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Standard Chartered PLC
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Welcome to Standard Chartered PLC Third Quarter 2021 Results. Today's presentation is being hosted by Bill Winters, Group Chief Executive; and Andy Halford, Group Chief Financial Officer. Once their opening remarks are finished, there will be an opportunity for questions and answers. [Operator Instructions] At this point, I'd like to hand over to Bill to begin. Please go ahead.
Thanks very much. And good morning, good afternoon, everyone. Thanks for joining us for our third quarter wrap-up. I'll say a few things upfront. Andy will take some details, and then we'll both be available for Q&A afterwards.So overall, I think this is a strong quarter and strong first 3 quarters of the year, reflecting the ongoing progress on all the key elements of our strategy. Network business continues to go well, very encouraging to see the improvement in trade volumes and income and profits. Financial Markets has continued to operate at a strong level. The affluent client strategy growth is ongoing. It's very encouraging for us to see steady growth in net new money across that excellent proposition.Our digitization trends remain very strong, especially in the mass markets. We obviously had a more detailed discussion on the digitalization agenda a few weeks back. So that's an encouraging ongoing progress. And as you can see, credit discipline remains strong and the asset quality remains good and encouraging.Just a couple of comments on sustainability. That's -- our focus is paying off. So we're seeing a good steady increase in transition and sustainable finance. We think that, that has a long, long road to run and very encouraged by the positioning of the bank so far. That combined with a top leadership position. We gave a very detailed assessment of our transition plans in 0 at the end of last week, which I expect will be well received as people really digest the detail. We've gone into a pretty great place to understand and then communicate the methodologies that we're using. There is no right answer to this.But the bottom line of all this is that we have a plan to get our bank in net zero by working with our clients, and we believe that the transition finance proposition and opportunities for us given our strong starting position and our focus on this in the early stage should either entirely or close to entirely or maybe beyond entirely offset any drag that comes from the net zero transition process. So overall, filling good shape there.A quick comment on outlook. Q4 is typically a seasonally slower quarter, and the October results year-to-date during the date October results to date suggests that this year will be no different. The momentum over the course of this year leaves us confident that our franchise can deliver that top line growth of 5% to 7% and positive to us as we look to 2022 and beyond. With that, I'll hand over to Andy, and then we'll be back for Q&A.
Well, thank you, Bill, and good morning, good afternoon to everybody. So just starting with Slide 3 and the usual financial overview. I'll cover this briefly, and then we can go into detail in a minute. So starting at the top, operating income at constant currency and excluding DVA is up 6% year-on-year at $3.8 billion and return to top line growth in the quarter, supported by good business momentum in many of our larger businesses.Even adjusting for the further IFRS 9 adjustment that we booked this quarter and last year's accelerated bancassurance bonus, this still represents an encouraging 5% underlying growth. As Bill has mentioned, trade activities and transaction banking has been particularly strong, which is encouraging as we think about and then going into 2022. Finally on income, the underlying net interest margin has broadly stabilized as we anticipated, and the momentum has continued in our fee earning businesses.Moving down to expenses. They were 3% higher on a constant currency basis, mainly due to the increase in performance-related pay and more investment in digital ventures, which many of you heard about during our recent innovation and digitization event. Importantly, the return to income growth enabled positive income-to-cost jaws of 3%. Credit impairment at $107 million in the quarter continued to remain low, with the management overlay broadly stable at a shape over $300 million. I'll cover this in more detail shortly. This all led to a 50% improvement in underlying profit before tax at constant currency of $1.1 billion. Effective tax rate improved to 23.5%, reflecting the geographic mix of profits and higher profits diluting the impact of nondeductible costs. All together, this contributed to a 7.1% RoTE print. Our capital and liquidity position remains strong, enabling us to respond quickly to requests from clients.Our CET1 at 14.6% continued to be above the 13% to 14% range that we have previously indicated we intend to operate within. As we assess opportunities to further strengthen our franchise over the coming weeks and months, we will provide an update on our capital management actions and shareholder return intentions when we announce our full year results in February 2022.So let's start looking in more detail at our income performance on Slide 4. This is the usual view of income by product, excluding DVA with currency fluctuations stripped out, highlight the underlying momentum. Starting with the top chart, which shows the year-on-year 3Q comparison. If we exclude the second and largely final tranche of the IFRS 9 interest rate adjustment of $96 million and the prior year $53 million acceleration of the bancassurance bonus, income has increased, as I just mentioned, at a healthy 5% as shown by the dotted line oval.Let me add some color to the product level highlights moving from left to right. Treasury and other income more than tripled, 2/3 of the improvement is due to the reduction in net funding cost paid and received from liability asset products. This reflects the relatively lower interest rate environment this year and the work undertaken to improve our liability mix. Financial Markets is up 4%, excluding DVA and the IFRS 9 adjustment. Within macro trading, we saw sustained growth in client flows with higher foreign exchange income and commodities having benefited from higher prices, offset by a reduction in the rates business due to unfavorable movement yields. You may recall that we integrated the majority of the corporate finance business into Financial Markets earlier this year, drive velocity through and originate to distribute model. We are seeing early success in this initiative with strong deal closure momentum in credit markets with balance sheet distribution volumes up close to 1/3.Lending and portfolio management grew a healthy 10% on an adjusted basis. This was driven by M&A deal