there are no further questions, either online or on the phone, then I will thank you all for taking this time with us for the ongoing support and the coverage and look forward to following up in the many discussions that we'll have in the days, weeks, months to come. Have a good rest of the week.