Interim Results 2014 Part 1

RNS Number : 3926O

Standard Chartered PLC

06 August 2014

Standard Chartered PLC - Highlights

For the six months ended 30 June 2014

Reported results

· Operating income¹ down 5 per cent to $9,269 million from H1 2013 and up 4 per cent from $8,920 million in H2 2013

· Profit before tax¹ of $3,268 million down 20 per cent from $4,088 million in H1 2013 and up 14 per cent from $2,870 million in H2 2013

· Statutory profit attributable to ordinary shareholders² is $2,310 million, up 8 per cent from $2,131 million in H1 2013 and up 24 per cent from $1,858 million in H2 2013

· Customer advances increased 3 per cent compared to H2 2013 to $305 billion from $296 billion and customer deposits were flat at $391 billion

Performance metrics³

· Dividend per share flat at 28.80 cents per share

· Normalised earnings per share declined 21 per cent to 96.5 cents from 121.9 cents in H1 2013

· Normalised return on ordinary shareholders' equity of 10.4 per cent (H1 2013: 13.3 per cent; H2 2013: 9.1 per cent)

Capital and liquidity metrics

· Tangible net asset value per share increased 3 per cent compared to H2 2013 to 1,646.8 cents (H1 2013: 1,537.9 cents, H2 2013: 1,597.5 cents)

· Common Equity Tier 1 capital ratio at 10.7 per cent on an end point basis under Basel III/CRD IV rules⁴

· Advances-to-deposits ratio of 78.1 per cent (H1 2013: 76.6 per cent, H2 2013: 75.7 per cent)

· Liquid asset ratio of 30.5 per cent (H1 2013: 28.3 per cent, H2 2013: 29.8 per cent)

Significant highlights

· We are taking action to address near term performance challenges, to embed our refreshed strategy and aspirations, including reorganising the bank, refocusing marketing and sales efforts, divesting non-core businesses and optimising risk weighted assets

· We continue to build market share across our core products. Volumes in Foreign Exchange are up 24 per cent and up 45 per cent in FX options

· We have strengthened our position as the leading transaction bank for corporates in Asia and rank #2 in trade finance globally. We are also ranked #2 underwriter of offshore Renminbi bonds

· We have maintained a tight discipline on costs, which are up only 1 per cent despite inflation, continued investment and increasing costs of regulation

· The balance sheet remains in excellent shape - diversified, well capitalised and highly liquid - and loan impairment is in line with our expectations

Commenting on these results, the Chairman of Standard Chartered PLC, Sir John Peace, said:

"The Group's first half performance was impacted primarily by a downturn in Financial Markets and the challenges we face in Korea. But the Group remains strong, with excellent capital and liquidity levels, a strong balance sheet, and a powerful international network. Whilst our first half performance is clearly not as good as in previous periods, we have taken assertive action to manage short term performance issues, and to position the Group to take advantage of considerable long-term growth opportunities we see across our markets. We have taken market share in a number of core products as we continue to support the growth aspirations of our clients."

¹All three periods profit before tax excludes own credit adjustment; H1 2013 profit before tax also excludes goodwill impairment

²Profit 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 117)

³ Results on a normalised basis reflect the results of Standard Chartered PLC and its subsidiaries (the 'Group') excluding items set out on note 11 on page 118

⁴See additional information on Capital page 88

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
Group summary	10
Client Segments, Geography and Products	12
Balance sheet	26
Risk review	28
Capital	86
Financial statements
Condensed consolidated interim income statement	97
Condensed consolidated interim statement of comprehensive income	98
Condensed consolidated interim balance sheet	99
Condensed consolidated interim statement of changes in equity	100
Condensed consolidated interim cash flow statement	101
Notes	102
Statement of directors' responsibilities	152
Independent review report	153
Additional information	154
Glossary	172
Financial calendar	178
Index	179

Unless another currency is specified, the word 'dollar' or symbol '$' in this document means 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; Greater China includes Hong Kong, Taiwan, China and Macau; North East (NE) Asia includes Korea, Japan and Mongolia; Middle East, North Africa and Pakistan (MENAP) includes United Arab Emirates (UAE), Bahrain, Qatar, Lebanon, Jordan, Saudi Arabia, Egypt, Oman, Iraq and Pakistan; South Asia includes India, Bangladesh, Nepal and Sri Lanka; and ASEAN includes Singapore, Malaysia, Indonesia, Brunei, Cambodia, Laos, Philippines, Thailand, Vietnam, Myanmar and Australia.

Standard Chartered PLC - Summary of results

For the six months ended 30 June 2014

		6 months ended	6 months ended	6 months ended
		30.06.14	30.06.13	31.12.13
		$million	$million	$million

Results
Operating income (excludes own credit adjustment) ¹		9,269	9,751	8,920
Impairment losses on loans and advances and other credit risk provisions		(846)	(730)	(887)
Goodwill impairment		-	(1,000)	-
Other impairment		(185)	(11)	(118)
Profit before goodwill impairment and own credit adjustment		3,268	4,088	2,870
Profit before taxation		3,253	3,325	2,739
Profit attributable to parent company shareholders		2,360	2,181	1,909
Profit attributable to ordinary shareholders²		2,310	2,131	1,858


Balance sheet
Total assets		690,138	649,957	674,380
Total equity		48,562	45,358	46,841
Total capital base (CRD IV)		60,691	-	56,369
Total capital base (Basel II)		-	54,650	-


Information per ordinary share		Cents	Cents	Cents
Earnings per share - normalised ³		96.5	121.9	82.4
- basic		94.6	88.1	76.5
Dividend per share⁴		28.80	28.80	57.20

Net asset value per share		1,909.9	1,814.7	1,872.8
Tangible net asset value per share		1,646.8	1,537.9	1,597.5


Ratios
Return on ordinary shareholders' equity - normalised basis ³		10.4%	13.3%	9.1%
Cost to income ratio - normalised basis ³		54.7%	51.4%	57.6%
Capital ratios⁵
Common Equity Tier 1 (CRD IV)		10.5%	-	10.9%
Common Equity Tier 1 (CRD IV) end point basis (see page 88)		10.7%	-	-
Core Tier 1 capital (Basel II)		-	11.4%	-
Total capital (CRD IV)		17.3%	-	17.0%
Total capital (Basel II)		-	16.9%	-


¹	Excludes own credit adjustment of $(15) million (30 June 2013: $237 million and 31 December 2013: $(131) million)
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 117)
³ ⁴	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 118 Represents the interim dividend per share declared for the six months ended 30 June 2014 and 30 June 2013 and the recommended final dividend per share for the six months ended 31 December 2013 (subsequently declared at the Annual General Meeting on 8 May 2014 and recognised in these financial statements)
⁵	See additional information on Capital on page 90

Standard Chartered PLC - Chairman's statement

Whilst the longer-term opportunities for Standard Chartered remain compelling, the first six months of 2014 have been challenging:

· Income excluding own credit down 5 per cent to $9.3 billion

· Profit before taxation, goodwill and own credit was down 20 per cent to $3.3 billion

· Normalised earnings per share were down 21 per cent to 96.5 cents

The Board has declared an interim dividend of 28.80 cents per share.

The Group's performance has continued to be affected by difficult market conditions, including the cyclical downturn in sentiment towards emerging markets. In addition, there have been some issues specific to Standard Chartered, such as the problems in Korea.

However, we continue to see strong opportunities for the business in the longer term. And with a strong balance sheet, we will continue to support the people and companies driving investment, trade and the creation of wealth across Asia, Africa and the Middle East.

Since announcing our refreshed strategy earlier this year, and implementing the new organisation on 1 April 2014, we have moved quickly to dispose of non-core businesses and reduce costs, whilst at the same time taking further steps to de-risk the business.

The intensity of regulatory pressure and political risk, at a time of market weakness, is putting huge pressure on bank boards and management leadership generally. However, we remain focused on implementing the refreshed strategy and are determined to return the bank to a growth trajectory which we believe will create significant value for our shareholders. The Board remains intensely focused on our shareholders' interests.

At the same time, our focus on conduct has intensified. We expect the right behaviour from every employee at all times, as being Here for good continues to sit at the heart of our business.

Sir John Peace

Chairman

6 August 2014

Standard Chartered PLC - Group Chief Executive's review

Our performance in the first half of 2014 is clearly disappointing. It is not what we strive for and not what our investors expect. In March, we made clear that this first half would be tough, and we were even more specific in our pre-close trading statement in June. The reasons for our weaker performance should be equally clear: continued Financial Markets weakness, challenges in Korea as we reshape our business there, and an uptick in impairment, largely due to a commodity fraud exposure in China and write-offs relating to pre-crisis strategic investments. Evolving regulatory requirements continue to add upward pressure - and uncertainty - to costs, while structurally impacting the income and return profile of some products.

We are taking action to get us back on the track of sustainable, profitable growth, because that is how we have driven value creation for our shareholders in the past, and how we will do so in future. It is worth noting that, despite the disappointing first half of 2014, we delivered more profit for our shareholders during these six months than we did in the whole of 2006 at the peak of the pre-crisis banking boom. Not many banks can make that claim.

We have refreshed and sharpened our strategy, and are executing it at pace. Over the past six months, we have completely reorganised the Group to make us fitter, more flexible and better aligned to our strategic aspirations. We have shifted our resource allocation, disposing of several non-strategic businesses, managing costs and capital deployment very tightly, and stepping up investment in priority areas. We have reset our client segment strategies, revised our product priorities and rethought the way we are approaching critical infrastructure and platform decisions.

Some of these changes have helped near-term performance. Some, such as tightening risk-weighted asset (RWA) deployment, or de-risking unsecured business in our Retail client segment, have exacerbated near-term pressures. However, the overarching objective is clear: to get us back to sustainable, profitable growth, delivering returns above our cost of capital.

This does not mean that we are ignoring short-term performance, including the two biggest challenges in the first half of 2014 - Financial Markets and Korea.

Financial Markets

In the first half of 2014, we saw Financial Markets income fall 20 per cent, or $432 million, against a very strong first half in 2013, up 6 per cent on the first half of 2012. The pressures on Financial Markets are of course not peculiar to us. Every bank is facing challenges as a result of sweeping regulatory changes and a low-rate, low-volatility environment.

The question is how much of this reduction is structural, and thus irreversible, and how much is cyclical. The answers vary by bank, depending on product and client mix, on geography, and on the balance of client income versus own account.

Our business is heavily client-driven, so less reliant on own account income; more oriented towards corporate clients rather than financial institutions, so shorter-dated and less complex; and more 'vanilla' than highly structured. We are also much more concentrated on emerging markets than most of our major competitors. This means that we have been heavily affected by cyclical factors, less so by structural changes. Low rates and low volatility mean less corporate hedging, tighter spreads and more challenging conditions for market making. Negative sentiment towards emerging markets reduces activity and impacts inventory values.

Most of the income reduction was in Foreign Exchange (FX) and Rates. In FX, the largest component of Financial Markets income, we saw strong growth in volumes, with Cash FX notional up 24 per cent year-on-year and FX Option notional up 45 per cent. This is against a pretty flat market, so we are winning market share. However, low volatility meant spreads fell, as did the gains from market making, so income fell 24 per cent, or $199 million. FX remains very attractive: it generates strong returns and is an integral part of how we support our clients as they invest and trade.

In Rates, volumes fell by 22 per cent with persistently low interest rates making clients less keen to hedge. Margins also fell, so income fell by 33 per cent, or $181 million. Most of this is cyclical, a result of the interest rate environment. However, longer-tenor, more complex derivatives face more of a structural challenge, given the impact of margining and capital requirements for non-centrally cleared derivatives. We are not immune to these changes, and areas such as hedging for project finance have been hit quite hard, but most of our business comprises relatively short-dated hedging for corporate clients off the back of trade or other commercial finance. According to Asia Risk Rankings, we are number one in corporate derivatives in Asia.

Our response to the challenges we face in Financial Markets reflect the mix of cyclical and structural factors, and the fact that even with this depressed performance, Financial Markets still produces a return on capital above the average for the Group as a whole. Financial Markets costs are down. Productivity is up. We are shifting resources from the areas most affected by structural change towards the client-driven flow businesses that play to our strengths and that we are confident will bounce back.

Korea

Alongside Financial Markets, Korea was the other big challenge in the first half of 2014. Korea made a loss of $127 million, a $264 million decrease year-on-year. As we have said before, there is no 'silver bullet' in Korea. Turning this business around will take time and a lot of work on multiple fronts, not least because the industry as a whole faces huge challenges.

We are making progress. We have announced the sale of our consumer finance and savings bank businesses. This will have some negative impact on income, but the benefits in terms of costs, headcount, loan impairment and capital will more than offset this. We continue to take action on costs. Headcount is down around 9 per cent year-on-year. The branch network is down by 47 outlets, or 13 per cent year-on-year.

We continue to de-risk the balance sheet, tightening underwriting criteria for unsecured Retail lending and exiting third-party sales channels. As a result, our unsecured credit card and personal loan balances are down 10 per cent on a constant currency basis in the first half of 2014. While filings under Korea's Personal Debt Rehabilitation Scheme remain elevated, we have seen noticeably fewer filings from loans written in the last six months.

Our actions to reshape the business have had a negative impact on this year's performance. De-risking and withdrawal from direct sales has hit income. Costs in the first half include $32 million of Special Retirement Plan expenses. Performance in the first half of this year has also been hit by lower principal finance gains and generally weak trading conditions, particularly in Financial Markets.

We continue to build business with Korean companies elsewhere in the network. This income, which is not included in our Korea numbers, amounted to about $100 million in the first half of 2014 and generates very attractive returns. With the recent announcement of renminbi (RMB) clearing and exchange in Seoul, we see a significant opportunity to leverage our distinctive capabilities in this arena. Just under 2 per cent of Korea's exports to China are currently settled in RMB and just under 1 per cent of imports. With China now settling more than 15 per cent of its global trade value in RMB, this is a considerable growth opportunity.

There is no quick fix for Korea, but we are making progress, and we are determined to get this business into better shape: more focused, more efficient and delivering better returns.

Opportunities in our markets

Financial Markets and Korea accounted for much of the profit shortfall in the first half of 2014. However, we remain confident in the strong growth of the opportunities across our markets and in our ability to make the most of them.

Our markets across Asia, Africa and the Middle East are continuing to grow rapidly, and demand for financial services is growing faster than GDP. To make the most of this opportunity we have set out five aspirations, and to make us more effective in delivering against these aspirations, we have reorganised the Group around our key client segments - Corporate & Institutional, Commercial & Private Banking and Retail. Although the new organisation has only been in effect for four months, it is making a difference in how we look at our business and how we serve our clients.

Corporate & Institutional Clients

The Corporate & Institutional segment generates around 60 per cent of total income. This is the core of what used to be called Wholesale Banking. In the first half of 2014, profits were down 17 per cent year-on-year, largely due to lower Financial Markets income as well as an increase in impairment.

In this segment, we are focused on building ever deeper relationships with our clients, concentrating on our core commercial banking capabilities and putting even greater emphasis on our strengths as a network bank, providing seamless support to our clients as they trade and invest across borders. Network income comprises over half of total client income.

Our market position remains very strong. We are a top two global trade bank as measured by SWIFT messages, and our market share is stable. According to East & Partners latest survey, we are not just number one in transaction banking relationships in Asia, but strengthening our lead. This is despite the actions we have taken to cut back on low-yielding RWA.

We have a very full agenda for this client segment, including deepening relationships, optimising return on capital and doing more with institutional investors. We are also working harder to leverage the relationships we have with these clients for the benefit of the Group as a whole: introducing owners and senior managers to our Private Banking offering and providing employee banking solutions through our Retail segment.

Commercial & Private Banking Clients

The Commercial and Private Banking Clients segment group has only existed since April 2014.

Commercial Clients combines the smallest, or middle-market, clients from our old Wholesale Banking business with the Medium Enterprise clients from our old SME business. There are about 50,000 clients in total with 90 per cent of the income from the top nine markets. This new segment has started life with a sharp drop in profit, down 61 per cent or $261 million. About 40 per cent of this is due to lower principal finance income. We had profitable realisations in the first half of 2013, valuation losses in the first half of 2014. Another 20 per cent is due to lower Financial Markets income, and higher loan impairment, mainly in Hong Kong and Korea, accounted for around another 20 per cent.

Despite this somewhat difficult start, we are enormously excited about the potential for the Commercial Client segment. Mid-sized companies play a huge role in the economies in which we operate, and represent a significant portion of the total banking wallet. However, we have never given this segment the focus it deserves. Our immediate priority is to bring together the teams, rationalising and standardising processes, such as credit and client due diligence. We are refining the product offering and delivery model and working together with the Corporate & Institutional segment to develop supply chain solutions that turn us from being a provider of finance to being a business partner that enhances supply chains, efficiency and resilience.

Our commercial clients are largely family-owned businesses, and the families are a perfect fit for Private Banking. However, many, perhaps most, are not aware that it exists. So we are making introductions, doing joint meetings, showing clients how we can support them. To put this in context, we believe the private banking wallet of our existing Commercial Client base is about four times the size of our current Private Banking business. While relatively small in the scheme of the Group as a whole, Private Banking will become an increasingly important source of growth. With assets under management up 13 per cent year-on-year, net new money up 15 per cent, and income up 4 per cent, despite exiting subscale presences in Miami, Geneva, and Korea, Private Banking has good momentum.

Retail Clients

On a global basis, income from Retail is down 2 per cent and profits down 9 per cent. Excluding Korea, income is up 1 per cent and profits are up 12 per cent. In a number of key markets, Retail is doing well. For example, in Hong Kong income is up 10 per cent and profits up 16 per cent, in Singapore, income is up 3 per cent and profits up 57 per cent, and in Africa income is up 14 per cent and profits up 42 per cent.

We are assertively re-shaping this business:

· Tackling Korea

· Redeploying resources towards the high-value segments

· Accelerating the shift from product sales to relationship management.

· Disposing of subscale and non-strategic franchises

· Refocusing the product offering

· Standardising platforms and processes

· Reshaping the branch network as we increasingly engage with our clients via digital channels

We are transforming Retail to be more relationship-driven, more selective, more efficient and more digital. This is a big, multi-year project, and in the near term, some of things we are doing - de-risking, disposals, exiting direct sales - will impact income momentum, but we know where we want to get to and we are making real progress.

