I admired Standard Chartered from the outside for years. I recognised a bank with a differentiated franchise in some of the world’s most exciting markets; a bank with outstanding client relationships and bankers who preserve and promote those relationships; a bank with a comprehensive set of products which are directly relevant to the clients it serves. Having now spent almost nine months at the helm, I am delighted to share my view that my perceptions from the outside are fully correct.
It is clear that we have real challenges to fully realise our potential – challenges we created for ourselves and those produced by a difficult external environment. Our Management Team and I have undertaken the root-and-branch review that I promised when I first joined, and sought to address every issue we have identified. With the launch of our new strategic plan in November 2015, I am committed to demonstrating real discipline in execution and, starting from now, will update on our progress at each set of results.
The economic and geo-political backdrop for the Group clearly deteriorated over 2015 and has not improved into 2016. Chinese equity markets have been increasingly volatile, impacting sentiment around the world, and commodity markets have plumbed new lows. This combination of headwinds has had an impact on our performance, in particular in the second half of last year.
However, the weakness in our performance in 2015 is also partly the result of deliberate management actions. We have accelerated the necessary repositioning of our main businesses, tightened risk tolerances, reduced and liquidated risk concentrations, and restructured our organisation, including a significant reduction in staff numbers. The immediate impact of these actions has been reduced income following business disposals and asset reductions, upfront costs to gain future efficiencies, and higher levels of impairments. These actions impacted our profits in 2015, but they were essential to secure the foundations and to reposition us for stronger returns and achieve our ambition of at least 8 per cent return on equity (ROE) by 2018 and 10 per cent by 2020.
The challenging external environment is not an excuse for our performance. We are not unwitting victims. Rather, the external challenges increase our urgent need to take all necessary steps to address the structural and operational issues we have identified as critical to improving returns. During 2015, we stepped up our cost reduction targets, built more capital, reduced risk exposures ahead of many of our competitors, and maintained an acute focus on returns. In this environment, these are the essential priorities that will ensure we stay fit and able to take advantage of attractive opportunities as they become available, and when other banks may be less able to react.
Our strategy, announced in November 2015, will address our performance issues and reposition our business on a strengthened platform. We have made good progress in a number of areas, though there is much work still to do during 2016 and beyond. The strategy’s three core priorities are to secure our foundations, get lean and focused and invest and innovate in our franchise.
By executing our aggressive transformation programme, we will position the Group for much improved profitability and create the capacity to continue to invest in our key areas of strength. We are investing into areas such as the role we play in the ongoing opening of China, our differentiated presence in Africa, and our strong position serving the rising affluent populations in our markets.
Securing the foundations
During 2015, and in particular since November 2015, we have built a stronger and more diverse balance sheet. We have organised the Group to be more efficient, assigning clearer accountability for results. Our strong balance sheet and clearer structure will underpin our ability to achieve our goals, in particular at a time when the external conditions are challenging.
In July 2015, we reorganised the Group around a new and simpler organisation structure, stripping out duplication and inefficiency and shifting greater accountability for performance to business and regional managers. While this simplification substantially reduces our cost base, the primary benefit is our ability to clarify accountability and improve decision-making speed and quality.
The Management Team was completed with the hiring of Mark Smith as the new Group Chief Risk Officer in January 2016, and Simon Cooper who joins to head our Corporate and Institutional Banking business in April 2016. Both Mark and Simon have significant global experience and deep knowledge of our businesses.
With strong shareholder support of our rights issue, we strengthened our financial position, delivering a Common Equity Tier 1 capital ratio of 12.6 per cent, temporarily suppressed by our restructuring initiatives, a liquid asset ratio of 30.9 per cent and a leverage ratio of 5.5 per cent.
We outlined a tightened risk tolerance covering every area of the Group, including operational risk, conduct risk, market risk and credit risk. As a result, we identified a portfolio of around $20 billion of risk-weighted assets (RWAs) that includes a small number of exposures that have, over recent years, made the Group more sensitive to idiosyncratic risks. These positions are being assertively managed out. With exposures that are more diverse and less concentrated, the remaining portfolio should be less sensitive to adverse economic and credit cycles.
We have made progress on identifying and optimising $50 billion of low-returning relationship RWAs in Corporate and Institutional Banking and Commercial Banking. Early indications suggest that a significant proportion of these relationships can be retained at materially improved returns. We are aiming to complete this exercise within the next 18-24 months.
