Standard Chartered PLC — Interim / Quarterly Report 2013

Aug 6, 2013

National Storage Mechanism | Additional information You don't have Javascript enabled. For full functionality this page requires javascript to be enabled. RNS Number : 0341L Standard Chartered PLC 06 August 2013  Standard Chartered PLC - Highlights For the six months ended 30 June 2013 Reported results1 · Profit before goodwill impairment and own credit adjustment is up 4 per cent at $4,088 million, from $3,936 million in H1 2012 (H2 2012: $2,915 million) · Reported profit before taxation after goodwill impairment charge of $1,000 million relating to Korea is $3,325 million. Reported profit attributable to ordinary shareholders2 is $2,131 million · Operating income excluding own credit adjustment is $9,751 million, up 4 per cent from $9,371 million in H1 2012 (H2 2012: $9,412 million) and up 5 per cent on a normalised basis3 · Customer advances up 3 per cent to $292 billion from $285 billion in H2 2012 and customer deposits marginally lower at $381 billion from $385 billion in H2 2012 Performance metrics3 · Interim dividend per share increased 6 per cent to 28.80 cents per share · Normalised earnings per share up 5 per cent at 121.9 cents from 116.6 cents in H1 2012 (H2 2012: 108.7 cents) · Normalised return on ordinary shareholders' equity of 13.3 per cent (H1 2012: 13.8 per cent, H2 2012: 12.4 per cent) Capital and liquidity metrics · Tangible net asset value per share increased 9 per cent to 1,537.9 cents (H1 2012: 1,414.1 cents, H2 2012: 1,519.9 cents) · Core Tier 1 capital ratio at 11.4 per cent (H1 2012: 11.6 per cent, H2 2012: 11.7 per cent) · Advances-to-deposits ratio of 76.6 per cent (H1 2012: 77.6 per cent, H2 2012: 73.9 per cent) · Liquid asset ratio of 28.3 per cent (H1 2012: 28.3 per cent, H2 2012: 30.5 per cent) Significant highlights · Delivered broad based performance across multiple markets, including excellent performances from Hong Kong, India and Africa · Profit before taxation in Hong Kong was over $1 billion for the first time in a six-month period · Income of over $50 million in 25 markets and 17 markets delivered double digit growth · Strong volume growth with market share gains in key products, including trade finance volumes up 18 per cent and cash FX volumes up 30 per cent · The Group remains highly liquid and well capitalised · Re-opened in Myanmar and announced the acquisition of a custody business in South Africa Commenting on these results, the Chairman of Standard Chartered PLC, Sir John Peace, said: "These results demonstrate the diversity and resilience of our business. Despite a difficult external environment, we continue to support our clients' growth aspirations. We have a strong balance sheet and ample liquidity. Income in both businesses accelerated in the second quarter and we have entered the second half of the year with good momentum. The Board remains confident for the long term." 1 Amounts for prior periods have been restated as explained in note 32 on page 149. 2 Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of those non-cumulative redeemable preference shares classified as equity (see note 10 on page 113) 3 Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items set out in note 11 on page 114 Standard Chartered PLC - Stock Code: 02888 Standard Chartered PLC - Table of contents Page Summary of results 3 Chairman's statement 4 Group Chief Executive's review 5 Financial review 10 Group summary 10 Consumer Banking 12 Wholesale Banking 15 Balance sheet 20 Risk review 22 Capital 90 Financial statements Condensed consolidated interim income statement 96 Condensed consolidated interim statement of comprehensive income 97 Condensed consolidated interim balance sheet 98 Condensed consolidated interim statement of changes in equity 99 Condensed consolidated interim cash flow statement 100 Notes 101 Statement of directors' responsibilities 161 Independent review report 162 Additional information 163 Glossary 181 Financial calendar 186 Index 187 Unless another currency is specified, the word 'dollar', symbol '$' or reference to USD in this document means United States (US) dollar and the word 'cent' or symbol 'c' means one-hundredth of one US dollar. Within this document, the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'; The Republic of Korea is referred to as Korea or South Korea; Middle East and Other South Asia (MESA) includes: Pakistan, United Arab Emirates (UAE), Bahrain, Qatar, Jordan, Sri Lanka and Bangladesh; and 'Other Asia Pacific' includes: China, Malaysia, Indonesia, Brunei, Thailand, Taiwan, Vietnam and the Philippines. Standard Chartered PLC - Summary of results For the six months ended 30 June 2013 6 months ended 6 months ended 6 months ended 30.06.13 30.06.121 31.12.121 $million $million $million Results Operating income (excluding own credit adjustment of $237 million in H1 2013) 9,751 9,371 9,412 Impairment losses on loans and advances and other credit risk provisions (730) (575) (621) Goodwill impairment (1,000) - - Other impairment (11) (74) (122) Profit before goodwill impairment and own credit adjustment 4,088 3,936 2,915 Profit before taxation 3,325 3,936 2,915 Profit attributable to parent company shareholders 2,181 2,856 2,031 Profit attributable to ordinary shareholders2 2,131 2,806 1,980 Balance sheet Total assets 649,957 613,556 631,208 Total equity 45,358 42,934 46,055 Total capital base 54,650 48,311 52,688 Information per ordinary share Cents Cents Cents Earnings per share - normalised 3 121.9 116.6 108.7 - basic 88.1 117.6 82.3 Dividend per share 4 28.80 27.23 56.77 Net asset value per share 1,814.7 1,736.1 1,852.3 Tangible net asset value per share 1,537.9 1,414.1 1,519.9 Ratios Return on ordinary shareholders' equity - normalised basis3 13.3% 13.8% 12.4% Cost to income ratio - normalised basis3 51.4% 52.1% 55.3% Capital ratios Core Tier 1 capital 11.4% 11.6% 11.7% Tier 1 capital 13.0% 13.4% 13.4% Total capital 16.9% 16.9% 17.4% 1 Amounts for prior periods have been restated as explained in note 32 on page 149 2 Profit attributable to ordinary shareholders is after the deduction of dividends payable to the holders of those non-cumulative redeemable preference shares classified as equity (see note 10 on page 113) 3 Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items presented in note 11 on page 114 4 Represents the interim dividend per share declared for the six months ended 30 June 2013 and 30 June 2012 and the recommended final dividend per share for the six months ended 31 December 2012 (subsequently declared at the Annual General Meeting on 8 May 2013 and recognised in these financial statements) Standard Chartered PLC - Chairman's statement Our results for the first six months of 2013 demonstrate the diversity and resilience of our business: · Profit before taxation, goodwill and own credit adjustment was up 4 per cent to $4.09 billion · Reported profit before taxation was $3.33 billion · Income excluding own credit adjustment was up 4 per cent to $9.75 billion, and up 5 per cent on a normalised basis · Normalised earnings per share were up 5 per cent to 121.9 cents The Board has declared an interim dividend of 28.80 cents per share, up 6 per cent. Despite turbulence in the global economy and increased regulatory headwinds, we have continued to deliver value for our shareholders. Standard Chartered's business remains robust and there are still strong opportunities across our footprint. The external environment will remain challenging for the foreseeable future, but we are in the right markets and have the right strategy in place to deliver growth. And, as ever, we keep the interests of our shareholders resolutely top of mind. Public interest in the behaviour of banks remains high, as do expectations. As a bank with over 88,000 employees in 70 markets, we cannot afford to be complacent. We continue to review and enhance our compliance controls and processes, and remain firmly focused on our culture and values, ensuring that we live up to our brand promise, Here for good, at every level of our business. This means putting our clients and customers at the heart of what we do and making sure that we contribute to sustainable economic growth and job creation in our markets. And it means adhering to the spirit as well as the letter of regulations, learning from past failures and being committed to continuously raising the bar on compliance effectiveness. There is no doubt that our markets will continue to grow and change dramatically. Technological, regulatory and social changes mean we will need to adapt and respond as our clients and customers navigate opportunities in our markets. We remain focused on the basics of good banking: managing risk, maintaining a strong balance sheet, controlling costs and supporting our clients and customers as they drive economic activity. This continued focus will enable us to drive superior returns for our shareholders through the cycle, delivering on our four financial objectives over time. Banking is a long game and we will continue to invest for the future, because our markets offer exciting opportunities for growth. Income in both businesses accelerated in the second quarter, we have entered the second half of the year with good momentum and we remain confident for the long term. I would like to thank the Board, the management team and the Group's employees for another good performance. Sir John Peace Chairman 6 August 2013 Standard Chartered PLC - Group Chief Executive's review Our performance so far this year has been resilient, with good underlying momentum somewhat masked by some big one-off items and weakness in own account income. Headline profit has been hit by the write-down of goodwill in respect of our Korean business, offset in part by own credit adjustment. Excluding these factors, income is up and profits are up. Costs are well controlled, without compromising investment. Credit quality remains good, notwithstanding the increase in Consumer Banking loan impairment, and the balance sheet is in excellent shape. Despite the squeeze on margins and the fall in own account income, we have continued to grow income, with Consumer Banking income up 7 per cent and Wholesale Banking client income up 6 per cent. Volumes have grown even faster, particularly in our core Commercial Banking businesses, such as Trade Finance, up 18 per cent, Cash, up 13 per cent, or Cash Foreign Exchange, up 30 per cent. Whilst some of our businesses have been slowed by economic turbulence or regulatory or policy interventions, our diversity means we can take such challenges in our stride and still deliver growth. The benefits of diversity are evident from our geographic performance. This year markets like Hong Kong, India and Africa delivered impressive growth, whilst Korea, Singapore and Other Asia Pacific faltered. However, looking back over the past decade, different markets have driven our growth in different periods. At a time when market sentiment towards emerging markets seems remarkably correlated, it is worth remembering that these economies don't all rise and fall simultaneously. None are immune to global economic trends, but they don't all respond in the same way. This is partly because of differences in structure - such as whether they import or export energy or how open they are to international trade and investment flows - and partly due to local idiosyncratic factors. There is no doubt that being spread across such diverse markets is a source of strength for us. It is one reason why we have been able to deliver growth in income and profits so consistently over the last decade and throughout the turbulence that has followed in the wake of the crisis. In the five years since August 2008 we have increased income by 40 per cent and our lending to clients and customers by 65 per cent. Korea Korea continues to be our most difficult market. The banking industry as a whole is having an extremely challenging time, given a slowing economy and the impact of multiple policy and regulatory interventions. Banking sector profits were down 48 per cent in the first half. For our part, in the first half we have faced a 5 per cent fall in income and a sharp rise in loan impairment, driven by the government-sponsored personal debt rehabilitation scheme. The goodwill impairment we have taken reflects the marked shift in industry economics. When we acquired Korea First Bank in 2005, the return on equity in the banking industry was around 18 per cent. Now it is about 4 per cent. We cannot escape the realities of the Korean context, but we are determined to improve productivity and return on capital, so we are further reducing costs, simplifying the operating structure and reinforcing the balance sheet. We are tightening our focus on core clients, which means exiting unprofitable relationships. We are reconfiguring the branch network, putting greater emphasis on digital and we are reviewing options for some non-core businesses, including potential sale. This won't be a quick turnaround. Indeed, we expect that the second half will also be very difficult. But we are making good progress in strengthening the underlying dynamics of the business. For example, we continue to make excellent progress in working with Korean clients as they trade and invest across the rest of our footprint. Network income from Korea grew by 12 per cent in the first half, to almost $120 million. We now have dedicated Korea desks covering 14 cities across ten countries, in places as diverse as Brazil and the UAE, and we see significant opportunities for further growth in network income. Korea has proved to be a huge challenge, but it is also an opportunity. It is the twelfth largest economy in the world and the sixth largest exporter. We are working to reconfigure the business to improve efficiency and returns and play to our strengths. It is not a quick fix, but we are committed to doing what we have to do to make it work. Singapore Whilst Korea has been a challenge for some time, Singapore has been one of our strongest performing markets over recent years. Yet, in the first half income fell 3 per cent, whilst profits fell 12 per cent. The decline in income is a result of three factors: a sharp reduction in own account income, largely in asset and liability management (ALM); pressure on Wholesale Banking margins, particularly Trade Finance; and a slowdown in Consumer Banking, again mainly due to weaker margins on both sides of the balance sheet. Credit quality is good and costs have been well controlled, despite significant investment in preparing for the subsidiarisation of the Consumer Banking business, which will take place in the fourth quarter, and in migrating to a new core banking platform, which we did successfully in June. With second quarter volumes up significantly on the first quarter and some signs of margins stabilising, we anticipate a stronger second half. Other Asia Pacific The rest of ASEAN forms part of Other Asia Pacific for reporting purposes. We have provided more detail on the countries within Other Asia Pacific in these results and intend to regroup them into ASEAN and Greater China regions for the full year and thereafter. The two biggest markets, Indonesia and Malaysia, saw declines in income and profits. In Malaysia this was driven by the non-repeat of private equity gains and loan sales. In Indonesia it was due to margin pressures and weak own account income, after a very strong performance in the first half last year. Taiwan and China, which together with Hong Kong make up Greater China, also contributed to the decline in Other Asia Pacific income and profit. In Taiwan flat income and an increase in impairment drove a 25 per cent reduction in first half profit. Various regulatory constraints have impeded growth, but we are reshaping both businesses and anticipate a modest pickup in the second half. In mainland China, weak ALM income and significant margin compression contributed to a 9 per cent fall in onshore income. On the other hand, profit from our investment in Bohai Bank increased by 78 per cent to $73 million. Overall profit fell by 8 per cent. We are actively managing the risks as China adjusts to a different pace and pattern of growth. There are significant stresses in the economy and financial system, but the strength of the underlying drivers of growth in China should not be overlooked. Moreover, the new government is determined to squeeze out excesses and get the economy onto a more sustainable growth path driven more by domestic consumption than investment and exports. There will be bumps and we are therefore being very thoughtful about the shape of our business and the structure of our balance sheet. Despite the evident stresses in the system, we are very comfortable with the quality of the book. In Wholesale Banking the loan book is trade-focused, short tenor and weighted to high quality clients. We have no exposure to local government investment vehicles and municipalities. In addition to the business we book onshore, China is also a major source of network income, generating some $350 million in the first half. Much of the network income originating from mainland China and Taiwan ended up in Hong Kong, our biggest market, where it helped to drive an excellent performance. In Hong Kong income was up 14 per cent and we delivered profits of just over $1 billion, up 19 per cent, with a range of businesses delivering a strong performance. Our renminbi business continues to grow, despite pressure on margins. And the regulatory changes made in July to further liberalise cross-border treasury and trade flows will create more opportunities. As business and finance across Hong Kong, Taiwan and mainland China gets ever more integrated, it makes sense to consider our three businesses as parts of an overall Greater China region. Indeed, our ability to make the interconnections is really important to clients. One example is Hutchison Whampoa, a client for over three decades which we serve across 12 countries, including all of Greater China. India As an economy, India has had a relatively tough couple of years, with falling GDP growth and a decline in the rupee. As the market began to slow, we took action to reshape the business, adjusting our risk profile and priorities. We are now starting to see the benefits, with Wholesale Banking income up 20 per cent and Consumer Banking income up 10 per cent, despite a 6 per cent foreign exchange drag. Loan impairment is up slightly year on year, but our portfolio is well diversified, well collateralised and short in tenor. Moreover, network income from India continues to grow strongly, up 37 per cent. This includes clients such as Apollo Tyres, which is investing in the US, or telecoms operator Bharti Group, with widespread operations across Africa. We expect the macro environment in India to remain somewhat challenging and uncertain, but, despite this, both businesses have very good momentum as we begin the second half. Africa In Africa we have also had a strong start to the year, with income up 16 per cent and profits up 10 per cent. Our Africa business has multiple, diverse engines of growth : seven markets delivered income of over $50 million in the first half and nine markets achieved double-digit income growth. We are using our network to facilitate trade and investment flows between Africa and the rest of the world. We are also making use of our sector expertise to help develop Africa's infrastructure. For example, we are contributing $2 billion to finance power generation and distribution under President Obama's Power Africa initiative, which was launched in July. We are investing across Africa, in people, systems and new branches. In the second half we will launch our new joint venture bank in Angola, giving us an onshore presence in sub-Saharan Africa's third largest economy for the first time. We also intend to open up in Mozambique. Macro environment Whilst growth in emerging markets has been slowing, in our footprint GDP growth rates are still substantially higher than in the major developed economies. In most of our markets demand for financial services is growing around twice as fast as GDP growth. Furthermore, in most markets our share is relatively small, so we can grow with the market, and we can grow by taking share. We have demonstrated pretty consistently that we can gain share from competitors in our core businesses. For example, in Trade Finance, whilst global trade volumes have been pretty flat, we have achieved an 18 per cent increase year on year. Enabling trade and investment One of the things that differentiates us is our network. It is not just the fact that we are present in so many countries, and have been for a very long time, but the way we work across borders, collaborating to support our clients as they trade and invest within, from and into Asia, Africa and the Middle East. Globalisation has many critics, but it is an enormously powerful driver of human wellbeing, and we play a vital role in making it happen. The patterns of world trade are constantly evolving, and we are well placed to support some of the fastest-growing corridors. One example is the India-Africa trade corridor, which has grown by a compound annual rate of 25 per cent since the beginning of this century. In June we took the chairmen and CEOs from our African subsidiaries to Delhi and Mumbai to meet Indian clients to discuss ways in which we can do even more to facilitate such trade. With trade comes investment. A recent example from the India-Africa trade corridor is Godrej, an Indian conglomerate that is investing in fast-moving consumer goods businesses across Africa. We recently supported its acquisition of a Kenya-based hair care products business. The old paradigm of investment and finance flowing from the West into the emerging markets no longer captures the complex reality. The US and Europe are still a huge source of investment in our footprint, and we work closely with many multinationals and financial institutions to facilitate these flows. But we are increasingly seeing massive South-South flows of investment. The new giants of modern globalisation are players like Samsung, which we bank across 27 countries, or Tata, which we bank across 19 countries. Operations efficiency For most banks the vast majority of cross-border business is between their home country and their international network. More than any other bank, we are multi-nodal, facilitating trade and investment across multiple corridors across our network. Doing this well requires continuous investment in our technology platforms. This offers clients more functionality and flexibility and increases our efficiency and resilience. We were a pioneer in cross-border hubbing and have invested heavily in implementing globally standardised technology platforms. For example, unlike most banks we run all our Trade Finance on a single platform and we are implementing a similar global platform for security services. This enables us to deliver continuous improvement in productivity. For example, in the first half, unit costs in Trade fell by 7 per cent and in Security Services by 3 per cent, and we held headcount almost flat, despite volumes in both businesses increasing significantly. Achieving continuous improvements in efficiency is how we create the headroom to keep on investing for growth. At a time when the costs of complying with ever more demanding regulations keep on going up, and when margins are under pressure in many of our businesses, it has never been more important and it remains a key component of our strategy. Technology-driven innovation Technology-driven innovation can be about reducing costs, but it is also about how we interact with our clients and customers and about the power we put in their hands. For example, we continue to roll out Breeze, our innovative consumer banking platform, to different markets. With an intuitive interface and rich functionality, Breeze has won multiple awards, and, more importantly, is really liked by customers. We have increased the number of digital customers by 11 per cent since the year end to almost three million, and now have online services across 31 markets. Big data offers great promise in banking. We can make better use of data to enhance risk management, offer better insights to our clients and tailor the products and services we offer them more effectively. Technology can also help us respond to the ever-increasing expectations from regulators and the public. Here for good The avalanche of regulation shows no sign of slowing, and the industry still faces an immense challenge in terms of rebuilding public trust. Strong rules are a vital part of the answer, but effective supervision and good governance are equally important and culture is the foundation. We recognised the importance of culture some time ago and embedded our values into our performance management systems, so that people got rewarded for how they did things, not just for what they did. We launched Here for good, making explicit our commitment to make a positive contribution to the societies in which we live and work, and to always try to do the right thing. We are not at all complacent. In an organisation of over 88,000 people, not everyone is going to be doing everything right all the time. So we keep on training, keep learning the lessons when things go wrong, and keep reinforcing the values. In the first half, all key operational staff - over 8,000 people - completed advanced sanctions training, and we are training all our employees on our new code of conduct. We have also stepped up spending on regulatory compliance, by almost $100 million in the first half, particularly in the area of financial crime. We will continue to commit substantial resources to uphold the highest standards of governance and conduct. We believe that by staying true to our values, by focusing on meeting the needs of our clients and customers, and by running the Group well, we can maximise our contribution to the broader economy and society. That is what being Here for good is all about. It is also about taking a long-term perspective, supporting emerging economies in developing models for sustainable economic growth. We are working with the government of Myanmar to develop Myanmar's financial markets and infrastructure. We have worked with the Bank of Ghana on their National Payments Strategy and provided sovereign ratings advice to countries such as Vietnam, Bangladesh and Nigeria. These are tangible examples of the depth of our commitment to our markets. Strategy Once again we have demonstrated the resilience of Standard Chartered. There has been no shortage of challenges over the past six months, but we have kept focused and continued to make progress against our strategic aspirations. In June we held our annual strategy board in Ghana, which confirmed our commitment to the fundamentals tenets of our strategy: our focus on Asia, Africa and the Middle East; our commitment to building deep, longstanding relationships with our clients and customers; and our commitment to being Here for good. However, whilst our strategy remains unchanged, we have to keep adapting to and anticipating changes in the world around us. Every year brings different challenges, so our priorities evolve, and we have to have the resilience and flexibility to navigate the unexpected. Outlook As we consider the outlook for the full year, it is important to bear in mind the growing turbulence and uncertainty in the global economy, whether it be the re-emergence of troubles in the eurozone, the market reaction to the prospect of Federal Reserve tapering, or quantitative easing in Japan. Regulation continues to add complexity, uncertainty and not inconsiderable cost. But the world is also seeing renewed growth prospects in the US, and Asia excluding Japan is expected to show GDP growth of over 6 per cent - a combination that underpins our growth. We enter the second half with good momentum, high volume growth and excellent client activity levels. We have a robust balance sheet, strong capital and ample liquidity to serve our clients as they achieve their growth aspirations. We are managing business-as-usual costs tightly, whilst continuing to invest selectively, and will target costs growing broadly in line with income for the full year. Whilst we are clearly not tracking to a double-digit income performance for 2013 - and will not compromise our standards to achieve this - we are still expecting to grow our business at a good rate this year, and remain confident in the potential of our strategy and in the growth of our markets. The income performance of Consumer Banking has been good, with tight expense control, though loan impairment is higher as a result of past asset growth. And volumes and transaction pipelines in Wholesale Banking remain excellent, supporting strong momentum in client income. Our franchise is in excellent shape, and we therefore enter the second half with confidence. Our resilient performance is a credit to our staff. I would like to thank the people of Standard Chartered for their commitment, professionalism and teamwork. Peter Sands Group Chief Executive 6 August 2013 Standard Chartered PLC - Financial review The following financial review reflects the restatement of prior period amounts to equity account rather than proportionately consolidate PT Permata Bank Tbk, our joint venture business in Indonesia, following the adoption by the Group of IFRS 11 from 1 January 2013 (see page 149 for further details). Group summary The Group has delivered a resilient performance for the six months ended 30 June 2013 (H1 2013) against a backdrop of ongoing turbulence in the global economy. Income continues to be well diversified across businesses, markets and products. 17 markets generated double digit income growth compared to the first half of 2012 and Hong Kong became the first market to deliver over $1 billion of profit before tax in a six-month period. Operating income, excluding $237 million of fair value gains relating to an own credit adjustment (OCA) following the adoption by the Group of IFRS 13 (see page 101 for further details), increased by $380 million, or 4 per cent, to $9,751 million. Profit before taxation, excluding OCA and the impact of a $1 billion impairment charge relating to our Korea business (see page 142 for further details), was up 4 per cent compared to the six months ended 30 June 2012 (H1 2012) at $4,088 million. Profit before taxation on a reported basis fell 16 per cent to $3,325 million. The commentary below and thereafter in this financial review excludes the impact of OCA to better reflect the underlying performance of the Group. Consumer Banking (CB) income increased 7 per cent to $3,683 million and operating profit fell 6 per cent to $858 million. Wholesale Banking (WB) income increased 2 per cent to $6,068 million and operating profit rose 7 per cent to $3,230 million. The normalised cost to income ratio was lower at 51.4 per cent compared to 52.1 per cent in H1 2012. Costs remain tightly controlled and grew broadly in line with income as we phased investment spend across both businesses. Normalised earnings per share grew 5 per cent to 121.9 cents. While normalised return on shareholders' equity of 13.3 per cent was lower than the prior year period, it was higher than that for the six months ended 31 December 2012 (H2 2012). Further details of basic and diluted earnings per share are provided in note 11 on pages 113 and 114. In accordance with accounting requirements, the cost of the UK bank levy is charged in the second half of the year. Note 5 on page 111 provides further details of the UK bank levy together with the impact, on a pro-forma basis, if the levy had been recognised in these financial statements. Asset quality in both businesses remains resilient, albeit with a few areas of localised pressure in CB. 72 per cent of the CB loan book is fully secured and 65 per cent of WB customer loans have a tenor of less than one year. CB loan impairment increased driven by the seasoning effects of growth in the unsecured book, lower levels of debt sales and increased levels of provisioning in Korea relating to the Personal Debt Rehabilitation Scheme (PDRS). The Group's balance sheet remains very strong and resilient - well diversified, conservative and with limited exposure to problem asset classes - and we continue to focus on the basics of banking. We have no direct sovereign exposure to Cyprus, Greece, Ireland, Italy, Portugal or Spain and our direct sovereign exposure to the remainder of the eurozone is immaterial. Further details of our exposure to the eurozone is set out on pages 67 to 73. The Group remains highly liquid and our advances-to-deposits ratio remained strong at 76.6 per cent, and up from 73.9 per cent at the year end. Following strong growth in H2 2012, deposit balances are moderated slightly during the period as good growth in Americas, UK & Europe and Hong Kong was offset by lower balances in Korea and in the Other Asia Pacific Region (Other APR). The Group maintains a conservative funding structure with only limited levels of refinancing required over the next few years and we continue to be a significant net lender to the interbank market. The Group remains strongly capitalised and generated good levels of organic equity during the period. The Core Tier 1 ratio at 30 June 2013 was 11.4 per cent, slightly down from 11.6 per cent at the year end primarily due to the timing of dividend payments and growth in risk-weighted assets. We remain focused on the disciplined execution of our strategy, staying true to the basics of banking and funding before lending. We continue to be well positioned not only for the opportunities that we see across our footprint in Asia, Africa and the Middle East but also for our continued ability to act as a bridge connecting these markets with the West. Operating income and profit 6 months ended OCA/ Goodwill impairment Excluding OCA/ Goodwill impairment 6 months ended 6 months ended H1 2013 vs H1 2012 H1 2013 vs H2 2012 30.06.13 30.06.12 31.12.12 Better / (worse) Better / (worse) $million $million $million $million $million % % Net interest income 5,598 - 5,598 5,374 5,407 4 4 Fees and commissions income, net 2,095 - 2,095 1,953 2,126 7 (1) Net trading income 1,685 237 1,448 1,560 1,179 (7) 23 Other operating income 610 - 610 484 700 26 (13) Non-interest income 4,390 237 4,153 3,997 4,005 4 4 Operating income 9,988 237 9,751 9,371 9,412 4 4 Operating expenses (5,034) - (5,034) (4,879) (5,843) (3) 14 Operating profit before impairment losses and taxation 4,954 237 4,717 4,492 3,569 5 32 Impairment losses on loans and advances and other credit risk provisions (730) - (730) (575) (621) (27) (18) Goodwill impairment (1,000) (1,000) - - - - - Other impairment (11) - (11) (74) (122) 85 91 Profit from associates and joint ventures 112 - 112 93 89 20 26 Profit before taxation 3,325 (763) 4,088 3,936 2,915 4 40 Standard Chartered PLC - Financial review continued Group performance Operating income grew $380 million to $9,751 million, up 4 per cent over H1 2012. On a normalised basis, operating income grew 5 per cent over H1 2012 (note 11 on page 114). The Group's income streams continued to be well diversified, by product and geography. CB income was 7 per cent higher at $3,683 million. The benefit from good volume growth in H2 2012 in Credit Cards and Personal Loans (CCPL), Current and Savings Accounts (CASA) and in the SME customer segment, together with improved mortgage margins and fees and a higher contribution from Wealth Management, was partly offset by margin compression in unsecured products and in CASA and Time Deposits. WB income was 2 per cent higher than H1 2012 at $6,068 million and client income was up 6 per cent. High levels of client activity drove strong volume growth across our businesses. This was partially offset by market-wide margin and spread compression which particularly impacted our Commercial Banking business. Own account income fell 15 per cent, with lower valuation gains in Principal Finance and Asset and Liability Management (ALM) impacted by lower reinvestment yields Net interest income grew by $224 million, or 4 per cent, to $5,598 million. The Group net interest margin declined to 2.2 per cent against H1 2012, but was flat compared to H2 2012. In CB, unsecured balances were lower against H2 2012 with muted growth in H1 2013 as we selectively tightened underwriting criteria in some markets. However on a year-on-year basis, higher volumes more than compensated for the fall in margins on unsecured assets. WB interest income benefitted from higher levels of client activity across most products, offsetting margin compression in Transaction Banking driven by excess market-wide liquidity and increased competition. Non-interest income was up by $156 million, or 4 per cent, to $4,153 million and comprises net fees and commissions, trading and other operating income. Net fees and commissions income rose by $142 million, or 7 per cent, to $2,095 million. Fees in CB benefitted from income earned on higher volumes of Wealth Management products sold together with fees earned in respect of the Korea Mortgage Purchase Program (MPP). In WB fees were down reflecting fewer large value transactions. Net trading income fell by 7 per cent to $1,448 million as strong growth in FX and Rates was offset by lower valuations in Principal Finance. Other operating income grew by $126 million, or 26 per cent, to $610 million, on the back of: higher gains from realisations out of the available-for-sale investment securities portfolio, up $40 million; increased dividend income, up $28 million; and increased income from aircraft and shipping operating lease assets, up $73 million. This was partly offset by lower levels of property disposals, down $58 million. Operating expenses increased $155 million, or 3 per cent, to $5,034 million. Expenses for H1 2013 benefitted from $36 million of provision recoveries while H2 2012 included $667 million relating to the settlements with the US authorities, $86 million in respect of a legacy commercial legal provision and $174 million in respect of the UK bank levy. Excluding these items, operating expenses were 4 per cent higher than H1 2012 and 3 per cent higher than H2 2012. During H1 2013 we continued to make targeted investments in both businesses, with investments in branches and mobile technology in CB and capability enhancements in WB. Reflecting continued investment, depreciation from our transport leasing business increased $34 million against H1 2012. Expenses were also impacted by higher regulatory and compliance costs. Staff costs rose by 3 per cent, as the impact of inflationary pressures was partly offset by lower levels of variable compensation. Pre-provision profit improved $225 million, or 5 per cent, to $4,717 million. Loan impairment increased by $155 million, or 27 per cent, at $730 million. CB loan impairment increased by $216 million, or 74 per cent, reflecting the seasoning impact of growth in unsecured lending, together with higher provisioning in Korea relating