Building relationships with our clients

Our client segment strategies are the primary drivers of our overall strategy. We are focused on who our clients are, what they need, and how we can be distinctive in meeting those needs.

Underpinning this is a huge amount of work on products and infrastructure. There is a lot going on in Transaction Banking, particularly around the internationalisation of the RMB, in Wealth Management, particularly in Bancassurance, in Corporate Finance where we are seeing a good pipeline of deals, and in Retail Products, where digitisation is the overriding theme.

We are also revamping our infrastructure, rolling out standardised platforms and processes, automating manual procedures, reinforcing controls, deploying tools to enable us to extract more value from the vast amounts of information we generate and capture every day. Through technology-driven innovation, we can empower our clients, achieve significant improvements in efficiency and run our business with greater insight, flexibility and control.

All this comes together in an overarching roadmap, essentially the execution plan to deliver the strategy. Three themes from this roadmap are worth highlighting.

Investing for growth

The first theme is investment. We recognise that to create the capacity to invest for growth, we have to be relentless in driving cost productivity and capital productivity.

On the cost front the challenge is clear. People account for almost 70 per cent of our costs, and wage inflation is running at 4 to 5 per cent across our markets, so that alone drives at least a 3 per cent increase in total costs. Regulatory-related costs continue to increase at pace and we think it is safe to assume that regulation will add 1 to 2 per cent to total costs every year. Add in some non-wage inflation - particularly true of premises costs given real estate price trends in our markets - and there is an underlying cost dynamic of at least 5 per cent per year, before taking account of current year business growth, let alone investment for future growth.

We must therefore achieve a continuous stream of sustainable productivity improvements to offset these cost headwinds. This is not about short-term squeezes, cutting back marketing, or freezing hiring, since this kind of cost reduction cannot be sustained. This is about disposing or shrinking underperforming businesses, cutting out complexity and duplication, automating everything we can automate and rolling out scalable platforms and processes. It is what we have been doing - costs only increased by 1 per cent last year, and only increased by 1 per cent in the first half of 2014 versus the same period of 2013, but given the pressures we are facing, we are redoubling our focus on costs and productivity.

We are not abandoning growth. Delivering sustainable and profitable growth is how we will drive shareholder value, but to deliver that growth requires investment and creating capacity for that investment requires a relentless focus on productivity improvement.

The logic is absolutely the same on capital. By managing the underlying business to be capital accretive we create the capacity to absorb regulatory add-ons and fund growth. Excluding two one-off regulatory adjustments to our Basel III Common Equity Tier 1 calculations, the Group was capital accretive in the first half of 2014, adding some 20 basis points in the period.

Conduct

We are committing very significant resources to raising the bar on conduct - new people and capabilities, new systems and extensive training. We see this as an integral part of our strategy, a key component of what it means to be Here for good.

We recognise that this is no easy task. There are multiple dimensions to conduct - from protecting clients' data to maintaining market integrity and preventing financial crime. All are important, but they are very different. Some are about making sure we do the right thing for our clients, and some about playing our role in protecting the integrity of the financial system by ensuring our clients do the right thing. And raising the bar on conduct only works if it is embraced by everyone in the Group. One person who doesn't act responsibly can undo the work of thousands who do.

Consistent and effective execution is vital, and we acknowledge that sometimes we have failed to meet our own and others' expectations. Getting to where we want to be is a multi-year project requiring sustained investment and focus. That is why we are implementing a comprehensive programme of change. Specifically, in financial crime compliance we have added senior expertise and doubled overall headcount. We have established a Board-level Financial Crime Risk Oversight Committee, and are executing a far-reaching Financial Crime Risk Mitigation Programme. We have embedded consideration of financial crime risks into our strategic decision-making and, as a result, are undertaking extensive de-risking actions across the business.

Internationalisation of the renminbi

Finally, the third theme is the internationalisation of the RMB, one of the biggest changes taking place in the way the global financial system works. This is the mechanism by which China, which will become the world's largest economy, will ultimately link its financial system to global markets. It is happening at an extraordinary pace and Standard Chartered is superbly placed to facilitate and benefit from this process, so across all our segments and product groups we are taking advantage of this massive shift in the way money flows around the world.

Outlook

2014 will be challenging. We are taking action on multiple fronts, both in response to near-term pressures and to execute the refreshed strategy we have set out. In the first half, for example, we have completely reorganised the Group, made a number of disposals, re-worked our segment strategies, and redirected capital and investment spend. Some of the things we have done have exacerbated the immediate performance challenge, but they are the right thing to do in reshaping the business for sustainable growth.

Our objective is getting back to a trajectory of sustainable, profitable growth, delivering returns above the cost of capital and turning the opportunities in our markets, the strength of our balance sheet, and the depth and quality of our client franchise into sustained shareholder value creation.

We know it won't be smooth or easy. Disciplined, focused execution will be critical, and in that context I would like to take this opportunity to thank the people of Standard Chartered for their professionalism, commitment and teamwork. And to thank our shareholders for their support.

Peter Sands

Group Chief Executive

6 August 2014

The following Financial review provides an analysis of:

· Group income statement (page 11)

· Profit of our four client segments, split by geographic region (pages 12 to 18)

· Product income, split by client segment (pages 19 to 21)

· Profit for each geographic region (pages 22 to 25)

· Group balance sheet (pages 26 to 27)

This Financial review also:

· Reflects the restatement of prior period amounts for the four new client segments and the new geographic regions (see note 29 on page 149 for further details);

· Excludes the impact of a $15 million loss relating to an own credit adjustment (OCA) (six months to 30 June 2013: gain of $237 million; six months to 31 December 2013: loss of $131 million) and the $1 billion goodwill impairment in the six months to 30 June 2013 to better reflect the underlying performance of the Group

The following commentary reflects movements compared to the six months to 30 June 2013 (H1 2013) unless otherwise indicated.

Group summary

The Group's performance for the six months to 30 June 2014 (H1 2014) has been impacted by a challenging external environment, with operating income down $482 million, or 5 per cent, to $9,269 million compared to H1 2013 although income rose 4 per cent compared to the six months to 31 December 2013 (H2 2013).

The normalised cost to income ratio was higher at 54.7 per cent compared to 51.4 per cent in H1 2013. Costs continue to be tightly managed, growing only 1 per cent despite continued investments, increased regulatory and compliance costs and inflationary pressures.

Profit before taxation fell by $820 million, or 20 per cent, to $3,268 million but was up 14 per cent compared to H2 2013.

Profit before taxation on a statutory basis was down 2 per cent at $3,253 million.

Normalised earnings per share fell 21 per cent to 96.5 cents. Further details of normalised items and the basic and diluted earnings per share are provided in note 11 on page 118.

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 114 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 on a proportionate basis.

We remain focused on the drivers of value creation for our shareholders and we continue to build out our franchise to take advantage of the opportunities that we see across our footprint in Asia, Africa and the Middle East.

Balance sheet

The Group's balance sheet remains strong and well diversified with limited exposure to problem asset classes (which is further discussed in the Risk Review on page 51).

Asset quality remains good although we remain watchful in India and of commodity exposures in general. 79 per cent of the Retail loan book is fully secured and over 60 per cent of Corporate and Institutional (C&I) client loans have a maturity of less than one year and are well collateralised.

Customer deposits, 54 per cent of which are in Current and Savings Accounts (CASA), were flat to the end of 2013, with growth in CASA in Hong Kong and Singapore offset by lower Time Deposit balances. 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.

Liquidity

The Group continues to be highly liquid and our advances-to-deposits ratio was 78.1 per cent, up from 75.7 per cent at the year end. Our liquid asset ratio was 30.5 per cent, up from 29.8 per cent at 31 December 2013, and both the Group LCR and NSFR were above 100 per cent at 30 June 2014.

Capital

The Group remains strongly capitalised and the Common Equity Tier 1 ratio at 30 June 2014 was 10.5 per cent, compared to 10.9 per cent (11.8 per cent under Basel II) at the last year end primarily due to the timing of dividends and higher risk weighted assets.

Standard Chartered PLC - Financial review continued

Operating income and profit
	6 months ended	6 months ended	6 months ended	H1 2014 vs H1 2013	H1 2014 vs H2 2013
	30.06.14	30.06.13	31.12.13	Better / (worse)	Better / (worse)
	$million	$million	$million	%	%
Net interest income	5,604	5,598	5,558	-	1
Non-interest income	3,665	4,153	3,362	(12)	9
Operating income ¹	9,269	9,751	8,920	(5)	4
Of which - Client income	8,373	8,648	8,224	(3)	2
Operating expenses	(5,083)	(5,034)	(5,159)	(1)	2
Operating profit before impairment losses and taxation ¹	4,186	4,717	3,761	(11)	11
Impairment losses on loans and advances and other credit risk provisions	(846)	(730)	(887)	(16)	5
Other impairment	(185)	(11)	(118)	nm	(57)
Profit from associates and joint ventures	113	112	114	1	(1)
Profit before taxation (excluding goodwill impairment and own credit adjustment)	3,268	4,088	2,870	(20)	14
Own credit adjustment	(15)	237	(131)	(106)	89
Goodwill impairment	-	(1,000)	-	100	-
Profit before taxation	3,253	3,325	2,739	(2)	19
¹ Excludes own credit adjustment - "nm" - not meaningful

Operating income fell to $9,269 million, down 5 per cent, or $482 million compared to H1 2013. Client income remained resilient and was down 3 per cent overall.

Income across the Group remains diverse and while it was a challenging period for most of our geographies, the Greater China and Africa regions both increased income and this helped to partly offset lower income from Korea, which was down $229 million compared to H1 2013.

In terms of the Group's client segments:

· Corporate and Institutional (C&I) income fell $243 million, or 4 per cent, to $5,334 million due to lower Financial Markets (FM) income, as low levels of volatility impacted Foreign Exchange (FX) income, and income from Rates was affected by reduced client activity

· Commercial income was down $196 million, or 24 per cent, to $616 million with a decline in FX income in Hong Kong, which was disrupted as a result of reduced client demand following the Renminbi (RMB) band widening by the Peoples Bank of China (PBoC), and lower Principal Finance income, due to reduced levels of realisations in the period and lower mark-to-market valuations

· Private Banking income rose $13 million, or 4 per cent, to $314 million driven by Wealth Management and secured lending

· Retail income fell $56 million, or 2 per cent, to $3,005 million compared to H1 2013 as we reduced higher risk Personal Loans in Korea and property cooling measures reduced Mortgages income in some markets. This was partly offset by higher Wealth Management income, which benefitted from the renewal of a multi-country insurance agreement in the period

From a product perspective, income from FM fell 20 per cent, or $432 million, to $1,780 million compared to H1 2013 reflecting the difficult market conditions. Income from Retail products fell 6 per cent to $2,435 million, largely due to the derisking actions in respect of unsecured lending. This was, however, partly offset by improved income from Asset and Liability Management (ALM), which was up 38 per cent to $420 million compared to H1 2013.

The Group net interest margin was lower at 2.1 per cent compared to 2.2 per cent at H1 2013, but was flat compared to H2 2013. C&I and Commercial client interest income benefitted from higher Trade balances and higher Lending margins, which was partly offset by lower margins from Cash Management and Custody. Retail net interest income was lower due to a decline in unsecured balances and margins as we derisked Personal Loan portfolios, and this impacted Korea in particular.

Operating expenses increased $49 million, or 1 per cent, to $5,083 million. Expenses for H1 2013 benefitted from $36 million of provision recoveries; H2 2013 was impacted by $235 million in respect of the UK bank levy; and in H1 2014, IT depreciation was $52 million lower than the prior year due to a change in the period over which the assets are depreciated. Excluding these items, operating expenses were 1 per cent higher than H1 2013 and 4 per cent higher than H2 2013. Costs remain tightly controlled and staff costs rose 2 per cent compared to H1 2013 as inflationary increases were partly offset by lower headcount. Despite increased regulatory and compliance costs, we continued to make targeted investments in the Group's franchise.

Loan impairment increased by $116 million, or 16 per cent, to $846 million. Loan impairment from C&I and Commercial clients increased 53 per cent primarily due to a small number of exposures in Greater China, including $62 million in respect of lending secured by commodities, and within the Africa, Europe and ASEAN regions. This was partly offset by lower provisions in India. Impairment from Retail clients was broadly flat as increased provisioning in Korea was offset by lower provisioning requirements in the ASEAN region.

Other impairment increased by $174 million to $185 million reflecting provisions against commodity financing assets in Greater China as a result of a fraud and the impairment of certain strategic and associate investments in the Europe region.

Profit before taxation fell $820 million, or 20 per cent, to $3,268 million compared to H1 2013 but was up 14 per cent compared to H2 2013.

The Group's effective tax rate (ETR), on a statutory basis, was 26.1 per cent, down from 32.8 per cent at H1 2013, reflecting a change in profit mix and the impact of the non-deductible goodwill impairment in the prior period.

Corporate and Institutional Clients
The following tables provide an analysis of operating profit by geographic regions for Corporate and Institutional Clients:
	6 months ended 30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	1,385	220	623	993	570	565	414	564	5,334
Of which - Client income	1,187	195	568	859	479	451	400	476	4,615
Operating expenses	(577)	(155)	(179)	(499)	(245)	(277)	(300)	(314)	(2,546)
Loan impairment	(61)	(2)	(28)	(66)	(4)	(79)	-	(26)	(266)
Other impairment	(95)	-	-	(3)	-	-	-	(71)	(169)
Profit from associates and joint ventures	76	-	-	14	-	-	-	-	90
Operating profit¹	728	63	416	439	321	209	114	153	2,443

¹ Operating income and operating profit excludes $(15) million in respect of own credit adjustment (Greater China $33 million, ASEAN $(27) million and Europe $(21) million)
	6 months ended 30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	1,273	340	679	1,051	593	585	443	613	5,577
Of which - Client income	1,164	240	567	891	498	498	402	490	4,750
Operating expenses	(569)	(151)	(204)	(500)	(252)	(238)	(278)	(308)	(2,500)
Loan impairment	(14)	(17)	(88)	(13)	(1)	(62)	1	(3)	(197)
Other impairment	(11)	(19)	-	1	-	-	-	1	(28)
Profit from associates and joint ventures	66	-	-	13	-	-	-	-	79
Operating profit¹	745	153	387	552	340	285	166	303	2,931

¹Operating income and operating profit excludes $237 million in respect of own credit adjustment (Greater China $7 million, NE Asia $2 million, ASEAN $93 million and Europe $135 million)
	6 months ended 31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	1,195	220	605	991	526	610	415	517	5,079
Of which - Client income	1,088	191	553	890	455	521	397	467	4,562
Operating expenses	(568)	(154)	(199)	(476)	(242)	(261)	(258)	(296)	(2,454)
Loan impairment	13	(36)	(18)	(79)	21	(185)	(4)	(3)	(291)
Other impairment	(3)	(8)	(76)	1	-	-	-	1	(85)
Profit from associates and joint ventures	65	-	-	12	-	-	-	-	77
Operating profit¹	702	22	312	449	305	164	153	219	2,326

¹Operating income and operating profit excludes $(131) million in respect of own credit adjustment (Greater China $(8) million, ASEAN $(48) million and Europe $(75) million)

Corporate and Institutional (C&I) clients comprises Global Corporates (major multinational corporations and large business groups which have sophisticated, cross-border needs requiring high levels of international service); Local Corporates (typically clients with operations in three geographies or less); and Financial Institutions (Banks, Investor clients, Insurance companies, Broker Dealers, Public Sector names (including Central Banks, Sovereign Wealth Funds and Development Organisations) and other types of financial institutions).

Around 90 per cent of C&I client income is generated by Transaction Banking, FM and Corporate Finance products.

Income from C&I clients fell $243 million, or 4 per cent, to $5,334 million but remains well diversified by client segment, product and geographic region and we continued deepening and broadening our relationship with clients.

Client income, which constitutes over 85 per cent of C&I income, fell by 3 per cent compared to H1 2013 reflecting challenging industry-wide market conditions. On a geographic basis, client income was lower across most regions except Greater China.

Income from Transaction Banking fell 2 per cent, as higher Cash Management and Custody income on the back of increased average balances was offset by lower Trade income.

FM income was impacted by cyclical factors, many of which were specific to our footprint. Income from Rates fell 33 per cent, particularly in the structured business in Korea, while FX income was down 22 per cent, despite strong volume growth as spreads compressed.

Own account income fell 13 per cent compared to H1 2013. FM income was sharply lower, reflecting the difficult market conditions which particularly impacted FX and Rates income. This was partly offset by higher ALM income, driven by improved accrual income, and higher income from Principal Finance realisations during the period.

Operating expenses were up $46 million, or 2 per cent, to $2,546 million. Expenses remain well controlled, despite increased regulatory and compliance costs.

Corporate and Institutional Clients continued
The following tables provide an analysis of operating profit by key countries for Corporate and Institutional Clients:
	6 months ended 30.06.14
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income¹	952	522	180	495	358	375	512
Of which - Client income	856	460	166	453	295	280	428
Operating expenses	(376)	(271)	(127)	(147)	(149)	(174)	(281)
Loan impairment	(58)	3	(2)	(27)	(2)	(4)	(26)
Other impairment	(95)	(1)	-	-	-	-	(71)
Profit from associates and joint ventures	-	-	-	-	-	76	-
Operating profit¹	423	253	51	321	207	273	134

¹Operating income and operating profit excludes $(15) million in respect of own credit adjustment (Greater China $33 million, ASEAN $(27) million and Europe $(21) million
	6 months ended 30.06.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income¹	926	577	305	563	394	289	538
Of which - Client income	850	455	214	468	322	262	419
Operating expenses	(366)	(305)	(123)	(173)	(156)	(175)	(272)
Loan impairment	(1)	-	(17)	(88)	4	(10)	(3)
Other impairment	(2)	10	(19)	-	-	(11)	1
Profit from associates and joint ventures	-	-	-	-	-	66	-
Operating profit¹	557	282	146	302	242	159	264

¹ Operating income and operating profit excludes $237 million in respect of own credit adjustment (Greater China $7 million, NE Asia $2 million, ASEAN $93 million and Europe $135 million)
	6 months ended 31.12.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income¹	848	487	182	491	355	295	461
Of which - Client income	771	465	164	449	298	268	417
Operating expenses	(371)	(246)	(126)	(165)	(154)	(170)	(256)
Loan impairment	8	(9)	(36)	(7)	(6)	-	(3)
Other impairment	-	-	(8)	(76)	-	(3)	1
Profit from associates and joint ventures	-	-	-	-	-	65	-
Operating profit¹	485	232	12	243	195	187	203

¹ Operating income and operating profit excludes $(131) million in respect of own credit adjustment (Greater China $(8) million, ASEAN $(48) million and Europe $(75) million)

Loan impairment increased by $69 million, or 35 per cent, to $266 million, driven by a small number of clients in Greater China, including $62 million in respect of lending secured by Commodities, Africa, Europe and within the ASEAN region. This was partly offset by lower impairment in India as the prior period was impacted by a small number of exposures.

