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FINANCIAL INSTITUTIONS
CREDIT OPINION25 January 2019
Update
Analyst Contacts
Srikanth Vadlamani +65.6398.8336VP-Sr Credit [email protected]
Alessandro Roccati +44.20.7772.1603Senior Vice [email protected]
KomaresanSubramanian
+65.6311.2602
Associate [email protected]
Graeme Knowd [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Standard Chartered BankUpdate following A1 deposit ratings affirmation
SummaryOn 22 December 2018, we affirmed the deposit ratings and senior unsecured debt ratings ofStandard Chartered Bank (SCB) at A1.
Standard Chartered Bank's (SCB) baseline credit assessment (BCA) was also affirmed at baa1.
At the same time, SCB's subordinated debt rating was downgraded by one notch to Baa2from Baa1.
Standard Chartered Bank(SCB) is the principal operating subsidiary of Standard CharteredPLC (SCPLC). SCPLC is the listed entity of the Standard Chartered Group.
SCB’s A1 bank deposit rating incorporates a three-notch uplift from the bank's BCA of baa1.The three-notch uplift takes into account our Advanced Loss Given Failure (LGF) analysis. Theratings do not include any uplift for external support.
SCB’s baa1 BCA reflects the group’s strong capital and liquidity , as well as its healthy fundingstructure. The BCA also factors in the stabilization in the group's asset quality. At the sametime, the BCA also incorporates the weak profitability of the group.
After factoring in the forward-looking issuance plan of the bank, the volume of subordinateddebt and the volume of loss-absorbing capital junior to it are lower than what had beenpreviously factored into their rating. This has driven the downgrade of the subordinated debtrating.
In addition to factoring in the bank's issuance plan, the LGF analysis also excludes 'hightrigger' AT1 capital instruments issued by SCPLC, which had been previously erroneouslyincluded in the LGF analysis.
For a discussion of the rating outlook and detailed credit considerations, please see the latestCredit Opinion for Standard Chartered PLC.
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Support and structural considerationsLoss Given Failure (LGF) analysisSCB is subject to the EU's directive on bank recovery and resolution, which we consider to be an operational resolution regime.
We assume residual tangible common equity at 3% and post-failure losses at 8% of tangible banking assets, a 25% runoff in juniorwholesale deposits, and a 5% runoff in preferred deposits. We assign a probability of 25% to deposits, in preference to seniorunsecured debt.
The balance sheet at failure, which forms the basis for our advanced LGF analysis, includes the combined balance sheet of SCPLC andSCB. At the same time, we exclude deposits and assets owned by the group's overseas subsidiaries, given that they lie outside the scopeof the UK authorities.
SCB's instruments ratings are based on the group's forecast liability structure as of end-2021.
SCB's long-term deposit and senior unsecured debt ratings of A1 in particular reflect group's unique corporate profile and liabilitystructure. This structure features a substantial amount of securities that could be bailed in during a resolution to the benefit of moresenior creditors. As a result the expected loss for depositors and senior creditors in resolution is reduced.
SCB's Baa2 subordinated debt rating reflects our Advanced LGF analysis, which indicates a moderate loss given failure.
After factoring in the forward-looking issuance plan of the bank, the volume of subordinated debt and the volume of loss-absorbingcapital junior to it are lower than what had been previously factored into their rating. This has driven the downgrade of thesubordinated debt rating.
SCB's Baa3(hyb) junior subordinated debt ratings reflect (1) our Advanced LGF analysis, which indicates a high loss given failure; and (2)an additional notching to capture the risk of differential probabilities of default across different instruments.
Government support considerationsSCB's ratings are based solely on its BCA and our LGF analysis. These ratings do not include any uplift for external support.
The current policy direction in the UK clearly suggests that the Government of United Kingdom (Aa2 stable) is unlikely to provideextraordinary support to banks in times of need. Moreover, aside from its headquarters in the UK, the group does not operate amaterial retail business in the country, thereby making it even less likely that the government would extend support to the group.
While SCB does operate in other jurisdictions with more supportive regulatory approaches, we would expect any support provided tobe ring-fenced to the group's local operations in those jurisdictions. Consequently, while we include market-specific systemic support inthe ratings of a number of SCB's subsidiaries and affiliates, such support is not taken into account in rating the UK-incorporated SCB.