closures and improved margins. Retail mortgages and credit cards and personal loans recorded close to double-digit growth, driven by higher balances across these products. Transaction Banking trading account is up double digits at 13% with intra-Asia cross-border flows growing as economies in the region progressively open up, driving growth in asset balances and deal closures. Our Swiss letter of credit volumes have nearly doubled since the low point in the second quarter of 2020 and have grown in 5 successive quarters and are now above pre-pandemic levels. Now we've also gained market share on a year-on-year basis.Wealth Management was down 3% on a reported basis, but primarily due to the accelerated recognition of the annual bancassurance bonus in the prior year, which was not repeated this year. Excluding this, income was up 6% with particularly strong performance in Singapore and India, which were more unfavorably impacted by the pandemic last year.Our Africa & Middle East region recorded its highest Wealth Management quarterly income in 5 years this quarter. In Transaction Banking, cash and retail deposits, we saw a familiar story when interest rates moved lower. Positive income has fallen sharply, more than offsetting growth in balances. The bottom chart shows income was sequential quarter-on-quarter. You'll see the picture is broadly similar to the year-on-year view that I just covered.Now turning to Slide 5, we'll spend a little time on net interest income and margin. The interest rate picture has not changed materially since the half year. Our reported third quarter net interest margin was 1.23%. But normalizing for the 7 basis point uplift from the IFRS 9 adjustment, it was 1.16% on an organized basis. This is in line with the guidance we gave in August, where we expected the NIM to remain broadly stable. The 1 basis point quarter-on-quarter drop is due in large part to continued HIBOR compression, which drifted lower by 4 basis points in the quarter. There was also a slight shift in the mix of the consumer business, where we have seen clients switching from higher-margin credit cards to fee-based and installment products. But this has been partially offset by improvements in pricing and our continued focus on improving the mix of our liability base.The third quarter net interest income was broadly flat year-on-year, excluding the IFRS 9 adjustment with average interest-earning asset growth of 6%, offset by a similar size decline in a normalized NIM. Speaking of interest rates, we said that when the pricing was right, we were linked to the tenure of our treasury book benefit from the steeper yield curve at the longer end. We have now started to do this using a portion of our equity base, and we will increase it over time.Our interest rate sensitivity to a parallel 100 basis point shift in interest rates across all currency remains as we communicated at the half year. That's around $1.1 billion of annualized net interest income, which will substantially flow through to the bottom line. We believe that the year 2 benefit is around 1.2 to 1.5x that of year 1 as long as dated maturities also start to reprice. We have seen healthy volume growth in all 3 courses with loans and advances to customers, having grown 7% or circa $20 billion year-to-date. In the third quarter alone, it grew $4 million or 2%, mainly in retail mortgages and financial markets, partially offset by the completion of loan syndications that were in progress at half year.With that, but before I move to expenses, a few words on our income outlook. Our third quarter performance supported by the broader macroeconomic outlook reinforces our confidence in the previously stated income guidance, where we expect full year income in 2021 to be similar to last year on a constant currency basis with the fourth quarter being sequentially lower, as Bill mentioned, reflecting 2 things: seasonality comparable with prior years and normalization of the third quarter IFRS 9 adjustment. Furthermore, the current foreign exchange outlook is probably a little bit near $200 million than $300 million earlier. And finally, the strong underlying business momentum we've seen throughout 2021 gives us the confidence that our income growth will return to our medium-term guidance range of 5% to 7% from next year.I'll move on to cover expenses now on Slide 6. I mentioned earlier that we printed positive income-to-cost jaws up 3% despite the increase in expenses in the third quarter. That increase was driven by 3 factors, as you'll see in the bottom chart, foreign exchange, performance-related pay and investment in digital ventures. Excluding these, operating expenses were lower compared to 2020. We, like many of you, are seeing early signs of increasing inflation pressures across our markets. As we outlined in our innovation and digitization event last month, we also have an ambitious innovation-led investment agenda. So the importance of continuing our tight rate on costs remains absolute.As we mentioned last month, we are deliberately dialing up our investments into strategic initiatives, and we expect that about half of our annual cash investment spend around $1 billion will be focused upon fundamentally strategic differentiating investments going forward. In parallel, we are continuing our focus on productivity initiatives that are creating capacity, both absorb inflation and create headroom for the cost of these investments.For example, in October and hence not in the third quarter numbers, we completed a significant restructuring exercise in Korea where our early retirement program has taken up by around 500 staff, representing over 10% total workforce in Korea. We think this will save us mid-tens of millions of dollars each year in operating expenses going forward. A significant part of the restructuring costs that we have spoken of earlier of about $0.5 billion will come from this program.As we have previously said, expenses excluding bank levy are likely to increase slightly in 2021 as we continue to invest and normalize our performance-related pay. But including this and the impact of currency translation, we continue to target full year outturn at or below $10.4 billion.Turning now to credit impairment and asset quality in Slide 7. Whilst credit risks remain elevated, our overall portfolio remains stable and resilient. Starting from the top half that is focusing on credit impairment, the year-to-date charge for the $60 million is very low compared to the $1.9 billion charge in the same period in 2020. And looking at just this quarter, credit impairment was just over $100 million, down circa $250 million year-on-year. There is a very small net release for the management overlay, $4 million in the quarter with the retained overlay now at $306 million.Now moving on to the bottom of the slide, the stop of high-risk assets in corporate, commercial and