Other impairment was higher by $141 million at $169 million, largely due to commodity financing positions in Greater China and impairments against certain strategic investments within the Europe region.

Operating profit fell by $488 million, or 17 per cent, to $2,443 million.

Commercial Clients
The following tables provide an analysis of operating profit by geographic regions for Commercial Clients:
	6 months ended 30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	248	33	90	89	83	73	-	-	616
Of which - Client income	267	46	86	82	77	59	-	-	617
Operating expenses	(142)	(41)	(35)	(68)	(37)	(39)	-	-	(362)
Loan impairment	(49)	(22)	(18)	(4)	(6)	(1)	-	-	(100)
Other impairment	-	-	-	-	-	-	-	-	-
Profit from associates and joint ventures	-	-	-	11	-	-	-	-	11
Operating profit/(loss)	57	(30)	37	28	40	33	-	-	165

	6 months ended 30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	306	50	157	155	86	58	-	-	812
Of which - Client income	308	51	102	91	80	63	-	-	695
Operating expenses	(144)	(44)	(46)	(66)	(38)	(36)	-	-	(374)
Loan impairment	(5)	(8)	(11)	(3)	(13)	(3)	-	-	(43)
Other impairment	17	-	-	(3)	-	-	-	-	14
Profit from associates and joint ventures	-	-	-	17	-	-	-	-	17
Operating profit/(loss)	174	(2)	100	100	35	19	-	-	426

	6 months ended 31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	293	43	108	99	87	69	-	-	699
Of which - Client income	254	46	90	92	80	64	-	-	626
Operating expenses	(145)	(45)	(37)	(54)	(35)	(41)	-	-	(357)
Loan impairment	(22)	(13)	(57)	(6)	(15)	(1)	-	-	(114)
Other impairment	(1)	-	(26)	-	-	-	-	-	(27)
Profit from associates and joint ventures	-	-	-	20	-	-	-	-	20
Operating profit/(loss)	125	(15)	(12)	59	37	27	-	-	221

The Commercial client segment serves medium-sized business clients who are managed by relationship managers.

Over three quarters of the client income from Commercial clients is generated by Transaction Banking, Financial Markets and Lending products.

Operating income for Commercial clients fell by $196 million, or 24 per cent, to $616 million.

Client income fell 11 per cent, with FM income in Hong Kong being the biggest driver of the fall, as the RMB band widening reduced client demand which disrupted the flow of FX revenues. Transaction Banking income declined primarily due to lower Cash Management income. Lending income was also lower as we exited low return exposures.

Own account income declined by $118 million reflecting a fall in income from Principal Finance as a result of lower mark to market valuations and reduced levels of realisations in the current period relating to Commercial clients. This primarily impacted income in Singapore and India.

Expenses were down $12 million, or 3 per cent, to $362 million as we tightly managed costs.

Loan impairment increased by $57 million to $100 million, driven by a small number of exposures in Hong Kong, Korea and China.

Other impairment in H1 2013 benefitted from recoveries on the realisation of previously impaired Principal Finance investments in China while H2 2013 was impacted by an investment write-down in India.

Operating profit fell by $261 million, or 61 per cent, to $165 million, with Hong Kong down $81 million to $87 million, India down $64 million to $34 million and Singapore down $54 million to $11 million.

Commercial Clients continued
The following tables provide an analysis of operating profit by key countries for Commercial Clients:
	6 months ended 30.06.14
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income	214	50	33	86	69	7	-
Of which - Client income	204	47	46	82	64	40	-
Operating expenses	(95)	(40)	(41)	(34)	(31)	(31)	-
Loan impairment	(32)	1	(22)	(18)	(2)	(17)	-
Other impairment	-	-	-	-	-	-	-
Profit from associates and joint ventures	-	-	-	-	-	-	-
Operating profit/(loss)	87	11	(30)	34	36	(41)	-

	6 months ended 30.06.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income	259	106	50	153	74	21	-
Of which - Client income	244	55	51	97	69	41	-
Operating expenses	(90)	(42)	(44)	(44)	(31)	(37)	-
Loan impairment	(1)	1	(8)	(11)	(6)	(4)	-
Other impairment	-	-	-	-	-	17	-
Profit from associates and joint ventures	-	-	-	-	-	-	-
Operating profit/(loss)	168	65	(2)	98	37	(3)	-

	6 months ended 31.12.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income	210	52	43	103	71	66	-
Of which - Client income	192	53	46	86	67	45	-
Operating expenses	(91)	(29)	(45)	(36)	(30)	(36)	-
Loan impairment	(3)	(1)	(13)	(56)	(12)	(19)	-
Other impairment	(2)	-	-	(26)	-	1	-
Profit from associates and joint ventures	-	-	-	-	-	-	-
Operating profit/(loss)	114	22	(15)	(15)	29	12	-

Private Banking Clients
The following tables provide an analysis of operating profit by geographic regions for Private Banking Clients:
	6 months ended 30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	70	-	17	138	14	-	-	75	314
Of which - Client income	63	-	15	134	14	-	-	69	295
Operating expenses	(53)	-	(8)	(76)	(15)	-	-	(75)	(227)
Loan impairment	-	-	-	-	-	-	-	-	-
Other impairment	-	-	-	-	-	-	-	(16)	(16)
Profit from associates and joint ventures	-	-	-	-	-	-	-	-	-
Operating profit/(loss)	17	-	9	62	(1)	-	-	(16)	71

	6 months ended 30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	58	10	20	124	12	-	-	77	301
Of which - Client income	52	9	15	127	12	-	-	69	284
Operating expenses	(47)	(10)	(8)	(73)	(12)	-	-	(63)	(213)
Loan impairment	-	-	-	-	-	-	(8)	-	(8)
Other impairment	-	-	-	-	-	-	-	-	-
Profit from associates and joint ventures	-	-	-	-	-	-	-	1	1
Operating profit/(loss)	11	-	12	51	-	-	(8)	15	81

	6 months ended 31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	58	-	14	125	16	-	-	72	285
Of which - Client income	54	-	13	128	14	-	-	73	282
Operating expenses	(45)	-	(8)	(68)	(11)	-	-	(62)	(194)
Loan impairment	-	-	-	-	-	-	-	-	-
Other impairment	-	-	-	-	-	-	-	-	-
Profit from associates and joint ventures	-	-	-	-	-	-	-	1	1
Operating profit	13	-	6	57	5	-	-	11	92

The Private Banking client segment is dedicated to giving high net worth clients highly personalised service and a comprehensive suite of products and services tailored to meet their financial needs.

Income from Private Banking clients primarily relates to Wealth Management and Retail products, including lending, generated from clients across Asia, Africa and the Middle East.

Operating income from Private Banking clients increased $13 million, or 4 per cent, to $314 million. Excluding income from Korea (which we exited in H2 2013), income rose 8 per cent. This reflected strong growth across the Hong Kong and the advising centres, led by Wealth Management, Lending and Mortgage products and good traction in sales of structured notes, equities and funds leveraging on improved market sentiment. This was partly offset by lower income from Deposits due to margin compression.

Client assets under management (AuM) grew 13 per cent compared to H1 2013 driven by higher investment balances.

Expenses were up $14 million, or 7 per cent, at $227 million. Excluding Korea, expenses rose 12 per cent. The increase reflects additional costs related to the exit of our Geneva business.

Other impairment increased to $16 million following a writedown of an associate investment.

Operating profit fell by $10 million, or 12 per cent, to $71 million. Excluding the other impairment charge, operating profit rose 7 per cent.

Retail Clients
The following tables provide an analysis of operating profit by geographic regions for Retail Clients:
	6 months ended 30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	1,082	456	229	700	284	240	-	14	3,005
Of which - Client income	1,015	431	220	671	269	227	-	13	2,846
Operating expenses	(638)	(420)	(157)	(387)	(185)	(151)	-	(10)	(1,948)
Loan impairment	(102)	(185)	(15)	(145)	(17)	(14)	-	(2)	(480)
Other impairment	-	-	-	-	-	-	-	-	-
Profit from associates and joint ventures	8	-	-	4	-	-	-	-	12
Operating profit/(loss)	350	(149)	57	172	82	75	-	2	589

	6 months ended 30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	1,022	536	243	756	280	210	-	14	3,061
Of which - Client income	974	502	226	734	269	201	-	13	2,919
Operating expenses	(624)	(380)	(167)	(430)	(191)	(147)	-	(8)	(1,947)
Loan impairment	(108)	(168)	(18)	(156)	(20)	(10)	-	(2)	(482)
Other impairment	-	-	-	3	-	-	-	-	3
Profit from associates and joint ventures	7	-	-	8	-	-	-	-	15
Operating profit/(loss)	297	(12)	58	181	69	53	-	4	650

	6 months ended 31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income	993	440	214	710	265	219	-	16	2,857
Of which - Client income	952	423	204	693	255	213	-	14	2,754
Operating expenses	(630)	(402)	(154)	(408)	(179)	(139)	-	(7)	(1,919)
Loan impairment	(106)	(185)	(23)	(139)	(19)	(9)	-	(1)	(482)
Other impairment	(1)	(2)	(3)	-	-	-	-	-	(6)
Profit from associates and joint ventures	8	-	-	8	-	-	-	-	16
Operating profit/(loss)	264	(149)	34	171	67	71	-	8	466

Retail clients comprise:

· Priority & International clients, managing and servicing High Value Segment customers and delivering a distinct and differentiated customer experience to them

· Personal & Preferred clients, providing banking products and services to a broader consumer market; and

· Business Clients, serving small business clients, sole proprietors and private companies, offering solutions such as working capital, business expansion, businesses protection and yield enhancement

Operating income from Retail clients fell $56 million, or 2 per cent, to $3,005 million but was up 5 per cent against H2 2013. Income from Retail clients remains diverse both by product and across geographic region. Hong Kong continues to be our largest retail market, growing income 10 per cent, which partly offset lower income from Korea, which was down 14 per cent. Excluding Korea, income rose 1 per cent compared to H1 2013.

The fall in income reflects reduced asset momentum due to derisking actions and lower margins, both of which impacted income from unsecured lending in Korea. Margin compression also impacted deposits income, which more than offset volume growth. Mortgages income was impacted by property cooling measures in Hong Kong and Singapore, reducing fee income as new transaction volumes decreased, and lower levels of originations under the Mortgage Purchase Program in Korea. Wealth Management income grew as market sentiment improved together with higher bancassurance income, which benefitted from the renewal of a multi-country distribution agreement in the current period.

Expenses were broadly flat at $1,948 million and continue to be tightly managed. Excluding the impact of a special retirement charge in Korea of $29 million, expenses fell 2 per cent.

Loan impairment was broadly flat at $480 million. Impairment in Korea rose by $17 million as we continue to see increased levels of PDRS filings. This was largely offset by lower provision levels in Malaysia and Singapore.

Operating profit fell by $61 million, or 9 per cent, to $589 million. Excluding Korea, which fell $141 million to a loss of $148 million, operating profit rose 12 per cent.

Retail Clients continued
The following tables provide an analysis of operating profit by key countries for Retail Clients:
	6 months ended 30.06.14
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income	756	325	456	161	155	133	-
Of which - Client income	704	316	431	154	148	121	-
Operating expenses	(342)	(164)	(419)	(119)	(91)	(166)	-
Loan impairment	(73)	(32)	(185)	(11)	(17)	(14)	-
Other impairment	-	-	-	-	-	-	-
Profit from associates and joint ventures	-	-	-	-	-	8	-
Operating profit/(loss)	341	129	(148)	31	47	(39)	-

	6 months ended 30.06.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income	686	316	533	172	151	138	-
Of which - Client income	644	315	500	160	144	132	-
Operating expenses	(323)	(194)	(372)	(131)	(91)	(171)	-
Loan impairment	(68)	(40)	(168)	(14)	(15)	(13)	-
Other impairment	-	-	-	-	-	-	-
Profit from associates and joint ventures	-	-	-	-	-	7	-
Operating profit/(loss)	295	82	(7)	27	45	(39)	-

	6 months ended 31.12.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income	680	316	440	147	149	125	-
Of which - Client income	642	315	422	137	141	119	-
Operating expenses	(333)	(172)	(400)	(119)	(88)	(164)	-
Loan impairment	(70)	(39)	(185)	(19)	(17)	(12)	-
Other impairment	-	-	(2)	(3)	-	-	-
Profit from associates and joint ventures	-	-	-	-	-	8	-
Operating profit/(loss)	277	105	(147)	6	44	(43)	-

Operating income by product and segment
Income by product and client segment is set out below:
	6 months ended 30.06.14
	Total	Corporate & Institutional	Commercial	Private Banking	Retail
	$million	$million	$million	$million	$million
Transaction Banking	1,918	1,603	302	1	12
Trade	999	824	162	1	12
Cash Management and Custody	919	779	140	-	-
Financial Markets	1,780	1,662	118	-	-
Foreign Exchange	636	537	99	-	-
Rates	371	363	8	-	-
Commodities and Equities	262	252	10	-	-
Capital Markets	284	280	4	-	-
Credit and Other¹	227	230	(3)	-	-
Corporate Finance	1,241	1,227	14	-	-
Wealth Management	817	-	64	205	548
Retail Products	2,435	-	2	94	2,339
Cards, Personal Loans and Unsecured Lending (CCPL)	1,315	-	-	-	1,315
Deposits	598	-	2	65	531
Mortgage and Auto	474	-	-	29	445
Other Retail Products	48	-	-	-	48
Others	1,078	842	116	14	106
Asset and Liability Management	420	278	22	14	106
Lending and Portfolio Management	529	393	136	-	-
Principal Finance	129	171	(42)	-	-

Total Operating income¹	9,269	5,334	616	314	3,005
¹Excludes $(15) million relating to an own credit adjustment

	6 months ended 30.06.13
	Total	Corporate & Institutional	Commercial	Private Banking	Retail
	$million	$million	$million	$million	$million
Transaction Banking	1,964	1,633	322	1	8
Trade	1,042	865	168	1	8
Cash Management and Custody	922	768	154	-	-
Financial Markets	2,212	2,043	169	-	-
Foreign Exchange	835	687	148	-	-
Rates	552	542	10	-	-
Commodities and Equities	288	276	12	-	-
Capital Markets	283	281	2	-	-
Credit and Other¹	254	257	(3)	-	-
Corporate Finance	1,238	1,220	18	-	-
Wealth Management	755	-	71	191	493
Retail Products	2,588	-	3	98	2,487
Cards, Personal Loans and Unsecured Lending (CCPL)	1,401	-	-	-	1,401
Deposits	605	-	3	72	530
Mortgage and Auto	519	-	-	25	494
Other Retail Products	63	-	-	1	62
Others	994	681	229	11	73
Asset and Liability Management	305	199	22	11	73
Lending and Portfolio Management	522	380	142	-	-
Principal Finance	167	102	65	-	-

Total Operating income¹	9,751	5,577	812	301	3,061
¹Excludes $237 million relating to an own credit adjustment

Operating income by product and segment continued
	6 months ended 31.12.13
	Total	Corporate & Institutional	Commercial	Private Banking	Retail
	$million	$million	$million	$million	$million
Transaction Banking	1,947	1,620	318	2	7
Trade	1,027	850	168	2	7
Cash Management and Custody	920	770	150	-	-
Financial Markets	1,644	1,551	93	-	-
Foreign Exchange	578	508	70	-	-
Rates	365	358	7	-	-
Commodities and Equities	219	216	3	-	-
Capital Markets	275	272	3	-	-
Credit and Other¹	207	197	10	-	-
Corporate Finance	1,281	1,266	15	-	-
Wealth Management	694	-	69	187	438
Retail Products	2,458	-	2	98	2,358
Cards, Personal Loans and Unsecured Lending (CCPL)	1,387	-	-	-	1,387
Deposits	588	-	2	68	518
Mortgage and Auto	478	-	-	29	449
Other Retail Products	5	-	-	1	4
Others	896	642	202	(2)	54
Asset and Liability Management	243	176	15	(2)	54
Lending and Portfolio Management	543	387	156	-	-
Principal Finance	110	79	31	-	-

Total Operating income¹	8,920	5,079	699	285	2,857
¹Excludes $(131) million relating to an own credit adjustment

Product performance

Transaction Banking income fell $46 million, or 2 per cent, to $1,918 million.

Trade income fell 4 per cent with lower margins than the previous year and a decline in fee income offsetting growth in balances. Growth in balances was lower than the first half of 2013, impacted by balance sheet optimisation actions taken during the period. Trade margins as a whole have stabilised since the end of 2013.

Cash Management and Custody income was flat, with margins down 4 basis points while average balances increased compared to H1 2013.

Financial Markets (FM) income was $432 million lower at $1,780 million compared to H1 2013 impacted by challenging industry-wide conditions and factors specific to Emerging Markets.

FX income fell 24 per cent to $636 million impacted by low levels of volatility across our footprint markets which reduced spreads although volumes grew strongly. Cash FX notionals rose 24 per cent and FX Option notionals rose 45 per cent. FX Options income in Hong Kong was impacted by the widening of the RMB trading band by the PBoC, which disrupted revenue flows.

Rates income fell 33 per cent to $371 million largely reflecting the challenging market conditions in the first half of 2014. Rates flow business remained resilient while the structured business was impacted by market conditions.

Commodities and Equities income fell 9 per cent to $262 million. Client hedging activity declined, as markets were range bound leading to low levels of volatility across most asset classes.