to PDRS and lower levels of portfolio sales. WB impairment fell by $61 million, as H1 2012 was impacted by provisions taken on a very small number of large exposures in India and the UAE. Although asset quality across both businesses remains good, we continue to closely monitor our portfolios for stress, reflecting our proactive approach to risk. Other impairment increased by $937 million to $1,011 million, $1 billion of which relates to a goodwill impairment charge against our Korean business. Excluding this, other impairment fell 85 per cent reflecting lower write-downs within Private Equity. Profit from associates and joint ventures grew $19 million to $112 million as China Bohai Bank continues to perform strongly. Profit before taxation excluding goodwill impairment rose $152 million, or 4 per cent, to $4,088 million. WB increased operating profit by 7 per cent while CB operating profit fell 6 per cent. The Group's effective tax rate (ETR) at 32.8 per cent is higher compared to H1 2012 as a result of the impact of goodwill impairment, partially offset by a decrease in non-deductible expenses. Consumer Banking The following tables provide an analysis of operating profit by geography for Consumer Banking: 6 months ended 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Consumer Banking Total $million $million $million $million $million $million $million $million $million Operating income 780 493 573 841 245 408 257 86 3,683 Operating expenses (394) (291) (403) (600) (159) (256) (165) (72) (2,340) Loan impairment (65) (39) (176) (163) (15) (27) (11) (10) (506) Other impairment - - - - - - - - - Profit from associates and joint ventures - - - 21 - - - - 21 Operating profit/(loss) 321 163 (6) 99 71 125 81 4 858 6 months ended 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Consumer Banking Total $million $million $million $million $million $million $million $million $million Operating income 674 479 588 760 223 371 235 99 3,429 Operating expenses (374) (268) (392) (575) (164) (247) (148) (78) (2,246) Loan impairment (46) (23) (96) (83) (11) (21) (9) (1) (290) Other impairment - - - (1) - - - (8) (9) Profit from associates and joint ventures - - - 24 - - - - 24 Operating profit 254 188 100 125 48 103 78 12 908 6 months ended 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Consumer Banking Total $million $million $million $million $million $million $million $million $million Operating income 736 495 595 836 217 382 247 84 3,592 Operating expenses (397) (285) (403) (634) (154) (246) (158) (73) (2,350) Loan impairment (49) (39) (127) (103) (16) (30) (11) (9) (384) Other impairment - - (1) (35) - - - - (36) Profit from associates and joint ventures - - - 19 - - - - 19 Operating profit 290 171 64 83 47 106 78 2 841 An analysis of Consumer Banking income by product is set out below: 6 months ended 30.06.13 6 months ended 30.06.12 6 months ended 31.12.12 Operating income by product $million $million $million Cards, Personal Loans and Unsecured Lending 1,411 1,278 1,390 Wealth Management 686 636 632 Deposits 714 765 761 Mortgages and Auto Finance 727 614 684 Other 145 136 125 Total operating income 3,683 3,429 3,592 Operating income in CB increased $254 million, or 7 per cent, to $3,683 million. H1 2012 included a property gain of $39 million and excluding this income increased 9 per cent. Income in CB remains diverse, with all major markets growing income except Korea and Americas, UK & Europe. Net interest income increased by $162 million, or 7 per cent, to $2,486 million, as higher asset and liability volumes offset the impact of margin compression in unsecured and liability products. Mortgage margins improved due to higher pricing in a number of markets and changes to internal funding cost although volumes continued to be affected by property market cooling measures and regulatory restrictions in several of our markets as well as continued transfers under the Korea MPP. CCPL margins tightened, down 28 basis points (bps), reflecting regulatory and competitive pressures although volumes saw good growth in H2 2012. On the liability side, while there was good growth in CASA volumes in Singapore and Hong Kong, deposit margins overall continue to be under pressure, with CASA down 21 bps reflecting the low interest rate environment across our markets. The proportion of customer deposits held as CASA remained broadly stable compared to H2 2012 at 59 per cent. Non-interest income at $1,197 million was $92 million, or 8 per cent higher. Excluding the property gain of $39 million in H1 2012, non-interest income increased 12 per cent primarily driven by growth in Wealth Management from increased sales of equity-linked products together with fees received from the Korea MPP. Expenses were up $94 million, or 4 per cent, at $2,340 million. Expenses continue to be tightly managed and the increase compared to H1 2012 reflects continued investment in infrastructure, front-line technology and systems. Loan impairment increased by $216 million, or 74 per cent, at $506 million. Around 20 per cent of this increase, or $39 million, reflects lower levels of debt sales in the current period. The remainder of the increase reflects the seasoning impact of growth in the unsecured portfolio, pockets of pressure in Other APR and higher levels of provisioning relating to an acceleration of filings under the PDRS in Korea. During the second half of 2012 and in the first quarter of 2013 we undertook a number of de-risking actions in Korea and other select markets to tighten our credit policy for new unsecured lending. Operating profit fell by $50 million, or 6 per cent, to $858 million, with a strong performance by Hong Kong and India offset by the impairment headwinds experienced in Korea and in Other APR. Product performance Income from CCPL grew $133 million, or 10 per cent, to $1,411 million. Higher volumes more than offset the impact of lower margins in Credit Cards, although balances fell against H2 2012. Margins were impacted by a change in product mix to lower margin products and also due to regulatory reforms in Hong Kong. Personal Loan margins remained flat although improved compared to the second half of 2012. Wealth Management income grew by 8 per cent to $686 million. Income growth was broad based as investor sentiment in a number of our markets improved. Equity-linked products accounted for almost all of the growth, although this segment represents just over a third of Wealth Management income. Income from non-equity linked products was broadly flat, as good growth from insurance products was offset by lower foreign exchange revenues. Deposits income fell by 7 per cent to $714 million. Although we saw good volume growth in CASA balances compared to H1 2012, CASA balances were broadly flat compared to H2 2012 while Time Deposits reduced, partly as a result of exchange rate translation. Margins for both CASA and Time Deposits continued to be under pressure, as the overall interest rate environment across our markets remained low and competition intensified. Mortgages and Auto Finance income grew by $113 million, or 18 per cent, to $727 million. This was largely driven by improved margins, up 16bps, as a result of re-pricing in Hong Kong and changes to internal funding costs although intensifying competition compressed margins in Singapore and the UAE. Regulatory constraints in a number of markets, including Taiwan and Korea, continued to impact mortgage volumes as well as transfers under the Korea MPP. The impact of this was partly offset by an increase in fees received from our participation in the Korea MPP. Other income primarily includes SME related trade and other transactional income and grew 7 per cent to $145 million. Geographic performance Hong Kong Income was up $106 million, or 16 per cent, to $780 million. Income from Mortgages grew strongly and benefitted from good growth in asset balances as we increased market share coupled with improved margins with a continued focus on originating new business in higher margin Prime rate based products. Wealth Management also delivered good growth, with higher levels of unit trust sales as market sentiment improved. CCPL income grew more slowly as margins continued to narrow during the period and regulatory reforms also impacted Credit Card income. Deposits income was slightly higher as the benefit of good volume growth in CASA in H2 2012 was partially offset by lower margins. We continued to see good growth in RMB deposits, with balances up strongly compared to H1 2012. Operating expenses were higher by $20 million, or 5 per cent, primarily due to the flow-through impact of prior period investments in the branch network and in front line technology. Pre-provision profit was up $86 million, or 29 per cent, to $386 million. Loan impairment was $19 million higher at $65 million, reflecting the seasoning impact of growth in unsecured lending together with lower recoveries. During the first half of 2013 we tightened underwriting criteria on unsecured products for selected higher risk customer segments. Operating profit rose $67 million, or 26 per cent, to $321 million. Singapore Income was up $14 million, or 3 per cent, to $493 million in tough market conditions. Although Credit Card volumes saw good momentum, CCPL income rose slightly as the pace of growth was impacted by the run-off of higher margin portfolios. Wealth Management benefitted from good growth across major product lines, with unit trust products performing particularly well. Margin compression continued to impact the Mortgages business and income fell compared to H1 2012 despite good growth in balances. Deposits income, however, grew strongly on the back of increased levels of CASA balances although Time Deposit margins narrowed slightly due to increased competition for liquidity. Operating expenses increased $23 million, or 9 per cent, to $291 million primarily from flow through and current period investments in technology and branches, while staff costs remained flat. Pre-provision profit fell by $9 million to $202 million. Loan impairment increased $16 million to $39 million due to the maturing of the unsecured portfolio. Operating profit fell by $25 million, or 13 per cent, to $163 million. Korea Income fell $15 million, or 3 per cent, to $573 million. On a constant currency basis, income fell 6 per cent. H1 2012 benefitted from a property gain and excluding this income grew 4 per cent on a headline basis. CCPL income increased on the back of improved margins although balances declined in H1 2013 against H2 2012 due to a tightening of underwriting criteria during the period. Mortgages continued to be impacted by regulatory headwinds and income fell as outstandings reduced although margins saw a slight improvement. We continued to originate and transfer fixed rate mortgages under the MPP in the first half of 2013, however the program is due to end in the third quarter of the year with the final transfer of the residual balance. Income from SMEs fell due to margin compression and increased competition from local banks. Deposits income was also lower, impacted by severe margin compression as a result of the falling interest rate environment. Wealth Management income grew slightly, as good growth in fund sales was partly offset by lower insurance income. Operating expenses rose $11 million, or 3 per cent, to $403 million. On a constant currency basis expenses fell 1 per cent. Expenses remained tightly managed with growth reflecting inflation related salary increases. Pre-provision profit was lower by $26 million at $170 million. Loan impairment was up $80 million, or 83 per cent, to $176 million due a market-wide acceleration in the number of filings under the PDRS. During H2 2012 and H1 2013 we have undertaken a number of de-risking actions to tighten underwriting criteria for unsecured products. Operating profit fell $106 million to a loss of $6 million. Other Asia Pacific (Other APR) Income was up $81 million, or 11 per cent, to $841 million with growth spread across the region. Income in China increased by 23 per cent to $166 million, reflecting continued growth in Personal Loan and Mortgage income, improved Mortgage margins, and strong Wealth Management income from increased unit trust sales. This was partially offset by lower Deposits income as margins were compressed. Income from SMEs also fell as margins were compressed across key deposit products. Income in Taiwan grew 3 per cent to $211 million with a strong double digit growth in Wealth Management as market sentiment improved. Deposits income also grew as Time Deposit margins improved reflecting a change in product mix. This was partly offset by lower Mortgages income as regulatory restrictions impacted balance sheet growth. CCPL income was also impacted by regulatory caps on Personal Loans and income was flat compared to H1 2012 despite higher margins. Income in Malaysia increased 13 per cent due to increased income from Personal Loans as margins improved. Indonesia income grew 6 per cent, or 12 per cent on a constant currency basis, as improved Wealth Management and Deposits income was partly offset by slightly lower CCPL income. Operating expenses were up $25 million, or 4 per cent, to $600 million. Expenses in China were tightly controlled and rose by 9 per cent to $200 million as we continued to invest in new branch outlets, adding 14 since H1 2012. Pre-provision profit was up $56 million, or 30 per cent, to $241 million. Loan impairment was up by $80 million, or 96 per cent, to $163 million, reflecting portfolio growth and mix change, a lower level of loan portfolio sales, higher bankruptcy levels in Taiwan and increased levels of provisioning in Thailand relating to a specific segment for which sales have been discontinued. Other APR delivered an operating profit of $99 million, down 21 per cent from H1 2012, with Taiwan and Thailand being the most significant contributors to the decline. The operating loss in China decreased to $42 million from $56 million in H1 2012. India Income rose $22 million, or 10 per cent, to $245 million. On a constant currency basis, income increased by 16 per cent. Mortgage income was up due to higher margins and benefitted from the portfolio acquisitions in 2012. CCPL also benefitted from higher volumes on the back of portfolio acquisitions and improved margins. This benefit was partly offset by lower Deposits income as margins were impacted by the low interest rate environment. Wealth Management income fell slightly due to weak local market sentiment. Income from SMEs grew strongly on the back of wider margins and increased volumes on a constant currency basis. Operating expenses were $5 million, or 3 per cent, lower at $159 million. On a constant currency basis, expenses increased by 2 per cent, reflecting increased investment in technology. Pre-provision profit was up $27 million, or 46 per cent, to $86 million. Loan impairment was marginally higher by $4 million at $15 million due to volume growth from acquired unsecured portfolios. Operating profit was higher by $23 million, or 48 per cent, to $71 million. On a constant currency basis, operating profit was 56 per cent higher. Middle East and Other South Asia (MESA) Income was up $37 million, or 10 per cent, to $408 million. Income in the UAE increased by 17 per cent with growth in CCPL reflecting good momentum in payroll-linked Personal Loan products. Mortgages income rose as volumes increased on the back of an improving property market while Deposits income was slightly lower as margins narrowed. Income from Islamic banking continued to grow strongly in the UAE. Income in Pakistan fell 9 per cent reflecting sharp margin compression following interest rate cuts. Bangladesh income grew 28 per cent, driven by higher Deposit income reflecting both improved margins and strong volumes. Operating expenses in MESA were higher by $9 million, or 4 per cent, at $256 million. While UAE expenses were up 9 per cent, reflecting flow through of prior period investments in front line sales capacity, expenses in most other markets were well controlled reflecting tight cost discipline across the region. Pre-provision profit for MESA was up $28 million, or 23 per cent, to $152 million. Loan impairment increased to $27 million, up $6 million compared to H1 2012 as the prior period benefitted from provision releases in the UAE. MESA operating profit increased 21 per cent, up $22 million to $125 million. Africa Income was up $22 million, or 9 per cent, at $257 million. On a constant currency basis, income was up 14 per cent. Income from CCPL grew strongly on the back of increased volumes, and increased CASA balances helped offset lower Time Deposit margins. Wealth Management income fell as growth was constrained by regulatory pricing changes. Income from SMEs grew on the back of good asset and liability growth. Kenya continues to be the largest CB income generator in the region and income grew 4 per cent. The pace of growth slowed compared to prior periods as strong growth in CCPL was partly offset by lower Deposit margins. Ghana and Zambia grew income at 32 per cent and 22 per cent respectively. Income growth in Ghana was driven by higher Deposit and SME income, partly offset by lower income from CCPL. Zambia saw good growth in both CCPL and Deposit income. Income in Nigeria was up 9 per cent and benefitted from good growth in CCPL and Wealth Management income, partly offset by lower Deposits income as margins compressed. Income in Botswana, however, was flat compared to H1 2012. Operating expenses were $17 million, or 11 per cent, higher at $165 million. On a constant currency basis, expenses were 16 per cent higher, as we continued to build out the distribution network across the region in line with our strategy. Pre-provision profit in Africa was higher by $5 million at $92 million. Loan impairment was up $2 million to $11 million. Operating profit was up $3 million, or 4 per cent to $81 million. On a constant currency basis, operating profit increased 8 per cent. Americas, UK & Europe The business in this region is primarily Private Banking in nature and focuses on delivering our product suite to international customers from across our network. Income fell $13 million, or 13 per cent to $86 million. Wealth Management income fell following the sale of our Private Banking operations in Miami and Deposits income was lower as margins were compressed. This was partly offset by increased income from Mortgages. Operating expenses fell $6 million, or 8 per cent, to $72 million as we continued to tightly manage costs. Impairment was higher by $9 million at $10 million. Operating profit fell by $8 million to $4 million. Wholesale Banking The following tables provide an analysis of operating profit by geography for Wholesale Banking: 6 months ended 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Wholesale Banking Total $million $million $million $million $million $million $million $million $million Operating income1 1,149 630 325 890 682 735 596 1,061 6,068 Operating expenses (432) (323) (146) (449) (205) (298) (256) (585) (2,694) Loan impairment (5) - (17) (27) (98) (11) (64) (2) (224) Other impairment (2) 10 (19) (1) - - - 1 (11) Profit from associates and joint ventures - - - 90 - - - 1 91 Operating profit1 710 317 143 503 379 426 276 476 3,230 1 Operating income and operating profit excludes Own credit adjustment of $237 million 6 months ended 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Wholesale Banking Total $million $million $million $million $million $million $million $million $million Operating income 1,014 683 362 1,072 567 754 500 990 5,942 Operating expenses (392) (320) (138) (477) (219) (312) (251) (524) (2,633) Loan impairment 2 (3) (21) (21) (94) (141) (2) (5) (285) Other impairment (8) (2) - (29) 9 (26) - (9) (65) Profit from associates and joint ventures - - - 69 - - - - 69 Operating profit 616 358 203 614 263 275 247 452 3,028 6 months ended 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Wholesale Banking Total $million $million $million $million $million $million $million $million $million Operating income 924 546 307 1,004 578 727 611 1,033 5,730 Operating expenses (409) (296) (148) (572) (216) (295) (227) (1,156) (3,319) Loan impairment (16) (1) (5) (14) (44) (124) (16) (17) (237) Other impairment 1 - (7) (92) - (6) - 18 (86) Profit from associates and joint ventures - - - 69 - - - 1 70 Operating profit/(loss) 500 249 147 395 318 302 368 (121) 2,158 Income by product is set out below: 6 months ended 6 months ended 6 months ended Operating income by product 30.06.13 30.06.12 31.12.12 $million $million $million Lending and Portfolio Management 400 421 416 Transaction Banking Trade 932 945 970 Cash Management and Custody 814 880 841 1,746 1,825 1,811 Global Markets1 Financial Markets 2 2,107 1,989 1,668 Asset and Liability Management (ALM) 410 484 353 Corporate Finance 1,238 991 1,231 Principal Finance 167 232 251 3,922 3,696 3,503 Total operating income 6,068 5,942 5,730 6 months ended 6 months ended 6 months ended Financial Markets operating income by desk 30.06.13 30.06.12 31.12.12 $million $million $million Foreign Exchange 835 739 538 Rates 552 539 426 Commodities and Equities 288 277 244 Capital Markets 283 290 301 Credit and Other2 149 144 159 Total Financial Markets operating income 2,107 1,989 1,668 1 Global Markets comprises the following businesses: Financial Markets (foreign exchange, interest rate and other derivatives, commodities and equities, debt capital markets, syndications); ALM; Corporate Finance (corporate advisory, structured trade finance, structured finance and project and export finance); and Principal Finance (corporate private equity, mezzanine, real estate infrastructure and alternative investments) 2 Excludes $237 million in respect of Own credit adjustment WB continued to be disciplined in the execution of its strategy, delivering robust results in a challenging market environment. Operating income grew $126 million, or 2 per cent, to $6,068 million. Operating profit rose $202 million, or 7 per cent, to $3,230 million. Client income, which constituted over 80 per cent of WB income in the first half of the year, increased by 6 per cent with Hong Kong becoming the first country to deliver over $1 billion of client income in a half year period. Own account income fell 15 per cent. The diversity of WB was again demonstrated, with strength in Corporate Finance and Financial Markets more than offsetting the impact of margin compression in Transaction Banking. We continue to be a market leader in the RMB market, maintaining our position as the largest foreign RMB clearing bank in China and the second largest bank in Hong Kong for RMB bond issuance. During the first half of 2013, we were named 'Best Renminbi Trade Settlement Bank' and 'Best Dim Sum Bond House' at The Asset Triple A awards and undertook a number of groundbreaking transactions for our clients, including the first ever CNH HIBOR fixing interest rate swap transaction with a Hong Kong-based corporate client and the first offshore CNY bond listed, cleared and settled in Singapore. Net interest income was up $62 million, or 2 per cent, to $3,112 million as good levels of client activity in Trade and Cash Management (Cash), and Corporate Finance drove increased balances. This was partially offset by margin compression as excess liquidity across a number of our footprint markets created intense levels of competition. Non-interest income increased by $50 million, or 2 per cent, to $2,956 million. Commercial Banking, which includes Transaction Banking (incorporating Trade and Cash), Lending and flow foreign exchange (FX), continue to represent the core of the WB business, contributing around half of client income. Transaction Banking benefitted from strong levels of client activity although this was more than offset by continued margin compression. As a result, Trade income fell 1 per cent and Cash Management and Custody income fell 8 per cent. Income from Financial Markets (FM) grew 6 per cent on the back of strong client activity levels across our businesses. FM Income exceeded $2 billion for the first time since 2009 with double digit growth in our FX business. ALM income fell by 15 per cent reflecting lower reinvestment yields. Corporate Finance income rose 25 per cent with a strong performance across all financing businesses. Income in Principal Finance fell 28 per cent, as market sentiment impacted valuation gains. Operating expenses grew $61 million, or 2 per cent, to $2,694 million. We continued to manage expenses tightly with reduced levels of variable compensation offset by increased investments in technology and client servicing together with higher regulatory costs. Excluding the $667 million impact of the settlements with the US authorities, expenses increased by 1 per cent compared to H2 2012. Loan impairment fell by $61 million to $224 million, as the prior year period was impacted by a small number of exposures in India and the UAE. The portfolio remains predominantly short tenor, with no significant sector concentrations. Credit quality continues to be good although we are watchful in India and around the impact of falling commodity prices. Other impairment fell $54 million, or 83 per cent, to $11 million, driven by lower levels of Private Equity impairments and recoveries on disposal of previously impaired investments. Profit from associates and joint ventures increased $22 million to $91 million reflecting continued good growth from Bohai. Product performance Lending and Portfolio Management income fell by $21 million, or 5 per cent, to $400 million. Margins rose 14 bps as we reallocated capital to higher return areas whilst average balances were flat on the prior year. This was offset by increased portfolio management costs. Transaction Banking income fell 4 per cent to $1,746 million. Trade income fell $13 million, or 1 per cent. Increased levels of client activity generated strong growth in average trade assets, up 18 per cent. This was offset by margin compression, with trade net interest margins 26 bps lower compared to H1 2012 due to excess liquidity across our markets. Cash Management and Custody income fell $66 million, or 8 per cent. Strong growth in average liabilities, up 13 per cent compared to H1 2012, was more than offset by margin compression, down 18 bps. Global Markets income increased by $212 million, or 6 per cent, to $3,908 million. Within Global Markets, the Financial Markets business, which primarily comprises sales and trading of foreign exchange and interest rate products, continued to be the largest contributor to income and has increasingly diverse income streams. FM income grew by $104 million, or 6 per cent, to $2,107 million. Client income, which forms over three quarters of FM income, grew 10 per cent while own account income rose 3 per cent. FX income grew strongly, up 13 per cent, driven by an increase in FX option volumes reflecting corporate hedging activity in North East Asia and a strong performance in G10 currency pairs. Cash FX increased 2 per cent, as we saw strong growth in volumes and increased market share which more than compensated for lower spreads which were impacted by market-wide compression. Rates income grew 2 per cent and our strong credit rating continues to provide a competitive advantage. Growth was constrained by the turmoil in the bond markets in June 2013 combined with a strong performance in June last year. Commodities and Equities income rose 4 per cent driven by strong client flows despite lower levels of volatility. We are seeing good progress on the investment in our Equities business with a strong performance in Equity Derivatives. In Capital Markets income fell 2 per cent, as growth in bond income was offset by lower income from syndications where margin compression eroded strong volume growth. ALM income was $74 million, or 15 per cent, lower at $410 million. The decrease was primarily driven by flat yield curves across our markets and the continued move to secured, high quality lower yielding assets to support regulatory requirements. This was partially offset by securities realisations on favourable positions. Corporate Finance income rose $247 million, or 25 per cent, to $1,238 million. Over 60 per cent of total income is annuity based underpinning a more stable earnings stream. Principal Finance income fell $65 million, or 28 per cent, to $167 million. Weaker market sentiment adversely affected valuations on our portfolio. This was partially offset by a greater number of investment realisations despite challenging market conditions. Geographic performance Hong Kong Income was up $135 million, or 13 per cent, to $1,149 million, with client income up 15 per cent and exceeding $1 billion for the first time in a half year period. Transaction Banking income fell as continued growth in average Trade assets and average liabilities was more than offset by compression in Trade and Cash margins. FM delivered strong broad based growth and FX income from RMB continued to grow and remains a key pillar of our business. Rates and Credit also grew reflecting client demand for yield in the current low interest rate environment. Corporate Finance income grew strongly driven by transport leasing and higher deal volumes. Own account income increased although the pace of growth was impacted by lower reinvestment yields in ALM. Hong Kong continues to leverage the Group's network as a hub into and out of China, although inbound revenues from China slowed compared to H1 2012. Operating expenses grew $40 million, or 10 per cent, to $432 million, primarily driven by depreciation of assets held within our transport leasing business. We continued to manage other expenses tightly. Pre-provision profit was up $95 million, or 15 per cent, to $717 million. Loan impairment was higher by $7 million at $5 million. Operating profit was up $94 million, or 15 per cent, at $710 million. Singapore Income fell $53 million, or 8 per cent, to $630 million although client income grew 1 per cent. Transaction Banking income fell, primarily due to margin compression as a result of excess liquidity and changes in client mix which particularly impacted Trade. This was partially offset by strong growth in average assets and liabilities reflecting increased levels of client activity. FM income benefitted from higher FX income, with strong volume growth from financial institution and corporate clients. This was partly offset by lower income from Capital Markets as corporate clients found alternative sources of funding. Corporate Finance income grew strongly due to asset growth and higher levels of recurring income from transaction in prior periods. Own account income fell on the back of lower ALM income, which was impacted by the increased cost of investing in high quality liabilities and more liquid asset classes. Operating expenses were well managed and grew by $3 million to $323 million, with continued discipline on expenses, lower levels of variable compensation and cost efficiencies. Pre-provision profit fell $56 million, or 15 per cent, to $307 million. Loan impairment was $3 million lower and credit quality remains good. Other impairment improved to a net recovery of $10 million following disposals of previously impaired Private Equity investments. Operating profit fell by $41 million to $317 million. Korea Income fell $37 million, or 10 per cent, to $325 million. On a constant currency basis income fell 12 per cent. Excluding a $35 million gain on a property disposal from H1 2012, income was broadly flat on a headline basis. Client income fell by 8 per cent primarily as a result of lower Transaction Banking income. The decline in Transaction Banking income was due to lower average Cash balances and margin compression, which was partly offset by higher Trade income as the impact of margin compression was compensated by strong growth in average balances. FM income was slightly higher with a strong Rates performance partially offset by lower FX income. Lending income was lower with a decline in average balances as we reallocated capital to higher returning parts of the network. Corporate Finance income, however, almost doubled as a result of higher structured finance deal flows. Own account income fell with ALM impacted by a flattened yield curve. Income generated by Korean clients across our network continued to show good momentum, growing at a double digit rate. Operating expenses were higher by $8 million, or 6 per cent, at $146 million. On a constant currency basis expenses increased by 2 per cent from flow through of prior period investments as we continued to tightly manage costs. Pre-provision profit fell by $45 million, or 20 per cent, to $179 million. Loan impairment decreased by $4 million to $17 million and credit quality across the portfolio remained good. Other impairment increased by $19 million and primarily related to historic derivative transactions. Operating profit was lower by $60 million, or 30 per cent, at $143 million. Other APR Income fell $182 million, or 17 per cent, at $890 million impacted by lower income in China and Indonesia. Income in China fell 21 per cent to $282 million primarily due to a fall in margins in Cash and lower reinvestment yields in ALM. Client income fell 5 per cent as strong growth in Cash, Trade and FM transaction volumes was more than offset by lower margins following interest rate cuts in 2012 and spread compression in FX. Corporate Finance income grew strongly as we provided advisory and financing solutions across a wider range of industries. Income in Taiwan fell 8 per cent. Client income increased 5 per cent while own account income fell sharply due to lower ALM income. Transaction Banking income was lower as a result of margin compression and lower average balances. This was more than offset by higher FX revenue on the back of increased hedging of RMB exposures. Own account income fell as excess liquidity in the market impacted returns. Indonesia income fell 33 per cent due to compression in Lending and Trade margins, and in lower FX spreads, combined with lower Corporate Finance income compared to a strong prior year period. Income in Malaysia fell 25 per cent primarily due to lower own account income as low reinvestment yields impacted ALM. Operating expenses in Other APR fell $28 million, or 6 per cent, to $449 million. Expenses in H2 2012 were impacted by $86 million relating to a legacy commercial legal provision while H1 2012 benefitted by $36 million of provision recoveries; excluding these items, expenses were flat compared to H2 2012 and 2 per cent higher than H1 2012. China operating expenses were flat at $183 million compared to H1 2012 and across the region we continued to drive tight cost management. Pre-provision profit in Other APR was lower by 26 per cent at $441 million. Loan impairment increased by $6 million to $27 million, $12 million of which relates to China. Other impairment was $28 million lower, and benefitted from impairment recoveries on disposal of previously impaired Private Equity investments. Other impairment in H2 2012 was impacted by an impairment of an associate. Profit from associates and joint ventures increased to $90 million as a result of a strong performance by Bohai. Operating profit was 18 per cent lower at $503 million. China contributed $159 million of operating profit, with Malaysia and Indonesia as the other major profit contributors in this region. India Income increased by $115 million, or 20 per cent, to $682 million. On a constant currency basis, income rose 27 per cent. Client income grew 3 per cent on a headline basis. Transaction Banking income fell as significant margin compression in Cash more than offset the benefit of higher Trade margins compared to H1 2012 and good growth in average Trade and Cash balances. Corporate Finance income grew strongly and we saw an increase in Lending margins. FM income rose on the back of higher FX and Rates income. Own account income grew strongly as ALM benefited from de-risking and realisations drove higher Principal Finance income. Cross-border activity from our Indian clients remained strong during the first half of 2013, with income booked across our network growing at a double digit rate. Operating expenses were lower by $14 million, or 6 per cent, at $205 million. On a constant currency basis, expenses fell by 1 per cent, with the benefit from lower headcount levels partly offset by higher infrastructure costs. Pre-provision profit increased $129 million, or 37 per cent, at $477 million. Loan impairment increased by $4 million to $98 million. While the charge in H1 2012 benefitted in part from a release of portfolio impairment provisions, the current year was impacted by charges relating to a small number of exposures. Other impairment saw a net recovery in H1 2012 which was not replicated in H1 2013. Operating profit increased $116 million, or 44 per cent, to $379 million. On a constant currency basis, operating profit rose 49 per cent. MESA Income was lower by $19 million, at 3 per cent to $735 million. Client income across the region fell 3 per cent as margin compression outstripped the benefit of increased volumes. Own account income was down, impacted by lower levels of volatility. Income in UAE, which generates more than 50 per cent of the income in this region income, fell by 6 per cent. Client income fell 5 per cent and was adversely affected by margin compression across Transaction Banking and Lending products. This was partly mitigated by strong double digit growth in Trade average assets. FM income was also lower, primarily due to lower FX income, which was impacted by tighter spreads and reduced market volatility, despite higher volumes. Own account income was also impacted by low levels of volatility and tighter margins. Income from Pakistan was down 11 per cent due to lower Transaction Banking and FX revenues. Bangladesh income grew 29 per cent driven by growth in FM and Transaction Banking. Operating expenses in MESA fell $14 million, or 4 per cent, to $298 million, as we managed costs tightly across the region and in the UAE in particular, where operating expenses fell 6 per cent. Pre-provision profit in MESA was down $5 million, or 1 per cent, to $437 million. Loan impairment fell $130 million to $11 million as H1 2012 was impacted by provisions against a small number of clients in the UAE. The current book continues to perform well. Operating profit consequently improved by 55 per cent to $426 million. Africa Income increased $96 million, or 19 per cent, to $596 million. On a constant currency basis, income was up 24 per cent. The business remains diversified across products, client groups and countries, with five markets generating double digit growth. Client income grew 25 per cent across a broad base of products and countries. Transaction Banking income increased driven by strong growth in average balances. FM income benefitted from increased FX income, as higher volumes compensated for spread compression, and higher Capital Markets income driven by loan syndications. Corporate Finance also grew strongly as