institutional banking portfolio across the 3 indicators in the bottom left graph continues to trend down. This is the fifth consecutive quarterly decline we've seen in high-risk assets around $6 billion or about 1/3 year-on-year. And specifically, on early alerts, if one excludes aviation, it is now in line with the pre-COVID levels. There's obviously been interest in our China commercial real estate exposure. Just to reiterate what we have said previously, we don't see this as a material issue at present. Of our total loans and advances to customers group-wide of about $300 billion, we have $18 billion or 6% in commercial real estate globally. Of this $18 billion, about $4 billion relates to China commercial real estate, of which $1 billion is booked onshore in China and $3 billion is booked in Hong Kong. We've included a slide in the appendix to provide you with further details on this.Thirdly, the full year impairment charge is going to be significant this year, albeit the economic recovery from the pandemic continues to be uneven. However, we are encouraged by the robust levels of export growth in many of our markets in Asia and excluding the impact of any unforeseeable events, we expect credit impairment to remain at low levels in the fourth quarter.And finally, to complete the financial overview, risk-weighted assets and capital on Slide 8, starting with the chart at the top. Risk-weighted assets were down $13 billion or 5% in the quarter. Despite client-driven asset growth adding about $4 billion, there were broadly similar declines in each bucket across retail model changes, optimization initiatives, asset quality and lower market risk RWAs. We do not expect to see such a widespread reduction in RWAs in the fourth quarter and indeed expect an additional $3 billion to $4 billion of RWAs due to the adoption of new structural foreign exchange regulatory rules in the fourth quarter. But overall, we expect our end-of-year RWAs to be only modestly higher than at the start of the year.Turning to the CET1 chart at the bottom. We remain strongly capitalized with a CET1 ratio above the top end of our target range. Profit after tax accretion of 30 basis points allowed us to reinvest into client-led asset growth with the lower RWA print that I've just spoken about adding 60 basis points to the CET1 ratio. Remember, the CET1 ratio includes a 34 basis point software relief and is expected to come out of capital from the start of next year, and the structural foreign exchange regulatory exchange will reduce fourth quarter CET1 by 15 to 20 basis points. Thereafter, software costs will be disallowed for the purposes of calculating the ongoing CET1 ratio.The full year 2021 outlook on capital is likely to be around the top of the 13% to 14% target range on a pro forma basis, excluding the software release. As we said at the half year results, we generally intend to operate within the 13% to 14% range, and there is no change to that intent. We'll provide an update on our capital management actions and shareholder return plans with the 2021 full year results when we announced those in February 22.And now on to the final slide before we open to questions, I won't repeat the outlook comments on the slide. The key point is that we have seen continued growth in many of our large markets. Bill spoke to you about the further progress we've made against our strategic initiatives, and we returned the reporting top line growth in the quarter. This reinforces our confidence in our outlook both for this year and to gain back 5% to 7% growth next year and beyond. So with that, I'll hand back to the operator, so Bill and I can take your questions.
[Operator Instructions] Your first question comes from the line of Aman Rakkar of Barclays.
Just a couple of questions on income and costs, if I can. Firstly, on net interest income. I think if I was to kind of factor in a broadly stable NIM in Q4 and a bit of balance sheet growth. That kind of implied Q4 net interest income is annualizing quite a clip below where the Street is next year. For it's worth, I think you probably have to grow your balance sheet 7% or 8% to hit 2022 consensus net interest income. Just kind of interested if you kind of share that view? How realistic is it that we can carry on growing? I know you're kind of annualizing at that level in Q3. How realistic is that we could do that kind of loan print next year? And is there anything else that we should be thinking about in terms of NIM drivers beyond rates that could be a potential positive next year?And then secondly, on costs, you've normally kind of indexed your medium-term cost guidance to inflation. Clearly, inflation is running perhaps a bit higher than what we're used to seeing. How are you thinking about the 2022 cost number? Is it harder to keep a lid on that? And what can we expect for 2022 costs, please?
Yes. Okay. So let me take those in order. So net interest income for next year, I think, 2 things. One, the underlying balance sheet growth that we have seen this year, we see as being encouraging. It's in a period when COVID effects has still clearly been evidential in a number of the markets. And we would be very much hoping that we can keep that sort of growth going through next year indeed, maybe pick it up a little bit as markets progressively move out of COVID.The margin itself, we are -- we think, very, very close to the bottom of that curve. There may be opportunity to slightly increase that next year, depending upon the way the rates move and when they move. So obviously, if they did increase to any degree, that would numerically take the balance sheet growth numbers that you've got, maybe slightly lower than that. But I think between the [indiscernible] 5% to 7% number for the top line income growth for us feels sought to be in a reasonable range for next year.On the cost front, I would say this, we've been very focused upon taking out cost of the core business now for the last several years be able to fund inflation and to be able to fund the increased spend on digitization. That is something that you have seen again in the 2021 year, where the costs have remained tightly controlled and where we have invested more to see into either the targeted areas for the normalization of the profit-related pay. There is some inflationary pressure clearly in some parts of business, and I think there's been a lot of commentary on the wealth management side, particularly in Asia, a lot of the banks, I guess, circling around the same opportunity areas. And as we move into next year, clearly, we will have more insight knowledge as to how the base [indiscernible] that cost pressure is. And clearly, in February, when we do the update for the full year this year but also talk about 2022, we're providing an update not just on cost but on the income side as well. So we will cover both of those at the end of February.
