Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Standard Chartered PLC (SC) at ‘A’ and Standard Chartered Bank (SCB) at ‘A+’. The Outlooks are Stable. Fitch has also affirmed SC’s and SCB’s Viability Ratings (VR) at ‘a’.
The ratings said SC’s ratings are driven by its VR and primarily reflect a strong franchise across key markets and a business model that materially benefits from higher interest rates.
The bank’s VR also balances strong capital and liquidity buffers and fairly conservative risk controls against its exposure to riskier markets and weaker profitability and asset quality than peers.
SC’s VR is one notch above its ‘a-‘ implied VR as Fitch believes the group’s business profile will positively impact its financial metrics over the long term, beyond that currently captured in the financial key rating drivers.
Fitch assesses SC on a consolidated basis as it is managed as a group and is highly integrated with its main banks. SC’s VR is equalised with that of its main operating company SCB, reflecting SC’s role in the group and moderate common equity double leverage (end-2022: 115%).
SCB’s Long-Term IDR is one notch above its and the group’s VRs as we believe that its senior creditors are protected by internal minimum requirement for own funds and eligible liabilities (MREL) buffers, given its role as a material legal entity in the group’s resolution planning.
SC’s business profile benefits from a wide international network that underpins its corporate, commercial and institutional banking business, and reasonable local retail franchises, primarily in Asia.
SC’s geographical footprint, spanning Asia, Africa, Europe and the US, provides value, and its business model is diversified by revenue streams. SC’s earnings are materially benefiting from higher interest rates, although its weaker-than-peers’ profitability remains a core strategic focus.
Stanchart’s risk profile balances its fairly conservative risk controls against exposure to riskier markets that are inherent in its international footprint and operations.
Its underwriting standards have tightened in recent years and credit growth is likely to be muted in the short-term given high interest rates and macroeconomic uncertainties. At the same time, SC’s appetite to lend to vulnerable sectors is low, although exposures remain material, but have reduced.
Stage 3 loans fell to 2.5% of gross loans at end-1Q23 from 2.7% in 2022; reflecting resilient asset quality in recent years, repayments and recoveries.
However, we expect the ratio to weaken toward 3% by end-2024, given macroeconomic pressures on corporate borrowers, including in commercial real estate, and SC’s exposures to weak sovereigns – mainly in South Asia and Africa.
“We expect credit impairment charges to increase from low levels, but to remain below 35bp of average loans given de-risking in recent years. SC’s non-loan exposures are of sound quality and underpin asset quality.
“We expect SC’s operating profit/risk-weighted assets to sustainably improve towards 2%, primarily due to higher interest rates, improving cost efficiency, and contained credit losses.
“As a result, we have revised the outlook on the ‘bbb+’ earnings and profitability score to positive from stable. We expect SC’s net interest income growth to remain strong, supported by asset repricing, structural hedge income, and manageable increases in funding costs”
Fitch expects SC’s common equity Tier 1 (CET1) ratio which printed at 13.7% in Q1 to remain within the group’s 13%-14% target range supported by RWA optimisation, muted loan growth and despite the announced higher shareholder returns.
It said stronger profitability should help to offset RWA inflation from expected asset quality deterioration. The ‘a’ score for capitalisation and leverage is above the implied ‘bbb’ category score and reflects our view of SC’s flexibility in managing its capital ratios.
Stanchart funding and liquidity profile is a rating strength given its strong deposit franchise in key markets, a low loans/deposits ratio in 1Q23 at 63%, sizeable liquidity buffers, and manageable refinancing needs.
Customer deposits remained broadly stable in 1Q23, with the share of low-cost current and savings account deposits gradually falling as term deposits yields have risen.
Deposits are mainly gathered through CCIB and are diversified by industry. SC’s strong liquidity coverage ratio reflects sizeable high-quality liquid assets.