deal flow increased. Own account income fell 5 per cent. Nigeria remains our largest WB market in the region and income grew 10 per cent led by Corporate Finance and higher Lending income. Ghana income grew 38 per cent due to higher Transaction Banking and ALM income. Zambia income grew 69 per cent with over four times more revenue from Corporate Finance transactions than H1 2012 and income in Kenya, up 22 per cent, also benefitted from higher Corporate Finance income. Income in Uganda and Tanzania fell, down 20 per cent and 12 per cent respectively, reflecting competitive challenges and excess liquidity in these markets. Operating expenses were up $5 million, or 2 per cent, to $256 million. On a constant currency basis, expenses were 7 per cent higher, reflecting investments made across the franchise to build capability together with inflation related increases. Pre-provision profit rose $91 million, or 37 per cent, to $340 million. While credit quality across the portfolio remains good, loan impairment increased by $62 million to $64 million, reflecting growth in loans across the region. Operating profit was $29 million higher at $276 million, up 12 per cent. On a constant currency basis, operating profit was up 16 per cent. Americas, UK & Europe This region acts as a two-way bridge, linking the Americas, UK & Europe with our markets in Asia, Africa and the Middle East. Income was up 7 per cent to $1,061 million. Client income increased by 12 per cent, with good growth in Transaction Banking, as higher average balances in Trade compensated for tighter Trade margins and higher Cash income. FM income was marginally higher as good performances in FX and Commodities was offset by weaker Credit income. Corporate Finance income grew strongly, driven by continued balance sheet momentum. Own account income fell, largely due to lower reinvestment yields and ongoing costs of meeting the regulatory liquid asset buffer requirements. Operating expenses increased by $61 million, or 12 per cent, reflecting higher regulatory and compliance costs partially offset by efficiencies and continued cost discipline across the region. Expenses in H2 2012 were impacted by $667 million relating to the settlements with the US authorities. Pre-provision profit rose $10 million, or 2 per cent to $476 million. Loan impairment fell to $2 million. Operating profit rose 5 per cent to $476 million. Group summary consolidated balance sheet H1 2013 vs H1 2013 vs H1 2013 vs H1 2013 vs 30.06.13 30.06.12 31.12.12 H1 2012 H2 2012 H1 2012 H2 2012 $million $million $million $million $million % % Assets Advances and investments Cash and balances at central banks 57,621 50,683 60,537 6,938 (2,916) 14 (5) Loans and advances to banks 73,305 73,930 67,797 (625) 5,508 (1) 8 Loans and advances to customers 285,353 272,453 279,638 12,900 5,715 5 2 Investment securities held at amortised cost 3,946 4,804 3,851 (858) 95 (18) 2 420,225 401,870 411,823 18,355 8,402 5 2 Assets held at fair value Investment securities held available-for-sale 90,866 83,391 95,374 7,475 (4,508) 9 (5) Financial assets held at fair value through profit or loss 28,135 27,743 27,076 392 1,059 1 4 Derivative financial instruments 54,548 52,530 49,495 2,018 5,053 4 10 173,549 163,664 171,945 9,885 1,604 6 1 Other assets 56,183 48,022 47,440 8,161 8,743 17 18 Total assets 649,957 613,556 631,208 36,401 18,749 6 3 Liabilities Deposits and debt securities in issue Deposits by banks 45,012 44,754 36,427 258 8,585 1 24 Customer accounts 371,314 350,248 372,874 21,066 (1,560) 6 (0) Debt securities in issue 58,690 57,814 55,979 876 2,711 2 5 475,016 452,816 465,280 22,200 9,736 5 2 Liabilities held at fair value Financial liabilities held at fair value through profit or loss 22,456 19,067 23,064 3,389 (608) 18 (3) Derivative financial instruments 53,781 50,144 47,192 3,637 6,589 7 14 76,237 69,211 70,256 7,026 5,981 10 9 Subordinated liabilities and other borrowed funds 18,393 16,408 18,588 1,985 (195) 12 (1) Other liabilities 34,953 32,187 31,029 2,766 3,924 9 13 Total liabilities 604,599 570,622 585,153 33,977 19,446 6 3 Equity 45,358 42,934 46,055 2,424 (697) 6 (2) Total liabilities and shareholders' funds 649,957 613,556 631,208 36,401 18,749 6 3 Balance sheet Unless otherwise stated, the variance and analysis explanations compare the position as at 30 June 2013 with the position as at 31 December 2012. The Group's balance sheet remains resilient and well diversified. We continue to be highly liquid and primarily deposit funded, with an advances to deposits ratio of 76.6 per cent, up from the previous year-end position of 73.9 per cent, although we saw increasing levels of competition for deposits across our footprint. We continue to be a net lender into the interbank market, particularly in Hong Kong, Singapore and Americas, UK & Europe. The Group's funding structure remains conservative, with limited levels of refinancing over the next few years. Senior debt funding during the period continued to demonstrate strong demand for our paper. The Group remains well capitalised with profit accretion, net of distributions during the period further supporting our growth. Our Core Tier 1 ratio fell slightly to 11.4 per cent from 11.6 per cent at the year end primarily due to the timing of dividend payments and higher risk-weighted assets. The profile of our balance sheet remains stable, with over 71 per cent of our financial assets held at amortised cost, and 59 per cent of total assets have a residual maturity of less than one year. The Group has low exposure to problem asset classes, no direct sovereign exposure to Cyprus, Greece, Ireland, Italy, Portugal or Spain and immaterial direct exposure to the rest of the eurozone. Balance sheet footings grew by $19 billion, or 3 per cent, during this period. We continued to grow loans to banks and customers and maintained our strategy of funding before lending, although we saw slightly lower Customer accounts balances. Cash and balances at central banks Cash balances fell by $3 billion as we redeployed excess liquidity into client and customer lending. Loans and advances to banks and customers Loans to banks and customers, including those held at fair value, grew by $14 billion, or 4 per cent, to $367 billion. CB portfolios, which represent 44 per cent of the Group's customer advances at 30 June, fell by $2 billion to $128 billion. 72 per cent is fully secured and the mortgage book continued to be conservatively placed, with an average loan to value ratio of 47 per cent. Mortgage balances fell by $2 billion as increasing levels of regulatory restrictions and intensifying competition impacted growth. This particularly affected Korea, where balances fell by $3 billion, although we originated and distributed $2 billion of fixed rate mortgages during the period under the Mortgage Purchase Program. Although we continued to see good demand for unsecured products, balances were broadly flat as prior years' originations matured and the pace of growth in new balances slowed during the year as we selectively tightened underwriting criteria in a few markets. The WB portfolio remains well diversified by geography and client segment and the business continued to strengthen its existing client relationships, growing customer advances by $9 billion, or 6 per cent, to $164 billion. Lending increased strongly in Singapore, up 17 per cent, and in Hong Kong, up 11 per cent, driven by the continued ability of these geographies to support cross border business originating across the network. Growth was also seen across a broad range of industry sectors, reflecting increased trade activity and a continued focus on commerce, manufacturing and mining sectors which make up over 55 per cent of WB customer lending. Loans to banks increased 10 per cent, with Other Asia Pacific up 24 per cent as a result of a strategy to move more liquidity to banks in our footprint countries and Americas, UK & Europe up 22 per cent reflecting its role as a bridge between the West and our footprint markets. Treasury bills, debt and equity securities Treasury bills, debt and equity securities, including those held at fair value, fell by $6 billion due to lower holdings of highly rated Treasury Bills reflecting a change in the eligibility criteria for liquid asset buffers in the UK. The maturity profile of these assets is largely consistent with prior periods, with around 47 per cent of the book having a residual maturity of less than twelve months. Derivatives Customer appetite for derivative transactions has continued to be strong, and notional values have increased since the year end, particularly in interest rate options as clients reacted to the potential tapering of quantitative easing in the US. Unrealised positive mark-to-market positions were $5 billion higher at $55 billion. Our risk positions continue to be largely balanced, resulting in a corresponding increase in negative mark to market positions. Of the $55 billion mark to market positions, $37 billion was available for offset due to master netting agreements. Deposits The Group has continued to see good deposit growth and deposits by banks, including those held at fair value, increased by $8 billion, largely due to higher clearing balances, particularly those held within the Americas, UK & Europe region from banks within our footprint. Customer deposits fell $4 billion. While we continued to see good levels of deposit gathering in Hong Kong, up 2 per cent, and Americas, UK & Europe, up 14 per cent, this was more than offset by lower balances in Korea, down 20 per cent as we exited expensive Time Deposits, and Other Asia Pacific, down 9 per cent, as corporate deposits fell in Taiwan and Japan. CASA continued to be core of the customer deposit base, constituting over 50 per cent of customer deposits. Debt securities in issue, subordinated liabilities and other borrowed funds Subordinated debt remained largely flat as new issues were offset by redemptions, while debt securities in issue grew by $2.7 billion, or 5 per cent, on the back of continued good demand for our name. Equity Total shareholders' equity was $0.7 billion lower at $45.4 billion as profit accretion for the period was more than offset by $1.4 billion of dividends paid and a negative impact of $1.1bn from foreign exchange movements. Standard Chartered PLC - Risk review The following parts of the Risk Review are reviewed by the auditor: from the start of the 'Risk management' section on page 25 to the end of the 'Liquidity' section on page 86, with the exception of the 'Asset backed securities' and 'the impact of Basel III' sections on pages 66, 67 and 79. Risk overview Standard Chartered has a defined risk appetite, approved by the Board, which is an expression of the amount of risk we are prepared to take and plays a central role in the development of our strategic plans and policies. Our overall risk appetite has not changed. We regularly assess our aggregate risk profile, conduct stress tests and monitor concentrations to ensure that we are operating within our approved risk appetite. Further details on our approach to risk appetite and stress testing are set out on page 26. We review and adjust our underwriting standards and limits in response to observed and anticipated changes in the external environment and the evolving expectations of our stakeholders. In the first half of 2013, we maintained our cautious stance overall whilst continuing to support our core clients. Credit risk management is covered in more detail on page 26. Our balance sheet and liquidity have remained strong and we already meet the enhanced liquidity thresholds required under forthcoming Basel III regulations. Over half of total assets mature within one year and of these approximately 70 per cent mature within three months. The balance sheet is highly diversified across a wide range of products, industries, geographies and customer segments, which serves to mitigate risk: • Customer loans and advances are 45 per cent of total assets • The Manufacturing sector in Wholesale Banking, which is 25 per cent of lending, is diversified by industry and geography • The largest concentration to any globally correlated industry is to energy at 9 per cent of total Wholesale Banking assets. The exposure is well spread across eight subsectors and over 350 client groups and, reflecting the trade bias in the portfolio, 68 per cent of exposures mature within one year • Our cross-border asset exposure is also diversified and reflects our strategic focus on our core markets and customer segments • 44 per cent of customer loans and advances are in Consumer Banking; 72 per cent of these are secured and the overall loan to value ratio on our mortgage portfolio is less than 48 per cent • The unsecured Consumer portfolio is spread across multiple products in over 30 markets We have low exposure to asset classes and segments outside our core markets and target customer base. We have no direct sovereign exposure (as defined by the European Banking Authority (EBA)) to Greece, Ireland, Italy, Portugal or Spain. Our total gross exposure to all counterparties in these countries is 0.6 per cent of total assets. Our direct sovereign exposure to the remainder of the eurozone is immaterial. Further details are given on page 67. Our exposure to countries impacted by the political developments in the Middle East and North Africa are also low. Exposures in Syria, Lebanon, Egypt, Libya, Algeria and Tunisia represent less than 0.5 per cent of our total assets. Our exposures to commercial real estate and leveraged loans account for less than 2 per cent and 1 per cent of our total assets respectively. The notional value of the Asset Backed Securities (ABS) portfolio, which accounts for 1 per cent of our total assets increased by $1.9 billion in the first half of 2013 due to investments in high quality, senior ABS and Residential Mortgage Backed Securities (RMBS) assets in the Group's portfolio of marketable securities. Further details are given on page 66. Market risk is tightly monitored using Value at Risk (VaR) methodologies complemented by sensitivity measures, gross nominal limits and loss triggers at a detailed portfolio level. This is supplemented with extensive stress testing which takes account of more extreme price movements. Our overall trading book risk exposure has not changed significantly. Further details on market risk are given on page 75. We maintained a strong advances-to-deposits ratio in the first half of 2013. Liquidity will continue to be deployed to support growth opportunities in our chosen markets. We manage liquidity in each of our branches and operating subsidiaries in each country, ensuring that we can meet all short-term funding and collateral requirements and that our balance sheet remains structurally sound. Our customer deposit base is diversified by type and maturity and we are a net provider of liquidity to the interbank money markets. We have a substantial portfolio of marketable securities that can be realised in the event of liquidity stress. Further details on liquidity are given on pages 79 to 86. We continue to engage actively with our regulators, in particular the Prudential Regulation Authority (PRA), the Bank of England (BoE) and our 'Crisis Management Group' regulators, to develop appropriate and workable responses to the various regulatory requirements that are being developed in relation to Recovery and Resolution Planning. It is critical that international regulators work together to develop co-ordinated approaches for cross-border banking groups. We have a well-established risk governance structure, which is set out on page 25, and an experienced senior team. Members of our executive committee (the Court) sit on our principal risk executive committees, which ensures that risk oversight is a critical focus for all our directors, while common membership between these committees helps us address the inter-relationships between risk types. Board committees provide additional risk management oversight and challenge. Risk governance is covered in more detail on page 25. We continue to build on the Group's culture of risk management discipline. During the first half of 2013 we refreshed and re-communicated the Group's Code of Conduct, reinforcing our values and our brand promise. We recognise that failures of regulatory compliance have damaged the Group's reputation, and continue to pay close attention to this. The management of operational risk, more broadly, continues to be enhanced as we incrementally roll out our new approach across all areas of the Group. We are introducing increased rigour in the process for anticipating a wide variety of operational risks and in our assessments of risks and control effectiveness. Operational risk and reputational risk are covered in more detail on pages 87 and 89. Restatement of prior periods The tables on pages 29 to 86 and related analysis reflect the restatement of balances at 30 June 2012 and 31 December 2012 for the impact of equity accounting Permata, the Group's joint venture business in Indonesia (within the Other APR geographic region) rather than the previous treatment of proportionate consolidation. Mortgage balances at 30 June 2012 have also been restated to gross-up balances Standard Chartered PLC - Risk review continued previously recorded on a net basis. In addition the geographic regions of Africa and Other APR have been restated for 30 June 2012 to reflect the transfer of Mauritius from Other APR to Africa region. Details are provided in note 32 on pages 149 to 158. Asset impairment review The total impairment charge (excluding goodwill impairment) in the first half of 2013 whilst broadly flat to H2 2012 has increased by $92 million compared to H1 2012. The increase has been in Consumer Banking, partly offset by a lower loan impairment charge in Wholesale Banking and lower other impairment charges. In Consumer Banking, total loan impairment provisions have increased year on year, primarily reflecting the growth and seasoning of loans booked between 2010 and 2012, and the ongoing impact of Korea Personal Debt Rehabilitation Scheme (PDRS) filings. The increase is otherwise in line with our portfolio growth and our continued strategic shift to unsecured products in selected markets. We remain disciplined in our approach to risk management and proactive in our collection efforts to minimise account delinquencies. In Wholesale Banking, total loan impairment provisions have reduced year on year due to lower provision levels in UAE. The credit quality of the portfolio quality remains high in spite of the volatility in commodity prices and currencies. Portfolio impairment provisions have increased in Wholesale Banking in line with loan portfolio growth. Other impairment excluding goodwill impairment is lower compared to prior periods and is explained in note 8 on page 112. Principal uncertainties We are in the business of taking selected risks to generate shareholder value, and we seek to contain and mitigate these risks to ensure they remain within our risk appetite and are adequately compensated. The key uncertainties we face in the coming year are set out below. This should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties that we may experience. Deteriorating macroeconomic conditions in footprint countries Macroeconomic conditions have an impact on personal expenditure and consumption, demand for business products and services, the debt service burden of consumers and businesses, the general availability of credit for retail and corporate borrowers and the availability of capital and liquidity funding for our business. All these factors may impact our performance. The world economy is coming out of a difficult period and uncertainty remains. The slowdown in China's growth may depress prices and trade in a number of commodity sectors such as energy, metals and mining sectors. A prolonged slowdown could have wider economic repercussions. The sovereign crisis in the eurozone is not fully resolved and, although acute risks have been addressed by ongoing policy initiatives, there is still a need for substantial new structural reform (see additional information on the risk of redenomination on page 67. Our exposure to eurozone sovereign debt is very low. However, we remain alert to the risk of secondary impacts from events in the West on financial institutions, other counterparties and global economic growth. Inflation and property prices appear to be under control in most of the countries in which we operate. Changes in monetary policy could lead to significant increases in interest rates from their currently low historical levels, with resulting impacts on the wider economy and on property values. We balance risk and return taking account of changing conditions through the economic cycle, and monitor economic trends in our markets very closely. We conduct stress tests to assess the effects of extreme but plausible trading conditions on our portfolio and also continuously review the suitability of our risk policies and controls. We manage credit exposures following the principle of diversification across products, geographies, client and customer segments. This provides for strong resilience against economic shocks in one or more of our portfolios. Regulatory changes and compliance Our business as an international bank will continue to be subject to an evolving and complex regulatory framework comprising legislation, regulation and codes of practice, in each of the countries in which we operate. A key uncertainty relates to the way in which governments and regulators adjust laws, regulations and economic policies in response to macroeconomic and other systemic conditions. The nature and impact of such future changes are not predictable and could run counter to our strategic interests. Some are anticipated to have a significant impact such as changes to capital and liquidity regimes, changes to the calculation of risk weighted assets, derivatives reform, remuneration reforms, recovery and resolution plans, banking structural reforms in a number of markets, the UK bank levy and the US Foreign Account Tax Compliance Act. Uncertainty remains regarding details of the application of the European Union's Capital Requirements Directive IV (CRD IV) and Over The Counter (OTC) Derivative reforms across our markets which could potentially have a material impact on the Group and its business model. Proposed changes could also adversely affect economic growth, the volatility and liquidity of the financial markets and, consequently, the way we conduct business and manage capital and liquidity. These effects may directly or indirectly impact our financial performance. Despite these concerns, we remain a highly liquid and well capitalised bank. It is in the wider interest to have a well run financial system, and we are supportive of a tighter regulatory regime that enhances the resilience of the international financial system. The Group will continue to participate in the regulatory debate through responses to consultations and working towards an improved and workable regulatory architecture. We are also encouraging our international regulators to work together to develop co-ordinated approaches to regulating and resolving cross border banking groups. We support changes to laws, regulations and codes of practice that will improve the overall stability of, and the conduct within the financial system because this provides benefits to our customers, clients and shareholders. However, we also have concerns that certain proposals may not achieve this desired objective and may have unintended consequences, either individually or in terms of aggregate impact. The Group seeks to comply with all applicable laws and regulations but may be subject to regulatory actions and investigations across our markets, the outcome of which are generally difficult to predict and can be material to the Group. The Group seeks to co-operate with regulators in response to requests for information, inquiries and investigations and takes remedial actions as necessary. The Group is participating in regulatory reviews wherever relevant, contributing to industry proposals to strengthen rate setting processes in certain markets and continues to review its practices and processes in the light of such proposals. During 2012, the Group reached settlements with the US authorities regarding US sanctions compliance in the period 2001 to 2007, involving a Consent Order by the New York Department of Financial Services (NYDFS), a Cease and Desist Order by the Federal Reserve Bank of New York (FRBNY), Deferred Prosecution Agreements with each of the Department of Justice and with the District Attorney of New York and a Settlement Agreement with the Office of Foreign Assets Control. In addition to the civil penalties totalling $667million, the terms of these settlements include conditions and ongoing obligations such as: reporting requirements; compliance reviews; banking transparency requirements; training measures; audit programmes; disclosure obligations; requirements to co-operate with further information requests and testimony; requirement to compliance with a remediation programme and the appointment of an independent monitor at the direction of NYDFS; and compliance with a separate remediation programme at the direction of the FRBNY. The Group is engaged with all relevant authorities to implement these programmes and to meet the obligations under the settlements, including the monitoring and compliance reviews, responding to further requests for information and inquiries related to its sanctions compliance and identifying further improvements to processes. The Group remains resolute in its commitment to tackling financial crime across its global footprint and complying with all relevant regulations. The Group has made significant enhancements in its global sanctions and anti-money laundering systems and procedures. The Group recognises that, following these settlements, its compliance with sanctions, not just in the US but throughout its footprint, will remain a focus of the relevant authorities. Financial markets dislocation There is a risk that a sudden financial market dislocation, perhaps as a result of a tightening of monetary policy in the major economies or a deterioration of the sovereign debt crisis in the eurozone, could significantly increase general financial market volatility which could affect our performance or the availability of capital or liquidity. These factors may have an impact on the mark-to-market valuations of assets in our available-for-sale and trading portfolios. The potential losses incurred by certain clients holding derivative contracts during periods of financial market volatility could also lead to an increase in disputes and corporate defaults. At the same time, financial market instability could cause some financial institution counterparties to experience tighter liquidity conditions or even fail. There is no certainty that Government action to reduce the systemic risk will be successful and it may have unintended consequences. We closely monitor the performance of our financial institution counterparties and adjust our exposure to these counterparties as necessary. We maintain robust processes to assess the appropriateness and suitability of products and services we provide to clients and customers to mitigate the risk of disputes. Geopolitical events We operate in a large number of markets around the world, and our performance is in part reliant on the openness of cross-border trade and capital flows. We face a risk that geopolitical tensions or conflicts in our footprint could impact trade flows, our customers' ability to pay, and our ability to manage capital or operations across borders. We actively monitor the political situation in all our principal markets, such as the development of events in the Middle East and territorial disputes in North East Asia. We conduct stress tests of the impact of extreme but plausible geopolitical events on our performance and the potential for such events to jeopardise our ability to operate within our stated risk appetite. Further details on stress testing are given on page 26. Risk of fraud The banking industry has long been a target for third parties seeking to defraud, to disrupt legitimate economic activity, or to facilitate other illegal activities. The risk posed by such criminal activity is growing as criminals become more sophisticated and as they take advantage of the increasing use of technology. We seek to be vigilant to the risk of internal and external crime in our management of people, processes, systems and in our dealings with customers and other stakeholders. We have a broad range of measures in place to monitor and mitigate this risk. Controls are embedded in our policies and procedures across a wide range of the Group's activities, such as origination, recruitment, physical and information security. Exchange rate movements Changes in exchange rates affect, among other things, the value of our assets and liabilities denominated in foreign currencies, as well as the earnings reported by our non-US dollar denominated branches and subsidiaries. Sharp currency movements can also impact trade flows and the wealth of clients both of which could have an impact on our performance. We monitor exchange rate movements closely and adjust our exposures accordingly. Under certain circumstances, we may take the decision to hedge our foreign exchange exposures in order to protect our capital ratios from the effects of changes in exchange rates. The effect of exchange rate movements on the capital adequacy ratio is mitigated to the extent there are proportionate movements in risk weighted assets. The table below sets out the period end and average currency exchange rates per US dollar for India, Korea, Singapore and Taiwan for the first half of 2013 and the half year periods ending 30 June 2012 and 31 December 2012. These are the markets for which currency exchange rate movements have had the greatest translation impact on the Group's results in the first half of 2013. 6 months ended 30.06.13 6 months ended 30.06.12 6 months ended 31.12.12 Indian rupee Average 54.95 52.13 54.72 Period end 59.35 55.56 54.96 Korean won Average 1,103.21 1,140.98 1,111.64 Period end 1,141.76 1,145.07 1,070.34 Singapore dollar Average 1.24 1.26 1.23 Period end 1.27 1.27 1.22 Taiwan dollar Average 29.65 29.65 29.50 Period end 30.01 29.89 29.07 As a result of our normal business operations, Standard Chartered is exposed to a broader range of risks than those principal uncertainties mentioned above and our approach to managing risk is detailed on the following pages. Risk management The management of risk lies at the heart of Standard Chartered's business. One of the main risks we incur arises from extending credit to customers through our trading and lending operations. Beyond credit risk, we are also exposed to a range of other risk types such as country cross-border, market, liquidity, operational, pension, reputational and other risks that are inherent to our strategy, product range and geographical coverage. Risk management framework Effective risk management is fundamental to being able to generate profits consistently and sustainably and is thus a central part of the financial and operational management of the Group. Through our risk management framework we manage enterprise-wide risks, with the objective of maximising risk-adjusted returns while remaining within our risk appetite. As part of this framework, we use a set of principles that describe the risk management culture we wish to sustain: • Balancing risk and return: risk is taken in support of the requirements of our stakeholders, in line with our strategy and within our risk appetite • Responsibility: it is the responsibility of all employees to ensure that risk-taking is disciplined and focused. We take account of our social responsibilities and our commitments to customers in taking risk to produce a return • Accountability: risk is taken only within agreed authorities and where there is appropriate infrastructure and resource. All risk-taking must be transparent, controlled and reported • Anticipation: we seek to anticipate future risks and ensure awareness of all known risks • Competitive advantage: we seek to achieve competitive advantage through efficient and effective risk management and control Risk governance Ultimate responsibility for setting our risk appetite and for the effective management of risk rests with the Board. Acting within an authority delegated by the Board, the Board Risk Committee (BRC), whose membership is comprised exclusively of non-executive directors of the Group, has responsibility for oversight and review of prudential risks including but not limited to credit, market, capital, liquidity and operational. It reviews the Group's overall risk appetite and makes recommendations thereon to the Board. Its responsibilities also include reviewing the appropriateness and effectiveness of the Group's risk management systems and controls, considering the implications of material regulatory change proposals, ensuring effective due diligence on material acquisitions and disposals, and monitoring the activities of the Group Risk Committee (GRC) and Group Asset and Liability Committee (GALCO). The BRC receives regular reports on risk management, including our portfolio trends, policies and standards, stress testing, liquidity and capital adequacy, and is authorised to investigate or seek any information relating to an activity within its terms of reference. The BRC also conducts 'deep dive' reviews on a rolling basis of different sections of the consolidated group risk information report. The Brand and Values Committee (BVC) oversees the brand, culture, values and good reputation of the Group. It ensures that the management of reputational risk is consistent with the risk appetite approved by the Board and with the creation of long term shareholder value. The role of the Audit Committee is to have oversight and review of financial, audit and internal control issues. Overall accountability for risk management is held by the Court of Standard Chartered Bank (the Court) which comprises the group executive directors and other senior executives of Standard Chartered Bank. The Court is the highest executive body of the Group and its terms of reference are approved by the Board of Standard Chartered PLC. The Court delegates authority for the management of risk to the GRC and the GALCO. The GRC is responsible for the management of all risks other than those delegated by the Court to the GALCO. The GRC is responsible for the establishment of, and compliance with, policies relating to credit risk, country cross-border risk, market risk, operational risk, pension risk and reputational risk. The GRC also defines our overall risk management framework. The GALCO is responsible for the management of capital and the establishment of, and compliance with, policies relating to balance sheet management, including management of our liquidity, capital adequacy and structural foreign exchange and interest rate risk. Members of the GRC and the GALCO are both drawn from the Court. The GRC is chaired by the Group Chief Risk Officer (GCRO). The GALCO is chaired by the Group Finance Director. Risk limits and risk exposure approval authority frameworks are set by the GRC in respect of credit risk, country cross-border risk, market risk and operational risk. The GALCO sets the approval authority framework in respect of liquidity risk. Risk approval authorities may be exercised by risk committees or authorised individuals. The committee governance structure ensures that risk-taking authority and risk management policies are cascaded down from the Board through to the appropriate functional, divisional and country-level committees. Information regarding material risk issues and compliance with policies and standards is communicated to the country, business, functional and Group-level committees. Roles and responsibilities for risk management are defined under a 'three lines of defence' model. Each line of defence describes a specific set of responsibilities for risk management and control. • First line of defence: all employees are required to ensure the effective management of risks within the scope of their direct organisational responsibilities. Business, function and geographic governance heads are accountable for risk management in their respective businesses and functions, and for countries where they have governance responsibilities. • Second line of defence: this comprises the Risk Control Owners, supported by their respective control functions. Risk Control Owners are responsible for ensuring that the risks within the scope of their responsibilities remain within appetite. The scope of a Risk Control Owner's responsibilities is defined by a given Risk Type and the risk management processes that relate to that Risk Type. These responsibilities cut across the Group and are not constrained by functional, business and geographic boundaries. The major risk types are described individually in the following sections. • Third line of defence: the independent assurance provided by the Group Internal Audit (GIA) function. Its role is defined and overseen by the Audit Committee. The findings from GIA's audits are reported to all relevant management and governance bodies - accountable line managers, relevant oversight function or committee and committees of the Board. GIA provides independent assurance of the effectiveness of management's control of its own business activities (the first line) and of the processes maintained by the Risk Control Functions (the second line). As a result, GIA provides assurance that the overall system of control effectiveness is working as required within the Risk Management Framework. The Risk function The GCRO directly manages a Risk function that is separate from the origination, trading and sales functions of the businesses. The GCRO also chairs the GRC and is a member of the Court. The role of the Risk function is: • To maintain the Risk Management Framework, ensuring it remains appropriate to the Group's activities, is effectively communicated and implemented across the Group and for administering related governance and reporting processes • To uphold the overall integrity of the Group's risk/return decisions, and in particular for ensuring that risks are properly assessed, that risk/return decisions are made transparently on the basis of this proper assessment, and are controlled in accordance with the Group's standards and risk appetite • To exercise direct risk control ownership for credit, market, country cross-border, short-term liquidity and operational risk types. The Group appoints Chief Risk Officers (CROs) for its two business divisions and principal countries and regions. CROs at all levels of the organisation fulfil the same role as the GCRO, in respect of the business, geography or legal entity for which they are responsible. The roles of CROs are aligned at each level. The independence