Equities income increased on the back of new product offerings and improved client connectivity.

Capital Markets income was flat at $284 million, with increased loan syndications volumes on the prior year period.

Credit and other income fell by 11 per cent to $227 million, primarily impacted by rising bonds yields.

Corporate Finance income was flat at $1,241 million as strong growth in M&A advisory income offset lower income from Strategic Finance, reflecting repayments and timing of deal flow. Structured Trade Finance income up slightly on higher client activity levels.

Wealth Management income rose 8 per cent to $817 million. Bancassurance income increased overall, benefitting from the renewal of a multi-country distribution agreement in the current period. Income from managed funds reduced as equity markets continue to recover, although this was offset by higher income from structured notes and Wealth Management lending.

Income from Retail products was $153 million lower at $2,435 million.

Income from CCPL fell 6 per cent to $1,315 million as we reduced our exposure to higher risk Personal Loans portfolio in a number of markets, particularly in Korea. Margins overall were compressed due to regulatory changes across multiple markets. Korea suffered significant margin decline as we exited the higher risk Personal Loans segment.

Deposits income was down 1 per cent at $598 million as good growth in CASA balances in Korea and Hong Kong was offset by lower margins in Time Deposits.

Mortgages and Auto Finance income fell 9 per cent to $474 million despite improved margins as property cooling measures impacted new transaction volumes in our key markets in Hong Kong and Singapore and income in Korea was primarily impacted by lower levels of origination under the Mortgage Purchase Program.

Other retail income fell 24 per cent to $48 million compared to H1 2013. Income was up $43 million against H2 2013, which was impacted by a $49 million loss on businesses held for sale in Korea.

ALM income was up 38 per cent to $420 million reflecting improved accrual income which offset lower income from securities sales.

Lending and Portfolio Management income rose by 1 per cent to $529 million. While average balances fell compared to H1 2013, this was more than offset by improved margins.

Principal Finance income fell 23 per cent to $129 million as gains from portfolio realisations were offset by reduced market valuations. Income relating to Commercial clients fell sharply largely as a result of reduced realisations and lower mark-to-market valuations.

Performance by geographic region and key countries
The following tables provide an analysis of operating profit by geographic regions and key countries:
	6 months ended 30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	2,785	709	959	1,920	951	878	414	653	9,269
Of which - Client income	2,532	672	889	1,746	839	737	400	558	8,373
Operating expenses	(1,410)	(616)	(379)	(1,030)	(482)	(467)	(300)	(399)	(5,083)
Loan impairment	(212)	(209)	(61)	(215)	(27)	(94)	-	(28)	(846)
Other impairment	(95)	-	-	(3)	-	-	-	(87)	(185)
Profit from associates and joint ventures	84	-	-	29	-	-	-	-	113
Operating profit/(loss)¹	1,152	(116)	519	701	442	317	114	139	3,268

¹Operating income and operating profit excludes $(15) million in respect of own credit adjustment (Greater China $33 million, ASEAN $(27) million and Europe $(21) million)
	6 months ended 30.06.13
	Greater China	North East Asia²	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	2,659	936	1,099	2,086	971	853	443	704	9,751
Of which - Client income	2,498	802	910	1,843	859	762	402	572	8,648
Operating expenses	(1,384)	(585)	(425)	(1,069)	(493)	(421)	(278)	(379)	(5,034)
Loan impairment	(127)	(193)	(117)	(172)	(34)	(75)	(7)	(5)	(730)
Other impairment	6	(19)	-	1	-	-	-	1	(11)
Profit from associates and joint ventures	73	-	-	38	-	-	-	1	112
Operating profit¹	1,227	139	557	884	444	357	158	322	4,088

¹Operating income and operating profit excludes $237 million in respect of own credit adjustment (Greater China $7 million, NE Asia $2 million, ASEAN $93 million and Europe $135 million) ²Other impairment excludes $1 billion relating to goodwill impairment charge on Korea business

	6 months ended 31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Operating income¹	2,539	703	941	1,925	894	898	415	605	8,920
Of which - Client income	2,348	660	860	1,803	804	798	397	554	8,224
Operating expenses	(1,388)	(601)	(398)	(1,006)	(467)	(441)	(258)	(600)	(5,159)
Loan impairment	(115)	(234)	(98)	(224)	(13)	(195)	(4)	(4)	(887)
Other impairment	(5)	(10)	(105)	1	-	-	-	1	(118)
Profit from associates and joint ventures	73	-	-	40	-	-	-	1	114
Operating profit/(loss)¹	1,104	(142)	340	736	414	262	153	3	2,870
¹Operating income and operating profit excludes $(131) million in respect of own credit adjustment (Greater China $(8) million, ASEAN $(48) million and Europe $(75) million)

Geographic performance

Greater China

Income was up $126 million, or 5 per cent, to $2,785 million. Over 90 per cent of the income in this region is from Hong Kong and China.

Income in Hong Kong rose $63 million, or 3 per cent, to $1,992 million. Client income increased slightly, up 2 per cent. Lower income from FM was offset by an improved performance in CCPL and Wealth Management. FM income was impacted as momentum slowed following the widening of the RMB trading band during 2014, reducing income from FX Options. Rates income also fell as low levels of volatility contributed to reduced client activity. CCPL income increased reflecting growth in fee income from Cards and higher Personal loan balances although this was partly offset by lower Mortgages income as property cooling measures impacted new transaction volumes. Wealth Management income grew strongly particularly in bancassurance. Own

account income rose due to gains from commodities and increased income from ALM reflecting the deployment of surplus CNH funding.

Income in China rose $67 million, or 15 per cent, to $515 million. Client income rose slightly, up 1 per cent compared to H1 2013. Transaction Banking income grew as margins in Cash and Trade increased coupled with strong growth in Trade volumes. Income from FM products increased with good flow FX momentum as a result of the wider RMB trading band although Rates income was impacted by low volatility in the market. Income from Retail products was largely flat as growth in CCPL income was offset by lower Mortgages income, which was impacted by significant margin compression. Own account income rose, as a result of the deployment of RMB funds accumulating in from Hong Kong, Taiwan and Singapore as the Group continued to be a leader in the internationalisation of RMB.

Performance by geographic region and key countries continued
The following tables provide an analysis of operating profit by key countries:
	6 months ended 30.06.14
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income¹	1,992	1,035	669	759	596	515	535
Of which - Client income	1,827	957	643	704	521	441	447
Operating expenses	(866)	(551)	(587)	(308)	(286)	(371)	(308)
Loan impairment	(163)	(28)	(209)	(56)	(21)	(35)	(26)
Other impairment	(95)	(1)	-	-	-	-	(87)
Profit from associates and joint ventures	-	-	-	-	-	84	-
Operating profit/(loss)¹	868	455	(127)	395	289	193	114

¹Operating income and operating profit excludes own credit adjustment (Hong Kong $32 million, Singapore $(20) million, Korea $1 million, China $1 million and UK $(21) million)
	6 months ended 30.06.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income¹	1,929	1,123	898	908	631	448	566
Of which - Client income	1,790	952	774	740	547	435	443
Operating expenses	(826)	(614)	(549)	(356)	(290)	(383)	(297)
Loan impairment	(70)	(39)	(193)	(113)	(17)	(27)	(3)
Other impairment²	(2)	10	(19)	-	-	6	1
Profit from associates and joint ventures	-	-	-	-	-	73	1
Operating profit¹	1,031	480	137	439	324	117	268

¹Operating income and operating profit excludes own credit adjustment (Hong Kong $2 million, Singapore $64 million, Korea $2 million, China $5 million and UK $135 million) ²Other impairment excludes $1 billion relating to goodwill impairment charge on Korea business

	6 months ended 31.12.13
	Hong Kong	Singapore	Korea	India	UAE	China	UK
	$million	$million	$million	$million	$million	$million	$million
Operating income¹	1,796	980	665	755	591	486	484
Of which - Client income	1,659	960	632	685	520	432	440
Operating expenses	(840)	(515)	(571)	(328)	(283)	(370)	(515)
Loan impairment	(65)	(49)	(234)	(82)	(35)	(31)	(3)
Other impairment	(2)	-	(10)	(105)	-	(2)	1
Profit from associates and joint ventures	-	-	-	-	-	73	1
Operating profit/(loss)¹	889	416	(150)	240	273	156	(32)

¹Operating income and operating profit excludes own credit adjustment (Hong Kong $(2) million, Singapore $(35) million, Korea $(1) million, China $(6) million and UK $(75) million)

Operating expenses across the region rose $26 million, or 2 per cent. Expenses in Hong Kong increased $40 million on the back of higher depreciation charges relating to our leasing business and investments in front-line technology. Expenses in China fell $12 million.

Loan impairment in the region was $85 million higher at $212 million and Other impairment rose $101 million to $95 million, primarily due to provisions relating to commodity financing transactions.

Operating profit fell $75 million, or 6 per cent, to $1,152 million, with Hong Kong down $163 million to $868 million and China up $76 million to $193 million.

North East Asia

Income was down $227 million, or 24 per cent, to $709 million. Korea represents over 90 per cent of income within this region.

Income in Korea fell $229 million, or 26 per cent, to $669 million. Income was up 1 per cent against H2 2013, but down 6 per cent excluding the $49 million fair value charge relating to businesses held for sale in that period. Client income fell 17 per cent compared to H1 2013 due to lower levels of income from FM and Retail products. Income from Rates was sharply lower, impacted by lower client volumes particularly in respect of structured notes and structured deposits. Lower levels of client activity also impacted Transaction Banking, where Trade income fell due to lower volumes and Cash

Performance by geographic region and key countries continued

Management income was impacted by a reduction in the size and tenor of balances. CCPL income declined as we continue to derisk the personal loan portfolio. Mortgages income also fell as Mortgage Purchase Program volumes declined. Own account income fell sharply primarily due to lower levels of Principal Finance realisations. We continued to generate income from Korean clients across our network and we opened three Korea desks in other countries to further increase the flow of cross-border transactions.

Operating expenses in Korea increased $38 million, or 7 per cent, to $587 million and includes a $32 million special retirement charge. Excluding this, expenses rose 1 per cent as we continued to tightly manage costs.

Loan impairment in Korea increased $16 million to $209 million primarily due to higher provisioning levels under the Personal Debt Rehabilitation Scheme.

Operating profit in Korea fell by $264 million to a loss of $127 million.

South Asia

Income fell $140 million, or 13 per cent, to $959 million. Around 80 per cent of the income in this region is from India.

Income in India fell by $149 million, or 16 per cent, to $759 million. On a constant currency basis, income fell 9 per cent. Client income was 5 per cent lower primarily due to reduced income from Transaction Banking and FM products. Transaction Banking income fell due to a fall in average balances across Trade and Cash Management, as we reduced low return exposures. The fall in FM income reflected lower spreads on FX products which more than offset higher volumes. This was partly offset by higher Lending income as margins improved. Income from CCPL fell as margins and balanced declined. Own account income was also lower due to lower derisking activity in the current period and lower Principal Finance realisations.

Operating expenses across the region fell $46 million, or 11 per cent, to $379 million. Expenses in India were down 13 per cent, or 4 per cent on a constant currency basis, as we reduced headcount and continued to manage costs tightly.

Loan impairment in the region fell $56 million, or 48 per cent, to $61 million as the prior period was impacted by charges on a small number of exposures.

Operating profit fell $38 million to $519 million, with India down $44 million to $395 million.

ASEAN

Income was down $166 million, or 8 per cent, to $1,920 million. While Corporate Finance income increased, difficult market conditions and regulatory headwinds, together with margin compression, impacted other products.

Income in Singapore fell $88 million, or 8 per cent, to $1,035 million. Client income remained resilient, however, increasing marginally by 1 percent compared to H1 2013. Transaction Banking income fell largely due to lower Cash Management and Trade margins which more than offset strong Trade volume momentum on the back of higher RMB assets. FM income was also down with lower income from Commodities and Equities partly offset by resilient FX flow volumes as we continued to focus on growing the RMB franchise despite increased competition and reduced client activity. Rates income was largely flat. Income from Corporate Finance rose and we gained market share, although the number of deals closed fell due to lower client activity levels. Income from retail products fell as regulatory cooling measures impacted Mortgages & Auto income, offsetting higher income from Cards reflecting portfolio growth. Own account income fell due to lower volatility, narrowing trading ranges and lower Principal Finance income.

Operating expenses fell $39 million, or 4 per cent, to $1,030 million. Expenses in Singapore fell $63 million reflecting lower levels of variable compensation and tight management of discretionary costs.

Loan impairment was up by $43 million, or 25 per cent, to $215 million. Although impairment levels in Singapore fell this was more than offset by higher provisions in Thailand.

ASEAN delivered an operating profit of $701 million, down 21 per cent, with Singapore down $25 million to $455 million.

Middle East, North Africa and Pakistan (MENAP)

Income fell $20 million, or 2 per cent, to $951 million, reflecting a challenging business environment, margin compression and heightened competition.

Income in the UAE, which generates over half of the income in this region, was down $35 million, or 6 per cent, to $596 million. Client income was down 5 per cent. Income from FM products fell primarily due to lower income from FX as spreads compressed and from Rates reflecting reduced client flows. Transaction Banking income was down, as margin compression in Cash Management offset higher average balances. Income from Corporate Finance was lower, as deal flow slowed, and Lending income was impacted by repayments and continued balance sheet optimisation. Volumes in CCPL and Mortgages increased as market conditions improved, offsetting margin compression from competitive pricing and surplus liquidity. Own account income fell due to lower income from commodities, partly offset by higher income from derisking activities in ALM.

Operating expenses in the region were $11 million, or 2 per cent, lower at $482 million, reflecting headcount rationalisation in the UAE and good cost discipline across the region.

Loan impairment in MENAP fell by $7 million to $27 million, largely within the UAE.

Operating profit for MENAP was broadly flat at $442 million although profit in the UAE fell $35 million to $289 million.

Africa

Income rose $25 million, or 3 per cent, to $878 million. On a constant currency basis income rose 11 per cent. Client income, however, fell 3 per cent on a headline basis. Transaction Banking fell due to compressed Cash Management margins and lower Trade balances, and FM income was impacted by lower FX spreads and reduced Rates volumes. Lending income also fell due to repayments and exiting low return exposures. This was partly offset by increased income from CCPL income on the back of higher balances and improved Cards margins. Unsecured lending across the region is primarily driven by payroll-linked accounts. Income from Mortgages also rose as margins and balances grew. Nigeria continues to be the largest C&I revenue engine in Africa and Kenya continues to be the largest generator of Retail income. Own account income grew primarily due to increased Principal Finance income.

Performance by geographic region and key countries continued

Operating expenses in Africa were higher by $46 million, or 11 per cent, to $467 million. On a constant currency basis, expenses rose 20 per cent primarily due to flow through of prior year investments together with investments in developing new markets.

Loan impairment increased to $94 million, up $19 million due to a small number of exposures.

Operating profit fell 11 per cent, down $40 million to $317 million. On a constant currency basis, profit fell 4 per cent.

The Americas and Europe regions act as a two-way bridge, leveraging capabilities within these regions to support our clients' cross-border needs in Asia, Africa and the Middle East

Americas

Income fell $29 million, or 7 per cent, to $414 million. Client income was flat despite increased client activity and higher volumes in Trade and Cash Management and across FX products in FM. FM income fell as a result of lower income from Rates, which was affected by low volatility and reduced bid-offer spreads, and Commodities and Equities, reflecting lower commodity prices. This was partly offset by improved FX income as increased volumes helped offset spread compression. Own account income fell, primarily as market conditions impacted FX income. This was partly offset by improved ALM income on higher reinvestment yields.

Operating expenses were $22 million, or 8 per cent, higher at $300 million primarily due to increased compliance and regulatory costs.

Operating profit fell $44 million, or 28 per cent to $114 million.

Europe

Income was down $51 million, or 7 per cent to $653 million.

Client income fell 2 per cent due to weaker demand for FM products as a result of low levels of market volatility reducing client hedging requirements and investment opportunities. While volumes in FX and Rates grew strongly, this was more than offset by significant spread compression. Corporate Finance income also fell on the back of repayments and lower deal volumes. This was partly offset by a rise in Transaction Banking income as balances grew and margins improved. Lending income was lower as balances reduced as we managed down low return exposures. Income from Wealth Management and Retail products provided to Private Banking clients was broadly flat. Own account income fell, impacted by difficult market conditions, although ALM income rose as we deployed surplus liquidity.

Operating expenses rose $20 million, or 5 per cent, to $399 million partly due to costs incurred to exit our Private Banking operations in Geneva. Expenses in H2 2013 included the cost of the UK bank levy of $235 million.

Loan Impairment was higher by $23 million to $28 million. Other impairment increased $88 million to $87 million as a result of impairments on certain strategic and associate investments.

Operating profit fell by $183 million to $139 million.

Group summary consolidated balance sheet
				H1 2014 vs	H1 2014 vs	H1 2014 vs	H1 2014 vs
	30.06.14	30.06.13	31.12.13	H1 2013	H2 2013	H1 2013	H2 2013
	$million	$million	$million	$million	$million	%	%
Assets
Cash and balances at central banks	62,182	57,621	54,534	4,561	7,648	8	14
Loans and advances to banks¹	91,420	74,880	86,169	16,540	5,251	22	6
Loans and advances to customers¹	305,061	291,793	296,015	13,268	9,046	5	3
Investment securities¹	127,456	114,932	124,277	12,524	3,179	11	3
Derivative financial instruments	48,105	54,548	61,802	(6,443)	(13,697)	(12)	(22)
Other assets	55,914	56,183	51,583	(269)	4,331	-	8
Total assets	690,138	649,957	674,380	40,181	15,758	6	2
Liabilities
Deposits by banks¹	50,375	45,390	44,526	4,985	5,849	11	13
Customer accounts¹	390,523	380,785	390,971	9,738	(448)	3	-
Debt securities in issue¹	80,324	65,524	71,412	14,800	8,912	23	12
Derivative financial instruments	47,785	53,781	61,236	(5,996)	(13,451)	(11)	(22)
Subordinated liabilities and other borrowed funds	24,691	18,393	20,397	6,298	4,294	34	21
Other liabilities¹	47,878	40,726	38,997	7,152	8,881	18	23
Total liabilities	641,576	604,599	627,539	36,977	14,037	6	2
Equity	48,562	45,358	46,841	3,204	1,721	7	4
Total liabilities and shareholders' funds	690,138	649,957	674,380	40,181	15,758	6	2

¹Includes balances held at fair value through profit or loss

Balance sheet

Unless otherwise stated, the variance and analysis explanations compare the position as at 30 June 2014 with the position as at 31 December 2013.