Just one quick follow-up then on the net interest income. I mean the comment around the structural hedge program and other kind of Treasury optimization efforts that might be going on. Should we be thinking about that as a meaningful positive into next year? Is there any way you can quantify any of that?
We will provide more quantification in February. So what I'd say, at this point is, as I said earlier, we've just started to put some of those hedges in place. It's relatively early days. It is a proportion of our equity base that we are now structurally hedging over time will increase that proportion. But it certainly will provide some underpinning for the 5% to 7% range for next year. And numerically, it's not big in the current year yet obviously, but it will be one of the factors in why we're confident about 5% to 7% range for the 2022 year.
Your next question comes from the line of Andrew Coombs of Citi.
Perhaps one big picture follow-up to the previous question and one more in minutiae. Big picture question, when you set that 5% to 7% growth target back at the end of 2018, I think at the time, you were penciling in similar in terms of rate rise assumptions. And then you are coupling that with 4% asset growth and 2% RWA growth. Obviously, you've actually had quite income margin headwinds since you set that guidance, but you have seen better loan growth. And now we're potentially going into an environment where those margin headwinds are going to become a tailwind. So we'd love a few more thoughts on the moving parts to about 5% to 7% in 2022 and then also where we go beyond 2022 as well when you split it out between the various parts of the revenue lines. And the second one more in the minutiae. Structured finance, $156 million in the third quarter. I know this can be quite lumpy. I think the quarterly run rate is usually around 100. So is there anything to draw out as we go into Q4? Is the pipeline still very strong? Or should we expect it to revert to norm?
Yes. So the 5% to 7%, as you say, we set back a while ago. And obviously, we had to sort of pause that during the course of COVID. And as we come out of COVID, be reappraised just sort of where we are at and what we think should be after the possible. And to your question, there's been a lot of moving parts that occurred in the intervening period. We clearly have seen the headwinds of margins, as you've referred to, hopefully, starting to sort of settle and maybe they'll become tailwinds, maybe slightly more beyond 2022.We have seen balance sheet that in the early days of COVID, obviously, was adversely impacted that we have seen a definite positivity to the growth that has happened subsequent to that. So I would say, if you put it all together, those plus areas that we're now focused upon, so a couple of years ago, the -- let's take the Mox. Digital Bank in Hong Kong was very much a sort of blueprint, whereas it is now a reality and different parts of the business clearly coming out of COVID at different rate. Our sense is that somewhere in that 5% to 7% corridor still makes sense. If you look at GDP growth expectations, albeit, obviously, inflation is playing a role in that, again, we sort of feel that, that sort of range should be the art of the possible. And although it gets less easy to predict beyond the 12 years out, but that 5% to 7% is not unique to the 2022 sort of general indication for -- to years that are beyond that. On the structural finance, I think...
Just come on point -- I mean as Andy just summed up and as your question suggests, there are opportunities on the [indiscernible]. First, the majority of our income is non-financing, which is right [indiscernible]. So we build the network income. As I commented earlier, our [indiscernible], both of the financing are growing at higher rates. The momentum is good. It's been very consistent. Obviously, less sensitive or insensitive to interest rate levels. And obviously, that's a big component of the overall 5% to 7% growth target that we've got. So we feel pretty good on both fronts.
Yes. And just on your second question, I mean, structured finance, the Aviation [indiscernible] within that. So it does tend to bubble around a little bit because that's sort of less of a continuum, but it depends on market conditions. So I would not read a new trend line into that. It's been a strong quarter, but that is all.
And your next question comes from the line of Joseph Dickerson of Jefferies.
Just quickly on the cost thing, Andy, when you were walking through some of the moving parts on costs next year. Are you guys committed to operating leverage next year? That's the first question. And then could you just provide a little color on what's happening on the cash management side? Is that primarily just interest rates suppressing that because that number is down, I think, 16%. So any color there would be helpful.
Okay. I got the first half of the question. I don't think I've got enough second half of the question quite even guess what the answer would be. But on the cost side and in terms of leverage, we'll update in February of where we're at. Just to reiterate, we have had very tight cost control. We continue to have very tight cost control. We absolutely want to invest into digital initiatives. We want to get that top line growth guy, but we'll provide an update both on cost and income in February.
The second part of the question was on the cash management revenue performance that was down 16% year-on-year. Is that the effect of HIBOR? Or is it just volumes?
It is primary rate effect. It's not so much a volume effect. And it's not just HIBOR. I mean, it's HIBOR in part, but we see cross currency. It is the part of our business that is very much bearing the forefront of rates. And as those rates come down, then the income from that part of the business diminishes. Hopefully, with the rate cycles starting to bottom, that should dark to bottom as well, but that is a long bit of business that is very corporate business that is very rate impacted yet.