of the Risk function is to ensure that the necessary balance in risk/return decisions is not compromised by short-term pressures to generate revenues. This is particularly important given that revenues are recognised from the point of sale while losses arising from risk positions typically manifest themselves over time. In addition, the Risk function is a centre of excellence that provides specialist capabilities of relevance to risk management processes in the wider organisation. Risk appetite We manage our risks to build a sustainable franchise in the interests of all our stakeholders. Risk appetite is an expression of the amount of risk we are willing to take in pursuit of our strategic objectives, reflecting our capacity to sustain losses and continue to meet our obligations arising from a range of different stress trading conditions. We define our risk appetite in terms of both volatility of earnings and the maintenance of adequate regulatory capital requirements under stress scenarios. We also define a risk appetite with respect to liquidity risk, operational risk and reputational risk. Our quantitative risk profile is assessed through a bottom-up analytical approach covering all of our major businesses, countries and products. It is also assessed against a range of exposure concentration thresholds. The Group's risk appetite statement is approved by the Board and forms the basis for establishing the risk parameters within which the businesses must operate, including policies, concentration limits and business mix. The Group will not compromise adherence to its risk appetite in order to pursue revenue growth or higher returns. The GRC and GALCO are responsible for ensuring that our risk profile is managed in compliance with the risk appetite set by the Board. Stress testing Stress testing and scenario analysis are used to assess the financial and management capability of Standard Chartered to continue operating effectively under extreme but plausible trading conditions. Such conditions may arise from economic, regulatory, legal, political, environmental and social factors. Our stress testing framework is designed to: • Contribute to the setting and monitoring of risk appetite • Identify key risks to our strategy, financial position, and reputation • Support the development of mitigating actions and contingency plans • Ensure effective governance, processes and systems are in place to co-ordinate and integrate stress testing • Ensure adherence to regulatory requirements. Our stress testing activity focuses on the potential impact of macroeconomic, geopolitical and physical events on relevant geographies, customer segments and asset classes. A Stress Testing Committee, led by the Risk function with members drawn from the businesses, Group Finance and Group Treasury, aims to ensure that the implications of specific stress scenarios are fully understood allowing informed mitigation actions and construction of contingency plans. The Stress Testing Committee generates and considers pertinent and plausible scenarios that have the potential to adversely affect our business and considers impact across different risk types and countries. Stress tests are also performed at country and business level. Credit risk management Credit risk is the potential for loss due to the failure of a counterparty to meet its obligations to pay the Group in accordance with agreed terms. Credit exposures arise from both the banking and trading books. Credit risk is managed through a framework that sets out policies and procedures covering the measurement and management of credit risk. There is a clear segregation of duties between transaction originators in the businesses and approvers in the Risk function. All credit exposure limits are approved within a defined credit approval authority framework. The Group manages its credit exposures following the principle of diversification across products, geographies, client and customer segments. Credit policies Group-wide credit policies and standards are considered and approved by the GRC, which also oversees the delegation of credit approval and loan impairment provisioning authorities. Policies and procedures specific to each business are established by authorised risk committees within Wholesale and Consumer Banking. These are consistent with our Group-wide credit policies, but are more detailed and adapted to reflect the different risk environments and portfolio characteristics. Credit rating and measurement Risk measurement plays a central role, along with judgment and experience, in informing risk taking and portfolio management decisions. It is a primary area for sustained investment and senior management attention. Since 1 January 2008, Standard Chartered has used the advanced Internal Ratings Based (IRB) approach under the Basel II regulatory framework to calculate credit risk capital requirements. For IRB portfolios, a standard alphanumeric credit risk grade (CG) system is used in both Wholesale and Consumer Banking. The grading is based on our internal estimate of probability of default over a one-year horizon, with customers or portfolios assessed against a range of quantitative and qualitative factors. The numeric grades run from 1 to 14 and some of the grades are further sub-classified A, B or C. Lower credit grades are indicative of a lower likelihood of default. Credit grades 1A to 12C are assigned to performing customers or accounts, while credit grades 13 and 14 are assigned to non-performing or defaulted customers. Our credit grades in Wholesale Banking are not intended to replicate external credit grades, and ratings assigned by external ratings agencies are not used in determining our internal credit grades. Nonetheless, as the factors used to grade a borrower may be similar, a borrower rated poorly by an external rating agency is typically assigned a worse internal credit grade. Advanced IRB models cover a substantial majority of our exposures and are used extensively in assessing risks at a customer and portfolio level, setting strategy and optimising our risk/return decisions. IRB risk measurement models are approved by the responsible risk committee, on the recommendation of the Group Model Assessment Committee (MAC). The MAC supports risk committees in ensuring risk identification and measurement capabilities are objective and consistent, so that risk control and risk origination decisions are properly informed. Prior to review by the MAC, all IRB models are validated in detail by a model validation team, which is separate from the teams that develop and maintain the models. Models undergo periodic review. Reviews are also triggered if the performance of a model deteriorates materially against predetermined thresholds during the ongoing model performance monitoring process. Credit approval Major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures are reviewed and approved by the Group Credit Committee (GCC). The GCC derives its authority from the GRC. All other credit approval authorities are delegated by the GRC to individuals based both on their judgment and experience and a risk-adjusted scale that takes account of the estimated maximum potential loss from a given customer or portfolio. Credit origination and approval roles are segregated in all but a very few authorised cases. In those very few exceptions where they are not, originators can only approve limited exposures within defined risk parameters. Credit concentration risk Credit concentration risk may arise from a single large exposure or from multiple exposures that are closely correlated. This is managed within concentration caps set by counterparty or groups of connected counterparties, and having regard for correlation, by country and industry in Wholesale Banking; and by product and country in Consumer Banking. Additional concentration thresholds are set and monitored, where appropriate, by tenor profile, collateralisation levels and credit risk profile. Credit concentrations are monitored by the responsible risk committees in each of the businesses and concentration limits that are material to the Group are reviewed and approved at least annually by the GCC. Credit monitoring We regularly monitor credit exposures, portfolio performance, and external trends that may impact risk management outcomes. Internal risk management reports are presented to risk committees, containing information on key environmental, political and economic trends across major portfolios and countries; portfolio delinquency and loan impairment performance; and IRB portfolio metrics including credit grade migration. The Wholesale Banking Credit Issues Forum (WBCIF) is a sub-committee of the Wholesale Banking Risk Committee, which in turn is a sub-committee of and derives its authority from the GRC. The WBCIF meets regularly to assess the impact of external events and trends on the Wholesale Banking credit risk portfolio and to define and implement our response in terms of appropriate changes to portfolio shape, portfolio and underwriting standards, risk policy and procedures. The Consumer Banking Credit Governance Committee (CGC) is a sub-committee of the Consumer Banking Risk Committee (CBRC). Both the CGC and CBRC meet regularly to assess relevant credit matters. This includes market developments with direct credit concerns, credit policy changes, prominent or emerging credit concerns and mitigating actions. Clients or portfolios are placed on early alert when they display signs of actual or potential weakness. For example, where there is a decline in the client's position within the industry, financial deterioration, a breach of covenants, non-performance of an obligation within the stipulated period, or there are concerns relating to ownership or management. Such accounts and portfolios are subjected to a dedicated process overseen by Early Alert Committees in countries. Client account plans and credit grades are re-evaluated. In addition, remedial actions are agreed and monitored. Remedial actions include, but are not limited to, exposure reduction, security enhancement, exiting the account or immediate movement of the account into the control of Group Special Assets Management (GSAM), our specialist recovery unit. In Consumer Banking, portfolio delinquency trends are monitored continuously at a detailed level. Individual customer behaviour is also tracked and is considered for lending decisions. Accounts that are past due are subject to a collections process, managed independently by the Risk function. Charged-off accounts are managed by specialist recovery teams. In some countries, aspects of collections and recovery functions are outsourced. The small and medium-sized enterprise (SME) business is managed within Consumer Banking in two distinct customer sub-segments: small businesses and medium enterprises, differentiated by the annual turnover of the counterparty. The credit processes are further refined based on exposure at risk. Larger exposures are managed through the Discretionary Lending approach, in line with Wholesale Banking procedures, and smaller exposures are managed through Programmed Lending, in line with Consumer Banking procedures. Discretionary Lending and Private Banking problem accounts are managed by GSAM. Credit risk mitigation Potential credit losses from any given account, customer or portfolio are mitigated using a range of tools such as collateral, netting agreements, credit insurance, credit derivatives and other guarantees. The reliance that can be placed on these mitigants is carefully assessed in light of issues such as legal certainty and enforceability, market valuation correlation and counterparty risk of the guarantor. Where appropriate, credit derivatives are used to reduce credit risks in the portfolio. Due to their potential impact on income volatility, such derivatives are used in a controlled manner with reference to their expected volatility. Collateral is held to mitigate credit risk exposures and risk mitigation policies determine the eligibility of collateral types. For Wholesale Banking, these policies set out the clear criteria that must be satisfied if the mitigation is to be considered effective: • excessive exposure to any particular risk mitigants or counterparties should be avoided. Collateral concentration mitigation standards are maintained at both the portfolio and counterparty level; • risk mitigants should not be correlated with the underlying assets such that default would coincide with a lowering of the forced sale value of the collateral; • where there is a currency mismatch, haircuts should be applied to protect against currency fluctuations; • legal opinions and documentation must be in place; and • ongoing review and controls exist where there is a maturity mismatch between the collateral and exposure. For all credit risk mitigants that meet the policy criteria, a clear set of procedures are applied to ensure that the value of the underlying collateral is appropriately recorded and updated regularly. Collateral types that are eligible for risk mitigation include: cash; residential, commercial and industrial property; fixed assets such as motor vehicles, aircraft, plant and machinery; marketable securities; commodities; bank guarantees; and letters of credit. Standard Chartered also enters into collateralised reverse repurchase agreements. All eligible collateral accepted by Consumer Banking is covered by a product proposal approved by senior credit officers with the relevant delegated authority. New collateral types have to be vetted through a stringent 'New Business Approval' process and approved by the CBRC. In order to be recognised as security and for the loan to be classified as secured, all items pledged must be valued and an active secondary resale market must exist for the collateral. Documentation must be held to enable Consumer Banking to realise the asset without the co-operation of the asset owner in the event that this is necessary. For certain types of lending - typically mortgages and asset financing - the right to take charge over physical assets is significant in terms of determining appropriate pricing and recoverability in the event of default. The requirement for collateral is however not a substitute for the ability to pay, which is the primary consideration for any lending decisions. Regular valuation of collateral is required in accordance with the Group's risk mitigation policy, which prescribes both the process of valuation and the frequency of valuation for different collateral types. The valuation frequency is driven by the level of price volatility of each type of collateral and the nature of the underlying product or risk exposure. Stress tests are performed on changes in collateral values for key portfolios to assist senior management in managing the risks in those portfolios. Physical collateral is required to be insured at all times and against all risks, with the Group as the loss payee under the insurance policy. Detailed procedures over collateral management must be in place for each business at the country level. Where appropriate, collateral values are adjusted to reflect current market conditions, the probability of recovery and the period of time to realise the collateral in the event of possession. Where guarantees or credit derivatives are used as credit risk mitigation the creditworthiness of the guarantor is assessed and established using the credit approval process in addition to that of the obligor or main counterparty. The main types of guarantors include bank guarantees, insurance companies, parent companies, shareholders and export credit agencies. The Group uses bilateral and multilateral netting to reduce pre-settlement and settlement counterparty risk. Pre-settlement risk exposures are normally netted using bilateral netting documentation in legally approved jurisdictions. Settlement exposures are generally netted using Delivery versus Payments or Payment versus Payments systems. Traded products Credit risk from traded products is managed within the overall credit risk appetite for corporates and financial institutions. The credit risk exposure from traded products is derived from the positive mark-to-market value of the underlying instruments, and an additional component to cater for potential market movements. For derivative contracts, we limit our exposure to credit losses in the event of default by entering into master netting agreements with certain counterparties. As required by IAS 32, exposures are only presented net in the financial statement if there is a legal right to offset and the assets/liabilities will be settled simultaneously. In addition, we enter into Credit Support Annexes (CSAs) with counterparties where collateral is deemed a necessary or desirable mitigant to the exposure. Further details on CSAs are set out on page 31. Securities Within Wholesale Banking, the Underwriting Committee approves the portfolio limits and parameters by business unit for the underwriting and purchase of all pre-defined securities assets to be held for sale. The Underwriting Committee is established under the authority of the GRC. Wholesale Banking operates within set limits, which include country, single issuer, holding period and credit grade limits. Day to day credit risk management activities for traded securities are carried out by Traded Credit Risk Management whose activities include oversight and approval within the levels delegated by the Underwriting Committee. Issuer credit risk, including settlement and pre-settlement risk, is controlled by Wholesale Banking Risk, while price risk is controlled by Group Market Risk. The Underwriting Committee approves individual proposals to underwrite new security issues for our clients. Where an underwritten security is held for a period longer than the target sell-down period, the final decision on whether to sell the position rests with the Risk function. Credit portfolio Maximum exposure to credit risk The table below presents the Group's maximum exposure to credit risk for its on-balance sheet and off-balance sheet financial instruments at 30 June 2013, before taking into account any collateral held or other credit risk mitigation. For on-balance sheet instruments, the maximum exposure to credit risk is the carrying amount reported on the balance sheet. For off-balance sheet instruments, the maximum exposure to credit risk generally represents the contractual notional amounts. The Group's exposure to credit risk is spread across our markets. The Group is affected by the general economic conditions in the territories in which it operates. The Group sets limits on the exposure to any counterparty and credit risk is spread over a variety of different personal and commercial customers. The Group's maximum exposure to credit risk has increased by $21.0 billion in the first half of 2013 compared to 31 December 2012. Exposure to loans and advances to banks and customers has increased by $13.5 billion due to broad based growth across several industry sectors in Wholesale Banking partly offset by a decline in Consumer Banking mortgages. Further details of the loan portfolio are set out on page 30. The Group's credit risk exposure arising from derivatives has increased by $5.1 billion compared to 31 December 2012. 30.06.13 30.06.12 31.12.12 $million $million $million Derivative financial instruments 54,548 52,530 49,495 Loans and advances to customers 291,793 278,140 284,616 Loans and advances to banks 74,880 74,605 68,571 Investment securities1 109,373 104,794 114,117 Contingent liabilities 47,594 43,559 44,293 Undrawn irrevocable standby facilities, credit lines and other commitments to lend 59,835 51,327 56,647 Documentary credits and short term trade-related transactions 8,171 8,614 7,610 Forward asset purchases and forward deposits placed 852 1,068 711 647,046 614,637 626,060 1 Excludes equity shares Credit risk mitigation Loans and advances The Group holds collateral against loans and advances to customer and banks of $142 billion (30 June 2012: $144 billion; 31 December 2012: $140 billion). Further details of collateral held by businesses and held for past due and individually impaired loans are set out on page 35. The Group has transferred to third parties by way of securitisation the rights to any collection of principal and interest on customer loan assets with a face value of $1,034 million (30 June 2012: $1,714 million; 31 December 2012: $1,321 million). The Group continues to recognise these assets in addition to the proceeds and related liability of $833 million (30 June 2012: $1,530 million; 31 December 2012: $1,093 million) arising from the securitisations. The Group considers the above customer loan assets to be encumbered. Further details of encumbered assets are provided on page 80. The Group has entered into credit default swaps for portfolio management purposes, referencing loan assets with a notional value of $21.8 billion (30 June 2012: $20.0 billion; 31 December 2012: $22.1 billion). These credit default swaps are accounted for as guarantees. The Group continues to hold the underlying assets referenced in the credit default swaps as it continues to be exposed to related credit and foreign exchange risk on these assets. Further details of the transactions are set out in note 33 on page 159. Derivatives financial instruments The Group enters into master netting arrangements which result in a single amount owed by or to the counterparty through netting the sum of the positive and negative mark-to-market values of applicable derivative transactions. At 30 June 2013 $37,379 million (30 June 2012: $20,708 million; 31 December 2012: $35,073 million) is available for offset as a result of master netting agreements. These amounts do not qualify for net presentation for accounting purposes as settlement is not intended to be made on a net basis. The Group holds cash collateral against derivative and other financial instruments of $3,241 million (30 June 2012: $3,132 million; 31 December 2012: $3,245 million) as disclosed in note 24 on page 143. Cash collateral includes collateral called under a variation margin process from counterparties if total uncollateralised mark-to-market exposure exceeds the threshold and minimum transfer amount specified in the CSA. With certain counterparties, the CSA is reciprocal and requires us to post collateral if the overall mark-to-market values of positions is in the counterparty's favour and exceeds an agreed threshold. The Group holds $2,123 million (30 June 2012: $2,213 million; 31 December 2012: $2,700 million) under CSAs. Off-balance sheet exposures For certain types of exposures such as letters of credit and guarantees, the Group obtains collateral such as cash depending on internal credit risk assessments as well as in the case of letters of credit holding legal title to the underlying assets should a default take place. Loan portfolio Group Consumer Banking Wholesale Banking Page reference Page reference Page reference Overview 31 40 50 Geographic analysis 31 40 51-52 Maturity analysis · By business 32 - - · By category of borrower - 41 52-53 Credit quality analysis · By business, internal credit grades and days past due 33-34 - - · By product and geography - 42-43 54-57 Credit risk mitigation · Collateral by business and credit quality 35 - - · Analysis of secured / unsecured loans by category of business 44 - · Collateral held by type - - 58 · Geographic analysis of mortgage loan to value ratios - 45 - Problem credit management and provisioning · Policies on credit management and provisioning 36 46 58 · Non-performing loans o By business 36 - - o By geography - 49 61-62 o Movement in non-performing loans and total impaired loans by business - 50 63 · Loan impairment o Movement in total impairment provisions 37 - - o Movement in individual impairment provision by geography 38 o Loan impairment charge - by geography - 47 59 o Loan impairment movement - by category of borrower - 48 60 Forbearance and other renegotiated loans 39 - - Group overview This section covers a summary of the Group's loan portfolio analysed by business and geography, along with an analysis of the maturity profile, credit quality and provisioning of the loan book. A more detailed analysis by product, by counterparty type and by geography is set out for Consumer Banking on pages 40 to 50 and Wholesale Banking on pages 50 to 63. Geographic analysis Loans and advances to customers grew by $7.2 billion since 31 December 2012 to $291.8 billion. The Consumer Banking portfolio in the first half of 2013 has decreased by $2.2 billion, or 2 per cent since December 2012, with a majority of the decline driven by Mortgages in Korea and Singapore. The Wholesale Banking portfolio has continued to grow in 2013, increasing by $9.4 billion, or 6 per cent, compared to December 2012 with all geographic regions except Korea, Africa and MESA regions growing balances. Loans to banks have increased by $6.3 billion since 31 December 2012 to $74.9 billion, mainly in Americas, UK and Europe. 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Consumer Banking 32,970 27,218 24,824 25,477 5,128 6,064 1,854 4,634 128,169 Wholesale Banking 23,899 33,224 6,980 25,255 6,948 14,266 6,230 47,559 164,361 Portfolio impairment provision (85) (46) (123) (168) (41) (135) (68) (71) (737) Total loans and advances to customers1,2 56,784 60,396 31,681 50,564 12,035 20,195 8,016 52,122 291,793 Total loans and advances to banks1,2 20,306 4,831 3,815 10,067 436 2,760 813 31,852 74,880 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Consumer Banking 28,629 25,413 30,613 25,705 4,528 4,980 1,462 3,256 124,586 Wholesale Banking 23,391 29,500 7,262 21,157 6,800 14,530 6,030 45,586 154,256 Portfolio impairment provision (70) (48) (132) (177) (34) (143) (47) (51) (702) Total loans and advances to customers1,2 51,950 54,865 37,743 46,685 11,294 19,367 7,445 48,791 278,140 Total loans and advances to banks1,2 22,311 5,178 4,755 10,720 422 3,780 503 26,936 74,605 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Consumer Banking 31,324 27,567 28,587 26,702 5,190 5,418 1,710 3,919 130,417 Wholesale Banking 21,515 28,321 7,710 22,526 6,827 14,672 6,327 47,023 154,921 Portfolio impairment provision (74) (47) (132) (166) (39) (138) (63) (63) (722) Total loans and advances to customers1,2 52,765 55,841 36,165 49,062 11,978 19,952 7,974 50,879 284,616 Total loans and advances to banks1,2 19,356 6,205 4,633 8,133 571 3,172 378 26,123 68,571 1 Amounts net of individual impairment provision and include financial instruments held at fair value through profit or loss (see note 12 on page 115). 2 Loans and advances to customers in the above table are presented on the basis of booking location of the loan. The analysis of loans and advances by geography presented on page 105 in note 2 to the financial statements present loans based on the location of the customers. Maturity analysis Approximately half of our loans and advances to customers are short-term having a contractual maturity of one year or less. The Wholesale Banking portfolio remains predominantly short-term, with 65 per cent (30 June 2012: 63 per cent; 31 December 2012: 62 per cent) of loans and advances having a contractual maturity of one year or less. In Consumer Banking, 55 per cent (30 June 2012: 57 per cent; 31 December 2012: 56 per cent) of the portfolio is in the mortgage book, which is traditionally longer term in nature and well secured. Whilst the Other and SME loans in Consumer Banking have short contractual maturities, typically they may be renewed and repaid over longer terms in the normal course of business. 30.06.13 One year or less One to five years Over five years Total $million $million $million $million Consumer Banking 39,438 22,546 66,185 128,169 Wholesale Banking 107,577 44,658 12,126 164,361 Portfolio impairment provision (737) Total loans and advances to customers 291,793 30.06.12 One year or less One to five years Over five years Total $million $million $million $million Consumer Banking 34,362 22,820 67,404 124,586 Wholesale Banking 97,722 45,872 10,662 154,256 Portfolio impairment provision (702) Total loans and advances to customers 278,140 31.12.12 One year or less One to five years Over five years Total $million $million $million $million Consumer Banking 38,475 23,592 68,350 130,417 Wholesale Banking 96,194 46,195 12,532 154,921 Portfolio impairment provision (722) Total loans and advances to customers 284,616 Credit quality analysis The table below sets out an analysis of the loan portfolio between those loans that are neither past due nor impaired, those that are past due but not individually impaired and those that are individually impaired. A loan is considered past due when a client or customer has failed to make a payment of principal or interest when contractually due. Most of the Group's loans to banks are in the credit grade 1-5 category as we lend in the interbank market to highly rated counterparties. Exposure in the credit grade 6-8 category predominantly relates to trade finance business with financial institutions in our core markets. As at 30 June 2013, 3 per cent of the Wholesale Banking loans to customers are either past due or individually impaired down from 6 per cent at 31 December 2012. Loans past due but not individually impaired declined by $3.7 billion compared to 31 December 2012 mainly due to the renegotiation of a very small number of large exposures in the first half of 2013 which are now reported as part of the Other renegotiated loans on page 39. These were regularised in the first half of 2013 and no impairment was recognised as a result of this renegotiation. Of the $891 million balances which were past due but not individually impaired at 30 June 2013, more than half have either been repaid or renegotiated. Net individually impaired loans in Wholesale Banking increased by $0.2 billion driven by a small number of exposures in India and Africa. In Consumer Banking, individually impaired loans increased by $66 million reflecting higher levels of impairment in unsecured lending and the impact of Personal Debt Rehabilitation Schedule (PDRS) in Korea. Despite the increase in impairment charge, the increase seen in impaired loans is lower as impaired unsecured loans are written off after 150 days. 30.06.13 30.06.12 Loans to banks Loans to customers - Wholesale Banking Loans to customers - Consumer Banking Total loans to customers Loans to banks Loans to customers - Wholesale Banking Loans to customers - Consumer Banking Total loans to customers $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans - Grades 1-5 64,889 65,785 58,726 124,511 63,665 65,051 56,748 121,799 - Grades 6-8 8,611 65,247 41,183 106,430 9,272 62,535 40,274 102,809 - Grades 9-11 1,195 27,958 21,019 48,977 1,135 21,966 21,297 43,263 - Grade 12 64 1,645 2,615 4,260 124 1,779 1,672 3,451 74,759 160,635 123,543 284,178 74,196 151,331 119,991 271,322 Past due but not individually impaired loans - Up to 30 days past due 12 656 3,080 3,736 171 472 3,175 3,647 - 31 - 60 days past due - 60 444 504 97 89 455 544 - 61 - 90 days past due - 175 228 403 - 182 204 386 - 91 - 150 days past due - - 178 178 - - 166 166 12 891 3,930 4,821 268 743 4,000 4,743 Individually impaired loans 211 4,666 1,298 5,964 230 3,818 1,113 4,931 Individual impairment provisions (100) (1,831) (602) (2,433) (87) (1,636) (518) (2,154) Net individually impaired loans 111 2,835 696 3,531 143 2,182 595 2,777 Total loans and advances 74,882 164,361 128,169 292,530 74,607 154,256 124,586 278,842 Portfolio impairment provision (2) (325) (412) (737) (2) (284) (418) (702) 74,880 164,036 127,757 291,793 74,605 153,972 124,168 278,140 Of which, held at fair value through profit or loss: Neither past due nor individually impaired - Grades 1-5 1,167 1,895 - 1,895 364 986 - 986 - Grades 6-8 408 3,801 - 3,801 303 4,149 - 4,149 - Grades 9-11 - 597 - 597 8 545 - 545 - Grade 12 - 147 - 147 - 7 - 7 1,575 6,440 - 6,440 675 5,687 - 5,687 31.12.12 Loans to banks Loans to customers - Wholesale Banking Loans to customers - Consumer Banking Total loans to customers $million $million $million $million Neither past due nor individually impaired loans - Grades 1-5 59,118 63,216 59,280 122,496 - Grades 6-8 7,757 61,739 41,696 103,435 - Grades 9-11 1,457 21,324 21,596 42,920 - Grade 12 32 1,400 2,689 4,089 68,364 147,679 125,261 272,940 Past due but not individually impaired loans - Up to 30 days past due 3 1,434 3,559 4,993 - 31 - 60 days past due - 114 493 607 - 61 - 90 days past due - 3,058 230 3,288 - 91 - 150 days past due - - 208 208 3 4,606 4,490 9,096 Individually impaired loans 309 4,400 1,232 5,632 Individual impairment provisions (103) (1,764) (566) (2,330) Net individually impaired loans 206 2,636 666 3,302 Total loans and advances 68,573 154,921 130,417 285,338 Portfolio impairment provision (2) (300) (422) (722) 68,571 154,621 129,995 284,616 Of which, held at fair value through profit or loss: Neither past due nor individually impaired - Grades 1-5 555 1,237 - 1,237 - Grades 6-8 219 3,048 - 3,048 - Grades 9-11 - 692 - 692 - Grade 12 - 1 - 1 774 4,978 - 4,978 Collateral The requirement for collateral is not a substitute for the ability to pay, which is the primary consideration for any lending decisions. In determining the financial effect of collateral held against loans neither past due or impaired, we have assessed the significance of the collateral held in relation to the type of lending. For loans and advances to banks and customers (including those held at fair value through profit or loss), the table below sets out the fair value of collateral held by the Group adjusted where appropriate in accordance with the risk mitigation policy as outlined on page 28 and for the effect of over-collateralisation. In Consumer Banking, collateral levels have remained stable compared to 31 December 2012. The decline in collateral value is in line with the decline in the loan portfolio and also reflecting the gradual shift in mix to unsecured loans. 72 per cent of the loans to customers are fully secured and around 88 per cent of collateral across the portfolio is property based. Collateral held against Wholesale Banking loans also covers off-balance sheet exposures including undrawn commitments and trade related instruments. At 30 June 2013, collateral as a proportion of total lending in Wholesale Banking remained broadly aligned when compared to 31 December 2012. Of the collateral obtained, which includes non-tangible collateral such as guarantees and letters of credit, approximately 50 per cent is secured on assets and this proportion is in line with the position at 31 December 2012 and 30 June 2012 respectively. Further details on collateral are explained in the Consumer Banking and Wholesale Banking sections on page 44 and 58 respectively. Consumer Banking Wholesale Banking Total Total Past due but not individually impaired loans Individually impaired loans Total Past due but not individually impaired loans Individually impaired loans Total Past due but not individually impaired loans Individually impaired loans $million $million $million $million $million $million $million $million $million As at 30 June 2013 Collateral 86,629 2,498 568 54,999 388 708 141,628 2,886 1,276 Amount outstanding1 128,169 3,930 1,298 239,243 903 4,877 367,412 4,833 6,175 As at 30 June 2012 Collateral 84,920 2,643 449 59,398 204 502 144,318 2,847 951 Amount outstanding1 124,586 4,000 1,113 228,863 1,011 4,048 353,449 5,011 5,161 As at 31 December 2012 Collateral 88,119 2,799 563 51,594 1,823 573 139,713 4,622 1,136 Amount outstanding1 130,417 4,490 1,232 223,494 4,609 4,709 353,911 9,099 5,941 1 Includes loans held at fair value through profit or loss. Collateral and other credit enhancements possessed or called upon The Group obtains assets by taking possession of collateral or calling upon other credit enhancements (such as guarantees). Repossessed properties are sold in an orderly fashion. Where the proceeds are in excess of the outstanding loan balance the excess is returned to the borrower. Certain equity securities acquired may be held by the Group for investment purposes and are classified as available-for-sale, and the related loan written off. The table below details the carrying value of collateral possessed and held by the Group at 30 June 2013; 30 June 2012 and 31 December 2012: 30.06.13 30.06.12 Consumer Banking Wholesale Banking Total Consumer Banking Wholesale Banking Total $million $million $million $million $million $million Property 39 - 39 23 - 23 Other 1 - 1 2 - 2 40 - 40 25 - 25 31.12.12 Consumer Banking Wholesale Banking Total $million $million $million Property 62 9 71 Other 3 - 3 65 9 74 Problem credit management and provisioning The Group's loan loss provisions are established to recognise incurred impairment losses either on specific loan assets or within a portfolio of loans and advances. Individually impaired loans are those loans against which individual impairment provisions have been raised. Estimating the amount and timing of future recoveries involves significant judgement, and considers the level of arrears as well as the assessment of matters such as future economic conditions and the value of collateral, for which there may not be a readily accessible market. Loan losses that have been incurred but have not been separately identified at the balance sheet date are determined on a portfolio basis, which takes into account past loss experience as a result of uncertainties arising from the economic environment, and defaults based on portfolio trends. Actual losses identified could differ significantly from the impairment provisions reported as a result of uncertainties arising from the economic environment. The total amount of the Group's impairment allowances is inherently uncertain being sensitive to changes in economic and credit conditions across the geographies where the Group operates. Economic and credit conditions are interdependent within each geography and as a result there is no single factor to which the Group's loan impairment allowances as a whole are sensitive. It is possible that actual events in the future differ from the assumptions built into the model resulting in material adjustments to the carrying amount of loans and advances. Non-performing loans A non-performing loan is any loan that is more than 90 days past due or is otherwise individually impaired (which represents those loans against which individual impairment provisions have been raised) and excludes: • Loans renegotiated before 90 days past due and on which no default in interest payments or loss of principal is expected; • Loans renegotiated at or after 90 days past due, but on which there has been no default in interest or principal payments for more than 180 days since renegotiation, and against which no loss of principal is expected. The gross non-performing loans in Consumer Banking and Wholesale Banking have remained at similar levels to 31 December 2012. 