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 78.1 per cent, up from the previous year-end position of 75.7 per cent. We continue to be a net lender into the interbank market, particularly in Hong Kong, Singapore and within the Americas and Europe regions. The Group's funding structure remains conservative, with limited levels of refinancing over the next few years.

The Group remains well capitalised although our Common Equity Tier 1 ratio fell to 10.5 per cent from 10.9 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 70 per cent of our financial assets held at amortised cost, and 58 per cent of total assets have a residual maturity of less than one year. The Group continues to have low exposure to problem asset classes.

Balance sheet footings grew by $16 billion, or 2 per cent, during this period, and we continued to see good growth in customer lending.

Cash and balances at central banks

Cash balances rose by $7.6 billion reflecting higher surplus liquidity and we continue to hold substantial balances with central banks.

Loans and advances to banks and customers

Loans to banks and customers, grew by $14 billion, or 4 per cent, to $396 billion.

Loans to C&I and Commercial clients are well diversified by geography and client segment and the business continued to strengthen its existing client relationships, growing customer advances by $7 billion, or 4 per cent, to $186 billion. Lending increased in Hong Kong, up 13 per cent, and Singapore, up 6 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 customer lending.

Loans to banks increased 6 per cent, with balances in Korea up 24 per cent reflecting placement of surplus liquidity and Europe up 9 per cent, reflecting its role as a bridge between the West and our footprint markets.

Lending to Retail and Private Banking clients rose $1.8 billion to $119 billion. 79 per cent is fully secured and the mortgage book continued to be conservatively placed, with an average loan to value ratio of 49.6 per cent. Mortgage balances rose by $1.6 billion, primarily in Hong Kong, while increasing levels of regulatory restrictions and intensifying competition impacted growth in other markets. Although we continued to see good demand for Card based products, CCPL balances fell $2 billion as we derisked Personal Loan portfolios in a number of markets and in Korea in particular.

Investment securities

Investment securities rose by $3.2 billion as we re-positioned our liquid assets, reducing holdings of Treasury Bills and increasing investments in highly rated corporate debt securities in line with the eligibility criteria for liquid asset buffers. The maturity profile of these assets is largely consistent with prior periods, with around 43 per cent of the book having a residual maturity of less than twelve months. Equity investments also reduced as we realised a number of Principal Finance investments.

Derivatives

Customer appetite for derivative transactions has reduced reflecting low levels of volatility in the market which has reduced client hedging needs. Notional values increased since the last year end reflecting a higher volume of short-dated transactions with Financial Institutions as a result of lower levels of volatility. Unrealised positive mark-to-market positions were $13.7 billion lower at $48 billion. Our risk positions continue to be largely balanced, resulting in a corresponding reduction in negative mark to market positions. Of the $48 billion mark to market positions, $34 billion was available for offset due to master netting agreements.

Deposits

Customer accounts were broadly flat to the end of 2013 while deposits by banks increased 13 per cent, or $6 billion, largely due to higher clearing balances. Customer deposits fell across the Greater China region as we exited higher cost Time Deposits while CASA remained broadly stable. This was offset by growth in Singapore, where we increased corporate term deposits and built up retail CASA balances, and in the Americas region reflecting higher clearing balances. 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

We continued to see good demand for our name across debt instruments. Subordinated liabilities rose $4.3 billion, as we replaced maturing debt, including the issuance of a 30 year instrument. Debt securities in issue grew by $9 billion, primarily in Short-dated certificates of deposit.

Equity

Total shareholders' equity was $1.7 billion higher at $48.6 billion reflecting profit accretion for the period, partly offset by dividend payments (net of scrip) of $0.7 billion.

Standard Chartered PLC - Risk Review

The following parts of the Risk review form part of the financial statements: 'Regulatory compliance, review, requests for information and investigations' and 'Risk of fraud and other criminal acts' on pages 30 and 31. From the start of the 'Risk management' section on page 31 to the end of the 'Pension risk' section on page 85. Excluding: Asset Backed Securities, page 63, Encumbered assets, page 74 and Liquidity coverage ratio and Net stable Funding ratio, page 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 33.

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. During the first half of 2014, we maintained a cautious stance overall, whilst continuing to support our core clients. We selectively reduced certain retail unsecured portfolios, principally in Korea. Credit risk management is covered in more detail on page 34.

Our balance sheet and liquidity have remained strong. 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 44 per cent of total assets, which is unchanged since December 2013

· The Manufacturing sector in Corporate and Institutional and Commercial client segments, which is 25 per cent of lending, unchanged since December 2013, remains diversified by industry and geography

· The largest concentration to any globally correlated industry is to energy at 20 per cent of total Corporate and Institutional and Commercial clients assets, which is slightly below 21 per cent at the year end. The exposure is well spread across six subsectors and over 370 client groups and, reflecting the trade bias in the portfolio, 57 per cent of exposures mature within one year

· 66 per cent of loans and advances to customers in the Corporate & Institutional and Commercial client segments mature in under one year, which is unchanged compared to December 2013.

· Our top 20 corporate exposures continue to be highly diversified, with each, on average, spread across seven markets and six industries

· Our cross-border asset exposure is also diversified and reflects our strategic focus on our core markets and customer segments. Further details are set out on page 66

· 39 per cent of customer loans and advances are in Retail products; 79 per cent of these are fully secured and the overall loan to value ratio on our mortgage portfolio is less than 50 per cent, compared with 78 per cent and 50 per cent at the end of 2013 respectively

· The unsecured Retail products 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 exposure in these countries is primarily in trade finance and financial markets. Further details of our eurozone exposures are given on page 65. Our exposure to countries impacted by the political developments in the Middle East and North Africa are also low. Exposures in Iraq, Syria, Jordan, Lebanon, Egypt, Libya, Algeria and Tunisia represent less than 0.5 per cent of our total assets. Our exposure to Russia and Ukraine is very low. It represents less than 0.05 per cent of our total assets.

Our exposures to commercial real estate and leveraged loans account for 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 2014 due to investments in high quality, senior ABS and Residential Mortgage Backed Securities (RMBS) assets held in the Group's portfolio of marketable securities. Further details are given on page 63.

We have closely managed our exposures in markets and sectors which have faced downturns during the first half of 2014, increasing collateral cover and selectively reducing exposures and limits.

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 market risk has risen during the first half of 2014 by 21 percent compared to the second half of 2013 and by 11 percent compared to the first half of 2013 in terms of value at risk. Further details on market risk are given on page 67.

We maintained a strong advances-to-deposits ratio in the first half of 2014. Liquidity continues to be deployed to support growth opportunities in our chosen markets. We manage liquidity in 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 provided on pages 72 to 83.

We continue to engage actively with our regulators, including the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), the Bank of England (BoE) and our 'host' regulators in each of the markets in which we operate.

We have a well-established risk governance structure, which is set out on page 32, and an experienced senior team. Members of our most senior executive body (the Court) sit on our principal risk executive committees, which ensure that risk oversight is a strong focus for all our executive 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.

We continue to build on the Group's culture of risk management discipline. We recognise that failures of regulatory compliance have damaged the Group's reputation, and continue to pay close attention to this. We have continued to reinforce our values and our brand promise, in part through continued emphasis on Group's Code of Conduct. 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 84 to 85.Impairment review

Impairment review

The total loan impairment charge for 2014 has increased by $116 million, or 16 per cent, to $846 million compared to H1 2013. This represents 55 basis points of total customer net loans and advances.

In Retail Clients, total loan impairment provisions have remained flat as the increase in Korea Personal Debt Rehabilitation Scheme (PDRS) filings has been offset by lower provision requirements in ASEAN. Portfolio impairment provisions also reduced as we reduced high risk personal loans exposure. We remain disciplined in our approach to risk management and proactive in our collection efforts to minimise account delinquencies.

In Corporate and Institutional Clients, total loan impairment provisions on balance sheet have increased by $206 million, or 11 per cent, compared to 31 December 2013. This was concentrated in a few names in Greater China and Africa. Loan impairment for Corporate & Institutional Clients represents 32 basis points of customer net loans and advances and remains in line with the range of our experience since 2009. The credit quality of the portfolio remains high in spite of the volatility in commodity prices and currencies.

Further details of credit risk in respect of the Group's loans portfolio is set out on pages 34 to 61.

Other impairment has increased by $174 million to $185 million reflecting the write-down of commodity assets arising from a fraud in Greater China and certain strategic and associate investments.

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 current 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 although the rate of growth is increasing, uncertainty remains. The unwinding of the US Federal Reserve's quantitative easing programme could lead to higher interest rates, volatility in financial markets and capital flight from emerging markets which may threaten the growth trajectory of some vulnerable economies. A slowdown in China's growth may depress prices and trade in a number of commodity sectors such as energy, metals and mining sectors, and 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 and the prospects for many of the European economies have improved, there is still a need for substantial new structural reform (see additional information on the risk of redenomination on page 64).

Our exposure to eurozone sovereign debt is very low. However, we remain alert to the risk of secondary impacts from events 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, though some central banks are already employing macro-prudential tools to temper property price increases. 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

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 always 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, (including proposals which could result in (i) deposit-taking entities being ring-fenced from Corporate and Institutional Clients activities and (ii) local branches of international banking groups being subsidiarised), the UK bank levy and the US Foreign Account Tax Compliance Act. In relation to the banking structural reforms, the European Commission has published a legislative proposal for a regulation introducing structural reforms to the EU banking sector, including a prohibition on proprietary trading and separation powers for supervisors relating to banks' other trading activities. Uncertainty remains regarding details of the application of the European Union's Capital Requirements Directive and Regulation (CRD IV), the proposed Bank Recovery and Resolution Directive (BRRD) 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, structure our global operating model 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 under current and currently published future regimes.

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 clients and shareholders and the broader geographies and markets in which we operate. 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.

Regulatory compliance, reviews, requests for information and investigations

Since the global financial crisis, the banking industry has been subject to increased regulatory scrutiny. There has been an unprecedented volume of regulatory changes and requirements, as well as a more intensive approach to supervision and oversight, resulting in an increasing number of regulatory reviews, requests for information and investigations, often with enforcement consequences, involving banks.

While the Group seeks to comply with the letter and spirit of all applicable laws and regulations at all times, it may be subject to regulatory actions, reviews, requests for information (including subpoenas and requests for documents) and investigations across our markets, the outcomes of which are generally difficult to predict and can be material to the Group. Where laws and regulations across the geographies in which the Group operates contradict each other or create conflicting obligations, the Group aspires to meet both local requirements and appropriate global standards.

In 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 (NYSDFS), 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 the District Attorney of New York (each a 'DPA') and a Settlement Agreement with the Office of Foreign Assets Control. In addition to the civil penalties totalling $667 million, the terms of these settlements (together the 'Settlements') include a number of conditions and ongoing obligations with regard to improving sanctions, Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) controls such as remediation programmes, reporting requirements, compliance reviews and programmes, banking transparency requirements, training measures, audit programmes, disclosure obligations and the appointment of an independent monitor (the "Monitor"). These obligations are managed under a programme of work referred to as the US Supervisory Remediation Program (SRP). The SRP comprises workstreams designed to ensure compliance with the remediation requirements contained in all of the Settlements. The Group has established a Financial Crime Risk Mitigation Programme (FCRMP), which is a comprehensive, multi-year programme designed to review many aspects of the Group's existing approach to anti-money laundering and sanctions compliance and to enhance them as appropriate. One key component of the FCRMP is to oversee and manage the SRP. As part of the FCRMP the Group or its advisors may identify new issues, potential breaches or matters requiring further review or further process improvements that could impact the scope or duration of the FCRMP.

¹ The US authorities comprise The New York Department of Financial Services (DFS), the Office of Foreign Assets Control (OFAC), the New York County District Attorney's Office (DANY), the United States Department of Justice (DOJ) and the Federal Reserve (NYFED)

The Group is engaged with all relevant authorities to implement these programmes and meet the obligations under the Settlements and is responding to further requests for information and inquiries related to its historic, current and future compliance with the relevant sanctions and AML regimes of all jurisdictions in which it operates.

As a result of its ongoing reviews and continuing engagement with US authorities, the Group believes that the term of the DPAs is likely to be extended. (The DPAs provide that if the Group fulfils all the requirements imposed by the DPAs, the applicable charges against the Group will be dismissed at the end of their applicable term.)

Separately, certain issues have been identified with respect to the Group's post-transaction surveillance system, which is part of its anti-money laundering systems and controls and is separate from the Group's sanctions screening systems. The Group is engaged in discussions with NYSDFS and the Monitor with respect to those issues and their ongoing remediation. The Group believes that the resolution of these issues is likely to involve an enforcement action by the NYSDFS that would include an extension of the term of the Monitor beyond the original two-year term, a monetary penalty and remedial actions.

The Group recognises that its compliance with historical, current and future sanctions, as well as AML and BSA requirements, and customer due diligence practices, not just in the US but throughout its footprint, is and will remain a focus of the relevant authorities.

As part of their remit to oversee market conduct, regulators and other agencies in certain markets are conducting investigations or requesting reviews into a number of areas of market conduct, including sales and trading, involving a range of financial products, and submissions made to set various market interest rates and other financial benchmarks, such as foreign exchange. At relevant times, certain of the Group's branches and/or subsidiaries were (and are) participants in some of those markets, in some cases submitting data to bodies that set such rates and other financial benchmarks. The Group is contributing to industry proposals to strengthen financial benchmarks processes in certain markets and continues to review its practices and processes in the light of the investigations, reviews and the industry proposals.

The Group is co-operating with all relevant ongoing reviews, requests for information and investigations. While the Group seeks to comply with the letter and spirit of all applicable laws and regulations, the outcome of these reviews, requests for information and investigations is uncertain and could result in further actions, penalties or fines but it is not possible to predict the extent of any liabilities or other consequences that may arise.

For further details on legal and regulatory matters refer to note 31 on page150.

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, a deterioration of the sovereign debt crisis in the eurozone, or a geopolitical event could significantly increase general financial market volatility which could affect our performance or the availability of capital or liquidity. In addition, reduction of monetary intervention by the US Federal Reserve, or other central banks, could disrupt external funding for some economies leading to lower growth and financial markets volatility. 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 stress test our market risk exposures to highlight the potential impact of extreme market events on those exposures and to confirm that they are within authorised stress loss triggers. Stress scenarios are regularly updated to reflect changes in risk profile and economic events. Where necessary, overall reductions in market risk exposure are enforced. 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. We also monitor the development of broader geopolitical events such as in Ukraine, the Middle East and territorial disputes in North East Asia. We conduct stress loss 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 33.

Risk of fraud and other criminal acts

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. Concerns about cyber risk have risen significantly, driven in part by geopolitical events. Cyber crime risks include fraud, vandalism and damage to critical infrastructure.

While the internet and networked technologies have provided major opportunities for digitising business, they have also given rise to significant risks as well-equipped and motivated attackers become more sophisticated. The incidence of cyber crime is rising, becoming more globally coordinated, and is a challenge for all organisations.

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. The Group has implemented a range of cyber defences to protect from hacking, misuse, malware, errors, social engineering and physical threats. 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. We use third parties where appropriate to further protect, test, validate and strengthen our defences.

We actively collaborate with our peers, regulators and other expert bodies as part of our response to this risk.

The Group's controls to address money laundering risks are under review as part of the Group's Financial Crime Risk Mitigation Programme, referred to in the section headed "Regulatory compliance, reviews, requests for information and investigations" above.

Fraud and criminal activity may also give rise to litigation impacting the Group. In December 2008 Bernard Madoff confessed to running a Ponzi scheme through Bernard L. Madoff Investment Securities, LLC ('BMIS'). American Express Bank ('AEB'), acquired by the Group in February 2008, had provided clients with access to funds that invested in BMIS. BMIS and the funds are in liquidation. Certain clients have brought actions against the Group in various jurisdictions seeking to recover losses based principally on the assertion that inadequate due diligence was undertaken on the funds. In addition, the BMIS bankruptcy trustee and the funds' liquidator have commenced proceedings against the Group, seeking to recover sums paid to clients when they redeemed their investments prior to BMIS' bankruptcy. There is a range of possible outcomes in the litigation described above, with the result that it is not possible for the Group to estimate reliably the liability that might arise. However, the Group considers that it has good defences to the asserted claims and continues to defend them vigorously.

For further details on legal and regulatory matters refer to note 31 on page 150.

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, Indonesia and Taiwan for the first half of 2014 and the half year periods ending 30 June 2013 and 31 December 2013. 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 2014.

	6 months Ended 30.06.2014	6 months Ended 30.06.2013	6 months Ended 31.12.2013
Indian rupee
Average	60.77	54.95	62.35
Period end	60.16	59.35	61.77
Korean won
Average	1,049.48	1,103.21	1,080.16
Period end	1,011.73	1,141.76	1,055.08
Indonesian rupiah
Average	11,689.54	9,771.52	11,286.33
Period end	11,855.50	9,925.00	12,164.29
Taiwan dollar
Average	30.23	29.65	29.75
Period end	29.89	30.01	29.84

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 risks. 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 seeks to ensure 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. Further details on the role of the Board and its committees in matters of risk governance are covered in the Corporate Governance section in the Group's Annual Report.

Overall accountability for risk management is held by the Standard Chartered Bank Court (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.

GRC and GALCO are essentially unchanged following the changes to the Group's organisation structure, although the committee structures below them have changed significantly in some areas. The previous divisional risk committee structures have been combined to achieve better integration and alignment to the new organisational model.

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, business 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 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 the 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.

The 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, the 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 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 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. The BRC advises the Board on the risk appetite statement and oversees that the Group remains within it.

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

· Establish the adequacy of capital and liquidity resources

· Support the development of mitigating actions and contingency plans including business continuity

· Meet regulatory requirements.

Our stress testing activity focuses on the potential impact of market, macroeconomic, geopolitical and physical events on relevant geographies, customer segments and asset classes. Stress tests are performed at Group, country and business level and bespoke scenarios are applied to our market risk positions.