Your next question comes from the line of Martin Leitgeb with Goldman Sachs.
Could I just go back to the -- just to the comments on NII and NIM outlook from here. It seems like the guidance at least on an underlying basis, excluding the one-off effect in 3Q are guiding for stabilization in margin with the, I guess, loan growth advice as that will [indiscernible] high expansion from here. If there was a scenario say that next year, we will get a hike in U.S. dollar, could you help us understand how quickly that impact of the hike feed through in terms of your P&L?Secondly, I'm not wanting to front run the capital comments for the full year. But I was just wondering, previously, the guidance was that Stan would like to operate well within the 13 to 14 target capital range. Now the expectation is for ending the year at the upper end. Should we expect Stan again to fall well within this range within a relatively short period thereafter? And thirdly, I was just wondering if there's any comments with regards to potential Citibank asset sales.
Right. I think that became a 3-part question, so let me take them in order. On the NIM, you referred to a hike in rates. Now whether it could be a hike in rates, I guess many will debate whether there may be some pickup in the rates. I suspect it's more likely. We have put the interest rate sensitivity into the pack. We have done it, I commented on it earlier. And I think you can sort of work out the math strong, that 100 basis points across all currency full year at $1.1 billion. So it depends very much upon your view as to how big hike is or is not. But a reasonable proportion of our book is short dated. Therefore, we do get the benefit coming through. If you look at core yield curves, you would sort of suggest that actually the benefits will be more '23, '24. But nonetheless, if there were some firmly upward improvement in rates, clearly that would be helpful to next year without any doubt. 13% to 14%, as I said, it is our intent generally to be operating within the range. The RWA reduction has boosted us quite well above the range, but we've got a couple of factors software structural hedging, which will take it down to top of range. It's not our intention to be sitting above or at top of the range forever. And when we talk in February, we'll talk about where we're at to that point in time.We obviously look at opportunities to strengthen the business, improve profitability. That is what we're doing at the moment. And by February, hopefully, we'll have more clarity on some elements of that, which could link into your third question on the city assets, which we have -- we have said we can't comment upon in any detail. But clearly, where there are opportunities selectively to strengthen the franchise, you would expect us to have a look at those, whether we do anything where we don't -- is not fully within our control, but we'll provide an update on that if there is any update to be provided as when things unfold.
Your next question comes from the line of Tom Rayner of Numis.
Could you confirm the size of the gain that was in aviation finance, please? And is that linked to the $35 million other impairment you took on that lease portfolio? And then also on revenue, did I hear you say, Andy, that the FX adjustment is closer to 200 now? So does that imply the benchmark revenue for 2020 is about $14,965,000, call it, $15 billion. Is that the benchmark that you're looking to sort of drive your 2021 similar revenue level from?And then just finally on inflation. Has there been any change to what you perceive to be inflation in terms of your cost target beyond this year, given what's happening across the world in terms of inflationary pressures?
Yes. Thanks, Tom. So within the structured finance, there were 1 or 2 gains from aircraft disposals. They don't tend to be a little bit lumpy, depends upon the market and when we can do those. So a slightly higher than average quarter from that, but that's the primary reason. On the interest rate -- sorry, the exchange rate, translation rate, it does move around over the course of the year as you will anticipate. We had put in a rough sort of $300 million proxy previously. If we rerun the numbers today, that's probably nearer the 200 than the 300 level. But clearly, with a couple of months to go, that will still have a little bit of time to run its course. We haven't guided on a specific revenue number for the current year other than saying it will be similar to last year on a constant FX basis. So that you could affect in whatever numbers you have got and whatever assumptions you have got on the FX side.On inflation, we've had different levels of inflation over a different period of time. There is -- as I said earlier, and I think we're in the press a little bit of upward pressure on that. We will clearly be doing what we can do to take operating costs out of the business from that as much as we can possibly do. Equally, as I said earlier, we do want to make sure we've got sufficient capacity to be able to invest into our new digital assets. So I think by February, with another, what, 4 months under our belt and just seeing what exactly is happening on inflation, we'll be in a better position to provide an update on the guidance or the cost side 2022 in February.
Okay. And just on the aviation thing still, the other impairment of $35 million. I'm just trying to understand what you've done in the quarter. You've sold some aircraft. You've had to take an impairment through the other impairment line and you book to gain. Is that all part of your restructuring of that portfolio? I'm just trying to understand what exactly has happened there?
Yes. I mean we -- when we sell aircraft, we will have some difference between accounting values. And what we have realized we will sometimes carry reserves for maintenance, which would be released to the extent they're not used at that point in time. That's the sort of standard industry practice. So we have had some movement both in the income and the other impairment line in respect to both of those. But as I say, it's not big in the overall scheme of things it's not abnormal in size terms, it's just the way the accounting for aircraft leasing does work relative to some of the deals that get closed in the quarter.
Your next question comes from the line of Omar Keenan of Crédit Suisse.