30.06.13 30.06.12 31.12.12 Consumer Banking Wholesale Banking Consumer Banking Wholesale Banking Consumer Banking Wholesale Banking $million $million $million $million $million $million Impaired loans 1,298 4,877 1,113 4,048 1,232 4,709 Less: Renegotiated loans1 (180) (420) (146) (27) (174) (437) Past due but not individually impaired loans greater than 90 days 178 - 166 - 208 - Gross non-performing loans 1,296 4,457 1,133 4,021 1,266 4,272 Individual impairment provisions2 (558) (1,929) (483) (1,723) (525) (1,866) Portfolio impairment provision (412) (327) (418) (286) (422) (302) Cover ratio 75% 51% 80% 50% 75% 51% 1 Renegotiated loans are excluded from non-performing loans if certain specific performance criteria are met as explained above and are a sub-set of forborne loans as defined on page 39. 2 The difference to total individual impairment provision reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days. Individual and portfolio impairment provisions Individual impairment provisions increased by $100 million compared to 31 December 2012. This was primarily in India ($49 million increase) and Africa ($43 million increase) as a result of a small number of Wholesale Banking exposures and within Consumer Banking in Korea due to higher levels of filings under the PDRS regulations. Portfolio impairment provision increased by $15 million mainly in Wholesale Banking reflecting the loan portfolio growth in the business. The amounts written off at $577 million primarily related to Consumer banking (30 June 2012: $385 million, 31 December 2012: $550 million) relating to increased write-offs in unsecured lending which are written off after 150 days past due. The following tables set out the movements in total individual and portfolio impairment provisions, together with the movement in individual impairment provisions by geography: 30.06.13 30.06.12 Individual Impairment Provisions Portfolio Impairment Provisions Total Individual Impairment Provisions Portfolio Impairment Provisions Total $million $million $million $million $million $million Provisions held at 1 January 2,433 724 3,157 1,926 746 2,672 Exchange translation differences (59) (19) (78) (27) (2) (29) Amounts written off (577) - (577) (385) - (385) Releases of acquisition fair values (1) - (1) (2) - (2) Recoveries of amounts previously written off 87 - 87 147 - 147 Discount unwind (42) - (42) (37) - (37) New provisions 871 74 945 851 61 912 Recoveries/provisions no longer required (179) (40) (219) (232) (101) (333) Net impairment charge/(release) against profit 692 34 726 619 (40) 579 Provisions held at 30 June 2,533 739 3,272 2,241 704 2,945 31.12.12 Individual Impairment Provisions Portfolio Impairment Provisions Total $million $million $million Provisions held at 1 July 2,241 704 2,945 Exchange translation differences 31 15 46 Amounts written off (550) - (550) Releases of acquisition fair values (1) - (1) Recoveries of amounts previously written off 141 - 141 Discount unwind (40) - (40) New provisions 827 55 882 Recoveries/provisions no longer required (216) (50) (266) Net impairment charge against profit 611 5 616 Provisions held at 31 December 2,433 724 3,157 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Provisions held at 1 January 2013 74 89 246 437 270 1,173 49 95 2,433 Exchange translation differences - (1) (18) (7) (27) (4) (2) - (59) Amounts written off (77) (43) (166) (186) (23) (67) (17) 2 (577) Releases of acquisition fair values - - - - - (1) - - (1) Recoveries of amounts previously written off 19 7 9 35 2 13 3 (1) 87 Discount unwind (1) (2) (6) (10) (9) (13) - (1) (42) New provisions 78 48 230 242 117 80 64 12 871 Recoveries/provisions no longer required (20) (9) (36) (58) (11) (38) (5) (2) (179) Net impairment charge against profit 58 39 194 184 106 42 59 10 692 Provisions held at 30 June 2013 73 89 259 453 319 1,143 92 105 2,533 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Provisions held at 1 January 2012 78 38 136 425 112 972 61 104 1,926 Exchange translation differences - 1 - (5) (14) (5) (4) - (27) Amounts written off (59) (62) (63) (113) (6) (59) (9) (14) (385) Releases of acquisition fair values - - - (1) - (1) - - (2) Recoveries of amounts previously written off 18 24 16 64 5 16 2 2 147 Discount unwind (1) (1) (6) (9) (7) (13) - - (37) New provisions 67 47 155 182 171 206 14 9 851 Recoveries/provisions no longer required (22) (25) (42) (85) (17) (31) (5) (5) (232) Net impairment charge against profit 45 22 113 97 154 175 9 4 619 Provisions held at 30 June 2012 81 22 196 458 244 1,085 59 96 2,241 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Provisions held at 1 July 2012 81 22 196 458 244 1,085 59 96 2,241 Exchange translation differences - 4 17 6 7 (4) - 1 31 Amounts written off (96) 5 (112) (206) (36) (64) (20) (21) (550) Releases of acquisition fair values - - - (1) - (1) - 1 (1) Recoveries of amounts previously written off 26 20 12 60 6 13 3 1 141 Discount unwind (1) (2) (7) (8) (6) (15) (1) - (40) New provisions 91 64 179 208 64 181 17 23 827 Recoveries/provisions no longer required (27) (24) (39) (80) (9) (22) (9) (6) (216) Net impairment charge against profit 64 40 140 128 55 159 8 17 611 Provisions held at 31 December 2012 74 89 246 437 270 1,173 49 95 2,433 Forbearance and other renegotiated loans In certain circumstances, the Group may renegotiate client and customer loans. Loans that are renegotiated on terms that are not consistent with those readily available in the market and/or where we have granted a concession compared with the original terms of the loans result in impairment. These loans are considered to be subject to forbearance strategies and are included in "Loans subject to forbearance" in the disclosures below which is a subset of impaired loans. Loans that are renegotiated primarily to grant extended tenure to a client or customer who is facing some difficulties but who we do believe is not impaired are reported as "Other renegotiated loans" in the disclosures below. Loans that are renegotiated for commercial reasons, which may occur, for example, if a client had a credit rating upgrade, are not included within this disclosure because they are not indicative of any credit stress. Forbearance strategies assist customers who are temporarily in financial distress and are unable to meet their original contractual repayment terms. Forbearance can be initiated by the customer, the bank or a third party (including government sponsored programmes or a conglomerate of credit institutions) and includes debt restructuring, such as a new repayment schedule, payment deferrals, tenor extensions and interest only payments. Consumer Banking In Consumer Banking, excluding Medium Enterprises and Private Banking, all loans subject to forbearance or renegotiated are managed within a separate portfolio. If such loans subsequently become past due, write off and IIP is accelerated to 90 days past due (unsecured loans and automobile finance) or 120 days past due (secured loans). The accelerated loss rates applied to this portfolio are derived from experience with other renegotiated loans, rather than the Consumer Banking portfolio as a whole, to recognise the greater degree of inherent risk. At 30 June 2013, $795 million (30 June 2012: $729 million; 31 December 2012: $769 million) of Consumer Banking loans were subject to forbearance programmes which required impairment provisions to be recognised. This represents 0.6 per cent of total loans and advances to Consumer Banking customers. These loans were largely concentrated in countries that have active government sponsored forbearance programmes. Provision coverage against these loans was 12 per cent (30 June 2012:18 per cent; 31 December 2012: 12 per cent), reflecting collateral held and expected recovery rates. 30.06.13 30.06.12 31.12.12 Gross loans Provisions Gross loans Provisions Gross loans Provisions $million $million $million $million $million $million Loans subject to forbearance 795 94 729 129 769 96 Other renegotiated loans 416 - 298 - 319 - Total Consumer Banking 1,211 94 1,027 129 1,088 96 Wholesale Banking For Wholesale Banking and Medium Enterprises and Private Banking accounts, forbearance and other renegotiations are applied on a case-by-case basis and are not subject to business wide programmes. In some cases, a new loan is granted as part of the restructure and in others, the contractual terms and repayment of the existing loans are changed or extended (for example, interest only for a period). Loans classified as subject to forbearance are managed by GSAM and are reviewed at least quarterly to assess and confirm the client's ability to adhere to the restructured repayment strategy. Accounts are also reviewed if there is a significant event that could result in deterioration in their ability to repay. If the terms of the renegotiation, where the present value of the new cash flows is lower than the present value of the original cash flows, the loan would be considered to be impaired and at a minimum a discount provision would be raised and shown under Loans subject to Forbearance. At 30 June 2013, $1,132 million (30 June 2012: $891 million; 31 December 2012: $1,011 million) of Wholesale Banking loans were subject to forbearance strategies which required impairment provisions to be recognised. This represents 0.7 per cent of total loans and advances to Wholesale Banking customers. $438 million (30 June 2012: $405 million; 31 December 2012: $437 million) of loans subject to forbearance represents those loans that have complied with the renegotiated loan terms for more than 180 days or when no loss of principal is expected. Although these remain impaired loans, they are excluded from our analysis of non-performing loans on page 61. The increase in other renegotiated loans compared to 31 December 2012 related to a small number of previously past due exposures where payment terms have been rescheduled during the period. There is no shortfall in the present value of cash flows when compared to the original terms of the loans and no impairment was recognised in these accounts. 30.06.13 30.06.12 31.12.12 Gross loans Provisions Gross loans Provisions Gross loans Provisions $million $million $million $million $million $million Loans subject to forbearance 1,132 240 891 205 1,011 232 Other renegotiated loans 4,420 - 1,203 - 773 - Total Wholesale Banking 5,552 240 2,094 205 1,784 232 Consumer Banking loan portfolio The Consumer Banking portfolio in the first half of 2013 has decreased by $2.2 billion, or 2 per cent compared to 31 December 2012. Mortgages declined by $2.3 billion as regulatory restrictions and increased competition continued to restrict growth in a number of markets, particularly in Korea and Singapore. In Korea we also originated and sold $2 billion ($6.9 billion since H1 2012) of fixed rate mortgages under the Mortgage Purchase Program to the Korea Housing Finance Corporation. Other loans, which include credit cards, and personal loans (including those related to Private Banking) declined marginally by $0.3 billion as growth in Hong Kong and MESA region was offset by lower balances in Korea as we selectively tightened underwriting criteria during H1 2013. SME lending grew by $0.4 billion with strong growth in MESA and Africa regions. Geographic analysis 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans to individuals Mortgages 22,741 13,995 13,682 14,215 2,181 1,763 275 1,459 70,311 Other 7,069 9,831 6,414 5,875 807 3,217 1,036 3,167 37,416 Small and medium enterprises 3,160 3,392 4,728 5,387 2,140 1,084 543 8 20,442 32,970 27,218 24,824 25,477 5,128 6,064 1,854 4,634 128,169 Portfolio impairment provision (56) (25) (107) (135) (20) (42) (23) (4) (412) Total loans and advances to customers 32,914 27,193 24,717 25,342 5,108 6,022 1,831 4,630 127,757 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans to individuals Mortgages 19,463 12,696 19,433 14,689 1,983 1,554 241 961 71,020 Other 6,346 9,630 6,389 5,920 649 2,622 967 2,293 34,816 Small and medium enterprises 2,820 3,087 4,791 5,096 1,896 804 254 2 18,750 28,629 25,413 30,613 25,705 4,528 4,980 1,462 3,256 124,586 Portfolio impairment provision (47) (27) (109) (149) (18) (46) (19) (3) (418) Total loans and advances to customers 28,582 25,386 30,504 25,556 4,510 4,934 1,443 3,253 124,168 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans to individuals Mortgages 21,441 14,278 16,686 14,832 2,284 1,629 256 1,221 72,627 Other 6,843 10,038 6,936 6,387 806 2,902 1,152 2,696 37,760 Small and medium enterprises 3,040 3,251 4,965 5,483 2,100 887 302 2 20,030 31,324 27,567 28,587 26,702 5,190 5,418 1,710 3,919 130,417 Portfolio impairment provision (50) (26) (116) (140) (20) (44) (22) (4) (422) Total loans and advances to customers 31,274 27,541 28,471 26,562 5,170 5,374 1,688 3,915 129,995 Maturity analysis The proportion of Consumer Banking loans maturing in less than one year increased to 31 per cent compared to 30 per cent at 31 December 2012, primarily due to lower mortgage balances. In addition the increase in lending to SME and Private Banking clients are typically of short tenor. The following tables show the contractual maturity of loans and advances to customers by each principal category of borrower. 30.06.13 One year or less One to five years Over five years Total $million $million $million $million Loans to individuals Mortgages 3,956 8,569 57,786 70,311 Other 24,487 10,469 2,460 37,416 Small and medium enterprises 10,995 3,508 5,939 20,442 39,438 22,546 66,185 128,169 Portfolio impairment provision (412) Total loans and advances to customers 127,757 30.06.12 One year or less One to five years Over five years Total $million $million $million $million Loans to individuals Mortgages 3,113 8,743 59,164 71,020 Other 21,338 10,787 2,691 34,816 Small and medium enterprises 9,911 3,290 5,549 18,750 34,362 22,820 67,404 124,586 Portfolio impairment provision (418) Total loans and advances to customers 124,168 31.12.12 One year or less One to five years Over five years Total $million $million $million $million Loans to individuals Mortgages 3,612 9,140 59,875 72,627 Other 24,082 10,923 2,755 37,760 Small and medium enterprises 10,781 3,529 5,720 20,030 38,475 23,592 68,350 130,417 Portfolio impairment provision (422) Total loans and advances to customers 129,995 Credit quality analysis The tables below set out the loan portfolio for Consumer Banking by product and by geography between those loans that are neither past due nor impaired, those that are past due but not individually impaired and those that are individually impaired. The overall credit quality of the portfolio remains good with over 95 per cent of the portfolio neither past due nor impaired. The mortgage portfolio is well collateralised and has an average loan-to-value ratio of 47.4 per cent. The proportion of the past due but not individually impaired loans decreased to $3.9 billion or 3 per cent of the loan portfolio (31 December 2012: 3.4 per cent). The $0.5 billion decline mainly arose in the less than 30 days past due category as the temporary timing differences at 31 December 2012 were regularised in the first half of 2013. Individually impaired loans increased by $66 million compared to 31 December 2012. The increase is primarily in Unsecured lending ($99 million), partly offset by declines in Mortgages ($36 million). The increase in unsecured lending impaired loans is driven by the impact of PDRS in Korea and seasoning of loans booked between 2010 and 2012. The portfolio impairment provision declined marginally due to the impact of exchange rates. 30.06.13 30.06.12 Neither past due nor individually impaired Past due but not individually impaired Individually impaired loans Total Neither past due nor individually impaired Past due but not individually impaired Individually impaired loans Total $million $million $million $million $million $million $million $million Loans to individuals Mortgages 68,499 1,630 311 70,440 68,901 1,915 340 71,156 Other 35,564 1,557 568 37,689 33,143 1,482 368 34,993 Small and medium enterprises 19,480 743 419 20,642 17,947 603 405 18,955 123,543 3,930 1,298 128,771 119,991 4,000 1,113 125,104 Individual impairment provision (602) (518) Portfolio impairment provision (412) (418) Total loans and advances to customers 127,757 124,168 31.12.12 Neither past due nor individually impaired Past due but not individually impaired Individually impaired loans Total $million $million $million $million Loans to individuals Mortgages 70,313 2,104 347 72,764 Other 35,810 1,709 469 37,988 Small and medium enterprises 19,138 677 416 20,231 125,261 4,490 1,232 130,983 Individual impairment provision (566) Portfolio impairment provision (422) Total loans and advances to customers 129,995 Consumer Banking - Loans to customers 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 32,500 26,564 23,851 23,936 4,750 5,588 1,773 4,581 123,543 Past due but not individually impaired loans 404 605 783 1,271 359 422 65 21 3,930 Individually impaired loans 90 66 359 420 46 218 28 71 1,298 Individual impairment provisions (24) (17) (169) (150) (27) (164) (12) (39) (602) Portfolio impairment provision (56) (25) (107) (135) (20) (42) (23) (4) (412) Total loans and advances to customers 32,914 27,193 24,717 25,342 5,108 6,022 1,831 4,630 127,757 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 28,333 24,805 29,643 24,212 4,211 4,275 1,381 3,131 119,991 Past due but not individually impaired loans 261 583 836 1,215 298 632 75 100 4,000 Individually impaired loans 53 40 240 417 46 229 23 65 1,113 Individual impairment provisions (18) (15) (106) (139) (27) (156) (17) (40) (518) Portfolio impairment provision (47) (27) (109) (149) (18) (46) (19) (3) (418) Total loans and advances to customers 28,582 25,386 30,504 25,556 4,510 4,934 1,443 3,253 124,168 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 30,878 26,956 27,340 25,142 4,825 4,772 1,629 3,719 125,261 Past due but not individually impaired loans 404 569 1,059 1,283 342 587 69 177 4,490 Individually impaired loans 66 57 329 417 52 224 24 63 1,232 Individual impairment provisions (24) (15) (141) (140) (29) (165) (12) (40) (566) Portfolio impairment provision (50) (26) (116) (140) (20) (44) (22) (4) (422) Total loans and advances to customers 31,274 27,541 28,471 26,562 5,170 5,374 1,688 3,915 129,995 Credit risk mitigation A secured loan is one where the borrower pledges an asset as collateral that the Group is able to take possession in the event that the borrower defaults. All secured loans are considered fully secured if the fair value of the collateral is equal to or greater than the loan at the time of origination. Other secured loans are considered to be partially secured. Within Consumer Banking, 72 per cent of lending is fully secured and 9 per cent was partially secured. The following tables present an analysis of Consumer Banking loans by product split between fully secured, partially secured and unsecured. 30.06.13 30.06.12 Fully secured Partially secured Unsecured Total1 Fully secured Partially secured Unsecured Total1 $million $million $million $million $million $million $million $million Loans to individuals Mortgages 70,311 - - 70,311 71,020 - - 71,020 Other 15,794 - 21,622 37,416 14,523 - 20,293 34,816 Small and medium enterprises 6,417 11,555 2,470 20,442 5,395 11,266 2,089 18,750 92,522 11,555 24,092 128,169 90,938 11,266 22,382 124,586 Per centage of total loans 72% 9% 19% 73% 9% 18% 31.12.12 Fully secured Partially secured Unsecured Total1 $million $million $million $million Loans to individuals Mortgages 72,627 - - 72,627 Other 15,509 - 22,251 37,760 Small and medium enterprises 5,985 11,634 2,411 20,030 94,121 11,634 24,662 130,417 Per centage of total loans 72% 9% 19% 1 Amounts net of individual impairment provisions Mortgage loan-to-value ratios by geography The following table provides an analysis of loan to value (LTV) ratios by geography for the mortgages portfolio. LTV ratios are determined based on the ratio of the current mortgage outstanding to the current fair value of the properties on which they are secured. Overall the average LTV ratio for the book has remained stable at 47.4 per cent compared to 47.8 per cent at 31 December 2012. Our major mortgage markets of Hong Kong, Singapore and Korea have an average LTV of less than 50 per cent. The proportion of the portfolio with average LTVs in excess of 100 per cent has declined from 0.5 per cent to 0.4 per cent. This is primarily due to property price increases and improving economic conditions in UAE. The average LTVs have remained stable across all regions. 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total % % % % % % % % % Less than 50 per cent 71.6 54.4 48.1 42.6 66.5 30.6 27.6 15.3 55.8 50 per cent to 59 per cent 11.6 17.7 22.2 18.5 12.7 16.6 14.2 82.6 16.7 60 per cent to 69 per cent 6.8 13.7 20.5 19.1 9.8 16.0 21.1 2.1 14.0 70 per cent to 79 per cent 4.4 12.2 2.6 12.4 7.7 15.7 19.4 - 8.3 80 per cent to 89 per cent 3.7 2.0 2.3 5.8 2.8 7.0 16.2 - 3.6 90 per cent to 99 per cent 1.8 - 1.0 1.3 0.5 3.5 0.8 - 1.2 100 per cent and greater - - 0.4 0.2 10.6 0.7 - 0.4 Average Portfolio loan to value 42.5 45.0 49.6 52.7 40.3 65.2 64.4 53.6 47.4 Loans to individuals - Mortgages ($million) 22,741 13,995 13,682 14,215 2,181 1,763 275 1,459 70,311 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total % % % % % % % % % Less than 50 per cent 71.1 53.8 50.9 33.3 53.7 22.5 27.8 10.5 52.7 50 per cent to 59 per cent 14.4 18.4 27.4 19.0 16.2 13.5 12.5 88.9 20.0 60 per cent to 69 per cent 8.9 15.1 16.1 21.4 12.9 17.1 20.4 0.6 15.0 70 per cent to 79 per cent 2.6 10.1 3.8 17.8 9.3 13.2 17.6 - 7.8 80 per cent to 89 per cent 2.3 2.6 1.3 6.9 2.8 8.3 19.0 - 3.2 90 per cent to 99 per cent 0.8 - 0.3 1.3 5.1 5.1 1.8 - 0.8 100 per cent and greater - - 0.1 0.3 - 20.4 1.2 - 0.6 Average Portfolio loan to value 42.9 45.3 47.8 54.6 46.9 78.6 65.0 51.4 48.1 Loans to individuals - Mortgages ($million) 19,463 12,696 19,433 14,689 1,983 1,554 241 961 71,020 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total % % % % % % % % % Less than 50 per cent 75.4 52.5 49.0 37.9 55.8 24.1 28.2 1.1 54.4 50 per cent to 59 per cent 11.4 18.4 24.6 19.1 15.4 15.9 13.9 98.9 17.9 60 per cent to 69 per cent 6.1 13.8 18.5 21.0 12.7 17.3 20.1 - 14.4 70 per cent to 79 per cent 3.2 12.7 5.0 14.5 10.5 13.3 18.8 - 8.4 80 per cent to 89 per cent 3.2 2.6 2.0 5.9 4.7 8.0 17.0 - 3.6 90 per cent to 99 per cent 0.7 - 0.7 1.3 0.9 5.2 1.2 - 0.8 100 per cent and greater - - 0.2 0.3 - 16.2 0.8 - 0.5 Average Portfolio loan to value 41.2 46.1 48.9 54.1 45.6 72.1 63.9 53.9 47.8 Loans to individuals - Mortgages ($million) 21,441 14,278 16,686 14,832 2,284 1,629 256 1,221 72,627 Problem credit management and provisioning In Consumer Banking, where there are large numbers of small value loans, a primary indicator of potential impairment is delinquency. A loan is considered delinquent (past due) when the counterparty has failed to make a principal or interest payment when contractually due. However, not all delinquent loans (particularly those in the early stage of delinquency) will be impaired. For delinquency reporting purposes we follow industry standards, measuring delinquency as of 1, 30, 60, 90, 120 and 150 days past due. Accounts that are overdue by more than 30 days are more closely monitored and subject to specific collections processes. Provisioning within Consumer Banking reflects the fact that the product portfolios (excluding medium-sized enterprises among SME customers and Private Banking customers) consist of a large number of comparatively small exposures. Mortgages are assessed for individual impairment on an account by account basis, but for other products it is impractical to monitor each delinquent loan individually and impairment is therefore assessed collectively. For the main unsecured products and loans secured by automobiles, the entire outstanding amount is generally written off at 150 days past due. Unsecured consumer finance loans are similarly written off at 90 days past due. For secured loans (other than those secured by automobiles) individual impairment provisions (IIPs) are generally raised at either 150 days (mortgages) or 90 days (Wealth Management) past due. The provisions are based on the estimated present values of future cashflows, in particular those resulting from the realisation of security. Following such realisation any remaining loan will be written off. The days past due used to trigger write offs and IIPs are broadly driven by past experience, which shows that once an account reaches the relevant number of days past due, the probability of recovery (other than by realising security where appropriate) is low. For all products there are certain situations where the individual impairment provisioning or write off process is accelerated, such as in cases involving bankruptcy, customer fraud and death. Write off and IIPs are accelerated for all restructured accounts to 90 days past due (unsecured and automobile finance) and 120 days past due (secured) respectively. Individually impaired loans for Consumer Banking will therefore not equate to those reported as non-performing on page 49, because non-performing loans include all those over 90 days past due. This difference reflects the fact that, while experience shows that an element of delinquent loans are impaired it is not possible to identify which individual loans the impairment relates to until the delinquency is sufficiently prolonged that loss is almost certain which in the Group's experience, is generally around 150 days in Consumer Banking. Up to that point the inherent impairment is captured in portfolio impairment provision (PIP). The PIP methodology provides for accounts for which an individual impairment provision has not been raised, either individually or collectively. PIP is raised on a portfolio basis for all products, and is set using expected loss rates, based on past experience supplemented by an assessment of specific factors affecting the relevant portfolio. These include an assessment of the impact of economic conditions, regulatory changes and portfolio characteristics such as delinquency trends and early alert trends. The methodology applies a larger provision against accounts that are delinquent but not yet considered impaired. The procedures for managing problem credits for the Private Bank and the medium-sized enterprises in the SME segment of Consumer Banking are similar to those adopted in Wholesale Banking (described on page 58). Loan impairment The total net impairment charge in Consumer Banking increased by $216 million in the first half of 2013 compared to 30 June 2012. The increase is mainly driven by the ongoing impact of Korea PDRS, the growth and maturity of unsecured business acquired in previous years and lower loan sales compared to prior periods. The increase was concentrated in larger markets such as Hong Kong, Singapore, Malaysia, Thailand and Taiwan where we have grown the unsecured book (33 per cent from 2010 to 2012) and was also impacted by the higher bankruptcy rates. The tables below set out the Individual impairment provision by geography together with an analysis of the individual impairment charge and the movement in impaired provision by product type. six months ended 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Gross impairment charge 74 48 210 223 24 58 14 12 663 Recoveries/provisions no longer required (15) (9) (33) (58) (10) (29) (5) (2) (161) Net individual impairment charge 59 39 177 165 14 29 9 10 502 Portfolio impairment provision charge/(release) 6 - (1) (2) 1 (2) 2 - 4 Net impairment charge 65 39 176 163 15 27 11 10 506 six months ended 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Gross impairment charge 62 44 130 161 22 67 12 3 501 Recoveries/provisions no longer required (18) (25) (40) (80) (11) (30) (4) (2) (210) Net individual impairment charge 44 19 90 81 11 37 8 1 291 Portfolio impairment provision charge/(release) 2 4 6 2 - (16) 1 - (1) Net impairment charge 46 23 96 83 11 21 9 1 290 six months ended 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Gross impairment charge 73 65 159 191 21 55 17 10 591 Recoveries/provisions no longer required (26) (24) (32) (77) (8) (22) (8) (1) (198) Net individual impairment charge 47 41 127 114 13 33 9 9 393 Portfolio impairment provision charge/(release) 2 (2) - (11) 3 (3) 2 - (9) Net impairment charge 49 39 127 103 16 30 11 9 384 The following tables set out the movement in total impairment provisions for Consumer Banking loans and advances by each principal category of borrower: Impairment provision held as at 1 January 2013 Net impairment charge during the period Amounts written off/ other movements during the period Impairment provision held as at 30 June 2013 $million $million $million $million Loans to individuals Mortgages 137 17 (25) 129 Other 228 420 (375) 273 Small and medium enterprises 201 65 (66) 200 566 502 (466) 602 Portfolio impairment provision 422 4 (14) 412 988 506 (480) 1,014 Impairment provision held as at 1 January 2012 Net impairment charge during the period Amounts written off/ other movements during the period Impairment provision held as at 30 June 2012 $million $million $million $million Loans to individuals Mortgages 135 9 (8) 136 Other 149 232 (204) 177 Small and medium enterprises 197 50 (42) 205 481 291 (254) 518 Portfolio impairment provision 424 (1) (5) 418 905 290 (259) 936 Impairment provision held as at 1 July 2012 Net impairment charge during the period Amounts written off/ other movements during the period Impairment provision held as at 31 December 2012 $million $million $million $million Loans to individuals Mortgages 136 1 - 137 Other 177 333 (282) 228 Small and medium enterprises 205 59 (63) 201 518 393 (345) 566 Portfolio impairment provision 418 (9) 13 422 936 384 (332) 988 Non-performing loans Non-performing loans have increased by $30 million compared with 31 December 2012 largely driven by Korea in line with the increase in the delinquency impacted by PDRS filings, partly offset by a decline in the UAE where credit quality has improved. The cover ratio is a common metric used in considering trends in provisioning and non-performing loans. It should be noted, as explained above, a significant proportion of the PIP is intended to reflect losses inherent in the loan portfolio that is less than 90 days delinquent and hence recorded as performing. This metric should be considered in conjunction with other credit risk information including that contained on page 36. The following tables set out the total non-performing loans and related provisions for Consumer Banking by geography: 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans and advances Gross non-performing 81 68 391 352 58 244 30 72 1,296 Individual impairment provision1 (24) (13) (169) (110) (27) (164) (12) (39) (558) Non-performing loans net of individual impairment provision 57 55 222 242 31 80 18 33 738 Portfolio impairment provision (412) 326 Cover ratio 75% 1 The difference to total individual impairment provision at 30 June 2013 reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days in line with the definition provided on page 36 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans and advances Gross non-performing 44 59 276 347 56 261 25 65 1,133 Individual impairment provision1 (18) (15) (106) (104) (27) (156) (17) (40) (483) Non-performing loans net of individual impairment provision 26 44 170 243 29 105 8 25 650 Portfolio impairment provision (418) 232 Cover ratio 80% 1 The difference to total individual impairment provision at 30 June 2012 reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days in line with the definition provided on page 36 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans and advances Gross non-performing 67 70 376 344 65 253 26 65 1,266 Individual impairment provision1 (24) (14) (141) (100) (29) (165) (12) (40) (525) Non-performing loans net of individual impairment provision 43 56 235 244 36 88 14 25 741 Portfolio impairment provision (422) 319 Cover ratio 75% 1 The difference to total individual impairment provision at 31 December 2012 reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days in line with the definition provided on page 36 The following tables set out the movement in individually impaired loans, those renegotiated loans excluded from non-performing and total non-performing loans. 30.06.13 30.06.12 Past due/ Individually impaired loans1 Renegotiated loans2 Total non-performing loans Past due/ Individually impaired loans1 Renegotiated loans2 Total non-performing loans $million $million $million $million $million $million At 1 January 1,440 (174) 1,266 1,223 (154) 1,069 Exchange translation differences (28) 7 (21) (21) 9 (12) Additions 561 (4) 557 469 1 470 Maturities and disposals (497) (9) (506) (392) (2) (394) At 30 June 1,476 (180) 1,296 1,279 (146) 1,133 31.12.12 Past due/ Individually impaired loans1 Renegotiated loans2 Total non-performing loans $million $million $million At 1 July 1,279 (146) 1,133 Exchange translation differences 33 (17) 16 Additions 237 (21) 216 Maturities and disposals (109) 10 (99) At 31 December 1,440 (174) 1,266 1 Includes past due but not individually impaired loans more than 90 days as explained on page 33 2 Renegotiated loans are excluded from non-performing loans if certain specific performance criteria are met as explained on page 36 and are a sub-set of forborne loans as defined on page 39. Wholesale Banking loan portfolio The Wholesale Banking loan portfolio has increased by $9.4 billion, or 6 per cent, compared with 31 December 2012. More than two-thirds of the growth is due to Trade Finance and Corporate Finance as Wholesale Banking continues to deepen relationships with clients in core markets. Customer assets growth has been broadly spread, with growth in Singapore, Hong Kong and the Americas, UK & Europe region partly offset by a decline in Korea. Growth in Singapore is mainly in trade loans and is concentrated in the Commerce and Manufacturing industry segments. Growth in Hong Kong is driven by syndications and trade products. The growth in the Americas, UK & Europe region is as a result of a number of large ticket leveraged finance deals primarily relating to clients across our network. In Korea, loans to customers declined by $0.7bn due to due to early repayment of fixed rate loans and severe competition due to availability of ample liquidity in the market. Single borrower concentration risk has been mitigated by active distribution of assets to banks and institutional investors, some of which is achieved through credit-default swaps and synthetic risk transfer structures. The Wholesale Banking portfolio remains diversified across both geography and industry. There are no significant concentrations within the broad industry classifications of manufacturing; financing, insurance and business services; commerce; or transport, storage and communication. The largest sector exposure is to manufacturing which is spread across many sub-industries. Exposure to bank counterparties at $74.9 billion increased by $6.3 billion compared with 31 December 2012 mainly in Hong Kong, on the back of RMB financing demand, and in Americas, UK & Europe. The Group continues to be a net lender in the interbank money markets, particularly in geographies such as Hong Kong, Singapore, Other APR, MESA and Americas, UK & Europe. Geographic analysis 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Agriculture, forestry and fishing 19 872 2 416 28 279 726 2,609 4,951 Construction 181 238 325 616 636 1,400 173 700 4,269 Commerce 5,621 14,774 521 4,914 825 4,681 681 5,794 37,811 Electricity, gas and water 358 858 38 758 48 333 239 2,523 5,155 Financing, insurance and business services 2,969 1,929 256 4,005 437 1,882 236 10,183 21,897 Governments - 386 436 1,286 1 311 - 622 3,042 Mining and quarrying 872 2,527 - 1,255 159 656 786 10,193 16,448 Manufacturing 7,310 3,519 4,145 9,262 3,084 2,762 2,381 8,304 40,767 Commercial real estate 3,954 2,723 998 1,418 1,238 884 - 1,175 12,390 Transport, storage and communication 2,379 4,663 147 1,197 470 904 776 5,331 15,867 Other 236 735 112 128 22 174 232 125 1,764 23,899 33,224 6,980 25,255 6,948 14,266 6,230 47,559 164,361 Portfolio impairment provision (29) (21) (16) (33) (21) (93) (45) (67) (325) Total loans and advances to customers 23,870 33,203 6,964 25,222 6,927 14,173 6,185 47,492 164,036 Total loans and advances to banks 20,306 4,831 3,815 10,067 436 2,760 813 31,852 74,880 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Agriculture, forestry and fishing 433 267 14 409 14 248 944 1,839 4,168 Construction 353 267 349 660 520 1,067 366 378 3,960 Commerce 4,918 9,201 421 3,709 858 4,252 884 4,980 29,223 Electricity, gas and water 664 411 - 622 - 416 258 2,297 4,668 Financing, insurance and business services 2,925 4,331 174 4,130 509 2,656 556 9,749 25,030 Governments 50 1,526 263 431 2 800 105 811 3,988 Mining and quarrying 1,001 2,227 - 1,006 421 360 259 11,218 16,492 Manufacturing 7,191 3,781 4,380 7,924 2,638 2,650 1,746 8,748 39,058 Commercial real estate 3,213 1,975 1,334 1,274 1,164 860 28 538 10,386 Transport, storage and communication 2,410 4,828 188 811 664 1,021 791 4,845 15,558 Other 233 686 139 181 10 200 93 183 1,725 23,391 29,500 7,262 21,157 6,800 14,530 6,030 45,586 154,256 Portfolio impairment provision (23) (21) (23) (28) (16) (97) (28) (48) (284) Total loans and advances to customers 23,368 29,479 7,239 21,129 6,784 14,433 6,002 45,538 153,972 Total loans and advances to banks 22,311 5,178 4,755 10,720 422 3,780 503 26,936 74,605 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Agriculture, forestry and fishing 54 806 4 392 13 261 785 2,079 4,394 Construction 374 484 487 508 629 1,183 259 659 4,583 Commerce 4,983 11,773 665 3,937 815 4,428 768 6,229 33,598 Electricity, gas and water 510 407 - 552 7 366 251 2,723 4,816 Financing, insurance and business services 2,702 2,184 52 4,272 378 2,295 455 10,149 22,487 Governments 50 790 651 765 2 319 47 630 3,254 Mining and quarrying 700 1,938 - 928 394 778 602 9,495 14,835 Manufacturing 6,018 3,845 4,182 8,690 2,864 2,893 2,208 8,941 39,641 Commercial real estate 3,524 2,296 1,354 1,413 1,270 1,082 64 540 11,543 Transport, storage and communication 2,400 3,330 194 920 447 965 809 5,411 14,476 Other 200 468 121 149 8 102 79 167 1,294 21,515 28,321 7,710 22,526 6,827 14,672 6,327 47,023 154,921 Portfolio impairment provision (24) (21) (16) (26) (19) (94) (41) (59) (300) Total loans and advances to customers 21,491 28,300 7,694 22,500 6,808 14,578 6,286 46,964 154,621 Total loans and advances to banks 19,356 6,205 4,633 8,133 571 3,172 378 26,123 68,571 Maturity analysis The Wholesale Banking portfolio remains predominantly short-term, with 65 per cent (June 2012: 63 per cent; December 2012: 62 per cent ) of loans and advances having a contractual maturity of one year or less driven by short-dated loans and trade finance transactions primarily within commerce, manufacturing and Transport, storage and communication. The following tables show the contractual maturity of loans and advances to customers by each principal category of borrowers' business or industry. 