Group level stress testing has covered a considerable range of macroeconomic scenarios. These included the effects of a major downturn in world trade, severe economic stress in emerging markets including a slump in emerging markets exports, sharp appreciation and depreciation in currencies, and the tapering of quantitative easing. Stress testing at business level covered a range of scenarios including the impact of foreign exchange depreciation or appreciation, sustained falls in base metals and energy prices and significant changes in interest rates.

At country level, a number of portfolio reviews were also undertaken, covering the effects of stress on a range of industry sectors, including the shipbuilding, banking, real estate, telecoms, mining and renewable energy sectors.

Market risk and liquidity stress tests are also carried out regularly as described in the sections on market risk on page 67 and liquidity risk on page 72.

In addition, the Financial Policy Committee of the Bank of England has introduced a new stress test of the banking system, focused on the eight largest UK banks, which includes the Group. Banks have been asked to project their performance under a three-year common stress scenario which has been designed by the European Banking Authority. The Group expects that the results of the BoE stress test will be used by the PRA to inform the setting of a bank's revised Capital Planning Buffer (CPB). See Capital management section on page 87.

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, industries, collateral types and client segments.

Credit risk committee

The Credit Risk Committee (CRC), which receives its ultimate authority from the GRC, is the primary senior management committee to ensure the effective management of credit risk throughout the Group in line with risk appetite and in support of Group strategy. The CRC regularly meets to monitor all material credit risk exposures, key internal developments and external trends and ensure that appropriate action is taken. It is chaired by the Group Chief Credit Officer.

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. These policies set key control standards on credit origination and credit risk assessment, concentration risk and large exposures, credit risk mitigation, credit monitoring, collection and recovery management. In addition, there are other group-wide policies integral to the credit risk management such as those relating to stress testing, risk measurement and impairment provisioning.

Policies and procedures specific to each client or product segment are established by authorised bodies. These are consistent with our Group-wide credit policies, but are more detailed and adapted to reflect the different risk characteristics across client and product segments. Policies are regularly reviewed and monitored to ensure these remain effective and consistent with the risk environment and risk appetite.

Credit rating and measurement

Risk measurement plays a central role, along with judgment and experience, in informing risk taking and portfolio management decisions.

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.

A standard alphanumeric credit risk grade (CG) system for Corporate, Institutional and Commercial clients is used. The numeric grades run from 1 to 14 and some of the grades are further sub-classified. Lower credit grades are indicative of a lower likelihood of default. Credit grades 1 to 12 are assigned to performing customers or accounts, while credit grades 13 and 14 are assigned to non-performing or defaulted customers. An analysis by credit grade of those loans that are neither past due nor impaired is set out on page 46.

For Retail client IRB portfolios, we use application and behaviour credit scores which are calibrated to generate a probability of default and then mapped to the standard alphanumeric credit risk grade system.

Our credit grades are not intended to replicate external credit grades (where these are available), and ratings assigned by external ratings agencies or credit bureaus 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 or credit bureau is typically assigned a worse internal credit grade.

Advanced IRB models cover a substantial majority of our exposures and are used 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 Credit Risk Committee, on the recommendation of the Credit Model Assessment Committee (MAC). The Credit MAC supports the Credit Risk Committee 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 Credit 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 annual 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 and credit risk assessment

Major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures are reviewed and approved by the Credit Approval Committee (CAC). The CAC is appointed by the CRC and derives its credit approving 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.

All credit proposals are subject to a robust credit risk assessment. It includes a comprehensive evaluation of the client's credit quality including willingness, ability, and capacity to repay. The primary lending consideration is usually based on the client's credit quality and the repayment capacity from operating cash flows for counterparties; and personal income or wealth for individual borrowers. The risk assessment gives due consideration to client's liquidity and leverage position. Where applicable, the assessment includes a detailed analysis of the credit risk mitigation arrangements to determine the level of reliance on such arrangements as the secondary source of repayment in the event of a significant deterioration in a client's credit quality leading to default. Lending activities that are considered as higher risk or non-standard are subjected to stricter minimum requirements and require escalation to senior credit officer or authorised bodies. An analysis of the loan portfolio is set out on pages 41 to 61.

Credit concentration risk

Credit concentration risk may arise from a single large exposure to a counterparty or a group of connected counterparties, or from multiple exposures across the portfolio that are closely correlated.

Large exposure concentration risk is managed through concentration limits set by counterparty or group of connected counterparties.

At the portfolio level, credit concentration thresholds are set and monitored to control for concentrations, where appropriate, by country, industry, product, tenor, collateral type, collateralisation level and credit risk profile.

For concentrations that are material at a Group level, thresholds are set and monitored by the CRC and reported to GRC and BRC.

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.

Credit risk committees meet regularly to assess the impact of external events and trends on the Group's credit risk portfolios and to define and implement our response in terms of appropriate changes to portfolio shape, portfolio and underwriting standards, risk policy and procedures.

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 Credit Issues 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. Typically, all Corporate, Institutional, Commercial and Private Banking past due accounts are managed by GSAM.

For retail and small business client exposures, 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.

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 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.

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.

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 the Group to realise the asset without the cooperation of the asset owner in the event that this is necessary.

For certain types of lending - typically mortgages, 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.

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.

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.

The Group uses bilateral and multilateral netting to reduce presettlement 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.

Master netting agreements are generally enforced only in the event of default. In line with IAS 32, derivative exposures are presented on a net basis in the financial statement only if there is a legal right to offset and there is intent to settle on a net basis or realise the assets and liabilities 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 40.

Securities

The portfolio limits and parameters for the underwriting and purchase of all pre-defined securities assets to be held for sale are approved by the Underwriting Committee. The Underwriting Committee is established under the authority of the CRC. The business 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 a specialist team within the Risk function whose activities include oversight and approval within the levels delegated by the Underwriting Committee. Issuer credit risk, including settlement and pre-settlement risk, and price risk are controlled by the Risk function.

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.

Loan impairment

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 by taking 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, for example, 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 in which 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 over the next year differ from the assumptions built into the model resulting in material adjustments to the carrying amount of loans and advances.

Retail Clients

Retail Clients product portfolios consist of a large number of comparatively small exposures, where it is impractical to assess each loan on an individual basis for impairment. The primary indicator of potential impairment in these portfolios is therefore delinquency. A loan is considered delinquent (or 'past due'), when the customer has failed to make a principal or interest payment in accordance with the loan contract. For delinquency reporting purposes we follow industry standards measuring delinquency as of one, 30, 60, 90, 120 and 150 days past due. Impairment is measured against these buckets in two stages:

In the first stage we raise 'portfolio impairment provisions' (PIP). These are calculated by applying expected loss rates to delinquency buckets. These are based on past experience of loss supplemented by an assessment of specific factors that affect each portfolio and that in particular aim to adjust historic data for current market conditions. Loss rates are generally calculated separately for each product in each country (either through the use of historical data or using proxies) and separate loss rates are used for renegotiated and forborne loans to reflect their increased risk. PIPs take into account the fact that, while delinquency is an indication of impairment, not all delinquent loans (particularly those in the early stages of delinquency) will in fact be impaired. This will only become apparent with the passage of time and as we investigate the causes of delinquency on a case by case basis. (Accounts that are overdue by more than 30 days are more closely monitored and subject to specific collections processes for this purpose). At the outset of delinquency therefore it is not possible to determine whether a loan is impaired; it is only possible to estimate the likelihood that it is. This is taken account of in the PIP method, which estimates loss by extrapolating past experience over whole portfolios, rather than analysing individual loans on a case by case basis.

In the second stage we are able to replace PIP with individual impairment provisions (IIP) as we develop more knowledge about each individual account. We apply IIP after the following number of days' delinquency:

o For mortgages after 150 days

o For secured wealth management products after 90 days

o For unsecured consumer finance loans after 90 days

o For all other unsecured loans and loans secured on automobiles, after 150 days

IIP is based on the estimated present values of future cashflows, in particular those resulting from the realisation of security. The days past due used to trigger IIP are 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 raising security as appropriate) is low. For all products there are certain situations where the IIP process is accelerated, such as in cases involving bankruptcy, customer fraud and death. IIP is also accelerated for all restructured accounts to 90 days past due (unsecured and automobile finance) and 120 days past due (secured loans) respectively.

Loan write off is again broadly driven by past experience of the point at which further recovery is unlikely. Write off occurs at the same time that IIP is established for all products except mortgage loans, which have not been restructured. The latter is fully impaired after 720 days past due.

The fact that it is not possible to be certain that a loan is impaired until several months after it becomes delinquent means that it is also not possible to be certain which delinquent loans are fully non-performing. The Group has determined that it is more likely than not that a loan is non-performing after 90 days and therefore uses 90 days delinquency as the distinguishing feature between performing and non-performing Retail Client loans. This is however, only an approximate measure and it also means that, for Retail Client portfolios, impaired loans do not equate to non-performing loans, because impairment cannot be generally determined on an individual basis until a later date.

It is inevitable that at the balance sheet date, the non-delinquent portfolio will include a few impaired loans that have not manifested themselves as delinquent. These are known as 'incurred, but not reported' losses. A PIP is raised against these by applying past experience adjusted for current conditions to non-delinquent loans on a portfolio basis.

For further details on Retail see page 41 to 61.

Corporate and Institutional, Commercial and Private Banking Clients

Loans are classified as impaired 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 client 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 Retail Clients, 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. 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.

For further details on Corporate and Institutional, Commercial and Private Banking Clients see page 41 to page 61.

Renegotiated and forborne loans

In certain circumstances, the Group may renegotiate client loans.

Loans that are renegotiated for commercial reasons, such as when a client had a credit rating upgrade, are not included as part of renegotiated and forborne loans because they are not indicative of any credit stress.

Loans that are renegotiated primarily to grant extended tenor to a client who is facing some difficulties but who we do not believe is impaired are reported as 'other renegotiated 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 to the original terms of the loans, are considered to be subject to forbearance strategies and are disclosed as "Loans subject to forbearance", which is a subset of impaired loans.

Forbearance strategies assist clients who are temporarily in financial distress and are unable to meet their original contractual repayment terms. Forbearance can be initiated by the client, 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.

Once a loan is subject to forbearance or is renegotiated, the loan continues to be reported as such, until the loan matures or is otherwise derecognised.

Retail Clients

For Retail Clients, all loans subject to forbearance (in addition to other renegotiated loans) are managed within a separate portfolio. If such loans subsequently become past due, charge 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 Retail Clients portfolio as a whole, to recognise the greater degree of inherent risk.

Corporate and Institutional, Commercial and Private Banking Clients

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 kept under close review to assess the client's ability to adhere to the restructured repayment strategy and to identify any events that could result in a deterioration in the client's ability to repay.

If the terms of the renegotiation are such that, 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. These accounts are monitored as described on page 35.

Renegotiated and forborne loans are disclosed by client segments on page 47.

Restatement of prior periods

In January 2014, the Group announced a change to its organisation structure effective 1 April 2014. To aid historic comparisons the Group's half year results restate segmental information for 30 June and 31 December 2013 under the new client segments and global product groups, and the new geographic regions.

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 2014, before and after 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 and is affected by the general economic conditions in the territories in which it operates. The Group sets limits on the exposure to any client or counterparty.

The Group's maximum exposure to credit risk has increased by $0.7 billion when compared to 31 December 2013. Loans and advances to banks and customers has increased by $14.3 billion since December 2013 due to growth in secured lending to banks and broad based growth across several industry sectors in the Corporate and Institutional Client segment. Further details of the loan portfolio are set out on page 41. Investment securities rose by $3.5 billion with the increase primarily in corporate bonds.

The Group's credit risk exposure before risk mitigation arising from derivatives decreased by $13.7 billion reflecting lower market volatility when compared to December 2013, despite higher volumes in several markets.

		30.06.14				30.06.13
			Credit risk management				Credit risk management
		Maximum exposure	Collateral	Master netting agreements	Net Exposure	Maximum exposure	Collateral	Master netting agreements	Net Exposure
		$million	$million	$million	$million	$million	$million	$million	$million
On balance sheet
Total Loans and advances to banks and customers¹
As per balance sheet		386,533				358,658
Included within fair value through profit and loss		9,948				8,015
		396,481	157,118	-	239,363	366,673	141,628	-	225,045
Investment securities²
As per balance sheet		100,907	-	-	100,907	94,812	-	-	94,812
Included within fair value through profit and loss		26,549	-	-	26,549	20,120	-	-	20,120
Less: Equity securities		(6,495)	-	-	(6,495)	(5,559)	-	-	(5,559)
		120,961	-	-	120,961	109,373	-	-	109,373
Derivative financial instruments³		48,105	3,961	34,437	9,707	54,548	3,241	37,379	13,928
Total balance sheet		565,547	161,079	34,437	370,031	530,594	144,869	37,379	348,346

Off balance sheet
Contingent liabilities		45,382	-	-	45,382	47,594	-	-	47,594
Undrawn irrevocable standby facilities, credit lines and other commitments to lend⁴		59,083	-	-	59,083	59,835	-	-	59,835
Documentary credits and short term trade-related transactions		8,160	-	-	8,160	8,171	-	-	8,171
Forward asset purchases and forward deposits		26	-	-	26	852	-	-	852
Total off- balance sheet		112,651	-	-	112,651	116,452	-	-	116,452
Total		678,198	161,079	34,437	482,682	647,046	144,869	37,379	464,798
¹	An analysis of credit quality is set out on page 47. Further details of collateral held by client segment and held for past due and individually impaired loans are set out on page 57
²	Equity shares are excluded as they are not subject to credit risk
³	The Group enters into master netting agreements which in the event of default, results 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
⁴	Excludes unconditionally cancellable facilities

Credit Portfolio continued
		31.12.13
			Credit risk management
		Maximum exposure	Collateral	Master netting agreements	Net Exposure
		$million	$million	$million	$million
On balance sheet
Total Loans and advances to banks and customers¹
As per balance sheet		374,410
Included within fair value through profit and loss		7,774
		382,184	152,926	-	229,258
Investment securities²
As per balance sheet		102,716	-	-	102,716
Included within fair value through profit and loss		21,561	-	-	21,561
Less: Equity securities		(6,800)	-	-	(6,800)
		117,477	-	-	117,477
Derivative financial instruments³		61,802	5,147	46,242	10,413
Total balance Sheet		561,463	158,073	46,242	357,148

Off balance sheet
Contingent liabilities		46,938	-	-	46,938
Undrawn irrevocable standby facilities, credit lines and other commitments to lend⁴		61,277	-	-	61,277
Documentary credits and short term trade-related transactions		7,409	-	-	7,409
Forward asset purchases and forward deposits		459	-	-	459
Total off- balance sheet		116,083	-	-	116,083
Total		677,546	158,073	46,242	473,231
¹	An analysis of credit quality is set out on page 49. Further details of collateral held by client segments and held for past due and individually impaired loans are set on page 57
²	Equity shares are excluded as they are not subject to credit risk
³	The Group enters into master netting agreements which in the event of default, results 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
⁴	Excludes unconditionally cancellable facilities

Credit risk mitigation

In all segments, credit risk is mitigated to some degree through collateral, further details of which are set out on pages 57 to 61. Other forms of credit mitigation are set out below.

Loans and advances

The Group has transferred to third parties by way of securitisation the rights to any collection of principal and interest on client loan assets with a face value of $696 million (30 June 2013: $1,034 million; 31 December 2013: $779 million). The Group continues to recognise these assets in addition to the proceeds and related liability of $378 million (30 June 2013: $833 million; 31 December 2013: $502 million) arising from the securitisations. The Group considers the above client loan assets to be encumbered. Further details of encumbered assets are provided on page 74.

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 2013: $21.8 billion; 31 December 2013: $21.4 billion). These credit default swaps are accounted for as guarantees as they meet the accounting requirements set out in IAS39. 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.

Derivatives financial instruments

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 2013: $3,241million; 31 December 2013: $3,068 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

Client segment by geographic region

The following pages provide detail of loans and advances to customers and loans to banks:

· by client segment, by geographic region (page 42)

· by industry/product, by geographic region (pages 43 to 44)

· by residual contractual maturity (page 45)

An analysis detailing the key points supplementing the above detail is set out below and is based on the booking location of the loan facility.

Loans and advances to customers (net of individual impairment and portfolio impairment provisions) grew by $9.0 billion since December 2013.

This was primarily within the Corporate & Institutional (C&I) segment which contributed $7.5 billion, across Greater China, ASEAN and Americas. The Commercial Client segment loan book was flat to December 2013 as we focused on driving RWA efficiencies and optimising capital usage across this portfolio following the reorganisation.

The Private Banking Client segment grew by $1.0 billion from December 2013 primarily through its operations in Singapore and Hong Kong.

The Retail Clients segment was marginally up compared to December 2013 and was reflective of our decision to de-risk the "Card, Personal Loans (CCPL) and other unsecured lending" book primarily in North East Asia. This was largely offset by growth in secured lending especially in Hong Kong.

The geographic split also provides an industry and product split. The growth in this period was largely in financing, insurance and business services. This was driven by increased trade finance volumes, in particular with financial institutions counterparties. In addition the Greater China region also saw a higher level of leveraged finance and IPO financing transactions. Other industry concentrations are broadly consistent period on period.

For the Private Banking and Retail client segments, client loans are analysed by product. The reduction in unsecured lending, which includes CCPL, was largely offset by growth in Mortgages, especially in Hong Kong although regulatory cooling measures in several markets tempered the related growth opportunities.

The Corporate and Institutional and Commercial Client segments remain predominantly short term. The C&I customer loan book has 65 per cent (30 June 2013: 65 per cent and 31 December 2013: 64 per cent) of loans maturing in less than one year. Likewise, the Commercial Clients book has 76 per cent (30 June 2013: 70 per cent and 31 December 2013: 71 per cent) of its loans maturing in less than one year.

The Private Banking Clients loan book also demonstrates a short term bias typical of secured wealth management lending secured on wealth management assets.

The Retail Clients loan book continues to be longer term in nature as Mortgages constitute a large majority at 82 per cent (30 June 2013: 82 per cent; 31 December 2013: 82 per cent) of the loan book.