Finally, we highlighted two markets for specific focus. One is Indonesia where we will continue to explore the best way to achieve a single, properly scaled entity, via the merger of our two entities or through selling one or the other. The second is Korea, where we launched a Special Retirement Plan covering over 1,000 staff exits with annualised savings of over $100 million per annum. We have also started to reshape our branch network through our new association with Shinsegae. Our returns in Korea remain challenging but we are determined to reduce our losses there and return the business to profitability.
Collectively, our restructuring actions have cost $1.8 billion so far. We remain confident in the original estimated cost for our planned restructuring of around $3 billion.
There is clearly more work to do to restructure these portfolios and to demonstrate the financial benefit, but we are making good progress and believe these actions will deliver sustainable improvements in returns over time.
Getting lean and focused
In addition to the immediate actions on the Group’s foundations, we have also made significant progress in reducing costs and improving efficiency. Our early efforts have resulted in Group operating costs, excluding the UK bank levy and regulatory costs, reducing by 7 per cent year-on-year. As part of our ongoing cost management, we also launched a Group-wide redundancy exercise as part of the planned restructuring, which was largely completed at the end of the year.
We have identified opportunities for future savings, launched our key investment initiatives and accelerated the transformation of each of our client segments. We have aligned key support functions closely with business managers, giving the members of our Management Team the ability to manage their businesses from end to end – improving efficiency and accountability. In 2015, we announced a new organisation structure, including reducing the current eight geographic regions to four and aligning key products with their most appropriate client segment. We also made several client transfers, notably combining Local Corporate Clients with our Commercial Clients. Each of these changes will only be reflected in our disclosures from the 2016 financial year. However, a restatement of prior periods will be provided early in 2016.
Building returns in Corporate and Institutional Banking
The returns we are currently earning from Corporate and Institutional Banking are well below the 10 per cent minimum threshold we have set for each of our businesses. Returns have been impacted by loan impairments, income pressures and high expenses as a proportion of income. We are acting on concrete plans to address each component of the profitability challenge.
Our core Corporate and Institutional Banking business is profitable and will grow in a less severe external environment. Our Corporate and Institutional Banking clients value our services, a fact reinforced by early progress in our RWA optimisation exercise to either reduce RWAs or manage up the returns on a portfolio of approximately $40 billion RWAs. We have differentiated offerings in products that deliver good returns and in markets that will resume strong growth once through the current period of economic consolidation. We win a good proportion of regional cash management and financing mandates across our markets. We are leading the expansion of renminbi services across the world. And we have deep local-currency financial markets knowledge and capabilities.
We have been repositioning our balance sheet so that the underlying strengths of our business become our areas of focus, reducing the distraction of volatile and adverse impairments. Our management and staff are well aware of the required changes and are operating at full speed to reposition our business and improve our returns.
Overhauling Commercial Banking
Our Commercial Banking business is very uneven across our markets with some presences more established than others. Overall performance has been poor with high loan impairments and weak income. To address a prior lack of focus on this client base, we created the Commercial client segment in 2014 with the larger corporate clients coming out of our Retail business and the smallest of our Corporate & Institutional Clients. At the end of 2015, we roughly doubled the size of the segment by adding Local Corporate Clients from Corporate and Institutional Banking. We have established Commercial Banking as a focused division of small and medium-sized corporate clients whose needs are substantially local but who can leverage the Group’s strong cross-border capabilities. We are rebuilding a consistent coverage and risk management organisation model to deal with this client base.
We have put a management structure in place for Commercial Banking with experienced regional managers and we are substantially upgrading our credit risk approach. We exited the former small and medium-sized enterprise business in the UAE and will continue to reduce operational risk through the completion of our customer due diligence remediation programme. To improve returns, we will upgrade or exit almost $10 billion of low returning RWAs, close to one-quarter of this client base.
From these secure foundations, we are looking to build the Commercial Banking business of our future. We continue to build out our network proposition, partnering with our Corporate and Institutional Banking business to bank their buyers and suppliers. Finally, the Commercial Banking team, has a renewed focus on expanding the client base with almost 3,000 new customers added across the network in 2015.
Given our starting point, there is no quick solution to achieving sustainably better returns from this segment. However, with a consistent and client-focused approach, we will build a competitive business that leverages the best of Standard Chartered to serve this important client base in our markets.