30.06.13 One year or less One to five years Over five years Total $million $million $million $million Agriculture, forestry and fishing 3,586 1,156 209 4,951 Construction 2,961 1,115 193 4,269 Commerce 33,924 3,371 516 37,811 Electricity, gas and water 1,801 1,195 2,159 5,155 Financing, insurance and business services 13,666 7,254 977 21,897 Governments 2,803 154 85 3,042 Mining and quarrying 7,928 6,480 2,040 16,448 Manufacturing 28,769 9,951 2,047 40,767 Commercial real estate 4,842 7,231 317 12,390 Transport, storage and communication 6,449 5,900 3,518 15,867 Other 848 851 65 1,764 107,577 44,658 12,126 164,361 Portfolio impairment provision (325) Total loans and advances to customers 164,036 30.06.12 One year or less One to five years Over five years Total $million $million $million $million Agriculture, forestry and fishing 3,528 523 117 4,168 Construction 2,381 1,350 229 3,960 Commerce 25,121 3,748 354 29,223 Electricity, gas and water 1,815 1,147 1,706 4,668 Financing, insurance and business services 14,646 9,571 813 25,030 Governments 2,371 1,453 164 3,988 Mining and quarrying 9,453 4,762 2,277 16,492 Manufacturing 27,383 10,009 1,666 39,058 Commercial real estate 3,866 6,211 309 10,386 Transport, storage and communication 6,276 6,406 2,876 15,558 Other 882 692 151 1,725 97,722 45,872 10,662 154,256 Portfolio impairment provision (284) Total loans and advances to customers 153,972 31.12.12 One year or less One to five years Over five years Total $million $million $million $million Agriculture, forestry and fishing 3,274 965 155 4,394 Construction 3,159 1,256 168 4,583 Commerce 28,941 4,239 418 33,598 Electricity, gas and water 1,863 1,043 1,910 4,816 Financing, insurance and business services 13,839 7,581 1,067 22,487 Governments 2,873 303 78 3,254 Mining and quarrying 6,873 5,275 2,687 14,835 Manufacturing 26,629 11,187 1,825 39,641 Commercial real estate 4,180 6,842 521 11,543 Transport, storage and communication 3,852 6,951 3,673 14,476 Other 711 553 30 1,294 96,194 46,195 12,532 154,921 Portfolio impairment provision (300) Total loans and advances to customers 154,621 Credit quality analysis The table below sets out an analysis of the loans to customers and banks between those loans that are neither past due nor impaired, those that are past due but not individually impaired and those that are individually impaired by industry type and by geography. In Wholesale Banking, the overall portfolio quality remains good and more than 96 per cent of the portfolio is neither past due nor individually impaired. Neither past due nor impaired loans have increased by $13.0 billion since 31 December 2012 in line with portfolio growth. This is primarily concentrated within the commerce and manufacturing sectors and within credit grades 1-5. Loans past due but not individually impaired decreased by $3.7 billion to $0.9 billion or 0.5 per cent of the loan portfolio (31 December 2012: 2.9 per cent). As explained on page 33, a majority of the past due balances at 31 December 2012 related to a small number of exposures which were either repaid or renegotiated in early 2013. Of the $891 million balances which were past due but not individually impaired at 30 June 2013, more than half have either been repaid or renegotiated. Individually impaired loans have remained at similar levels to 31 December 2012. Loans to banks remain predominantly high quality and more than 99 per cent of the portfolio is neither past due nor individually impaired. 30.06.13 30.06.12 Neither past due nor individually impaired Past due but not individually impaired Individually impaired loans Total Neither past due nor individually impaired Past due but not individually impaired Individually impaired loans Total $million $million $million $million $million $million $million $million Agriculture, forestry and fishing 4,835 52 93 4,980 4,099 15 83 4,197 Construction 3,942 148 244 4,334 3,701 129 195 4,025 Commerce 37,386 193 891 38,470 28,759 135 898 29,792 Electricity, gas and water 5,093 5 67 5,165 4,614 51 9 4,674 Financing, insurance and business services 20,813 7 1,306 22,126 24,399 9 783 25,191 Governments 3,042 - - 3,042 3,988 - - 3,988 Mining and quarrying 16,212 142 137 16,491 16,438 54 - 16,492 Manufacturing 39,857 295 1,162 41,314 38,095 295 1,229 39,619 Commercial real estate 12,213 27 170 12,410 10,246 4 162 10,412 Transport, storage and communication 15,489 22 552 16,063 15,263 51 428 15,742 Other 1,753 - 44 1,797 1,729 - 31 1,760 160,635 891 4,666 166,192 151,331 743 3,818 155,892 Individual impairment provision (1,831) (1,636) Portfolio impairment provision (325) (284) Total loans and advances to customers 164,036 153,972 Loans and advances to banks 74,759 12 211 74,982 74,196 268 230 74,694 Individual impairment provision (100) (87) Portfolio impairment provision (2) (2) Total loans and advances to banks 74,880 74,605 31.12.12 Neither past due nor individually impaired Past due but not individually impaired Individually impaired loans Total $million $million $million $million Agriculture, forestry and fishing 4,286 54 83 4,423 Construction 4,121 301 233 4,655 Commerce 33,027 306 933 34,266 Electricity, gas and water 4,735 4 85 4,824 Financing, insurance and business services 18,897 2,616 1,139 22,652 Governments 3,254 - - 3,254 Mining and quarrying 14,253 574 17 14,844 Manufacturing 38,342 684 1,176 40,202 Commercial real estate 11,379 30 158 11,567 Transport, storage and communication 14,105 25 543 14,673 Other 1,280 12 33 1,325 147,679 4,606 4,400 156,685 Individual impairment provision (1,764) Portfolio impairment provision (300) Total loans and advances to customers 154,621 Loans and advances to banks 68,364 3 309 68,676 Individual impairment provision (103) Portfolio impairment provision (2) Total loans and advances to banks 68,571 The tables below set out an analysis of the loan to customers and banks between those loans that are neither past due nor impaired, those that are past due but not individually impaired and those that are individually impaired by geography. Loans to customers 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 23,619 33,012 6,863 24,854 6,253 12,557 6,161 47,316 160,635 Past due but not individually impaired loans 233 92 - 139 130 296 1 - 891 Individually impaired loans 96 192 207 488 857 2,392 148 286 4,666 Individual impairment provisions (49) (72) (90) (226) (292) (979) (80) (43) (1,831) Portfolio impairment provision (29) (21) (16) (33) (21) (93) (45) (67) (325) Total loans and advances to customers 23,870 33,203 6,964 25,222 6,927 14,173 6,185 47,492 164,036 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 23,287 29,333 7,123 20,873 6,245 13,090 5,889 45,491 151,331 Past due but not individually impaired loans 88 37 - 83 133 392 10 - 743 Individually impaired loans 79 204 229 412 635 1,944 174 141 3,818 Individual impairment provisions (63) (74) (90) (211) (213) (896) (43) (46) (1,636) Portfolio impairment provision (23) (21) (23) (28) (16) (97) (28) (48) (284) Total loans and advances to customers 23,368 29,479 7,239 21,129 6,784 14,433 6,002 45,538 153,972 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 20,674 28,036 7,554 22,171 6,186 12,697 6,212 44,149 147,679 Past due but not individually impaired loans 769 160 - 87 134 657 20 2,779 4,606 Individually impaired loans 122 199 261 487 748 2,326 132 125 4,400 Individual impairment provisions (50) (74) (105) (219) (241) (1,008) (37) (30) (1,764) Portfolio impairment provision (24) (21) (16) (26) (19) (94) (41) (59) (300) Total loans and advances to customers 21,491 28,300 7,694 22,500 6,808 14,578 6,286 46,964 154,621 Loans to banks 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 20,289 4,831 3,815 9,980 435 2,761 813 31,835 74,759 Past due but not individually impaired loans 11 - - - 1 - - - 12 Individually impaired loans 6 - - 165 - - - 40 211 Individual impairment provisions - - - (77) - - - (23) (100) Portfolio impairment provision - - - (1) - (1) - - (2) Total loans and advances to banks 20,306 4,831 3,815 10,067 436 2,760 813 31,852 74,880 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 22,135 5,175 4,755 10,632 422 3,684 503 26,890 74,196 Past due but not individually impaired loans 168 3 - - - 97 - - 268 Individually impaired loans 8 - - 166 - - - 56 230 Individual impairment provisions - - - (77) - - - (10) (87) Portfolio impairment provision - - - (1) - (1) - - (2) Total loans and advances to banks 22,311 5,178 4,755 10,720 422 3,780 503 26,936 74,605 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Neither past due nor individually impaired loans 19,349 6,205 4,633 8,048 570 3,076 378 26,105 68,364 Past due but not individually impaired loans 2 - - - 1 - - - 3 Individually impaired loans 5 - - 164 - 97 - 43 309 Individual impairment provisions - - - (78) - - - (25) (103) Portfolio impairment provision - - - (1) - (1) - - (2) Total loans and advances to banks 19,356 6,205 4,633 8,133 571 3,172 378 26,123 68,571 Credit risk mitigation Collateral held against Wholesale Banking exposures amounted to $55 billion (30 June 2012: $59 billion; 31 December 2012: $52 billion). Our underwriting standards encourage taking specific charges on assets. 51 per cent of collateral held is comprised of physical assets or is property based, with the remainder held largely in investment securities. Non-tangible collateral - such as guarantees and letters of credit - may also be held against corporate exposures although the financial effect of this type of collateral is less significant in terms of recoveries. However this type of collateral is considered when determining probability of default and other credit related factors. Problem credit management and provisioning Loans are classified as impaired and considered non-performing in line with the definition on page 36 and where analysis and review indicates that full payment of either interest or principal is questionable, or as soon as payment of interest or principal is 90 days overdue. Impaired accounts are managed by our specialist recovery unit, GSAM, which is separate from our main businesses. Where any amount is considered irrecoverable, an individual impairment provision is raised. This provision is the difference between the loan carrying amount and the present value of estimated future cash flows. The individual circumstances of each customer are taken into account when GSAM estimates future cash flow. All available sources, such as cash flow arising from operations, selling assets or subsidiaries, realising collateral or payments under guarantees, are considered. In any decision relating to the raising of provisions, we attempt to balance economic conditions, local knowledge and experience, and the results of independent asset reviews. Where it is considered that there is no realistic prospect of recovering a portion of an exposure against which an impairment provision has been raised, that amount will be written off. As with Consumer Banking, a PIP is held to cover the inherent risk of losses which, although not identified, are known through experience to be present in any loan portfolio. In Wholesale Banking, this is set with reference to historic loss rates and subjective factors such as the economic environment and the trends in key portfolio indicators. The PIP methodology provides for accounts for which an individual impairment provision has not been raised. Loan impairment The individual impairment charge decreased by $28 million or 13 per cent compared with 31 December 2012, primarily due to lower provisions in UAE. Individual impairment charge in India and Africa related to a small number of exposures in the manufacturing sector. Portfolio impairment provision increased in the first half of 2013 in line with the growth in the loan portfolio. The table below sets out the net impairment charge for Wholesale Banking loans and advances and other credit risk provisions by geography. 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Gross impairment charge 4 - 20 19 93 22 50 - 208 Recoveries/provisions no longer required (5) - (3) - (1) (9) - - (18) Net individual impairment (credit)/charge (1) - 17 19 92 13 50 - 190 Portfolio impairment provision charge/(release) 5 - - 8 7 (2) 14 (2) 30 Net loan impairment charge 4 - 17 27 99 11 64 (2) 220 Other credit risk provisions 1 - - - (1) - - 4 4 Net impairment charge 5 - 17 27 98 11 64 2 224 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Gross impairment charge 5 3 25 21 149 139 2 6 350 Recoveries/provisions no longer required (4) - (2) (5) (6) (1) (1) (3) (22) Net individual impairment charge 1 3 23 16 143 138 1 3 328 Portfolio impairment provision (release)/charge (3) - (2) 5 (49) 3 1 6 (39) Net loan impairment charge (2) 3 21 21 94 141 2 9 289 Other credit risk provisions - - - - - - - (4) (4) Net impairment (release)/charge (2) 3 21 21 94 141 2 5 285 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Gross impairment charge 18 (1) 20 17 43 126 - 13 236 Recoveries/provisions no longer required (1) - (7) (3) (1) - (1) (5) (18) Net individual impairment charge/(credit) 17 (1) 13 14 42 126 (1) 8 218 Portfolio impairment provision charge/(release) - 2 (8) - 4 (6) 17 5 14 Net loan impairment charge 17 1 5 14 46 120 16 13 232 Other credit risk provisions (1) - - - (2) 4 - 4 5 Net impairment charge 16 1 5 14 44 124 16 17 237 Impairment provisions on loans and advances The following table sets out the movement in impairment provisions on loans and advances by each principal category of borrowers business or industry: Impairment provision held as at 1 January 2013 Net impairment charge during the period Amounts written off/ other movements during the period Impairment provision held as at 30 June 2013 $million $million $million $million Agriculture, forestry and fishing 29 4 (4) 29 Construction 72 7 (14) 65 Commerce 668 15 (24) 659 Electricity, gas and water 8 8 (6) 10 Financing, insurance and business services 165 5 59 229 Mining and quarrying 9 36 (2) 43 Manufacturing 561 100 (114) 547 Commercial real estate 24 - (4) 20 Transport, storage and communication 197 14 (15) 196 Other 31 2 - 33 Individual impairment provision against loans and advances to customers 1,764 191 (124) 1,831 Portfolio impairment provision against loans and advances to customers 300 30 (5) 325 Total impairment provisions on loans and advances to customers 2,064 221 (129) 2,156 Individual impairment provision against loans and advances to banks 103 (1) (2) 100 Portfolio impairment provision against loans and advances to banks 2 - - 2 Total impairment provisions on loans and advances to banks 105 (1) (2) 102 Impairment provision held as at 1 January 2012 Net impairment charge during the period Amounts written off/ other movements during the period Impairment provision held as at 30 June 2012 $million $million $million $million Agriculture, forestry and fishing 24 - 5 29 Construction 65 8 (8) 65 Commerce 464 65 40 569 Electricity, gas and water 6 - - 6 Financing, insurance and business services 167 64 (70) 161 Mining and quarrying 1 - (1) - Manufacturing 542 36 (17) 561 Commercial real estate 24 - 2 26 Transport, storage and communication 40 151 (7) 184 Other 29 (2) 8 35 Individual impairment provision against loans and advances to customers 1,362 322 (48) 1,636 Portfolio impairment provision against loans and advances to customers 321 (38) 1 284 Total impairment provisions on loans and advances to customers 1,683 284 (47) 1,920 Individual impairment provision against loans and advances to banks 82 6 (1) 87 Portfolio impairment provision against loans and advances to banks 2 (1) 1 2 Total impairment provisions on loans and advances to banks 84 5 - 89 Impairment provision held as at 1 July 2012 Net impairment charge during the period Amounts written off/ other movements during the period Impairment provision held as at 31 December 2012 $million $million $million $million Agriculture, forestry and fishing 29 - - 29 Construction 65 11 (4) 72 Commerce 569 71 28 668 Electricity, gas and water 6 - 2 8 Financing, insurance and business services 161 54 (50) 165 Mining and quarrying - - 9 9 Manufacturing 561 65 (65) 561 Commercial real estate 26 - (2) 24 Transport, storage and communication 184 11 2 197 Other 35 6 (10) 31 Individual impairment provision against loans and advances to customers 1,636 218 (90) 1,764 Portfolio impairment provision against loans and advances to customers 284 15 1 300 Total impairment provisions on loans and advances to customers 1,920 233 (89) 2,064 Individual impairment provision against loans and advances to banks 87 - 16 103 Portfolio impairment provision against loans and advances to banks 2 (1) 1 2 Total impairment provisions on loans and advances to banks 89 (1) 17 105 Non-performing loans Gross non-performing loans in Wholesale Banking have increased by $185 million, or 4.3 per cent, since December 2012. The cover ratio reflects the extent to which gross non-performing loans are covered by individual and portfolio impairment provisions and was unchanged at 51 per cent as at 30 June 2013 compared with 31 December 2012. The balance of non-performing loans not covered by individual impairment provisions represents the value of collateral held and the Group's estimate of the net outcome of any workout strategy. The cover ratio after taking into account collateral is 66 per cent (30 June 2012: 62 per cent; 31 December 2012: 65 per cent). The following tables set out the total non-performing loans to banks and customers for Wholesale Banking on the basis of the geographic regions to which the exposure relates to rather than the booking location: 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans and advances Gross non-performing 102 13 207 739 859 2,055 269 213 4,457 Individual impairment provision1 (49) (12) (90) (310) (290) (1,032) (80) (66) (1,929) Non-performing loans net of individual impairment provision 53 1 117 429 569 1,023 189 147 2,528 Portfolio impairment provision (327) Net non-performing loans and advances 2,201 Cover ratio 51% 1 The difference to total individual impairment provision at 30 June 2013 reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days in line with the definition provided on page 36 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans and advances Gross non-performing 87 13 229 820 649 2,025 161 37 4,021 Individual impairment provision1 (63) (7) (90) (319) (217) (929) (42) (56) (1,723) Non-performing loans net of individual impairment provision 24 6 139 501 432 1,096 119 (19) 2,298 Portfolio impairment provision (286) Net non-performing loans and advances 2,012 Cover ratio 50% 1 The difference to total individual impairment provision at 30 June 2012 reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days in line with the definition provided on page 36 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S Asia Africa Americas UK & Europe Total $million $million $million $million $million $million $million $million $million Loans and advances Gross non-performing 128 21 261 707 754 2,089 147 165 4,272 Individual impairment provision1 (50) (14) (105) (304) (240) (1,061) (37) (55) (1,866) Non-performing loans net of individual impairment provision 78 7 156 403 514 1,028 110 110 2,406 Portfolio impairment provision (302) Net non-performing loans and advances 2,104 Cover ratio 51% 1 The difference to total individual impairment provision at 31 December 2012 reflects provisions against restructured loans that are not included within non-performing loans as they have been performing for 180 days in line with the definition provided on page 36 The following table set out the movement in individually impaired loans, those renegotiated loans excluded from non-performing and the total non-performing loans. 30.06.13 30.06.12 Individually impaired loans Renegotiated loans1 Total non-performing loans Individually impaired loans Renegotiated loans1 Total non-performing loans $million $million $million $million $million $million At 1 January 4,709 (437) 4,272 3,450 (407) 3,043 Exchange translation differences (91) - (91) (58) (1) (59) Additions 661 (3) 658 884 384 1,268 Maturities and disposals (402) 20 (382) (228) (3) (231) At 30 June 4,877 (420) 4,457 4,048 (27) 4,021 31.12.12 Individually impaired loans Renegotiated loans1 Total non-performing loans $million $million $million At 1 July 4,048 (27) 4,021 Exchange translation differences 18 (2) 16 Additions 825 (412) 413 Maturities and disposals (182) 4 (178) At 31 December 4,709 (437) 4,272 1 Renegotiated loans are excluded from non-performing loans if certain specific performance criteria are met as explained on page 36 and are a sub-set of forborne loans as explained on page 39. Debt securities and treasury bills Debt securities and treasury bills are analysed as follows: 30.06.13 30.06.12 Debt securities Treasury bills Total Debt securities Treasury bills Total $million $million $million $million $million $million Securities neither past due nor impaired: AAA 22,220 3,608 25,828 18,797 4,078 22,875 AA- to AA+ 18,988 7,010 25,998 18,163 8,981 27,144 A- to A+ 22,342 7,917 30,259 24,030 8,171 32,201 BBB- to BBB+ 7,778 4,678 12,456 7,867 3,440 11,307 Lower than BBB- 3,225 823 4,048 1,987 1,328 3,315 Unrated 8,812 1,714 10,526 7,193 523 7,716 83,365 25,750 109,115 78,037 26,521 104,558 Net impaired securities: Impaired securities 411 - 411 403 - 403 Impairment (153) - (153) (167) - (167) 258 - 258 236 - 236 83,623 25,750 109,373 78,273 26,521 104,794 Of which: Assets at fair value1 Trading 13,516 3,380 16,896 14,487 4,542 19,029 Designated at fair value 368 - 368 327 - 327 Available-for-sale 65,793 22,370 88,163 58,656 21,979 80,635 79,677 25,750 105,427 73,470 26,521 99,991 Assets at amortised cost1 Loans and receivables 3,946 - 3,946 4,803 - 4,803 3,946 - 3,946 4,803 - 4,803 83,623 25,750 109,373 78,273 26,521 104,794 31.12.12 Debt securities Treasury bills Total $million $million $million Securities neither past due nor impaired: AAA 20,755 6,516 27,271 AA- to AA+ 20,232 6,594 26,826 A- to A+ 23,570 10,694 34,264 BBB- to BBB+ 10,122 3,818 13,940 Lower than BBB- 3,027 502 3,529 Unrated 6,471 1,571 8,042 84,177 29,695 113,872 Net impaired securities: Impaired securities 404 - 404 Impairment (159) - (159) 245 - 245 84,422 29,695 114,117 Of which: Assets at fair value1 Trading 14,882 2,955 17,837 Designated at fair value 333 - 333 Available-for-sale 65,356 26,740 92,096 80,571 29,695 110,266 Assets at amortised cost1 Loans and receivables 3,851 - 3,851 3,851 - 3,851 84,422 29,695 114,117 1 See note 12, 13 and 17 of the financial statements for further details. The above table analyses debt securities and treasury bills that are neither past due nor impaired by external credit rating. The standard credit ratings used by the Group are those used by Standard & Poor's or their equivalent. Debt securities held that have a short-term rating are reported against the long-term rating of the issuer. For securities that are unrated, the Group applies an internal credit rating as described under credit rating and measurements on page 27. Debt securities in the AAA rating category increased by $1.5 billion to $22.2 billion in June 2013 mainly due to increase higher quality corporate bonds in Hong Kong and Singapore. Unrated securities primarily relate to corporate issuers. Using internal credit ratings $9,728 million (30 June 2012: $6,761 million; 31 December 2012: $7,208 million) of these securities are considered to be equivalent to investment grade. Treasury bills have declined by $3.9 billion or 13 per cent since December 2012. Singapore sold $2.1 billion of Treasury bills to deploy the funds into higher quality assets as part of liquidity and regulatory deployment. Korea also decreased Treasury bills by $2.1 billion partially due to the market interest rates decline and partly driven by the restructuring of the balance sheet. Asset backed securities Total exposures to asset backed securities 30.06.13 30.06.12 Percentage Percentage of notional Carrying Fair of notional Carrying Fair value of Notional value value1 value of Notional value value1 portfolio $million $million $million portfolio $million $million $million Residential Mortgage Backed Securities (RMBS) 46% 3,095 3,060 3,067 25% 636 562 552 Collateralised Debt Obligations (CDOs) 4% 241 185 205 11% 283 219 230 Commercial Mortgage Backed Securities (CMBS) 7% 440 329 333 21% 525 395 375 Other Asset Backed Securities (Other ABS) 43% 2,851 2,831 2,845 43% 1,067 1,036 1,051 100% 6,627 6,405 6,450 100% 2,511 2,212 2,208 Of which included within: Financial assets held at fair value through profit or loss 3% 173 173 173 2% 54 54 54 Investment securities - available-for-sale 74% 4,962 4,854 4,854 28% 704 548 548 Investment securities - loans and receivables 23% 1,492 1,378 1,423 70% 1,753 1,610 1,606 100% 6,627 6,405 6,450 100% 2,511 2,212 2,208 31.12.12 Percentage of notional Carrying Fair value of Notional value value1 portfolio $million $million $million Residential Mortgage Backed Securities (RMBS) 46% 2,160 2,114 2,120 Collateralised Debt Obligations (CDOs) 5% 260 203 219 Commercial Mortgage Backed Securities (CMBS) 10% 478 355 351 Other Asset Backed Securities (Other ABS) 39% 1,869 1,847 1,861 100% 4,767 4,519 4,551 Of which included within: Financial assets held at fair value through profit or loss 4% 190 191 191 Investment securities - available-for-sale 61% 2,905 2,786 2,786 Investment securities - loans and receivables 35% 1,672 1,542 1,574 100% 4,767 4,519 4,551 1 Fair value reflects the value of the entire portfolio, including assets redesignated to loans and receivables The carrying value of Asset Backed Securities (ABS) represents 1 per cent (30 June 2012: 0.4 per cent; 31 December 2012: 0.7 per cent) of our total assets. The Group has an existing portfolio of ABS which it reclassified from trading and available-for-sale to loans and receivables with effect from 1 July 2008. No assets have been reclassified since 2008.This portfolio has been gradually managed down since 2010. The carrying value and fair value for this part of the portfolio were $852 million and $896 million respectively as at 30 June 2013. Note 12 to the financial statements provides details of the remaining balance of those assets reclassified in 2008. The Group has also extended its investment to a limited amount of trading in ABS and has also acquired an additional $2.2 billion of ABS during 2013 for liquidity reasons. This is classified as available-for-sale and primarily related to high quality RMBS and ABS assets with an average credit grade of AAA. The credit quality of the overall asset backed securities portfolio remains strong, with over 91 per cent of the portfolio rated A- or better, and 73 per cent of the portfolio rated as AAA. The portfolio is broadly diversified across asset classes and geographies, with an average credit grade of AA. The fair value of the entire portfolio is $45 million higher than the carrying value at 30 June 2013 benefiting from redemptions and a recovery in market prices in certain asset classes. Financial statement impact of asset backed securities Available- for-sale Loans and receivables Total $million $million $million Six months to 30 June 2013 Credit to available-for-sale reserves 24 - 24 Credit to the profit and loss account (3) - (3) Six months to 30 June 2012 Credit to available-for-sale reserves 9 - 9 Charge to the profit and loss account 1 - 1 Six months to 31 December 2012 Charge to available-for-sale reserves (12) - (12) Charge to the profit and loss account 4 - 4 Selected European country exposures The following tables on the following page summarise the Group's direct exposure (both on and off balance sheet) to certain specific countries within the eurozone that have been identified on the basis of their higher bond yields, higher sovereign debt to GDP ratio and external credit ratings compared with the rest of the eurozone. Total gross exposure represents the amount outstanding on the balance sheet (including any accrued interest but before provisions) and positive mark-to-market amounts on derivatives before netting. To the extent gross exposure does not represent the maximum exposure to loss this is disclosed separately. Exposures are assigned to a country based on the country of incorporation of the counterparty as at 30 June 2013. The Group has no direct sovereign exposure (as defined by the European Banking Authority) to the eurozone countries of Greece, Ireland, Italy, Portugal and Spain (GIIPS) and only $0.5 billion direct sovereign exposure to other eurozone countries. The Group's non-sovereign exposure to GIIPS is $3.9 billion ($2.8 billion after collateral and netting) and $35.5 billion ($19.1 billion after collateral and netting) to the remainder of the eurozone. This exposure primarily consists of balances with corporates. The substantial majority of the Group's total gross GIIPS exposure has a tenor of less than five years, with approximately 30 per cent having a tenor of less than one year. The Group has no direct sovereign exposure and $272 million (30 June 2012: $269 million and 31 December 2012: $263 million) of non-sovereign exposure (after collateral and netting) to Cyprus. The exit of one or more countries from the eurozone or ultimately its dissolution could potentially lead to significant market dislocation, the extent of which is difficult to predict. Any such exit or dissolution, and the redenomination of formerly euro-denominated rights and obligations in replacement national currencies would cause significant uncertainty in any exiting country, whether sovereign or otherwise. Such events are also likely to be accompanied by the imposition of capital, exchange and similar controls. While the Group has limited eurozone exposure as disclosed above, the Group's earnings could be impacted by the general market disruption if such events should occur. We monitor the situation closely and we have prepared contingency plans to respond to a range of potential scenarios, including the possibility of currency redenomination. Local assets and liability positions are carefully monitored by in-country asset and liability and risk committees with appropriate oversight by GALCO and GRC at the Group level. 30.06.13 Country Greece Ireland Italy Portugal Spain Total $million $million $million $million $million $million Direct sovereign exposure - Banks 752 928 1 233 1,914 Other financial institutions 1,634 6 1,640 Other corporate 23 144 103 18 69 357 Total gross exposure 23 2,530 1,037 19 302 3,911 Direct sovereign exposure - - - - - - Banks - (749) (28) - (165) (942) Other financial institutions - (122) (6) - - (128) Other corporate (1) (51) (1) - (3) (56) Total collateral/netting (1) (922) (35) - (168) (1,126) Direct sovereign exposure - Banks 3 1 900 1 68 972 Other financial institutions 1,512 2 1,512 Other corporate 22 93 102 18 66 301 Total net exposure 22 1,608 1,002 19 134 2,785 1 This represents a single exposure, which is fully guaranteed by its US parent company. 2 This represents a single exposure which is part of a wider structured finance transaction and is unaffected by Irish economic risk. 30.06.12 Country Greece Ireland Italy Portugal Spain Total $million $million $million $million $million $million Direct sovereign exposure - - - - - - Banks 2 1,037 690 1 365 2,095 Other financial institutions - 754 5 - 10 769 Other corporate 37 94 98 21 66 316 Total gross exposure 39 1,885 793 22 441 3,180 Direct sovereign exposure - - - - - - Banks - (1,010) (36) - (172) (1,218) Other financial institutions - (2) (5) - - (7) Other corporate (5) (32) (3) - - (40) Total collateral/netting (5) (1,044) (44) - (172) (1,265) Direct sovereign exposure - - - - - - Banks 2 27 1 654 1 193 877 Other financial institutions - 752 2 - - 10 762 Other corporate 32 62 95 21 66 276 Total net exposure 34 841 749 22 269 1,915 1 This represents a single exposure, which is fully guaranteed by its US parent company. 2 This represents a single exposure which is part of a wider structured finance transaction and is unaffected by Irish economic risk. 31.12.12 Country Greece Ireland Italy Portugal Spain Total $million $million $million $million $million $million Direct sovereign exposure - - - - - - Banks 2 918 600 1 281 1,802 Other financial institutions - 1,331 9 - - 1,340 Other corporate 29 173 65 20 74 361 Total gross exposure 31 2,422 674 21 355 3,503 Direct sovereign exposure - - - - - - Banks - (914) (55) - (130) (1,099) Other financial institutions - (78) (9) - - (87) Other corporate (2) (39) - - (4) (45) Total collateral/netting (2) (1,031) (64) - (134) (1,231) Direct sovereign exposure - - - - - - Banks 2 4 1 545 1 151 703 Other financial institutions - 1,253 2 - - - 1,253 Other corporate 27 134 65 20 70 316 Total net exposure 29 1,391 610 21 221 2,272 1 This represents a single exposure, which is fully guaranteed by its US parent company 2 This represents a single exposure which is part of a wider structured finance transaction and is unaffected by Irish economic risk The Group's exposure to GIIPS at 30 June 2013 is analysed by financial asset as follows: 30.06.13 Greece Ireland Italy Portugal Spain Total $million $million $million $million $million $million Loans and advances Loans and receivables 17 52 441 18 30 558 Held at fair value through profit or loss - - 11 - - 11 Total gross loans and advances 17 52 452 18 30 569 Collateral held against loans and advances (1) (13) (9) - (3) (26) Total net loans and advances 16 39 443 18 27 543 Debt securities Trading Available-for-sale - 51 - - 34 85 Loans and receivables - - - - 6 6 Total gross debt securities - 51 - - 40 91 Collateral held against debt securities - - - - - - Total net debt securities - 51 - - 40 91 Derivatives Gross exposure - 919 27 - 178 1,124 Collateral/netting1 - (907) (26) - (165) (1,098) Total derivatives - 12 1 - 13 26 Contingent liabilities and commitments 6 1,506 558 1 54 2,125 Total net exposure (on and off balance sheet)1 22 1,608 1,002 19 134 2,785 Total balance sheet exposure 17 1,022 479 18 248 1,784 1 Based on ISDA (International Swaps and Derivatives Association) netting The Group's exposure to GIIPS at 30 June 2012 is analysed by financial asset as follows: 30.06.12 Greece Ireland Italy Portugal Spain Total $million $million $million $million $million $million Loans and advances Loans and receivables 25 7 447 21 95 595 Held at fair value through profit or loss - - 7 - - 7 Total gross loans and advances 25 7 454 21 95 602 Collateral held against loans and advances (5) - (3) - - (8) Total net loans and advances 20 7 451 21 95 594 Debt securities Trading Available-for-sale - 60 - - 75 135 Loans and receivables - - 3 - 6 9 Total gross debt securities - 60 3 - 81 144 Collateral held against debt securities - (10) - - - (10) Total net debt securities - 50 3 - 81 134 Derivatives Gross exposure 5 1,064 70 - 179 1,318 Collateral/netting1 - (1,033) (42) - (172) (1,247) Total derivatives 5 31 28 - 7 71 Contingent liabilities and commitments 9 753 267 1 86 1,116 Total net exposure (on and off balance sheet)1 34 841 749 22 269 1,915 Total balance sheet exposure 30 1,131 527 21 355 2,064 1 Based on ISDA (International Swaps and Derivatives Association) netting The Group's exposure to GIIPS at 31 December 2012 is analysed by financial asset as follows: 31.12.12 Greece Ireland Italy Portugal Spain Total $million $million $million $million $million $million Loans and advances Loans and receivables 20 91 301 20 26 458 Held at fair value through profit or loss - - 17 - - 17 Total gross loans and advances 20 91 318 20 26 475 Collateral held against loans and advances (2) (38) (24) - (4) (68) Total net loans and advances 18 53 294 20 22 407 Debt securities Trading Designated at fair value - - - - 41 41 Available-for-sale - 51 - - 78 129 Loans and receivables - - - - - - Total gross debt securities - 51 - - 119 170 Collateral held against debt securities - - - - - - Total net debt securities - 51 - - 119 170 Derivatives Gross exposure 2 1,025 44 - 137 1,208 Collateral/netting1 - (992) (39) - (132) (1,163) Total derivatives 2 33 5 - 5 45 Contingent liabilities and commitments 9 1,254 311 1 75 1,650 Total net exposure (on and off balance sheet)1 29 1,391 610 21 221 2,272 Total balance sheet exposure 22 1,167 362 20 282 1,853 1 Based on ISDA (International Swaps and Derivatives Association) netting Other selected eurozone countries A summary analysis of the Group's exposure to France, Germany, the Netherlands and Luxembourg is also provided as these countries are considered to have significant sovereign debt exposure to GIIPS. France Germany Netherlands Luxembourg Total $million $million $million $million $million Direct sovereign exposure 69 405 - - 474 Banks 3,603 3,404 1,958 972 9,937 Other financial institutions 155 27 153 142 477 Other corporate 860 750 5,769 873 8,252 Total net exposure at 30 June 2013 4,687 4,586 7,880 1,987 19,140 Total net exposure at 30 June 2012 5,329 7,310 8,761 1,828 23,228 Total net exposure at 31 December 2012 3,738 12,809 12,114 2,594 31,255 The Group's lending to these selected eurozone countries primarily takes the form of repurchase agreements, inter-bank loans and bonds. The substantial majority of the Group's total gross exposures to these selected countries have a tenor of less than three years, with more than 61 per cent having a tenor of less than one year. The Group's exposure in Germany is primarily with the central bank. Other than all these specifically identified countries, the Group's residual net exposure to the eurozone is $2.1 billion, which primarily comprises bonds and export structured financing to banks and corporates. Country cross-border risk Country cross-border risk is the risk that we will be unable to obtain payment from our customers or third parties on their contractual obligations as a result of certain actions taken by foreign governments, chiefly relating to convertibility and transferability of foreign currency. The GRC is responsible for our country cross-border risk limits and delegates the setting and management of country limits to the Group Country Risk function. The business and country chief executive officers manage exposures within these limits and policies. Countries designated as higher risk are subject to increased central monitoring. Cross-border assets comprise loans and advances, interest-bearing deposits with other banks, trade and other bills, acceptances, amounts receivable under finance leases, derivatives, certificates of deposit and other negotiable paper, investment securities and formal commitments where the counterparty is resident in a country other than where the assets are recorded. Cross-border assets also include exposures to local residents denominated in currencies other than the local currency. Cross-border exposure also includes the value of commodity, aircraft and shipping assets owned by the Group that are held in a given country. The profile of our country cross-border exposures greater than one per cent of total assets as at 30 June 2013, remained consistent with our strategic focus on core franchise countries, and with the scale of the larger markets that we operate in. Changes in the pace of economic activity had an impact on growth of cross-border exposure for certain territories. Growth of country cross-border exposure to China and Hong Kong reflect the expansion of our corporate client base, increased trade finance activities and transactions with local and foreign banks in Hong Kong. India remains a core territory for the Group where our competitive advantage positions us to offer US dollar facilities in the domestic market, and for investment and trade flows overseas that may be supported by parent companies in India. In Korea and Singapore, the reported exposures reflect the Group's increased emphasis on short term trade finance over longer term corporate lending. The increase in exposure to Brazil is attributable to trade and investment flows with our core markets. The increase in exposure to Australia is primarily attributable to the placement of funds in Australian tradable instruments for balance sheet management purposes. In line with a change in accounting treatment, the country cross-border exposure to Indonesia arising from Permata, a joint venture in which the Group holds 44.56 per cent, is now counted at the value of the Group's equity in the joint venture. This has reduced the reported exposure value for Indonesia but there is no significant change in the underlying cross-border business activity. Cross-border exposure to countries in which we do not have a major presence predominantly relates to short-dated money market treasury activities, which can change significantly from period to period. Exposure also represents some global corporate business for customers with interests in our footprint. This explains our significant exposure in the US, Switzerland and France. Growth in US exposure is further driven by surplus liquidity flowing into the US and being placed with the Federal Reserve Bank, other US institutions and in short term US issued instruments. The table below, which is based on our internal cross-border country risk reporting requirements, shows cross-border exposures that exceed one per cent of total assets. 