The growth in loans to banks of $5.3 billion since December 2013 is primarily across Greater China, ASEAN and Europe driven in part by liquidity management activity by virtue of our RMB leadership position. Given the nature of this book, it is predominantly short term and the maturity profile remains consistent period on period.

Overall, the loan portfolio continues to be well diversified geographically and by industry with a consistent maturity profile.

Client segment by geographic region continued

	30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Corporate and Institutional	41,423	6,954	7,688	44,114	12,616	5,939	11,320	38,616	168,670
Commercial	6,341	3,150	2,479	2,916	1,512	665	-	610	17,673
Private banking	3,340	-	154	9,753	253	-	-	4,636	18,136
Retail	41,895	19,632	4,177	28,641	4,819	1,904	-	246	101,314
	92,999	29,736	14,498	85,424	19,200	8,508	11,320	44,108	305,793
Portfolio impairment provision	(142)	(105)	(65)	(173)	(69)	(65)	(6)	(107)	(732)
Total loans and advances to customers^1,2	92,857	29,631	14,433	85,251	19,131	8,443	11,314	44,001	305,061
Intra-segmental balance	2,991	(5)	9,891	1,310	4,810	5,323	(37)	(24,283)	-
Total loans and advances to customers^1,3	95,848	29,626	24,324	86,561	23,941	13,766	11,277	19,718	305,061
Total loans and advances to banks¹	28,555	7,806	478	7,869	1,712	901	13,187	30,912	91,420

	30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Corporate and Institutional	36,459	7,579	7,463	42,410	12,308	5,875	9,900	36,776	158,770
Commercial	5,799	3,212	2,317	3,274	1,236	658	-	884	17,380
Private banking	2,645	56	89	7,300	212	-	-	4,380	14,682
Retail	40,458	21,862	4,393	28,793	4,388	1,551	-	253	101,698
	85,361	32,709	14,262	81,777	18,144	8,084	9,900	42,293	292,530
Portfolio impairment provision	(151)	(124)	(58)	(147)	(118)	(68)	(4)	(67)	(737)
Total loans and advances to customers^1,2	85,210	32,585	14,204	81,630	18,026	8,016	9,896	42,226	291,793
Intra-segmental balance	1,201	2	11,905	629	5,296	4,584	(610)	(23,007)	-
Total loans and advances to customers^1,3	86,411	32,587	26,109	82,259	23,322	12,600	9,286	19,219	291,793
Total loans and advances to banks¹	26,027	5,257	759	7,735	2,437	813	11,048	20,804	74,880

	31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Corporate and Institutional	37,423	7,298	7,395	41,638	12,187	5,792	10,682	38,778	161,193
Commercial	6,406	3,109	2,340	3,249	1,274	672	-	791	17,841
Private banking	3,003	33	131	9,020	250	-	-	4,723	17,160
Retail	40,936	20,283	4,295	28,337	4,708	1,696	-	262	100,517
	87,768	30,723	14,161	82,244	18,419	8,160	10,682	44,554	296,711
Portfolio impairment provision	(146)	(107)	(64)	(154)	(74)	(67)	(5)	(79)	(696)
Total loans and advances to customers^1,2	87,622	30,616	14,097	82,090	18,345	8,093	10,677	44,475	296,015
Intra-segmental balance	2,224	2	11,511	762	5,190	5,029	(248)	(24,470)	-
Total loans and advances to customers^1,3	89,846	30,618	25,608	82,852	23,535	13,122	10,429	20,005	296,015
Total loans and advances to banks¹	27,905	6,561	575	6,776	2,097	742	13,067	28,446	86,169

¹Amounts net of individual impairment provision and include financial instruments held at fair value through profit or loss (see note 12 on page 119)

² The disclosures in the risk review section are presented on the basis of booking location of the loan except for a small number of impaired loans which have been reallocated into the region in which they are managed to align with income statement presentation

³The balances are based on the location of the customer

Loan Portfolio continued
Industry and Retail products analysis by geographic region
	30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Industry:
Agriculture, forestry and fishing	137	7	131	1,303	158	467	365	251	2,819
Construction	523	477	668	611	1,332	141	26	354	4,132
Commerce	10,950	1,315	1,891	16,912	5,256	998	2,376	7,160	46,858
Electricity, gas and water	1,001	429	40	883	420	437	100	2,258	5,568
Financing, insurance and business services	9,925	667	609	5,741	1,735	717	3,091	8,062	30,547
Governments	251	-	3	1,347	140	99	-	430	2,270
Mining and quarrying	869	38	58	3,611	576	695	2,600	6,638	15,085
Manufacturing	14,550	4,068	4,571	8,069	2,544	2,231	2,359	9,089	47,481
Commercial real estate	6,451	1,975	1,650	4,114	1,265	48	-	781	16,284
Transport, storage and communication	2,901	740	440	3,631	694	743	403	3,969	13,521
Other	206	388	106	808	8	28	-	234	1,778
Retail Products:
Mortgages	34,132	12,240	2,472	22,234	1,869	351	-	1,351	74,649
CCPL and other unsecured lending	7,491	5,291	1,011	5,235	1,883	1,343	-	246	22,500
Auto	-	1	44	790	324	5	-	-	1,164
Other	3,612	2,100	804	10,135	996	205	-	3,285	21,137
	92,999	29,736	14,498	85,424	19,200	8,508	11,320	44,108	305,793
Portfolio impairment provision	(142)	(105)	(65)	(173)	(69)	(65)	(6)	(107)	(732)
Total loans and advances to customers¹	92,857	29,631	14,433	85,251	19,131	8,443	11,314	44,001	305,061

Total loans and advances to banks	28,555	7,806	478	7,869	1,712	901	13,187	30,912	91,420
	30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Industry:
Agriculture, forestry and fishing	53	8	121	1,290	225	730	2,057	552	5,036
Construction	535	357	695	728	1,436	182	-	701	4,634
Commerce	10,547	1,248	1,660	16,933	4,833	915	826	4,969	41,931
Electricity, gas and water	699	393	67	938	341	239	438	2,085	5,200
Financing, insurance and business services	5,229	514	570	4,168	1,855	236	2,838	7,345	22,755
Governments	-	463	3	1,673	311	-	-	622	3,072
Mining and quarrying	993	24	202	3,659	657	791	2,107	8,086	16,519
Manufacturing	14,659	5,141	4,365	6,751	2,135	2,410	1,105	7,198	43,764
Commercial real estate	6,272	1,835	1,324	3,381	884	2	-	1,175	14,873
Transport, storage and communication	2,828	389	641	5,375	788	788	508	4,824	16,141
Other	443	419	132	785	80	240	21	104	2,224
Retail Products:
Mortgages	32,485	13,867	2,337	21,753	1,621	277	-	1,459	73,799
CCPL and other unsecured lending	7,812	6,249	1,221	5,800	2,021	1,247	-	322	24,672
Auto	-	6	50	1,040	335	2	-	-	1,433
Other	2,806	1,796	874	7,503	622	25	-	2,851	16,477
	85,361	32,709	14,262	81,777	18,144	8,084	9,900	42,293	292,530
Portfolio impairment provision	(151)	(124)	(58)	(147)	(118)	(68)	(4)	(67)	(737)
Total loans and advances to customers¹	85,210	32,585	14,204	81,630	18,026	8,016	9,896	42,226	291,793

Total loans and advances to banks	26,027	5,257	759	7,735	2,437	813	11,048	20,804	74,880
¹The disclosures in the risk review section are presented on the basis of booking location of the loan except for a small number of impaired loans which have been reallocated into the region in which they are managed to align with income statement presentation

Loan Portfolio continued
Industry and Retail products analysis by geographic region
	31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Industry:
Agriculture, forestry and fishing	88	7	110	1,090	176	570	329	454	2,824
Construction	515	436	685	548	1,565	150	16	418	4,333
Commerce	10,255	1,172	1,608	18,705	4,991	1,055	2,484	7,198	47,468
Electricity, gas and water	852	428	55	887	444	310	77	2,404	5,457
Financing, insurance and business services	6,241	761	524	3,292	1,714	331	2,001	7,917	22,781
Governments	141	22	24	974	313	-	105	144	1,723
Mining and quarrying	1,264	22	59	3,583	563	870	2,742	7,077	16,180
Manufacturing	14,701	4,582	4,237	7,125	1,998	2,112	2,139	8,179	45,073
Commercial real estate	6,605	2,087	1,435	3,730	1,007	11	-	1,327	16,202
Transport, storage and communication	2,798	472	879	3,926	678	736	789	4,163	14,441
Other	369	418	119	1,023	13	319	-	291	2,552
Retail Products:
Mortgages	32,940	12,821	2,298	21,636	1,753	293	-	1,355	73,096
CCPL and other unsecured lending	7,672	5,586	1,161	5,617	2,102	1,399	-	271	23,808
Auto	-	1	44	914	321	4	-	-	1,284
Other	3,327	1,908	923	9,194	781	-	-	3,356	19,489
	87,768	30,723	14,161	82,244	18,419	8,160	10,682	44,554	296,711
Portfolio impairment provision	(146)	(107)	(64)	(154)	(74)	(67)	(5)	(79)	(696)
Total loans and advances to customers¹	87,622	30,616	14,097	82,090	18,345	8,093	10,677	44,475	296,015

Total loans and advances to banks	27,905	6,561	575	6,776	2,097	742	13,067	28,446	86,169
¹The disclosures in the risk review section are presented on the basis of booking location of the loan except for a small number of impaired loans which have been reallocated into the region in which they are managed to align with income statement presentation

Loan portfolio continued

Maturity analysis by client segment

Over 60 per cent of our loans and advances to customers are short-term having a contractual maturity of one year or less.

The following table presents the maturity profile by client segment:


	30.06.14
	One year or less	One to five years	Over five years	Total
	$million	$million	$million	$million
Corporate and Institutional	195,051	53,453	11,588	260,092
- Loans to banks	85,970	5,377	75	91,422
- Loans to customers	109,081	48,076	11,513	168,670

Commercial	13,461	2,191	2,021	17,673
Private Banking	15,455	1,334	1,347	18,136
Retail	18,892	19,688	62,734	101,314
	242,859	76,666	77,690	397,215
Portfolio impairment provision				(734)
Total loans and advances to banks and customers				396,481


	30.06.13
	One year or less	One to five years	Over five years	Total
	$million	$million	$million	$million
Corporate and Institutional	175,359	46,277	12,016	233,652
- Loans to banks	71,827	2,900	155	74,882
- Loans to customers	103,532	43,377	11,861	158,770

Commercial	12,220	2,574	2,586	17,380
Private Banking	12,877	376	1,429	14,682
Retail	18,386	20,877	62,435	101,698
	218,842	70,104	78,466	367,412
Portfolio impairment provision				(739)
Total loans and advances to banks and customers				366,673


	31.12.13
	One year or less	One to five years	Over five years	Total
	$million	$million	$million	$million
Corporate and Institutional	185,436	50,514	11,414	247,364
- Loans to banks	82,642	3,445	84	86,171
- Loans to customers	102,794	47,069	11,330	161,193

Commercial	12,627	2,653	2,561	17,841
Private Banking	14,664	1,145	1,351	17,160
Retail	19,106	19,979	61,432	100,517
	231,833	74,291	76,758	382,882
Portfolio impairment provision				(698)
Total loans and advances to banks and customers				382,184

Credit quality analysis

Pages 47 to 56 provide further details around the metrics and characteristics that the Group uses to monitor the quality of its loan portfolio. This includes disclosures relating to non-performing loans and those loans that have been renegotiated or are forborne.

A non-performing loan is any loan that is more than 90 days past due or is otherwise individually impaired. This excludes 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. These loans may have a provision reflecting the time value of money and if so, are reported as part of forborne loans.

The definition and policies in respect of renegotiated and forborne loans is set out on page 37.

Credit quality

An overall breakdown of the loan portfolio by client segment is set out on pages 49 to 49, differentiating between the performing and non performing book.

Within the performing book, there is an analysis:

o By credit grade, which plays a central role in the quality assessment and monitoring of risk as explained in page 34 and 35

o Of loans and advances past due but not impaired: a loan is considered past due if payment of principal or interest has not been made on its contractual due date

o Of loans and advances where an impairment provision has been raised- these represent certain forborne accounts which have complied with their revised contractual terms for more than 180 days

Non-performing loans are analysed, net of individual impairment provisions between what is past due but not impaired and what is impaired.

This is followed by further analysis of credit quality by geography, together with the related impairment charges and provisions (page 50).

The key points supplementing the above analysis are as follows:

Performing loans that are neither past due nor impaired constitutes 96 per cent of customer loans and this is consistent with past periods (30 June 2013: 97 per cent; 31 December 2013: 96 per cent). Loans and advances to customers in grade 12 in the C&I segment increased by $3,410 million, primarily driven by loans to a connected group of companies that were renegotiated in 2013. Excluding this, the credit grade composition across all client segments is consistent with the prior period.

Loans and advances "past due but not impaired" are similar to levels at the end of December 2013 and arise substantially in the "up to 30 days past due" category. In the Retail client segment, these primarily relate to loans where there is a temporary timing difference in payments. In the C&I and Commercial segments, across all past due categories approximately 74 per cent of the amounts past due have been regularised by end July.

Non-performing loans (net of individual impairment provisions) are higher by $439 million. This increase is primarily in the C&I and Commercial client segments and is driven by a few small exposures in Africa and Europe. Details and further analysis around gross and net non performing loans by client segment and by geography are provided on pages 51 to 53.

Renegotiated and forborne loans included in these amounts are consistent with the level seen as at December 2013.

A Portfolio Impairment Provision (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. PIP balances are up $36 million, largely in the C&I and Commercial Client segments. Further details around the policy and rationale underlying the determinant of the PIP are provided on pages 36 and 37.

As highlighted on page 40, collateral provides risk mitigation to some degree in all client segments and better supports the credit quality and cover ratio assessments post impairment provisions. Details in this regard are provided on pages 57 to 61.

In respect of loans to banks, the credit quality composition is consistent with prior periods with most of the growth in this period being in Credit Grade 1 to 5.

Credit quality analysis continued
By Client segment
		30.06.14
			Loans to Customers
	Loans to banks		Corporate and Institutional	Commercial	Private Banking	Retail Clients	Total
	$million		$million	$million	$million	$million	$million
Performing Loans
Neither past due nor impaired
- Grades 1-5	82,594		65,908	1,566	3,273	57,697	128,444
- Grades 6-8	7,492		67,345	7,067	14,596	22,067	111,075
- Grades 9-11	1,154		24,016	7,635	90	16,218	47,959
- Grade 12	34		5,071	276	7	1,157	6,511
	91,274		162,340	16,544	17,966	97,139	293,989
of the above, renegotiated loans	-		4,793	21	-	284	5,098
Past due but not impaired
- Up to 30 days past due	46		2,365	323	104	2,807	5,599
- 31 - 60 days past due	1		203	45	2	497	747
- 61 - 90 days past due	-		379	51	2	240	672
	47		2,947	419	108	3,544	7,018
of the above, renegotiated loans	-		143	4	-	199	346
Impaired forborne loans, net of provisions	-		600	9	-	149	758

Total performing loans	91,321		165,887	16,972	18,074	100,832	301,765

Non-performing Loans
Past due but not impaired
- 91 - 120 days past due	-		-	1	-	100	101
-121 - 150 days past due	-		-	16	-	88	104
	-		-	17	-	188	205

Individually impaired loans, net of provisions	101		2,783	684	62	294	3,823
of the above, forborne loans	-		702	47	-	143	892

Total non-performing loans, net of individual impairment	101		2,783	701	62	482	4,028

Total loans and advances	91,422		168,670	17,673	18,136	101,314	305,793
Portfolio impairment provision	(2)		(322)	(41)	(2)	(367)	(732)
Total net loans and advances	91,420		168,348	17,632	18,134	100,947	305,061

The following table sets out loans and advances held at fair value through profit and loss which are included within the table above

Neither past due nor impaired
- Grades 1-5	3,972		1,493	-	-	-	1,493
- Grades 6-8	124		3,426	-	-	-	3,426
- Grades 9-11	-		218	-	-	-	218
- Grade 12	-		431	-	-	-	431
	4,096		5,568	-	-	-	5,568
Past due but not impaired
- Up to 30 days past due	-		2	-	-	-	2

Individually impaired loans	-		282	-	-	-	282

Credit quality analysis continued
	30.06.13
				Loans to Customers
	Loans to banks			Corporate and Institutional			Commercial			Private Banking			Retail Clients			Total
	$million			$million			$million			$million			$million			$million
Performing Loans
Neither past due nor impaired
- Grades 1-5	64,889			65,654			1,111			3,693			54,053			124,511
- Grades 6-8	8,611			62,587			6,807			10,716			26,320			106,430
- Grades 9-11	1,195			25,685			8,183			106			15,003			48,977
- Grades 12	64			1,511			236			97			2,416			4,260
	74,759			155,437			16,337			14,612			97,792			284,178
of the above, renegotiated loans	-			4,390			34			1			411			4,836
Past due but not impaired
- Up to 30 days past due	12			593			539			16			2,588			3,736
- 31 - 60 days past due	-			33			43			6			422			504
- 61 - 90 days past due	-			172			9			-			222			403
	12			798			591			22			3,232			4,643
of the above, renegotiated loans	-			-		-			-			-		-
Impaired forborne loans, net of provisions	-			418		1			-			135		554

Total performing loans	74,771			156,653		16,929			14,634			101,159		289,375

Non-performing Loans
Past due but not impaired
- 91 - 120 days past due	-			-		-			-			101		101
-121 - 150 days past due	-			-		6			-			71		77
	-			-		6			-			172		178

Individually impaired loans, net of provisions	111			2,117		445			48			367		2,977
of the above, forborne loans	-			427		48			-			564		1,039

Total non-performing loans, net of individual impairment	111			2,117		451			48			539		3,155

Total loans and advances	74,882			158,770		17,380			14,682			101,698		292,530
Portfolio impairment provision	(2)			(309)		(42)			(1)			(385)		(737)
Total net loans and advances	74,880			158,461		17,338			14,681			101,313		291,793

The following table sets out loans and advances held at fair value through profit and loss which are included within the table above