So firstly, I wanted to ask about rate sensitivity. Can you make some comments on what deposit beta assumptions Standard Chartered is making under the old and new guidance? And the key markets of Hong Kong, Singapore and Korea, can you talk about the share of deposits that are managed rates versus explicitly market rate? And could you perhaps just elaborate on the discussion around the year 2 to year 5 sensitivity and exactly where it's coming from, just because I think, previously, you might have made some comments that the sensitivity is mostly short dated. So I just wonder what's changed there. And then my second question is just on costs. Could you possibly comment what the existing -- I guess, under the current planning assumption, what the expectations are for underlying wage inflation, again, in the key markets, Hong Kong, Singapore, India, China, Korea, just so we can go away and think about that.
Yes. Okay, Omar. Let me -- I'll probably address the base at a slightly high level. The sensitivity analysis we do, we are looking at across 59 different geographies. We're looking at many different asset classes, many different liability classes and trying as best as we can do to work out how we think things will move. So we're not driving this from a specific deposit beta or whatever. We are educating ourselves in part by what happened as we came down the rates curve as a consequence of COVID because that has given us some more recent real-life sense of relativity as to some of the economics on this. The numbers that you've seen there, the $1.1 billion is the aggregation of a lot of those assumptions done country by country and building up to that total number.The year 2 impact, so just to be clear on this, in the $1.1 billion, we are basically saying, if there's a 100 basis point change absolute in the first 12 months, what is the impact upon orders. We look at behavioral change. We look at contractual change, et cetera. They will, outside of the first 12-month period, some customers who have got contractual relationships with us that didn't enable them change during that 12-month period. But as and when their maturity comes up outside the 12-month period and we expect that they would reprice to the then new rate, there will then be some further upside on that $1.1 billion number. Now that obviously is sensitive because we'll have to take into account behaviors whether they're likely to roll it over at a high rate, whether they move on. But our broad estimate there is that by the time you get to the second year, NPAT, you will be 1.2 to 1.5x the first year NPAT that we have published. On the cost side of it, the wage inflation, as I said just earlier, it's early days. We are seeing pockets of inflationary pressure. And by the time we come to do the February update to the results, we'll have another 4 months of experience under our belt. And therefore, I think it is more appropriate that we update on the cost outlook in February and obviously at that time are placed on income and CET1 ratios, et cetera.
Your next question comes from the line of Manus Costello of Autonomous.
A couple of questions from me as well, please. Firstly, I saw that your Pillar 2A went up by 22 bps. It was expected to go up by 22 bps in Q4. I wonder what drove that and how that's influencing your thinking about capital management into next year, presumably. It means you might be slightly less aggressive on thinking about running down core Tier 1 ratios. And my second question is on your sustainability numbers. You've got a comment in the slides that your income was up 110% year-to-date. At the first half stage, that was just up 55% year-to-date. So I wondered if you could let us know what the absolute numbers are in terms of that income because I think you're targeting $1 billion of income within the next couple of years from that business. So if you can give us an idea of how you've managed to accelerate it so dramatically during the third quarter and what the absolute numbers are, I'd be very grateful.
Yes. Thank you, Manus. Listen, there are some movements on the Pillar 2A, Pillar 1. But overall, it is not impacting the overall target CET1 ratio at all. That remains to be in the 13% to 14% range. It is still well above the regulatory minimum. And therefore, that is what we will continue to operate within. On the sustainability income, we will be publishing numbers on that from the start of next year. But as you say, that has pretty much doubled so far in this year. And I think it's fair to say we're going through some of the sustainability disclosures at the moment so that we can make sure that we are more fulsome in our disclosures to the market as we move forward.
And the $1 billion that you're looking for from that business, that is achieved in 2024. When -- what's your aspiration time frame?
I don't think we actually put a time line to it, but that is what we are planning to be exploring in the business to get up to as fast as we possibly can do.
Your next question comes from the line of Robert Noble of Deutsche Bank.
Can I just ask on your rate impact? Presumably, that's all balance sheet pass-through. So what do you see the rising rate? How do you see impacting your financial markets businesses, if that's all? And secondly, the IFRS 9 benefit in income, I think you said last quarter, Andy, it would be about $140 million for the year, and it's slightly higher than that. So how much of this is temporary versus permanent? And why did it end up higher than expected? Or is it just the case in this very small number?
Yes. Okay, Robert. So the financial markets business sort of likes volatility to the regional expense. So when there is unpredictability on rates, obviously, we've got clients who are looking to hedge. What we have published is the overall rate impact for the group as a whole rather than split it by product, by country, by whatever. So forgive us if we haven't gone into that full level detail. But roughly about 100 basis points to $1.1 billion is the full impact on the group.And on the IFRS 9 adjustment, as we've said, I think, at the half year, we were still working through our book of the poor performing loans, and we had an estimate at that time as to what would likely be the full effect. The numbers account a little bit higher than we'd indicated at that point in time. We're pretty close to being through the full book now. There may be a very small amount, but it will be very small in the fourth quarter. So I think the numbers we've got there are pretty much now done. It is a sort of catch-up from what we've done in the past, only a proportion of that is current year effect. So the majority is catch-up past the minority is -- within year effect. And the accounting from now on, it was just about being double on the new basis as we go forward through 2022 and beyond.
So I think you said in the past that 1/3 of it is a permanent uplift than 2/3. Is that the same sort of proportionately thinking now you have a closer look at it?
Yes, that is a rough proxy that remains.
Your next question comes from the line of Fahed Kunwar of Redburn.