30.06.13 30.06.12 31.12.12 Less than one year More than one year Total Less than one year More than one year Total Less than one year More than one year Total $million $million $million $million $million $million $million $million $million China 31,605 13,266 44,871 28,220 12,863 41,083 23,809 11,783 35,592 India 13,655 18,585 32,240 12,018 17,946 29,964 12,230 18,200 30,430 US 20,672 6,421 27,093 19,072 5,813 24,885 22,485 6,730 29,215 Hong Kong 22,696 7,264 29,960 18,494 6,762 25,256 18,096 8,458 26,554 Singapore 17,354 4,958 22,312 14,252 6,509 20,761 16,561 5,508 22,069 United Arab Emirates 6,156 10,842 16,998 6,629 10,468 17,097 6,580 11,293 17,873 Korea 10,576 6,670 17,246 10,322 6,695 17,017 9,696 6,693 16,389 Switzerland 5,185 4,342 9,527 5,343 4,319 9,662 5,050 4,983 10,033 Indonesia1 3,603 4,295 7,898 3,419 3,976 7,395 4,094 4,410 8,504 France 2,210 4,983 7,193 1,554 3,744 5,298 721 4,551 5,272 Australia 1,621 5,528 7,149 1,987 2,866 4,853 1,456 4,189 5,645 Brazil 4,829 2,044 6,873 4,318 1,931 6,249 4,157 1,613 5,770 1 Prior periods have been restated to reflect the change in accounting treatment of cross-border exposure to Indonesia arising from Permata Market risk We recognise market risk as the potential for loss of earnings or economic value due to adverse changes in financial market rates or prices. Our exposure to market risk arises principally from customer-driven transactions. The objective of our market risk policies and processes is to obtain the best balance of risk and return whilst meeting customers' requirements. The primary categories of market risk for Standard Chartered are: • interest rate risk: arising from changes in yield curves, credit spreads and implied volatilities on interest rate options • currency exchange rate risk: arising from changes in exchange rates and implied volatilities on foreign exchange options • commodity price risk: arising from changes in commodity prices and commodity option implied volatilities; covering energy, precious metals, base metals and agriculture • equity price risk: arising from changes in the prices of equities, equity indices, equity baskets and implied volatilities on related options Market risk governance The GRC approves our market risk appetite taking account of market volatility, the range of products and asset classes, business volumes and transaction sizes. The Group Market Risk Committee (GMRC), under authority delegated by the GRC, is responsible for setting VaR and stress loss triggers for market risk within our risk appetite. The GMRC is also responsible for policies and other standards for the control of market risk and overseeing their effective implementation. These policies cover both trading and non-trading books of the Group. The trading book is defined as per the PRA Handbook's Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU). This is more restrictive than the broader definition within IAS 39 'Financial Instruments: Recognition and Measurement', as the PRA only permits certain types of financial instruments or arrangements to be included within the trading book. Limits by location and portfolio are proposed by the businesses within the terms of agreed policy. Group Market Risk (GMR) approves the limits within delegated authorities and monitors exposures against these limits. Additional limits are placed on specific instruments and position concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. For example, interest rate sensitivity is measured in terms of exposure to a one basis point increase in yields, whereas foreign exchange, commodity and equity sensitivities are measured in terms of the underlying values or amounts involved. Option risks are controlled through revaluation limits on underlying price and volatility shifts, limits on volatility risk and other variables that determine the option's value. Value at Risk We measure the risk of losses arising from future potential adverse movements in market rates, prices and volatilities using a VaR methodology. VaR, in general, is a quantitative measure of market risk that applies recent historical market conditions to estimate the potential future loss in market value that will not be exceeded in a set time period at a set statistical confidence level. VaR provides a consistent measure that can be applied across trading businesses and products over time and can be set against actual daily trading profit and loss outcome. VaR is calculated for expected movements over a minimum of one business day and to a confidence level of 97.5 per cent. This confidence level suggests that potential daily losses, in excess of the VaR measure, are likely to be experienced six times per year. We apply two VaR methodologies: • Historical simulation: involves the revaluation of all existing positions to reflect the effect of historically observed changes in market risk factors on the valuation of the current portfolio. This approach is applied for general market risk factors and from the fourth quarter of 2012 has been extended to cover also the majority of specific (credit spread) risk VaR • Monte Carlo simulation: this methodology is similar to historical simulation but with considerably more input risk factor observations. These are generated by random sampling techniques, but the results retain the essential variability and correlations of historically observed risk factor changes. This approach is now applied for some of the specific (credit spread) risk VaR in relation to idiosyncratic exposures in credit markets In both methods an historical observation period of one year is chosen and applied. VaR is calculated as our exposure as at the close of business, generally UK time. Intra-day risk levels may vary from those reported at the end of the day. Back testing To assess their predictive power, VaR models are back tested against actual results. In the first half of 2013 there have been no exceptions in the regulatory back testing, and there was none in 2012. This is within the 'green zone' applied internationally to internal models by bank supervisors. Stress testing Losses beyond the confidence interval are not captured by a VaR calculation, which therefore gives no indication of the size of unexpected losses in these situations. GMR complements the VaR measurement by weekly stress testing of market risk exposures to highlight the potential risk that may arise from extreme market events that are rare but plausible. Stress testing is an integral part of the market risk management framework and considers both historical market events and forward-looking scenarios. A consistent stress testing methodology is applied to trading and non-trading books. The stress testing methodology assumes that scope for management action would be limited during a stress event, reflecting the decrease in market liquidity that often occurs. Stress scenarios are regularly updated to reflect changes in risk profile and economic events. The GMRC has responsibility for reviewing stress exposures and, where necessary, enforcing reductions in overall market risk exposure. The GRC considers the results of stress tests as part of its supervision of risk appetite. Regular stress test scenarios are applied to interest rates, credit spreads, exchange rates, commodity prices and equity prices. This covers all asset classes in the Financial Markets banking and trading books. Ad hoc scenarios are also prepared reflecting specific market conditions and for particular concentrations of risk that arise within the businesses. Market risk changes The average levels of Total VaR as well as non-trading VaR in the first half of 2013 have remained at a similar level to the first half of 2012. The average level of Trading book VaR has dropped by 8 per cent in the first half of 2013 compared to the second half of 2012. The actual level of Total VaR at the end of the first half of 2013 in June was 34 per cent higher than at the end of the second half of 2012 in December. This was due to the sharp increase in market volatility observed in late May and June, 2013. This entered the one year VaR historical observation period and had an immediate impact on the period-end VaR. This increase was also reflected in the non-trading actual VaR (up 41 per cent) but less so in Trading book actual VaR (up 21 per cent) as trading book positions were reduced. Daily value at risk (VaR at 97.5%, one day) 6 months to 30.06.13 6 months to 30.06.12 Average High3 Low3 Actual4 Average High3 Low3 Actual4 Trading and Non-trading $million $million $million $million $million $million $million $million Interest rate risk1 27.3 31.6 22.1 30.5 26.4 30.0 21.5 26.3 Foreign exchange risk 4.4 7.6 3.0 3.8 4.8 7.6 2.3 4.8 Commodity risk 1.5 2.3 1.0 1.2 1.8 3.0 1.2 1.5 Equity risk 15.8 18.2 13.0 14.9 16.2 18.5 14.0 14.0 Total2 28.7 39.6 22.1 39.6 28.3 32.0 23.1 28.7 6 months to 31.12.12 Average High3 Low3 Actual4 Trading and Non-trading $million $million $million $million Interest rate risk1 25.1 31.1 20.7 24.4 Foreign exchange risk 4.7 7.7 2.3 4.2 Commodity risk 1.5 3.0 1.0 1.0 Equity risk 15.6 18.5 13.9 16.4 Total2 29.3 38.5 22.6 29.5 6 months to 30.06.13 6 months to 30.06.12 Average High3 Low3 Actual4 Average High3 Low3 Actual4 Trading $million $million $million $million $million $million $million $million Interest rate risk1 9.4 11.9 6.5 8.1 11.0 14.6 7.8 10.4 Foreign exchange risk 4.4 7.6 3.0 3.8 4.8 7.6 2.3 4.8 Commodity risk 1.5 2.3 1.0 1.2 1.8 3.0 1.2 1.5 Equity risk 1.7 2.1 1.3 1.7 1.7 2.8 1.0 2.7 Total2 10.2 13.3 8.0 9.7 14.5 20.8 8.3 14.7 6 months to 31.12.12 Average High3 Low3 Actual4 Trading $million $million $million $million Interest rate risk1 9.7 15.7 6.1 8.2 Foreign exchange risk 4.7 7.7 2.3 4.2 Commodity risk 1.5 3.0 1.0 1.0 Equity risk 1.4 2.8 0.6 1.9 Total2 11.1 20.8 6.8 8.0 1 Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale 2 The total VaR shown in the tables above is not a sum of the component risks due to offsets between them 3 Highest and lowest VaR for each risk factor are independent and usually occur on different days 4 Actual one day VaR at period end date Market risk continued 6 months to 30.06.13 6 months to 30.06.12 Average High3 Low3 Actual4 Average High3 Low3 Actual4 Non-trading $million $million $million $million $million $million $million $million Interest rate risk1 24.3 27.7 20.9 26.1 22.6 26.7 19.7 22.3 Equity risk 15.3 17.6 12.4 14.5 17.4 18.0 16.4 16.7 Total2 25.8 33.7 19.6 33.7 27.7 30.4 25.7 27.6 6 months to 31.12.12 Average High3 Low3 Actual4 Non-trading $million $million $million $million Interest rate risk1 21.9 24.9 17.8 21.4 Equity risk 16.0 17.4 14.4 16.9 Total2 26.5 33.5 21.9 23.9 1 Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale 2 The total VaR shown in the tables above is not a sum of the component risks due to offsets between them 3 Highest and lowest VaR for each risk factor are independent and usually occur on different days 4 Actual one day VaR at period end date Average daily income earned from market risk related activities5 Trading 6 months to 30.06.13 6 months to 30.06.12 6 months to 31.12.12 $million $million $million Interest rate risk 6.1 5.7 7.8 Foreign exchange risk 6.6 5.9 4.3 Commodity risk 1.7 1.7 1.5 Equity risk 0.5 0.3 0.4 Total 14.9 13.6 14.0 Non-Trading Interest rate risk 3.1 4.9 2.7 Equity risk - (0.4) 0.6 Total 3.1 4.5 3.3 5 Reflects total product income, which is the sum of client income and own account income Market risk VaR coverage Interest rate risk from non-trading book portfolios is transferred to Financial Markets where it is managed by local ALM desks under the supervision of local Asset and Liability Committees (ALCO). ALM deals in the market in approved financial instruments in order to manage the net interest rate risk, subject to approved VaR and risk limits. VaR and stress tests are therefore applied to these non-trading book exposures (except Group Treasury, see below) in the same way as for the trading book, including available-for-sale securities. Securities classed as loans and receivables or held to maturity are not reflected in VaR or stress tests since they are accounted on an amortised cost basis and are match funded, so market price movements have no effect on either profit and loss or reserves. Structural foreign exchange currency risks are managed by Group Treasury and are not included within Group VaR. The foreign exchange risk on the non-trading book portfolios is minimised by match funding assets and liabilities in the same currency. Equity risk relating to non-listed Private Equity and Strategic Investments is not included within the VaR. It is separately managed through delegated limits for both investment and divestment, and is also subject to regular review by an investment committee. These are included as Level 3 assets as disclosed in note 12 to the financial statements. Group Treasury market risk Group Treasury raises debt and equity capital and the proceeds are invested within the Group as capital or placed with ALM. Interest rate risk arises due to the investment of equity and reserves into rate-sensitive assets, as well as some tenor mismatches between debt issuance and placements. This risk is measured as the impact on net interest income (NII) of an unexpected and instantaneous adverse parallel shift in rates and is monitored over a rolling one-year time horizon (see table below). This risk is monitored and controlled by the Group's Capital Management Committee (CMC). Group Treasury NII sensitivity to parallel shifts in yield curves 30.06.13 30.06.12 31.12.12 $million $million $million +25 basis points 32.0 33.6 33.1 -25 basis points (32.0) (33.6) (33.1) Group Treasury also manages the structural foreign exchange risk that arises from non-US dollar currency net investments in branches and subsidiaries. The impact of foreign exchange movements is taken to reserves which form part of the capital base. The effect of exchange rate movements on the capital ratio is partially mitigated by the fact that both the value of these investments and the risk weighted assets in those currencies follow broadly the same exchange rate movements. With the approval of CMC, Group Treasury may hedge the net investments if it is anticipated that the capital ratio will be materially affected by exchange rate movements. As at 30 June 2013, the Group had taken net investment hedges (using a combination of derivative and non-derivative financial investments) of $1,341 million (30 June 2012: $961 million, 31 December 2012: $971 million) to partly cover its exposure to Korean won. The table below sets out the principal structural foreign exchange exposures (net of investment hedges) of the Group: 30.06.13 30.06.12 31.12.12 $million $million $million Hong Kong dollar 7,207 6,350 6,619 Korean won 5,522 5,728 6,301 Indian rupee 4,036 3,621 4,025 Taiwanese dollar 2,797 2,811 2,946 Chinese renminbi 2,943 2,452 2,245 Singapore dollar 947 1,097 1,195 Thai baht 1,666 1,532 1,662 UAE dirham 1,641 1,685 1,598 Malaysian ringgit 1,519 1,262 1,360 Indonesian rupiah 1,023 926 1,164 Pakistani rupee 555 594 586 Other 3,803 3,233 3,648 33,659 31,291 33,349 An analysis has been performed on these exposures to assess the impact of a one per cent fall in the US dollar exchange rates adjusted to incorporate the impacts of correlations of these currencies to the US dollar. The impact on the positions above would be an increase of $244 million (30 June 2012: $236 million; 31 December 2012: $255 million). Changes in the valuation of these positions are taken to reserves. Derivatives Derivatives are contracts with characteristics and value derived from underlying financial instruments, interest and exchange rates or indices. They include futures, forwards, swaps and options transactions. Derivatives are an important risk management tool for banks and their customers because they can be used to manage market price risk. The market risk of derivatives is managed in essentially the same way as other traded products. Our derivative transactions are principally in instruments where the mark-to-market values are readily determinable by reference to independent prices and valuation quotes. We enter into derivative contracts in the normal course of business to meet customer requirements and to manage our exposure to fluctuations in market price movements. Derivatives are initially recognised and subsequently measured at fair value and shown in the balance sheet as separate totals of assets and liabilities. The revaluation gains are recognised in the profit and loss except where cash flow or net investment hedging has been achieved, in which case the effective portion of change in fair value is recognised within other comprehensive income The credit risk arising from all financial derivatives is managed as part of the overall lending limits to financial institutions and corporate customers. This is covered in more detail in the Credit risk section. Hedging Countries within the Group use futures, forwards, swaps and options transactions primarily to mitigate interest and foreign exchange risk arising from their in-country exposures. The Group also uses futures, forwards and options to hedge foreign exchange and interest rate risk. In accounting terms under IAS 39, hedges are classified into three types: fair value hedges, predominantly where fixed rates of interest or foreign exchange are exchanged for floating rates; cash flow hedges, predominantly where variable rates of interest or foreign exchange are exchanged for fixed rates; and hedges of net investments in overseas operations translated to the parent company's functional currency, US dollars. The notional value of interest rate swaps for the purpose of fair value hedging marginally decreased by $0.3 billion at 30 June 2013 compared to 31 December 2012. Fair value hedges largely hedge the interest-rate risk on our debt securities in the UK which form part of the Group's liquidity buffers and are used to manage fixed rate securities and loan portfolios in our key markets. Currency and interest rate swaps used for cash flow hedging have remained stable since 31 December 2012. We may also, under certain individually approved circumstances, enter into economic hedges that do not qualify for IAS 39 hedge accounting treatment, and which are accordingly marked to market through the profit and loss account, thereby creating an accounting asymmetry. These are entered into primarily to ensure that residual interest rate and foreign exchange risks are being effectively managed. Current economic hedge relationships include hedging the foreign exchange risk on certain debt issuances and on other monetary instruments held in currencies other than US dollars. Liquidity risk Liquidity risk is the risk that we either do not have sufficient financial resources available to meet our obligations as they fall due, or can only access these financial resources at excessive cost. It is our policy to maintain adequate liquidity at all times, in all geographic locations and for all currencies, and hence to be in a position to meet obligations as they fall due. We manage liquidity risk both on a short-term and structural basis. In the short-term, our focus is on ensuring that the cash flow demands can be met where required. In the medium-term, the focus is on ensuring the balance sheet remains structurally sound and aligned to our strategy. The GALCO is the responsible governing body that approves our liquidity management policies. The Liquidity Management Committee (LMC) receives authority from the GALCO and is responsible for setting or delegating authority to set liquidity limits and proposing liquidity risk policies. Liquidity in each country is managed by the country ALCO within the pre-defined liquidity limits set by the LMC and in compliance with Group liquidity policies and practices and local regulatory requirements. GMR and Group Treasury propose and oversee the implementation of policies and other controls relating to the above risks. We seek to manage our liquidity prudently in all geographical locations and for all currencies. Exceptional market events can impact us adversely, thereby affecting our ability to fulfill our obligations as they fall due. The principal uncertainties for liquidity risk are that customers withdraw their deposits at a substantially faster rate than expected, or that asset repayments are not received on the expected maturity date. To mitigate these uncertainties, our customer deposit base is diversified by type and maturity. In addition we have contingency funding plans including a portfolio of liquid assets that can be realised if a liquidity stress occurs, as well as ready access to wholesale funds under normal market conditions. Policies and procedures Our policy is to manage liquidity, in each country without presumption of Group support. Each country ALCO is responsible for ensuring that the country is able to meet all of its obligations to make payments as they fall due, and operates within the local regulations and liquidity limits set for the entities operating in that country. Our liquidity risk management framework requires limits to be set for prudent liquidity management. There are limits on: • The local and foreign currency cash flow gaps • The level of external wholesale borrowing to ensure that the size of this funding is proportionate to the local market and our local operations • The level of borrowing from other countries within the Group to contain the risk of contagion from one country to another • Commitments, both on and off balance sheet, to ensure there are sufficient funds available in the event of drawdown on these commitments • The advances to deposits ratio to ensure that commercial advances are funded by stable sources and that customer lending is funded by customer deposits • The amount of assets that may be funded from other currencies In addition, we prescribe a liquidity stress scenario that includes accelerated withdrawal of deposits over a period of time. Each country has to ensure that cash inflows exceed outflows under such a scenario. All limits are reviewed at least annually, and more frequently if required, to ensure that they remain relevant given market conditions and business strategy. Compliance with limits is monitored independently on a regular basis by GMR and Finance. Limit excesses are escalated and approved under a delegated authority structure and reviewed by ALCO. Excesses are also reported monthly to the LMC and GALCO which provide further oversight. We have significant levels of marketable securities, including government securities that can be realised, repurchased or used as collateral in the event of liquidity stress. In addition, a funding crisis response and recovery plan (FCRRP) is maintained by Group Treasury that is reviewed and approved annually. The FCRRP lays out trigger points and actions in the event of a liquidity crisis to ensure that there is an effective response by senior management. A similar plan is maintained within each country. Impact of Basel III The Group already meets the Basel III coverage requirements of 100 per cent for both the Net Stable Funding Ratio and the Liquidity Coverage Ratio, well ahead of the required implementation date. Primary sources of funding A substantial portion of our assets is funded by customer deposits made up of current and savings accounts and other deposits. Of total customer deposits, 40 per cent is retail deposits, 51 per cent corporate deposits, 9 per cent other (30 June 2012: retail 40 per cent, corporate 52 per cent, other 8 per cent ; 31 December 2012: retail 41 per cent, corporate 51 per cent, other 8 per cent). These customer deposits, which are widely diversified by type and maturity, represent a stable source of funds. The ALCO in each country monitors trends in the balance sheet and ensures that any concerns that might impact the stability of these deposits are addressed effectively. The ALCO also reviews balance sheet plans to ensure that projected asset growth is matched by growth in this stable funding base. We maintain access to wholesale funding markets in all major financial centres and countries in which we operate as well as to commercial paper issuance. This seeks to ensure that we have flexibility around maturity transformation, have market intelligence, maintain stable funding lines and can obtain optimal pricing when we perform our interest rate risk management activities. In the next 12 months approximately $5 billion of the Group's senior and subordinated debt is falling due for repayment either contractually or callable by the Group. Further details of the Group's senior and subordinated debt by geography are provided in note 2 to the financial statements on page 106. Encumbered assets Encumbered assets represent those on balance sheet assets pledged or used as collateral in respect of certain of the Group's liabilities. Hong Kong government certificates of indebtedness which secure the equivalent amount of Hong Kong currency notes in circulation, and cash collateral pledged against derivatives are included within other assets. Taken together these encumbered assets represent 2.7 per cent (30 June 2012: 2.6 per cent; 31 December 2012: 2.2 per cent) of total assets, continuing the Group's historical low level of encumbrance. The following table provides a reconciliation of the Group's encumbered assets to total assets. 30.06.13 30.06.12 Unencumbered assets Encumbered assets Total assets Unencumbered assets Encumbered assets Total assets $million $million $million $million $million $million Cash and balances at central banks 47,958 - 47,958 42,027 - 42,027 Restricted balances at central banks 9,663 - 9,663 8,656 - 8,656 Derivative financial instruments 54,548 - 54,548 52,530 - 52,530 Loans and advances to banks1 73,728 1,152 74,880 74,605 - 74,605 Loans and advances to customers1 290,246 1,547 291,793 276,411 1,729 278,140 Investment securities1 111,684 3,248 114,932 104,083 5,493 109,576 Other assets 26,137 11,904 38,041 21,241 8,926 30,167 Current tax assets 198 - 198 268 - 268 Prepayments and accrued income 2,687 - 2,687 2,688 - 2,688 Interests in associates 1,662 - 1,662 1,408 - 1,408 Goodwill and intangible assets 6,100 - 6,100 7,056 - 7,056 Property, plant and equipment 6,759 - 6,759 5,575 - 5,575 Deferred tax assets 736 - 736 860 - 860 Total 632,106 17,851 649,957 597,408 16,148 613,556 1 Includes assets held at fair value through profit or loss 31.12.12 Unencumbered assets Encumbered assets Total assets $million $million $million Cash and balances at central banks 50,974 227 51,201 Restricted balances at central banks 9,336 - 9,336 Derivative financial instruments 49,495 - 49,495 Loans and advances to banks1 67,848 723 68,571 Loans and advances to customers1 282,238 2,378 284,616 Investment securities1 118,951 1,598 120,549 Other assets 19,289 9,259 28,548 Current tax assets 215 - 215 Prepayments and accrued income 2,552 - 2,552 Interests in associates 1,527 - 1,527 Goodwill and intangible assets 7,302 - 7,302 Property, plant and equipment 6,620 - 6,620 Deferred tax assets 676 - 676 Total 617,023 14,185 631,208 1 Includes assets held at fair value through profit or loss In addition to the above the Group received $8,710 million (30 June 2012: $7,681 million; 31 December 2012: $10,517 million) as collateral under reverse repurchase agreements that was eligible for repledging. Of this the Group repledged $1,161 million (30 June 2012: $870 million; 31 December 2012: $1,378 million) under repurchase agreements. Liquidity metrics We also monitor key liquidity metrics on a regular basis, both on a country basis and in aggregate across the Group. The key metrics are: Advances to deposits ratio This is defined as the ratio of total loans and advances to customers relative to total customer deposits. A low advances to deposits ratio demonstrates that customer deposits exceed customer loans resulting from emphasis placed on generating a high level of stable funding from customers. 30.06.13 $million 30.06.12 $million 31.12.12 $million Loans and advances to customers1 291,793 278,140 284,616 Customer accounts2 380,785 358,646 385,117 Advances to deposits ratio 76.6% 77.6% 73.9% 1 see note 16 to the financial statements on page 138 2 see note 22 to the financial statements on page 143 Liquid asset ratio This is the ratio of liquid assets to total assets. The significant level of holdings of liquid assets in the balance sheet reflects the application of our liquidity policies and practices and the holdings of these assets are spread across our geographies. The following table details the component of liquid assets together with the ratio of liquid assets to total assets. This ratio improved in the first half of 2013 compared with the second half of 2012 reflecting the increased levels of liquid assets held to meet regulatory liquidity requirements, especially in the UK. 30.06.13 30.06.12 31.12.12 $million $million $million Cash and balances at central banks 57,621 50,683 60,537 Restricted balances (9,663) (8,656) (9,336) Loans and advances to banks - net of impairment 74,769 74,462 68,365 Deposits by banks (45,390) (45,793) (37,395) Treasury bills 25,750 26,521 29,695 Debt securities 83,623 78,273 84,422 of which: Issued by governments 32,755 28,684 33,688 Issued by banks 29,464 31,968 32,261 Issued by corporate and other entities 21,404 17,621 18,473 Illiquid securities (908) (784) (1,706) Other encumbered assets (1,881) (865) (1,834) Liquid assets 183,921 173,841 192,748 Total assets 649,957 613,556 631,208 Liquid assets to total asset ratio (%) 28.3% 28.3% 30.5% Geographic spread of liquid assets 30.06.13 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S.Asia Africa Americas UK & Europe Total % % % % % % % % % Liquid assets 25 9 7 14 3 5 3 34 100 30.06.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S.Asia Africa Americas UK & Europe Total % % % % % % % % % Liquid assets 26 10 9 14 3 5 3 30 100 31.12.12 Hong Kong Singapore Korea Other Asia Pacific India Middle East & Other S.Asia Africa Americas UK & Europe Total % % % % % % % % % Liquid assets 24 10 9 14 3 4 3 33 100 Liquidity management - stress scenarios The Group conducts a range of liquidity related stress analyses, both for internal and regulatory purposes. Internally, three stress tests are run routinely: an acute 8-day name specific stress, a 30-day market wide stress and a more chronic 90-day combined name specific and market wide stress. The 8-day stress is specifically designed to determine a minimum quantity of marketable securities that must be held at all times in all countries. This stress is computed daily, and the minimum marketable securities requirement is observed daily. This is intended to ensure that, in the unlikely event of an acute loss of confidence in the Group or any individual entity within it, there is sufficient time to take corrective action. Every country must pass, on stand-alone basis, with no presumption of Group support. As at 30 June 2013 all countries passed the stress test. The Group is also exposed to the risk of market-wide disruption in one or more countries. It is therefore appropriate to test resilience in each country to unexpected local market disruption, for example loss of interbank money or foreign exchange markets. To this end, country ALCOs consider a 30-day market-wide stress. Finally, a 90-day test is run. These stress tests consider more prolonged stresses that affect markets across a number of the Group's main footprint countries and in which the Group itself may come under some sustained pressure. This pressure may be unwarranted or may be because the Group is inextricably linked with those markets/countries. The stress tests the adequacy of contingency funding arrangements beyond the marketable securities held to cover the 8-day stress, including the portability of funding from one country to support another. These stresses are managed at a Group rather than individual country level. Liquidity and funding risks are also considered as part of the Group's wider periodic scenario analysis, including reverse stress testing. In addition, the Group runs a range of stress tests to meet regulatory requirements, as defined by the PRA and local regulators. Liquidity analysis of the Group's balance sheet Contractual maturity of assets and liabilities This table analyses assets and liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date as at the balance sheet date on a discounted basis. Contractual maturities do not necessarily reflect actual repayments or cash flow. Within the tables below cash and balances with central banks, loans and advances to banks, treasury bills and investment securities that are available-for-sale are used by the Group principally for liquidity management purposes. 