Counterparty Risk (CR) AssessmentCounterparty Risk (CR) Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and aredistinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default andthe expected financial loss suffered in the event of default, and (2) apply to counterparty obligations and contractual commitmentsrather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds,contractual performance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.
SCB's CR Assessment is positioned at A1(cr)/P-1(cr)The CR Assessment is positioned three notches above SCB's BCA of baa1, based on the buffer against default provided to the seniorobligations represented by the CR Assessment by subordinated instruments. The main difference with our Advanced LGF approachused to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, ratherthan the expected loss; therefore, we focus purely on subordination and take no account of the volume of the instrument class.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 25 January 2019 Standard Chartered Bank: Update following A1 deposit ratings affirmation
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Counterparty Risk Ratings (CRR)Moody’s Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debtcounterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are nothonoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralizedportion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchaseagreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit,guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operatingfunctions.
SCB's CRR is positioned at A1(cr)/P-1(cr)In assigning CRRs to SCB and its branches, our approach starts with the banks' adjusted Baseline Credit Assessment (BCA) and usesthe agency’s existing advanced LGF approach that takes into account the level of subordination to CRR liabilities in the bank's balancesheet and assumes a nominal volume of such liabilities.
The CRR for the rated bank subsidiaries and branches of SCB are three notches higher than the adjusted BCA. Although SCB is likelyto have more than a nominal volume of CRR liabilities at failure, this has no impact on the ratings because the significant level ofsubordination below the CRR liabilities at SCBalready provides the maximum amount of uplift allowed under our rating methodology.
In our view secured counterparties to banks typically benefit from greater protections under insolvency laws and bank resolutionregimes than do senior unsecured creditors, and that this benefit is likely to extend to the unsecured portion of such securedtransactions in most bank resolution regimes. We believe that in many cases regulators will use their discretion to allow a bank inresolution to continue to honor its CRR liabilities or to transfer those liabilities to another party who will honor them, in part becauseof the greater complexity of bailing in obligations that fluctuate with market prices, and also because the regulator will typically seekto preserve much of the bank’s operations as a going concern in order to maximize the value of the bank in resolution, to stabilize thebank quickly, and to avoid contagion within the banking system. CRR liabilities at SCB and its rated branches therefore benefit from thesubordination provided by more junior liabilities, including all unsecured debt obligations at SCPLC and SCB.
3 25 January 2019 Standard Chartered Bank: Update following A1 deposit ratings affirmation
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Ratings
Exhibit 1Category Moody's RatingSTANDARD CHARTERED BANK
Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits A1/P-1Baseline Credit Assessment baa1Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured A1Subordinate Baa2Jr Subordinate -Dom Curr Baa3 (hyb)Other Short Term (P)P-1
PARENT: STANDARD CHARTERED PLC
Outlook StableSenior Unsecured A2Subordinate Baa2Jr Subordinate Baa3 (hyb)Pref. Stock Non-cumulative Ba1 (hyb)
STANDARD CHARTERED AG
Counterparty Risk Rating (P)A1/(P)P-1Bank Deposits (P)A1/(P)P-1Baseline Credit Assessment baa1Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment A1(cr)/P-1(cr)Issuer Rating (P)A1ST Issuer Rating (P)P-1
STANDARD CHARTERED BANK (SINGAPORE)LIMITED
Outlook Rating(s) Under ReviewCounterparty Risk Rating Aa2/P-11
Bank Deposits Aa3/P-12
Baseline Credit Assessment a23
Adjusted Baseline Credit Assessment a23
Counterparty Risk Assessment Aa2(cr)/P-1(cr)2
Issuer Rating Aa33
ST Issuer Rating P-13
[1] Rating(s) within this class was/were placed on review on June 19 2018 [2] Rating(s) within this class was/were placed on review on February 22 2018 [3] Placed under review for possibledowngrade on February 22 2018Source: Moody's Investors Service
4 25 January 2019 Standard Chartered Bank: Update following A1 deposit ratings affirmation
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5 25 January 2019 Standard Chartered Bank: Update following A1 deposit ratings affirmation
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Americas 1-212-553-1653
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6 25 January 2019 Standard Chartered Bank: Update following A1 deposit ratings affirmation