I just had another question, sorry, on operation. Just to clarify the answer to Joe's question earlier, actually. If I look this year and I adjust for FX for 2021 based on your guide, your revenues are flat and your costs are plus 4%. Is minus 4% kind of jaws or operating leverage? In the next couple of years, I think consensus has plus 3%. And I appreciate you only give more in February, but how are you going to convert that operating leverage and turn it around given the level of investment that I think you appreciate that you need to make to drive the digital strategy and the kind of inflation on the ground? It does feel like quite the turnaround to hit consensus and your 7% RoTE target. And then my second question was a clarification. And I may have misheard, but are you staying at the top end of the range for 2021 on your capital as a kind of buffer for potential acquisition of the city assets? Or is there something else as to why you're not kind of within the middle of that range for '21?
Yes. I mean if you look forward in terms of the operational leverage, as we all well know, there are quite a number of moving parts here. I'm trying to forecast all of them precisely at this point in time. It's not the easiest things to do. We have seen good asset momentum. We have seen good client demand. And as I said earlier, with the effects of COVID totally wearing off progressively over time, that should bode well for where we are in the future. The net interest margin, just to repeat, it seems to be around bottom now. And if we see some increase in interest rates during next year, that will be marginally helpful to that cause. The cost side of it, we are saying that the cash investment we're making into IT in absolute terms, we don't think that will change in total. But the mix of it that will be going into digital, more strategic investments will increase, but not the overall increase. So it's a mix change within that. And as I said previously, over the last 3 or 4 years, we've done, I think, a pretty good job of chiseling away at the core cost base in order to be able to create the capacity to fund both the inflationary effects. And over the recent years, the increase that have had in those investments. So we'll put that all together. We'll talk about that in February. But rest assured, a huge focus in the business on cost control. And as we talked about in the digital innovation section, more of a focus now upon income Street coming from different sources, things like the Mox venture, the event, which is about to start in Singapore and looking at where we can develop other income streams in addition to the ones that we have availed ourselves for up until now. On the CET1, we have always said that if we have got spare capital, we will first look to invest that in the business. That may be organic. It may be inorganic. To the extent that there are not opportunities in that area, then obviously would look to return any excess to shareholders that could be, by the way, of dividend where it could be by way of buyback. There is an inorganic opportunity we referred to, which is out at the moment, which may or may not come to anything. But just at this point in time, our senses that we are better just to hold on how to drive, see how that one plays out. And then by February, we should be able to be clear what is exactly what we're doing by way of investment in the business versus returns to shareholders.
Could I ask one quick follow-up? I mean -- so if I exclude rate rises in 2022, and you can say no to this question, can you commit -- do you think you'll generate positive operating leverage ex rate rises in '22? Is that realistic?
Well, I think in February, we'll be better able to do that update. We'll have a clearer view as to where the rates are going. And as I say, we have got a balance, and we all know this. Between making sure we are investing, particularly in the new digital players in the business to make sure that we are giving ourselves the best possible runway for future income growth, we will be doing everything we can and we have done in the past to contain the core cost base within the business. But I really think it's best that we address that in February.
Your next question comes from the line of Robin Down of HSBC.
Apologies. I've got a huge cold at the moment. Just a couple of questions. Firstly, can I bring the margin discussion much shorter term into Q4, because we've also got the Bank of Korea raising rates, hyper rates are kind of creeping up. And normally, we see seasonal pickup in December, albeit I appreciate there's more liquidity now in the system than prior years. And then you've got obviously a little bit of your structural hedge benefit perhaps coming through. I'm just wondering if Q3 is in fact likely to be the sort of trough in margins and whether or not you might be anticipating a little bit of a creep up in as early as Q4.The second question I've got is a really, sorry, trainspottery one. The mortgage income fell in the quarter, even on a constant currency basis. And I'm kind of slightly surprised by that given the sort of continuing underlying growth within mortgage volumes. I'm just wondering, obviously, I presume you're seeing competition somewhere. If there's any kind of pockets of competition that you would call out for that line.And then just finally, on the treasury income, it seemed quite strong in Q3. Historically, I think you've tended to book gains more in the first half of the year. I just wonder if there's, again, anything that you wanted to call out for treasury in Q3.
Okay. So Q4 margin, trying to predict the margin with great precision always tricky. I'd reiterate that we feel we are very close to or around the bottom. There are 1 or 2 reasons, as you highlight, why maybe there could be a little bit of upside. Three months ago, we saw probably high ore has gone as far as it was going to go. It went a little bit further. So there are always some things that are difficult to predict accurately. If your hypothesis is right, then clearly that is good news, but I think we are looking at it as being broadly stable for the next quarter. It could be up a fraction. It could be down a fraction. I think it's there or thereabouts. On the mortgage side, we have seen good mortgage volume growth. I think in the line with the mortgage and also that are combined in there, and there are some offset in the auto side. So overall, I think the mortgage income relatively sort of stable to fall in the period. Treasury income, it depends on the quarter as to what we do by way of realizations, and that obviously triggers some gains. So that depends a little bit on where our book is positioned relative to rates. So again, it will move around quarter-by-quarter, not an easy one to give you a specific number by quarter on. We will do what is best for the bank in terms of management of the rights and management of the surplus liabilities that we have got at that point in time.