30.06.13 Three months or less Between three months and one year Between one year and five years More than five years and undated Total $million $million $million $million $million Assets Cash and balances at central banks 47,905 - - 9,716 57,621 Derivative financial instruments 13,031 14,552 18,445 8,520 54,548 Loans and advances to banks1 48,844 22,981 2,900 155 74,880 Loans and advances to customers1 98,128 48,150 67,204 78,311 291,793 Investment securities1 18,891 35,413 46,528 14,100 114,932 Other assets 29,492 3,276 299 23,116 56,183 Total assets 256,291 124,372 135,376 133,918 649,957 Liabilities Deposits by banks1 42,036 2,629 631 94 45,390 Customer accounts1 313,564 53,076 9,840 4,305 380,785 Derivative financial instruments 13,359 14,838 17,388 8,196 53,781 Senior debt1 2,338 2,579 13,849 2,982 21,748 Other debt securities in issue1 22,191 15,481 2,799 3,305 43,776 Other liabilities 22,699 4,777 1,929 11,321 40,726 Subordinated liabilities and other borrowed funds - 927 4,614 12,852 18,393 Total liabilities 416,187 94,307 51,050 43,055 604,599 Net liquidity gap (159,896) 30,065 84,326 90,863 45,358 1 Amounts include financial instruments held at fair value through profit or loss (see note 12) on page 115 30.06.12 Three months or less Between three months and one year Between one year and five years More than five years and undated Total $million $million $million $million $million Assets Cash and balances at central banks 42,027 - - 8,656 50,683 Derivative financial instruments 11,907 14,777 13,199 12,647 52,530 Loans and advances to banks1 50,190 21,417 2,505 493 74,605 Loans and advances to customers1 90,111 41,271 68,692 78,066 278,140 Investment securities1 21,279 31,423 42,582 14,292 109,576 Other assets 15,572 10,557 152 21,741 48,022 Total assets 231,086 119,445 127,130 135,895 613,556 Liabilities Deposits by banks1 43,253 2,010 453 77 45,793 Customer accounts1 295,030 49,117 7,181 7,318 358,646 Derivative financial instruments 11,215 14,690 12,327 11,912 50,144 Senior debt 1,263 3,950 14,214 2,974 22,401 Other debt securities in issue 22,317 14,531 2,340 823 40,011 Other liabilities 21,281 2,700 655 12,583 37,219 Subordinated liabilities and other borrowed funds - 614 1,162 14,632 16,408 Total liabilities 394,359 87,612 38,332 50,319 570,622 Net liquidity gap (163,273) 31,833 88,798 85,576 42,934 1 Amounts include financial instruments held at fair value through profit or loss (see note 12) 31.12.12 Three months or less Between three months and one year Between one year and five years More than five years and undated Total $million $million $million $million $million Assets Cash and balances at central banks 51,201 - - 9,336 60,537 Derivative financial instruments 10,492 9,523 19,034 10,446 49,495 Loans and advances to banks1 46,705 18,916 2,760 190 68,571 Loans and advances to customers1 89,654 44,293 69,787 80,882 284,616 Investment securities1 24,783 34,041 47,270 14,455 120,549 Other assets 22,192 2,780 289 22,179 47,440 Total assets 245,027 109,553 139,140 137,488 631,208 Liabilities Deposits by banks1 35,410 1,294 597 94 37,395 Customer accounts1 314,220 52,972 10,873 7,052 385,117 Derivative financial instruments 10,077 10,150 17,567 9,398 47,192 Senior debt1 1,618 2,713 15,539 1,786 21,656 Other debt securities in issue1 23,823 9,890 3,147 2,724 39,584 Other liabilities 16,944 5,388 1,604 11,685 35,621 Subordinated liabilities and other borrowed funds 617 944 3,496 13,531 18,588 Total liabilities 402,709 83,351 52,823 46,270 585,153 Net liquidity gap (157,682) 26,202 86,317 91,218 46,055 1 Amounts include financial instruments held at fair value through profit or loss (see note 12) Behavioural maturity of financial assets and liabilities As discussed on pages 79 to 86 the Group seeks to manage its liabilities both on a contractual and behavioural basis primarily by matching the maturity profiles of assets and liabilities. The cash flows presented on page 100 reflect the cash flows which will be contractually payable over the residual maturity of the instruments. In practice, however, certain liability instruments behave differently from their contractual terms and typically, for short term customer accounts, extend to a longer period than their contractual maturity. The Group's expectation of when such liabilities are likely to become payable is provided in the table below: 30.06.13 Three months or less Between three months and one year Between one year and five years More than five years and undated Total $million $million $million $million $million Loans and advances to customers 76,138 45,635 110,518 59,502 291,793 Loans and advances to banks 49,102 22,501 3,122 155 74,880 Total loans and advances 125,240 68,136 113,640 59,657 366,673 Deposits by banks 41,960 2,630 704 96 45,390 Customer accounts 159,321 60,987 155,761 4,716 380,785 Total deposits 201,281 63,617 156,465 4,812 426,175 Net gap (76,041) 4,519 (42,825) 54,845 (59,502) 30.06.12 Three months or less Between three months and one year Between one year and five years More than five years and undated Total $million $million $million $million $million Loans and advances to customers 85,383 44,038 85,078 63,641 278,140 Loans and advances to banks 53,591 17,802 2,638 574 74,605 Total loans and advances 138,974 61,840 87,716 64,215 352,745 Deposits by banks 43,041 2,134 527 91 45,793 Customer accounts 138,814 61,810 127,075 30,947 358,646 Total deposits 181,855 63,944 127,602 31,038 404,439 Net gap (42,881) (2,104) (39,886) 33,177 (51,694) 31.12.12 Three months or less Between three months and one year Between one year and five years More than five years and undated Total $million $million $million $million $million Loans and advances to customers 81,318 49,906 88,262 65,130 284,616 Loans and advances to banks 49,391 15,903 3,106 171 68,571 Total loans and advances 130,709 65,809 91,368 65,301 353,187 Deposits by banks 35,265 1,451 607 72 37,395 Customer accounts 161,572 65,092 149,956 8,497 385,117 Total deposits 196,837 66,543 150,563 8,569 422,512 Net gap (66,128) (734) (59,195) 56,732 (69,325) Operational risk Operational risk is the potential for loss arising from the failure of people, process or technology or the impact of external events. Operational risk exposures are managed through a consistent set of management processes that drive risk identification, assessment, control and monitoring. We seek to control operational risks to ensure that operational losses do not cause material damage to the Group's franchise. Operational risks can arise from all business lines and from all activities carried out by the Group. We seek to systematically identify and manage operational risk by segmenting all the Group's activities into manageable units. Each of these has an owner who is responsible for identifying and managing all the risks that arise from those activities as an integral part of their first line responsibilities. Products and services offered to clients and customers in all our markets are also assessed and authorised in accordance with product governance procedures. Although operational risk exposures can take many varied forms, we seek to manage them in accordance with standards that drive systematic risk identification, assessment, control and monitoring. These standards are challenged and reviewed regularly to ensure their ongoing effectiveness. To support the systematic identification of material operational risk exposures associated with a given process, we classify them into the following types: Operational Risk Subtypes Processing failure Potential for loss due to failure of an established process or to a process design weakness External Rules & Regulations Potential for actual or opportunity loss due to failure to comply with laws or regulations, or as a result of changes in laws or regulations or in their interpretation or application Liability Potential for loss or sanction due to a legal claim against any part of the Group or individuals within the Group Legal enforceability Potential for loss due to failure to protect legally the Group's interests or from difficulty in enforcing the Group's rights Damage to assets Potential for loss or damage to physical assets and other property from natural disaster and other events Safety and security Potential for loss or damage to health or safety of staff, customers or third parties arising from internal failures or the effects of external events Internal crime or dishonesty Potential for loss due to action by staff that is intended to defraud, misappropriate property or to circumvent the law or company policy External crime Potential for loss due to criminal acts by external parties such as fraud, theft and other criminal activity Model Potential for loss due to a significant discrepancy between the output of risk measurement models and actual experience Identified operational risk exposures are rated 'low', 'medium', 'high' or 'very high' in accordance with defined risk assessment criteria. Risks that are outside set materiality thresholds receive a differential level of management attention and are reported to senior management and risk committees up to Board level. Significant external events or internal failures that have occurred are analysed to identify the root cause of any failure for remediation and future mitigation. Actual operational losses are systematically recorded. In the second line of defence, Group Operational Risk is responsible for setting and maintaining the standards for operational risk management and control. In addition, specialist operational risk control owners have responsibility for the control of operational risk arising from the management of the following activities: Operational risk control area People Management Recruiting, developing, compensating and managing employees Technology Management Developing, maintaining and using information technology, and information security Vendor Management Procurement, licensing, outsourcing and supplier management Property Management Managing property assets, projects and facilities. Security Management Protecting the security of staff and customers Regulatory Compliance Maintaining relationships with regulators, evidencing compliance with banking and securities regulations and managing regulatory change Legal processes Effective documentation of material transactions and other material contractual agreements, controlling the rights pertaining to material assets of the Group, and managing material claims and legal disputes Accounting & Financial Control Financial and management accounting, associated reporting and financial control Tax management Tax planning, structuring and reporting Corporate authorities & structure Maintaining effective corporate legal entity structure and corporate decision making authorities Each Risk Control Owner (RCO) has second line responsibility for all types of operational risk which may arise within his or her risk control area. RCOs are supported by a specialist control function and are responsible for identifying risks that are material to the Group and for maintaining an effective control environment, across the whole organisation. This includes defining appropriate policies for approval by authorised risk committees, that impose specific controls and constraints on the Group's activities. The Group Operational Risk Committee, chaired by the GCRO, oversees the management of operational risks across the Group, supported by business, functional, and country-level committees. All operational risk committees operate on the basis of a defined structure of delegated authorities and terms of reference, derived from the GRC. Reputational risk Reputational risk is the potential for damage to the Group's franchise, resulting in loss of earnings or adverse impact on market capitalisation as a result of stakeholders taking a negative view of the Group or its actions. Reputational risk could arise from the failure of the Group to effectively mitigate the risks in its businesses including one or more of country, credit, liquidity, market, regulatory, legal or other operational risk. Damage to the Group's reputation could cause existing clients to reduce or cease to do business with the Group and prospective clients to be reluctant to do business with the Group. All employees are responsible for day to day identification and management of reputational risk. These responsibilities form part of the Group Code of Conduct and are further embedded through values-based performance assessments. Reputational risk may also arise from a failure to comply with environmental and social standards. Our primary environmental and social impacts arise through our relationship with our clients and customers and the financing decisions we take. We have published a series of position statements covering high impact sectors and key issues. These set out our approach to the provision of financial services to clients who operate in these sectors, and support our internal environmental and social risk assessment process. We have mechanisms in our origination and credit processes to identify and assess environmental and social risks, and a dedicated Sustainable Finance team in Wholesale Banking who review proposed high-risk transactions. The GRC provides Group-wide oversight on reputational risk, sets policy and monitors material risks. The Group Head of Corporate Affairs is the overall risk control owner for reputational risk. The BVC and BRC provide additional oversight of reputational risk on behalf of the Board. At the business level, the Wholesale Banking Responsibility and Reputational Risk Committee and the Consumer Banking Reputational Risk Committee have responsibility for managing reputational risk in their respective businesses. At country level, the Country Head of Corporate Affairs is the risk control owner of reputational risk. It is his or her responsibility to protect our reputation in that market with the support of the country management team. The Head of Corporate Affairs and Country Chief Executive Officer must actively: • Promote awareness and application of our policies and procedures regarding reputational risk • Encourage business and functions to take account of our reputation in all decision-making, including dealings with customers and suppliers • Implement effective in-country reporting systems to ensure they are aware of all potential issues in tandem with respective business committees • Promote effective, proactive stakeholder management through ongoing engagement. Pension risk Pension risk is the potential for loss due to having to meet an actuarially assessed shortfall in the Group's pension schemes. The risk assessment is focused on our obligations towards our major pension schemes, ensuring that our funding obligation to these schemes is comfortably within our financial capacity. Pension risk is monitored on a quarterly basis, taking account of the actual variations in asset values and updated expectations regarding the progression of the pension fund assets and liabilities. The Group Pension Risk Committee is the body responsible for governance of pension risk and it receives its authority from GRC. Standard Chartered PLC - Capital The following parts of Capital are reviewed by the auditor: from the start of 'Capital management' on page 90 to the end of 'Movement in total capital' on page 92. Capital management Our approach to capital management is to maintain a strong capital base to support the development of our business, to meet regulatory capital requirements at all times and to maintain strong credit ratings. Strategic, business and capital plans are drawn up annually covering a five year horizon and are approved by the Board. The capital plan ensures that adequate levels of capital and an optimum mix of the different components of capital are maintained to support our strategy. Group Treasury is responsible for the ongoing assessment of the demand for capital and the updating of the Group's capital plan. The capital plan takes the following into account: • current regulatory capital requirements and our assessment of future standards • demand for capital due to business growth forecasts, loan impairment outlook and market shocks or stresses • forecast demand for capital to support credit ratings and as a signaling tool to the market • available supply of capital and capital raising options The Group formulates a capital plan with the help of internal models and other quantitative techniques. The models help to estimate potential future losses arising from credit, market and other risks and using regulatory formulae, the amount of capital required to support them. In addition, the models enable the Group to gain an enhanced understanding of its risk profile, e.g. by identifying potential concentrations and assessing the impact of portfolio management actions. Stress testing and scenario analysis are used to ensure that the Group's internal capital assessment considers the impact of extreme but plausible scenarios on its risk profile and capital position. They provide an insight into the potential impact of significant adverse events and how these could be mitigated. We use a capital model to assess the capital demand for material risks, and support this with our internal capital adequacy assessment. Each material risk is assessed, relevant mitigants considered, and appropriate levels of capital determined. The capital modelling process is a key part of our management disciplines. A strong governance and process framework is embedded in our capital planning and assessment methodology. The key capital management committees are the Capital Management Committee (CMC) and the Group Asset and Liability Committee (GALCO). GALCO approves the capital governance framework and delegates to CMC the approval of capital management policies. At a country level, capital is monitored by the local Asset and Liability Committee (ALCO). Appropriate policies are in place governing the transfer of capital within the Group. These ensure that capital is remitted as appropriate, subject to complying with local regulatory requirements and statutory and contractual restrictions. There are no current material practical or legal impediments to the prompt transfer of capital resources in excess of those required for regulatory purposes or repayment of liabilities between the parent company, Standard Chartered PLC and its subsidiaries when due. Current compliance with Capital Adequacy Regulations In light of the uncertain economic environment and continuing uncertainty in the evolving regulatory debate on banks' capital structures, we continue to believe it is appropriate to remain strongly capitalised and well above regulatory requirements. On 1 April 2013, the UK Financial Services Authority (FSA) ceased to exist. From this date, Standard Chartered PLC has been authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. The capital that we are required to hold by the PRA is determined by our balance sheet, off-balance sheet, counterparty and other risk exposures. Further detail on counterparty and risk exposures is included in the Risk review on pages 29 to 30. Capital in branches and subsidiaries is maintained on the basis of host regulators' requirements and the Group's assessment of capital requirements under normal and stress conditions. Suitable processes and controls are in place to monitor and manage capital adequacy and ensure compliance with local regulatory ratios in all our legal entities. These processes are designed to ensure that we have sufficient capital available to meet local regulatory capital requirements at all times. The table on page 91 summarises the consolidated capital position of the Group. BaselII The Group complies with the Basel II framework, which has been implemented in the UK through the PRA and FCA's General Prudential Sourcebook and Prudential Sourcebook for Banks, Building Societies and Investment Firms. Since 1 January 2008, we have been using the advanced Internal Ratings Based (IRB) approach for the calculation of credit risk capital requirements with the approval of the FSA and latterly the PRA. This approach builds on our risk management practices and is the result of a significant investment in data warehousing and risk models. We use Value at Risk (VaR) models for the calculation of market risk capital requirements for part of our trading book exposures where permission to use such models has been granted by the FSA. Where our market risk exposures are not approved for inclusion in VaR models, the capital requirements are determined using standard rules provided by the regulator. We apply The Standardised Approach for determining the capital requirements for operational risk. Standard Chartered PLC - Capital continued Capital base 30.06.13 30.06.12 31.12.12 $million $million $million Shareholders' equity Parent company shareholders' equity per balance sheet 44,768 42,305 45,362 Preference share classified as equity included in Tier 1 capital (1,494) (1,494) (1,495) 43,274 40,811 43,867 Non-controlling interests Non-controlling interests per balance sheet 590 629 693 Non-controlling Tier 1 capital included in other Tier 1 capital (320) (320) (320) 270 309 373 Regulatory adjustments Unrealised (gains)/losses on available-for-sale debt securities (22) 52 (97) Unrealised gains on available-for-sale equity securities included in Tier 2 (362) (215) (490) Cash flow hedge reserve 49 (26) (81) Other adjustments1 485 (34) (35) 150 (223) (703) Deductions Goodwill and other intangible assets (6,100) (7,067) (7,312) 50 per cent excess of expected losses 2 (930) (788) (966) 50 per cent of tax on expected losses 234 209 240 50 per cent of securitisation positions (111) (114) (118) Other regulatory adjustments (13) (65) (42) (6,920) (7,825) (8,198) Core Tier 1 capital 36,774 33,072 35,339 Other Tier 1 Capital Preference shares included within shareholders' equity 1,494 1,494 1,495 Preference shares included within 'Subordinated debt and other borrowings' 1,187 1,196 1,205 Innovative Tier 1 securities (excluding non-controlling Tier 1 capital) 2,493 2,519 2,553 Non-controlling Tier 1 Capital 320 320 320 5,494 5,529 5,573 Deductions 50 per cent of tax on expected losses 234 209 240 50 per cent of material holdings (502) (543) (552) (268) (334) (312) Total Tier 1 capital 42,000 38,267 40,600 Tier 2 capital: Qualifying subordinated liabilities:3 Subordinated liabilities and other borrowed funds as per balance sheet 18,393 16,543 18,799 Preference shares eligible for Tier 1 capital (1,187) (1,196) (1,205) Innovative Tier 1 securities eligible for Tier 1 capital (2,493) (2,519) (2,553) Adjustments relating to fair value hedging and non-eligible securities (1,148) (1,796) (2,052) 13,565 11,032 12,989 Regulatory adjustments Reserves arising on revaluation of available-for-sale equities 362 215 490 Portfolio impairment provision 272 244 248 634 459 738 Deductions 50 per cent excess of expected losses2 (930) (788) (966) 50 per cent of material holdings (502) (543) (552) 50 per cent of securitisation positions (111) (114) (118) (1,543) (1,445) (1,636) Total Tier 2 capital 12,656 10,046 12,091 Deductions from Tier 1 and Tier 2 capital (6) (2) (3) Total capital base 54,650 48,311 52,688 1 Other includes the effect of regulatory consolidation and own credit adjustment. 2 Excess of expected losses in respect of advanced IRB portfolios are shown gross of tax benefits. 3 Represents perpetual subordinated debt $1,251 million (30 June 2012: $1,501 million, 31 December 2012: $1,314 million) and other eligible subordinated debt $12,314 million (30 June 2012: $9,531 million, 31 December 2012: $11,675 million). Lower Tier 2 instruments due to mature within five years includes amortisation. Movement in total capital 6 months ended 6 months ended 6 months ended 30.06.13 30.06.12 31.12.12 $million $million $million Opening Core Tier 1 capital: 35,339 31,833 33,072 Ordinary shares issued in the period and share premium 21 23 36 Profit for the period 2,236 2,856 2,031 Dividends, net of scrip (1,372) (1,096) (311) Decrease/(increase) in goodwill and other intangible assets 1,212 (6) (245) Foreign currency translation differences (1,027) (212) 725 Decrease/(increase) in unrealised gains on available for sale assets 203 (230) (149) Movement in eligible other comprehensive income (301) (25) 331 Net effect of regulatory consolidation and change in non-controlling interests 613 - - Increase/(decrease) in excess expected loss, net of tax 30 (63) (147) Decrease/(increase) in securitisation positions 7 (8) (4) Own credit adjustment, net of tax (187) - - Closing Core Tier 1 capital 36,774 33,072 35,339 Opening Other Tier 1 capital 5,261 5,179 5,195 (Decrease)/increase in tax benefit of excess expected loss (6) 23 31 Increase/(decrease) in material holdings 50 (22) (9) Other (79) 15 44 Closing Other Tier 1 capital 5,226 5,195 5,261 Opening Tier 2 capital 12,091 10,499 10,046 Issuance of subordinated loan capital, net of redemptions and foreign currency translation differences 576 (316) 1,957 (Decrease) /increase in revaluation reserve (128) (26) 275 Increase in portfolio impairment provision 24 5 4 Increase/(decrease) in excess expected loss 36 (86) (178) Increase/(decrease) in material holdings 50 (22) (9) Decrease/(increase) in securitisation positions 7 (8) (4) Closing Tier 2 capital 12,656 10,046 12,091 Deductions from total capital (6) (2) (3) Closing Total capital 54,650 48,311 52,688 Risk weighted assets and capital ratios 30.06.13 30.06.12 31.12.12 $million $million $million Credit risk 264,043 233,170 246,650 Operational risk 33,289 30,761 30,761 Market risk 26,444 22,387 24,450 Total risk weighted assets 323,776 286,318 301,861 Capital ratios Core Tier 1 capital 11.4% 11.6% 11.7% Tier 1 capital 13.0% 13.4% 13.4% Total capital ratio 16.9% 16.9% 17.4% Risk weighted assets by business and geography 30.06.13 30.06.12 31.12.12 $million $million $million Consumer Banking 85,133 74,448 80,889 Credit risk 74,721 65,040 71,481 Operational risk 10,412 9,408 9,408 Wholesale Banking 238,643 211,870 220,972 Credit risk 189,322 168,130 175,169 Operational risk 22,877 21,353 21,353 Market risk 26,444 22,387 24,450 Total risk weighted assets 323,776 286,318 301,861 Hong Kong 38,672 34,347 36,534 Singapore 47,307 41,934 45,064 Korea 24,431 26,291 26,667 Other Asia Pacific 63,082 53,916 52,313 India 22,592 21,110 23,145 Middle East & Other S Asia 33,993 32,671 33,119 Africa 21,116 13,516 19,856 Americas, UK & Europe 81,750 70,067 73,527 332,943 293,852 310,225 Less : Netting balances1 (9,167) (7,534) (8,364) Total risk weighted assets 323,776 286,318 301,861 1 Risk weighted assets by geography are reported gross of any netting benefits Risk weighted contingent liabilities and commitments2 30.06.13 30.06.12 31.12.12 $million $million $million Contingent liabilities 15,850 14,207 14,725 Commitments 12,211 11,805 12,640 2 These amounts are included in total risk weighted assets and include amounts relating to the Group's associates and joint ventures Movement in risk weighted assets Wholesale Banking Credit risk Consumer Banking Credit risk Total Credit risk Market risk $million $million $million $million Opening risk weighted assets at 1 January 2013 175,169 71,481 246,650 24,450 Assets growth 11,193 2,162 13,355 1,994 Credit migration 2,450 (201) 2,249 - Risk-weighted assets efficiencies 228 414 642 - Model, methodology and policy changes 3,661 3,125 6,786 - Acquisitions and disposals - (295) (295) - Foreign currency translation differences (3,379) (1,965) (5,344) - Closing risk weighted assets at 30 June 2013 189,322 74,721 264,043 26,444 Wholesale Banking Credit risk Consumer Banking Credit risk Total Credit risk Market risk $million $million $million $million Opening risk weighted assets at 1 January 2012 157,538 62,856 220,394 21,354 Assets growth 10,165 1,130 11,295 1,033 Credit migration 1,163 582 1,745 - Risk-weighted assets efficiencies 526 (1,000) (474) - Model, methodology and policy changes - 1,405 1,405 - Acquisitions and disposals - - - - Foreign currency translation differences (1,262) 67 (1,195) - Stressed VaR - - - - Closing risk weighted assets at 30 June 2012 168,130 65,040 233,170 22,387 Wholesale Banking Credit risk Consumer Banking Credit risk Total Credit risk Market risk $million $million $million $million Opening risk weighted assets at 1 July 2012 168,130 65,040 233,170 22,387 Assets growth 71 2,633 2,704 1,865 Credit migration 3,777 582 4,359 - Risk-weighted assets efficiencies (3,326) - (3,326) - Model, methodology and policy changes 5,324 1,308 6,632 (700) Acquisitions and disposals - - - - Foreign currency translation differences 1,193 1,918 3,111 - Stressed VaR - - - 898 Closing risk weighted assets at 31 December 2012 175,169 71,481 246,650 24,450 Risk weighted assets (RWA) grew by $21.9 billion, or 7 per cent, compared to 31 December 2012, with an increase in Wholesale Banking and Consumer Banking of $17.7 billion and $4.2 billion respectively. Wholesale Banking RWA growth was mainly in Americas, UK & Europe, Other Asia Pacific (Other APR) and Singapore. Consumer Banking RWA growth was mainly in Hong Kong, Americas, UK & Europe and Middle East & Other South Asia. Growth in Other APR was due to the Group now fully consolidating one of its joint ventures for regulatory purposes and this change in methodology increased RWA by $6.9 billion, of which $3.9 billion was in Wholesale Banking (credit risk $3.7 billion, operational risk $0.2 billion) and $3 billion in Consumer Banking (credit risk $2.7 billion, operational risk $0.3 billion). Wholesale Banking credit risk RWA increased by $14.2 billion, of which $11.2 billion was driven by asset growth in Transaction Banking and Corporate Finance. Credit migration resulting from internal rating downgrades increased RWA by $2.5 billion across Africa, India, Singapore and Hong Kong. These increases were partially offset by foreign currency translation differences, which reduced RWA by $3.4 billion due to the appreciation of the US dollar relative to Asian currencies. Consumer Banking credit risk RWA increased by $3.2 billion, with $2.3 billion due to asset growth, net of disposals and RWA efficiencies, across SME, Wealth Management and Credit Cards and Personal Loans. Foreign currency translation differences decreased RWA by $2 billion, with a further $0.2 billion reduction resulting from credit migration. Model adjustments increased RWA by $0.4 billion following the introduction of adjustments to retail portfolios in Korea. At 30 June 2013 our market risk RWA was $26.4 billion (31 December 2012: $24.5 billion). The increase in market risk RWA is mainly due to increased positions held in foreign exchange and structured products. The PRA has granted the Group CAD2 internal model approval covering the majority of interest rate, foreign exchange risk, energy and agricultural trading, as well as market risk arising from precious and base metals trading. Positions outside the CAD2 permission continue to be assessed according to standard PRA rules. Of the total market risk RWA, 29 per cent is subject to CAD2 internal models and 71 per cent is under standard rules. Operational risk RWA increased by $2.5 billion, or 8 per cent. This is primarily determined by the change in income over a rolling three year time horizon and the growth reflects the strong performance of the Group over that period and the methodology change for Other APR. Basel III On 27 June 2013, the final texts of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) which together are referred to as CRD IV were published in the EU Official Journal of the European Parliament. The CRD IV package is the framework for the implementation of the Basel III proposals in the European Union. There are ongoing consultations in Europe on the implementation of CRD IV. The European Banking Authority (EBA) has issued, and will continue to issue, technical standards on the implementation of various aspects of CRD IV over the course of 2013 and 2014. The CRR has direct legal effect in the UK and will, for the most part, apply from 1 January 2014. The CRD will be transposed into UK national law by 31 December 2013 and therefore gives scope for UK national discretions to be applied. The PRA and the FCA are due to issue consultations in relation to the implementation of CRD IV in due course. The Group remains strongly capitalised with a focus on Core Tier 1 (CT1) and Common Equity Tier 1 (CET1) capital. We expect our CET1 ratio would be around 80 bps lower than our reported Basel II CT1 ratio on a pro forma basis.This is driven by increased regulatory deductions from CET1 and increased RWA, in particular the requirements for Credit Valuation Adjustments (CVA). This estimate is not a capital or RWA forecast as the actual outcome will depend on how the CRD IV rules are finally implemented, the future shape of the Group and the extent to which the PRA gives recognition to the Group's implementation of internal models for the calculation of RWA. The Group's Additional Capital Disclosures as at 30 June 2013 provide further information on the CRD IV capital position and leverage ratio and can be found at www.standardchartered.com Standard Chartered PLC Condensed consolidated interim income statement For the six months ended 30 June 2013 6 months ended 6 months ended 6 months ended Notes 30.06.13 30.06.121 31.12.121 $million $million $million Interest income 8,914 8,884 8,943 Interest expense (3,316) (3,510) (3,536) Net interest income 5,598 5,374 5,407 Fees and commission income 2,338 2,208 2,367 Fees and commission expense (243) (255) (241) Net trading income 3 1,685 1,560 1,179 Other operating income 4 610 484 700 Non-interest income 4,390 3,997 4,005 Operating income 9,988 9,371 9,412 Staff costs 5 (3,397) (3,306) (3,186) Premises costs 5 (426) (413) (450) General administrative expenses 5 (860) (841) (1,866) Depreciation and amortisation 6 (351) (319) (341) Operating expenses (5,034) (4,879) (5,843) Operating profit before impairment losses and taxation 4,954 4,492 3,569 Impairment losses on loans and advances and other credit risk provisions 7 (730) (575) (621) Other impairment Goodwill impairment 8 (1,000) - - Other 8 (11) (74) (122) Profit from associates and joint ventures 112 93 89 Profit before taxation 3,325 3,936 2,915 Taxation 9 (1,089) (1,036) (830) Profit for the period 2,236 2,900 2,085 Profit attributable to: Non-controlling interests 28 55 44 54 Parent company shareholders 2,181 2,856 2,031 Profit for the period 2,236 2,900 2,085 cents cents cents Earnings per share: Basic earnings per ordinary share 11 88.1 117.6 82.3 Diluted earnings per ordinary share 11 87.3 116.5 81.4 Dividends per ordinary share: Interim dividend declared 10 28.80 - - Interim dividend paid 10 - 27.23 - Final dividend paid 10 - - 56.77 $million $million $million Total dividend: Total interim dividend payable2 696 - - Total interim dividend (paid 11 October 2012) - 650 - Total final dividend (paid 14 May 2013) - - 1,366 1 Amounts have been restated as explained in note 32 2 Dividend declared/payable represents the interim dividend as declared by the Board of Directors on 6 August 2013 and is expected to be paid on 17 October 2013. This dividend does not represent a liability to the Group at 30 June 2013 and is a non-adjusting event as defined by IAS 10 'Events after the reporting period' Standard Chartered PLC Condensed consolidated interim statement of comprehensive income For the six months ended 30 June 2013 6 months ended 6 months ended 6 months ended 30.06.13 30.06.12 1 31.12.12 1 Notes $million $million $million Profit for the period 2,236 2,900 2,085 Other comprehensive income: Items that will not be reclassified to Income statement: Actuarial gains/(losses) on retirement benefit obligations 26 44 (76) - Items that may be reclassified subsequently to Income statement: Exchange differences on translation of foreign operations: Net (losses)/gains taken to equity (1,112) (220) 788 Net gains/(losses) on net investment hedges 81 (4) (69) Share of other comprehensive income from associates and joint ventures (3) 1 3 Available-for-sale investments: Net valuation (losses)/gains taken to equity (115) 317 737 Reclassified to income statement (210) (147) (189) Cash flow hedges: Net (losses)/gains taken to equity (161) 44 89 Reclassified to income statement (2) - (20) Taxation relating to components of other comprehensive income 64 (47) (85) Other comprehensive income for the period, net of taxation (1,414) (132) 1,254 Total comprehensive income for the period 822 2,768 3,339 Total comprehensive income attributable to: Non-controlling interests 28 39 1 83 Parent company shareholders 783 2,767 3,256 822 2,768 3,339 1 Amounts have been restated as explained in note 32 Standard Chartered PLC Condensed consolidated interim balance sheet As at 30 June 2013 Notes 30.06.13 30.06.121 31.12.121 $million $million $million Assets Cash and balances at central banks 12, 30 57,621 50,683 60,537 Financial assets held at fair value through profit or loss 12, 13 28,135 27,743 27,076 Derivative financial instruments 12, 14 54,548 52,530 49,495 Loans and advances to banks 12, 15 73,305 73,930 67,797 Loans and advances to customers 12, 16 285,353 272,453 279,638 Investment securities 12, 17 94,812 88,195 99,225 Other assets 12, 18 38,041 30,167 28,548 Current tax assets 198 268 215 Prepayments and accrued income 2,687 2,688 2,552 Interests in associates and joint ventures 1,662 1,408 1,527 Goodwill and intangible assets 20 6,100 7,056 7,302 Property, plant and equipment 6,759 5,575 6,620 Deferred tax assets 736 860 676 Total assets 649,957 613,556 631,208 Liabilities Deposits by banks 12, 21 45,012 44,754 36,427 Customer accounts 12, 22 371,314 350,248 372,874 Financial liabilities held at fair value through profit or loss 12, 13 22,456 19,067 23,064 Derivative financial instruments 12, 14 53,781 50,144 47,192 Debt securities in issue 12, 23 58,690 57,814 55,979 Other liabilities 12, 24 28,719 25,942 24,285 Current tax liabilities 1,286 1,186 1,066 Accruals and deferred income 4,212 4,171 4,811 Subordinated liabilities and other borrowed funds 12, 25 18,393 16,408 18,588 Deferred tax liabilities 178 144 161 Provisions for liabilities and charges 147 165 215 Retirement benefit obligations 26 411 579 491 Total liabilities 604,599 570,622 585,153 Equity Share capital 27 1,212 1,196 1,207 Reserves 43,556 41,109 44,155 Total parent company shareholders' equity 44,768 42,305 45,362 Non-controlling interests 28 590 629 693 Total equity 45,358 42,934 46,055 Total equity and liabilities 649,957 613,556 631,208 1 Amounts have been restated as explained in note 32 Standard Chartered PLC Condensed consolidated interim statement of changes in equity For the six months ended 30 June 2013 Share capital Share premium account Capital and capital redemption reserve1 Merger reserve Available-for-sale reserve Cash flow hedge reserve Translation reserve Retained earnings Parent company shareholders equity Non-controlling interests Total $million $million $million $million $million $million $million $million $million $million $million At 1 January 2012 1,192 5,432 18 12,421 (109) (13) (1,394) 23,167 40,714 661 41,375 Profit for the period - - - - - - - 2,856 2,856 44 2,900 Other comprehensive income - - - - 147 39 (215) (60) 2 (89) (43) (132) Distributions - - - - - - - - - (33) (33) Shares issued, net of expenses 1 22 - - - - - - 23 - 23 Net own shares adjustment - - - - - - - (284) (284) - (284) Share option expense, net of taxation - - - - - - - 181 181 - 181 Capitalised on scrip dividend 3 (3) - - - - - - - - - Dividends, net of scrip - - - - - - - (1,096) (1,096) - (1,096) At 30 June 2012 1,196 5,451 18 12,421 38 26 (1,609) 24,764 42,305 629 42,934 Profit for the period - - - - - - - 2,031 2,031 54 2,085 Other comprehensive income - - - - 440 55 724 6 2 1,225 29 1,254 Distributions - - - - - - - - - (27) (27) Shares issued, net of expenses 1 35 - - - - - - 36 - 36 Net own shares adjustment - - - - - - - (102) (102) - (102) Share option expense, net of taxation - - - - - - - 178 178 - 178 Capitalised on scrip dividend 10 (10) - - - - - - - - - Dividends, net of scrip - - - - - - - (311) (311) - (311) Other increases - - - - - - - - - 8 8 At 31 December 2012 1,207 5,476 18 12,421 478 81 (885) 26,566 45,362 693 46,055 Profit for the period - - - - - - - 2,181 2,181 55 2,236 Other comprehensive income - - - - (277) (132) (1,023) 34 2 (1,398) (16) (1,414) Distributions - - - - - - - - - (142) (142) Shares issued, net of expenses 4 17 - - - - - - 21 - 21 Net own shares adjustment - - - - - - - (129) (129) - (129) Share option expense, net of taxation - - - - - - - 103 103 - 103 Capitalised on scrip dividend 1 (1) - - - - - - - - - Dividends, net of scrip - - - - - - - (1,372) (1,372) - (1,372) At 30 June 2013 1,212 5,492 18 12,421 201 (51) (1,908) 27,383 44,768 590 45,358 1 Includes capital reserve of $5 million and capital redemption reserve of $13 million 2 For the period ended 30 June 2013, comprises actuarial gain, net of taxation and non-controlling interests of $37 million (30 June 2012: loss of $61 million and 31 December 2012: gain of $3 million) and share of comprehensive income from associates and joint ventures of $(3) million (30 June 2012: $1 million and 31 December 2012: $3 million) Standard Chartered PLC Condensed consolidated interim cash flow statement For the six months ended 30 June 2013 6 months ended 6 months ended 6 months ended Notes 30.06.13 30.06.12 1 31.12.12 1 $million $million $million Cash flows from operating activities Profit before taxation 3,325 3,936 2,915 Adjustments for: Non-cash items and other adjustments included within income statement 29 2,079 1,101 1,320 Change in operating assets 29 (35,808) (3,340) (5,069) Change in operating liabilities 29 26,942 13,187 5,783 Contributions to defined benefit schemes (77) (45) (158) UK and overseas taxes paid (836) (961) (806) Net cash (used in)/from operating activities (4,375) 13,878 3,985 Net cash flows from investing activities Purchase of property, plant and equipment (89) (73) (89) Disposal of property, plant and equipment 54 179 16 Acquisition of investment in subsidiaries, associates and joint ventures, net of cash acquired - (4) (59) Purchase of investment securities (72,839) (70,657) (86,226) Disposal and maturity of investment securities 74,828 67,564 77,763 Dividends received from investment in subsidiaries, associates and joint ventures 4 13 1 Net cash from/(used in) investing activities 1,958 (2,978) (8,594) Net cash flows from financing activities Issue of ordinary and preference share capital, net of expenses 21 23 36 Purchase of own shares (154) (316) (109) Exercise of share options through ESOP 25 32 7 Interest paid on subordinated liabilities (492) (503) (486) Gross proceeds from issue of subordinated liabilities 2,750 1,051 2,339 Repayment of subordinated liabilities (1,689) (1,303) (398) Interest paid on senior debts (500) (540) (327) Gross proceeds from issue of senior debts 4,252 11,924 (471) Repayment of senior debts (2,406) (6,122) 184 Dividends paid to non-controlling interests and preference shareholders, net of scrip (192) (84) (77) Dividends paid to ordinary shareholders, net of scrip (1,322) (1,045) (261) Net cash from financing activities 293 3,117 437 Net (decrease)/increase in cash and cash equivalents (2,124) 14,017 (4,172) Cash and cash equivalents at beginning of the period 79,518 69,566 83,282 Effect of exchange rate movements on cash and cash equivalents (903) (301) 408 Cash and cash equivalents at end of the period 30 76,491 83,282 79,518 1 Amounts have been restated as explained in note 32 This information is provided by RNS The company news service from the London Stock Exchange END IR GRGDILBGBGXL