Transforming Retail Banking
Our Retail Banking transformation is well under way and has continued to make good progress in 2015. We have taken upfront charges of some $400 million to reduce ongoing costs, notably in Korea, and are investing to build a much more robust, efficient and nimble systems infrastructure across the Group. In many of our markets, our brand resonates with the growing affluent and emerging affluent client segments and we will invest to reinforce that brand. This, combined with a plan to deepen our presence in core cities where there is a large and growing affluent client base, is powering the growth of Priority Clients. Excluding transfers of clients into Priority, this client sub-segment grew income by over 10 per cent year-on-year. Priority Clients contributed 35 per cent of Retail Clients’ income in 2015, up from 27 per cent in 2014.
Our Retail business in core cities, excluding China and Korea, already generates equity returns well in excess of 10 per cent. We aim to replicate this success across the rest of our focus cities via selective investment and disciplined optimisation of branches. Where we cannot see a route to improved returns in an acceptable timeframe, we will scale down or exit our presence in cities and markets.
As mentioned above, we have taken action to manage our expense base in Korea and focus on growth through operational improvements and our cooperation with Shinsegae. Nevertheless, we expect our Korean retail operation to be challenged for some time.
Over the course of 2016, we will implement the first stages of our infrastructure overhaul, driving improved efficiency and service quality. We will substantially improve our digital offerings both at the point of client interface as well as through our operational processes. Taken together, we are confident that delivery against these targets will drive returns and growth to strong levels over the next three years.
Investing in Private Banking and Wealth Management
We have an outstanding distribution platform for wealth products delivered through our Retail and Private Banking segments. We will substantially increase our investment in both the Wealth platform and the Private Banking coverage channels in addition to the Retail investments mentioned above. Our primary focus in Wealth Management is to upgrade our infrastructure to improve our digital offering and service quality. We will seek to grow our assets under management sourced through our Private Bank by increasing the number of relationship managers, increasing the number of clients sourced through our corporate relationships and upgrading appropriate Retail Clients.
We have real competitive advantages in these business areas. Our strong Wealth Management platform, local presence, strong brand and advice capabilities position us very well versus local and global competition. The underlying demographic trends make this a particularly natural place for investment. Our 2015 performance was severely impacted by a concentrated credit loss of $94 million in the first half. We have reviewed, and will continue to strengthen, our credit process to avoid a repeat. Our revised business model will focus less on concentrated lending and more on the distribution of Wealth Management products and advice. As such, we began our investment process in 2015, announcing the addition of a new head of the Private Banking and Wealth Management business, recruiting relationship managers and beginning our technology investment programme.
Establishing best-in-class control and conduct capabilities
Our commitment to improve our conduct and controls is factored into every strategic and operational decision we make. We are on the front line in the fight against financial crime and take this responsibility most seriously. We have invested significant amounts in people and into our underlying conduct and compliance infrastructure with a total cost in 2015 of over $1 billion, up 40 per cent year-on-year. We continue to cooperate fully with the US authorities and the Financial Conduct Authority in their ongoing investigations. As we stated in November 2015, we remain unable to determine when these investigations will conclude or the size of any potential fines that might result. We will provide further updates in due course.
Summary and outlook
We have a good and valuable franchise, core financial strength, outstanding client relationships, and the right team of people. We have made substantial strides in securing the Group’s foundations, we continue to take action to get leaner and more focused, and we are creating capacity to invest.
Given current market conditions and the early stage of implementation of our new strategy, we expect the financial performance of the Group to remain subdued during 2016. We will continue to take the necessary and sometimes painful actions to reposition the Group for returns and disciplined growth. We will increase the value of our franchise through the relentless focus on execution that we set out alongside our strategy in November 2015. We will continue to balance support for strong, high-returning clients with discipline on our tightened risk tolerances. We will continue to take out substantial costs and invest much of these savings into the future of the Group. We will also retain a strong balance sheet which both protects us from economic volatility and positions us for future opportunity when conditions allow.
Finally, I would like to thank our clients, all the staff at Standard Chartered and you, our shareholders, for your support. The past year has been tough for everyone in the Group and for all of us as shareholders. We are the custodians of a fabulous franchise and, through continued hard work and clear decisions, we intend to achieve our ambition of delivering at least 8 per cent ROE by 2018 and 10 per cent by 2020.