And your next question comes from the line of Guy Stebbings of Exane BNP Paribas.
Just a couple of follow-ups really. So firstly, on cost and FX, you rise down support to income this year, but I don't think you talked to an offset on the cost one. So perhaps you can confirm what the year-over-year FX headwind, the cost guidance is now pretty case on for this year. I presume just a case of an incremental benefit there being offset by inflationary pressures, investment spend, et cetera. And then on capital, you've talked to be at the top end of the guidance range for the 1st of January pro forma to software. I just wondered is there anything else we should be bearing in mind outside of strategic actions when assessing the framework for returning excess capital in the context of your capital out. I guess part of your headwinds in Q1 next year are severe like they are for some new KPIs now is IFRS 9 transition [indiscernible]. It's really just the software that we should be pro forming the capital position for when thinking about size of excess.
Yes. Thanks, Guy. So on the FX, we have got a slightly different profile of income by currency to that which we've got costs, which I think you would understand the $200 million to $300 million range. We have been $300 million or $200 million on the income side. I'd say the cost number is probably more middle of that range to high end of the range rather than the low end of that rate. So not quite as big a change as on the income side. And on the CET1, I don't think there's anything particular to call out. We've got structural effects. We've got the software. And if there were anything inorganic, then obviously, that could be an impact. But I think other than that, there's nothing that I particularly called out as being unusual.
Okay. Can I just quickly follow up on one other point actually. On the hedge, can I just check, is it just equity that you're going to include in the hedge and know what you might consider interest rate and sensitive deposits? Just a point of clarification there.
At the moment, we're focusing upon hedging of the equity side. And as I said earlier, we've done a proportion of that. And over the coming months, depending upon where rates are, we will increase that. We are going through and having a look at where there are other opportunities. And if we think there are other opportunities, then we will bring those into the fold.
Your next question comes from the line of Gurpreet Sahi of Goldman Sachs.
I just have a quick one on DPS. It seems like YTD earnings were quite on an underlying basis, quite strong at around $0.81. So can you just remind us of the payout policy and how the Board could think about dividend raises into the year-end?
Sorry, I didn't catch the very first part of your question.
EPS.
EPS. Okay. So EPS, yes, I mean I think that when we come to February, the way the Board will very much look at this is about the 13% to 14% range is something which we have said we are prepared to operate dynamically within that at any point in that range. We're obviously higher than it at the moment. As I said earlier, there are opportunities out there. We'll have to look at it and see what we can do to actually improve the position there. If we've got surplus then the question will be -- on the one hand, we want to have a degree of momentum on dividends so that shareholders have predictability on that front. And to the extent having done that, there is still more than I think the buyback route is quite preferred, particularly with the share price as it's, by historic levels, very low price at this point in time. So not being for more progressive dividend policy, but they intend to be progressive as much as we can be and then to the extent the small services. So it will be driven more by that than will be driven by an EPS sort of type ratio per se.
Your final question comes from the line of James Invine of Society Generale.
We have a couple of questions on the capital position and kind of where you stand relative to the target range. But I was just wondering kind of how you think about the target range itself. I mean I think when you set that a few years ago, the bank was in quite a different state with the worse balance sheet, worse income statement, and I think some -- probably some conduct issues at that point. So why aren't you kind of starting to lower your target range, please?
Yes, James, the second target range has got quite a number of inputs into it. One is how do we think the bank would fare if there were -- is for a situation? Have you got enough to cover there? Hopefully, the bank is in a better position on that front. We've got what the regulators are requiring, which clearly is a level, a little bit lower than where we're at, at the moment. We've also got rating agencies to take into account because they will rate us, and we obviously want to make sure that we're operating in a sensible space on that front. So you put all of those together, we've got the complexity of capital requests at the local level, not all these calculated PRA basis, some of them calculate at the local country level. We need to make sure that we are compliant with local country level in order to be able to get distributions up to compare it in order to be able to return capital to shareholders. So when you put all of that together, it is a complicated mix. We feel that 13% to 14% range is about the right place to be. Some of the banks are a bit higher. Some of the banks are a little bit lower. Each of them has got their own idiosyncrasy, but 13% to 14% that we feel is about right for us where we are at this point in the cycle.
Fine. Okay. And I think previously...
I would just reiterate what we said a few times is that we're perfectly happy to operate within that range. And for the right opportunities, we would go above the range. For -- in a different environment than what we see right now, we would want to be at the top of the range. And as Andy has mentioned a few times, we've got opportunities right now, but believe that we will have to see how they play out to determine where we settle. But certainly, when we look at this environment, our underlying asset quality and the opportunities that we have for investment, we're perfectly comfortable operating to the middle of the range and below for the right opportunity.
I will now hand over to Bill for closing remarks.
Just a big thanks for a lot of good detailed questions. Overall, we will continue to reflect on good momentum on the underlying strategic objectives of that. So we're very happy to be able to repeat the target on 5% income growth with positive jaws, good strong capital strength, good ongoing asset quality. And we'll obviously provide some more detail based on what we see in Q4, but also assessment of the market we get to cover. Thanks again for the time and the focus.
Thank you. That concludes today's presentation. Thank you for participating. You may now disconnect.