Neither past due nor impaired
- Grades 1-5		1,167	1,895		-			-			-				1,895
- Grades 6-8		408	3,801		-			-			-				3,801
- Grades 9-11		-	597		-			-			-				597
- Grade 12		-	147		-			-			-				147
		1,575	6,440		-			-			-				6,440
Past due but not impaired
- Up to 30 days past due		-	-		-			-			-				-

Individually impaired loans		-	-		-			-			-				-

Credit quality analysis continued
		31.12.13
			Loans to Customers
	Loans to banks		Corporate and Institutional	Commercial	Private Banking	Retail Clients	Total
	$million		$million	$million	$million	$million	$million
Performing Loans
Neither past due nor impaired
- Grades 1-5	73,862		61,425	1,326	3,709	54,141	120,601
- Grades 6-8	10,325		66,195	6,812	13,169	24,988	111,164
- Grades 9-11	1,825		25,614	8,348	87	15,236	49,285
- Grade 12	35		1,661	295	69	2,342	4,367
	86,047		154,895	16,781	17,034	96,707	285,417
of the above, renegotiated loans	-		4,208	26	-	388	4,622
Past due but not impaired
- Up to 30 days past due	17		2,463	422	42	2,548	5,475
- 31 - 60 days past due	-		272	59	38	418	787
- 61 - 90 days past due	-		579	33	4	202	818
	17		3,314	514	84	3,168	7,080
of the above, renegotiated loans	-		583	-	-	-	583
Impaired forborne loans, net of provisions	-		474	1	-	150	625

Total performing loans	86,064		158,683	17,296	17,118	100,025	293,122

Non-performing Loans
Past due but not impaired
- 91 - 120 days past due	-		-	-	-	115	115
-121 - 150 days past due	-		-	5	1	77	83
	-		-	5	1	192	198

Individually impaired loans, net of provisions	107		2,510	540	41	300	3,391
of the above, forborne loans	-		801	61	-	461	1,323

Total non-performing loans, net of individual impairment	107		2,510	545	42	492	3,589

Total loans and advances	86,171		161,193	17,841	17,160	100,517	296,711
Portfolio impairment provision	(2)		(287)	(39)	(1)	(369)	(696)
Total net loans and advances	86,169		160,906	17,802	17,159	100,148	296,015

The following table sets out loans and advances held at fair value through profit and loss which are included within the table above

Neither past due nor impaired
- Grades 1-5	2,271		1,026	-	-	-	1,026
- Grades 6-8	196		3,321	-	-	-	3,321
- Grades 9-11	-		211	-	-	-	211
- Grade 12	-		25	-	-	-	25
	2,467		4,583	-	-	-	4,583
Past due but not impaired
- Up to 30 days past due	-		405	-	-	-	405

Individually impaired loans	-		319	-	-	-	319

Credit quality by geographic region

Loans and advances to customers

The tables below set out an analysis of the loan to customers between those loans that are neither past due nor impaired, those that are impaired, the impairment provision and net impairment charge by geographic region:

	30.06.14
	Balance sheet²						Profit and loss
	Neither past due nor individually impaired	Past due but not individually impaired	Individually impaired	Individual impairment provision	Portfolio impairment provision	Total	Net individual impairment provision	Portfolio impairment provision/ (release)	Net loan impairment charge¹
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Greater China	91,331	1,265	693	(290)	(142)	92,857	216	(4)	212
North East Asia	28,646	833	610	(353)	(105)	29,631	217	(8)	209
South Asia	13,046	748	1,102	(398)	(65)	14,433	48	-	48
ASEAN	82,278	2,591	926	(371)	(173)	85,251	186	18	204
MENAP	17,144	859	2,377	(1,180)	(69)	19,131	32	(7)	25
Africa	7,504	394	966	(356)	(65)	8,443	96	-	96
Americas	11,268	52	1	(1)	(6)	11,314	-	1	1
Europe	42,772	481	927	(72)	(107)	44,001	20	28	48
	293,989	7,223	7,602	(3,021)	(732)	305,061	815	28	843

	30.06.13
	Balance sheet²						Profit and loss
	Neither past due nor individually impaired	Past due but not individually impaired	Individually impaired	Individual impairment provision	Portfolio impairment provision	Total	Net individual impairment provision	Portfolio impairment provision/ (release)	Net loan impairment charge¹
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Greater China	83,877	1,081	607	(204)	(151)	85,210	116	10	126
North East Asia	31,616	786	567	(260)	(124)	32,585	194	(1)	193
South Asia	13,018	657	929	(342)	(58)	14,204	108	10	118
ASEAN	79,706	1,660	744	(333)	(147)	81,630	165	7	172
MENAP	16,130	550	2,584	(1,120)	(118)	18,026	40	(6)	34
Africa	7,934	66	176	(92)	(68)	8,016	59	16	75
Americas	9,883	-	17	-	(4)	9,896	-	1	1
Europe	42,014	21	340	(82)	(67)	42,226	11	(3)	8
	284,178	4,821	5,964	(2,433)	(737)	291,793	693	34	727

	31.12.13
	Balance sheet²						Profit and loss
	Neither past due nor individually impaired	Past due but not individually impaired	Individually impaired	Individual impairment provision	Portfolio impairment provision	Total	Net individual impairment provision	Portfolio impairment provision/ (release)	Net loan impairment charge¹
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Greater China	86,512	822	634	(200)	(146)	87,622	121	(6)	115
North East Asia	29,724	784	536	(321)	(107)	30,616	235	(1)	234
South Asia	12,670	854	1,023	(386)	(64)	14,097	90	6	96
ASEAN	79,502	2,232	831	(321)	(154)	82,090	211	12	223
MENAP	16,472	685	2,438	(1,176)	(74)	18,345	51	(38)	13
Africa	7,620	219	595	(274)	(67)	8,093	192	3	195
Americas	10,554	127	5	(4)	(5)	10,677	4	-	4
Europe	42,363	1,555	703	(67)	(79)	44,475	1	5	6
	285,417	7,278	6,765	(2,749)	(696)	296,015	905	(19)	886

¹Excludes impairment charges relating to debt securities classified as loans and receivables (refer to note 7 on page 115)

²The disclosures in the risk review section are presented on the basis of booking location of the loan except for a small number of impaired loans which have been reallocated into the region in which they are managed to align with income statement presentation

Problem credit management and provisioning

Non-performing loans by client segment

The definition of non-performing loans are set out on page 46.

The cover ratio is a common metric used in considering trends in provisioning and non-performing loans. This metric should be considered in conjunction with other credit risk information provided in this Risk Review.

The cover ratio for Retail Clients increased slightly to 87 per cent compared to 2013 while the cover ratio for Corporate and Institutional Clients was stable at 49 per cent compared to 31 December 2013.

Commercial and Private Banking segment's cover ratios decreased to 43 per cent and 47 per cent respectively since December 2013, driven by small number of exposures.

The balance of non-performing loans not covered by individual impairment provisions represents the adjusted 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 for Corporate and Institutional Clients is 64 per cent (30 June 2013: 66 per cent, 31 December 2013: 63 per cent).

The table below presents a movement of the gross non-performing loans to banks and customers, together with the provisions held, for all segments and the respective cover ratios.

Further details by geography are set out in pages 53 for Retail Clients and Corporate and Institutional Clients respectively.

			30.06.14
			Corporate and Institutional	Commercial	Private Banking	Retail	Total
			$million	$million	$million	$million	$million
Gross non-performing loans at 1 January			4,541	959	94	885	6,479
Exchange translation differences			21	21	(1)	14	55
Classified as non-performing during the year			777	299	28	491	1,595
Recoveries on loans and advances previously written off			-	-	-	-	-
Additions			777	299	28	491	1,595
Transferred to assets held for sale			-	-	-	-	-
Transferred to performing during the year			(8)	(18)	-	(129)	(155)
Net repayments			(272)	(70)	-	(65)	(407)
Amounts written off			(56)	(22)	-	(246)	(324)
Disposals of loans			0	(2)	(8)	(48)	(58)
Reductions			(336)	(112)	(8)	(488)	(944)

Gross non-performing loans at 30 June			5,003	1,167	113	902	7,185
Individual impairment provisions¹			(2,119)	(466)	(51)	(420)	(3,056)
Net non-performing loans			2,884	701	62	482	4,129
Portfolio impairment provision			(324)	(41)	(2)	(367)	(734)
Total			2,560	660	60	115	3,395
Cover ratio			49%	43%	47%	87%	53%
	¹	The difference to total individual impairment provision at reflects provisions against performing forborne loans that are not included within non-performing loans as they have been performing for 180 days

Problem credit management and provisioningcontinued

Non-performing loans by client segment continued
	30.06.13
	Corporate and Institutional	Commercial	Private Banking	Retail	Total
	$million	$million	$million	$million	$million
Gross non-performing loans at 1 January	3,788	720	95	935	5,538
Exchange translation differences	(62)	(29)	(7)	(11)	(109)
Classified as non-performing during the year	614	161	5	458	1,238
Recoveries on loans and advances previously written off	-	-	-	-	-
Additions	614	161	5	458	1,238
Transferred to assets held for sale	-	-	-	-	-
Transferred to performing during the year	(8)	(3)	-	(83)	(94)
Net repayments	(328)	(35)	-	(82)	(445)
Amounts written off	(23)	(18)	-	(218)	(259)
Disposals of loans	(43)	(5)	(1)	(67)	(116)
Reductions	(402)	(61)	(1)	(450)	(914)

Gross non-performing loans at 30 June	3,938	791	92	932	5,753
Individual impairment provisions¹	(1,710)	(340)	(44)	(393)	(2,487)
Net non-performing loans	2,228	451	48	539	3,266
Portfolio impairment provision	(311)	(42)	(1)	(385)	(739)
Total	1,917	409	47	154	2,527
Cover ratio	51%	48%	49%	83%	56%

			31.12.13
			Corporate and Institutional	Commercial	Private Banking	Retail	Total
			$million	$million	$million	$million	$million
Gross non-performing loans at 1 July			3,938	791	92	932	5,753
Exchange translation differences			(43)	(16)	10	(12)	(61)
Classified as non-performing during the year			1,024	220	(3)	457	1,698
Recoveries on loans and advances previously written off			-	5	-	24	29
Additions			1,024	225	(3)	481	1,727
Transferred to assets held for sale			-	-	-	(111)	(111)
Transferred to performing during the year			(79)	-	-	(43)	(122)
Net repayments			(257)	(18)	-	(2)	(277)
Amounts written off			(5)	(18)	-	(340)	(363)
Disposals of loans			(37)	(5)	(5)	(20)	(67)
Reductions			(378)	(41)	(5)	(516)	(940)

Gross non-performing loans at 31 December			4,541	959	94	885	6,479
Individual impairment provisions1			(1,924)	(414)	(52)	(393)	(2,783)
Net non-performing loans			2,617	545	42	492	3,696
Portfolio impairment provision			(289)	(39)	(1)	(369)	(698)
Total			2,328	506	41	123	2,998
Cover ratio			49%	47%	56%	86%	54%
	¹	The difference to total individual impairment provision at reflects provisions against performing forborne loans that are not included within non-performing loans as they have been performing for 180 days

Problem credit management and provisioning

Non-performing loans by geographic region

Gross non-performing, increased by $706 million, or 11 per cent, since December 2013. These increases were primarily driven by a small number of large exposures in Africa and Europe.

The following tables set out the total non-performing loans to banks and customers on the basis of the geographic regions to which the exposure relates to rather than the booking location:


	30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Loans and advances
Gross non-performing¹	515	644	1,131	1,181	1,787	966	1	960	7,185
Individual impairment provision²	(244)	(353)	(397)	(441)	(1,168)	(356)	(1)	(96)	(3,056)
Non-performing loans net of individual impairment provision	271	291	734	740	619	610	-	864	4,129
Portfolio impairment provision	(142)	(105)	(65)	(174)	(70)	(65)	(6)	(107)	(734)
Net non-performing loans and advances	129	186	669	566	549	545	(6)	757	3,395
Cover ratio									53%


	30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	$million	$million	$million	$million	$million	$million	$million	$million	$million
Loans and advances
Gross non-performing¹	453	599	952	901	2,264	299	16	269	5,753
Individual impairment provision²	(165)	(260)	(339)	(352)	(1,174)	(92)	(1)	(104)	(2,487)
Non-performing loans net of individual impairment provision	288	339	613	549	1,090	207	15	165	3,266
Portfolio impairment provision	(151)	(124)	(58)	(148)	(119)	(68)	(4)	(67)	(739)
Net non-performing loans and advances	137	215	555	401	971	139	11	98	2,527
Cover ratio									56%


			31.12.13
			Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
			$million	$million	$million	$million	$million	$million	$million	$million	$million
Loans and advances
Gross non-performing¹			460	574	1,040	1,065	1,987	609	5	739	6,479
Individual impairment provision²			(150)	(324)	(388)	(394)	(1,160)	(274)	(4)	(89)	(2,783)
Non-performing loans net of individual impairment provision			310	250	652	671	827	335	1	650	3,696
Portfolio impairment provision			(146)	(107)	(64)	(155)	(75)	(67)	(5)	(79)	(698)
Net non-performing loans and advances			164	143	588	516	752	268	(4)	571	2,998
Cover ratio											54%

	¹	The disclosures in the risk review section are presented on the basis of booking location of the loan except for a small number of impaired loans which have been reallocated into the region in which they are managed to align with income statement presentation
	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

Problem credit management and provisioning continued

Individually impaired loans by client segment

Individually impaired loans broadly remained stable in Retail Clients, compared to 2013 at $1.1 billion. Corporate and Institutional Clients individually impaired loans increased by $599 million, or 12 per cent since 31 December 2013. Individual impairment provisions increases were primarily in Greater China and Africa as a result of a small number of Corporate and Institutional Clients exposures and within Retail Clients in Korea due to higher levels of filings under the PDRS. .

The amounts written off primarily relate to Retail Clients, which generate a higher level of write-offs as unsecured lending balances are written off once they are more than 150 days past due.

The following table shows movement in individually impaired loans and provisions for each of client segments:

				30.06.14
			Corporate and Institutional		Commercial	Private Banking	Retail	Total
			$million		$million	$million	$million	$million
Gross individually impaired loans at 1 January			5,018		968	94	1,090	7,170
Exchange translation differences			32		8	1	19	60
Transfer to assets held for sale			-		-	-	-	-
Classified as individually impaired during the year			1,009		307	27	494	1,837
Transferred to not impaired during the year			(37)		(18)	-	(128)	(183)
Other movements¹			(405)		(93)	(8)	(366)	(872)
Gross individually impaired loans at 30 June			5,617		1,172	114	1,109	8,012

Provisions held at 1 January			1,927		422	52	448	2,849
Exchange translation differences			60		(32)	-	(49)	(21)
Amounts written off			(48)		(24)	-	(502)	(574)
Releases of acquisition fair values			(1)		-	-	-	(1)
Recoveries of amounts previously written off			(2)		1	-	106	105
Discount unwind			(31)		(9)	1	(13)	(52)
Transferred to assets held for sale			-		-	-	-	-
New provisions			246		114	-	654	1,014
Recoveries/provisions no longer required			(18)		(10)	(1)	(166)	(195)
Net individually impairment charge against profit			228		104	(1)	488	819
Individually impairment provisions held at 30 June			2,133		462	52	478	3,125
Net individually impaired loans			3,484		710	62	631	4,887
	¹	Other movement includes repayments, amounts written off and disposals of loans

Impaired loans continued
	30.06.13
	Corporate and Institutional	Commercial	Private Banking	Retail	Total
	$million	$million	$million	$million	$million
Gross individually impaired loans at 1 January	4,230	721	95	1,103	6,149
Exchange translation differences	(75)	(19)	(7)	(14)	(115)
Transfer to assets held for sale	-	-	-	-	-
Classified as individually impaired during the year	618	145	5	462	1,230
Transferred to not impaired during the year	(15)	(2)	-	(30)	(47)
Other movements¹	(408)	(44)	(2)	(410)	(864)
Gross individually impaired loans at 30 June	4,350	801	91	1,111	6,353

Provisions held at 1 January	1,639	345	44	405	2,433
Exchange translation differences	(34)	(8)	(1)	(16)	(59)
Amounts written off	(54)	(23)	-	(500)	(577)
Releases of acquisition fair values	(1)	-	-	-	(1)
Recoveries of amounts previously written off	5	(3)	-	85	87
Discount unwind	(24)	(7)	-	(11)	(42)
Transferred to assets held for sale	-	-	-	-	-
New provisions	192	57	-	622	871
Recoveries/provisions no longer required	(19)	(12)	-	(148)	(179)
Net individually impairment charge against profit	173	45	-	474	692
Individually impairment provisions held at 30 June	1,704	349	43	437	2,533
Net individually impaired loans	2,646	452	48	674	3,820

				31.12.13
			Corporate and Institutional		Commercial	Private Banking	Retail	Total
			$million		$million	$million	$million	$million
Gross individually impaired loans at 1 July			4,350		801	91	1,111	6,353
Exchange translation differences			(322)		(69)	6	(370)	(755)
Transfer to assets held for sale			-		-	-	(111)	(111)
Classified as individually impaired during the year			1,072		236	(3)	536	1,841
Transferred to not impaired during the year			(82)		-	-	(76)	(158)
Other movements¹			-		-	-	-	-
Gross individually impaired loans at 31 December			5,018		968	94	1,090	7,170

Provisions held at 1 July			1,704		349	43	437	2,533
Exchange translation differences			(26)		(8)	1	11	(22)
Amounts written off			(28)		(29)	-	(539)	(596)
Releases of acquisition fair values			1		(2)	-	(1)	(2)
Recoveries of amounts previously written off			8		3	-	113	124
Discount unwind			(33)		(7)	-	(11)	(51)
Transferred to assets held for sale			-		-	-	(42)	(42)
New provisions			325		132	8	671	1,136
Recoveries/provisions no longer required			(24)		(16)	-	(191)	(231)
Net individually impairment charge against profit			301		116	8	480	905
Individually impairment provisions held at 31 December			1,927		422	52	448	2,849
Net individually impaired Loans			3,091		546	42	642	4,321
	¹	Other movement includes repayments, amounts written off and disposals of loans

Individual and portfolio impairment provisions

The movement in individual impairment provision is discussed on page 54. Portfolio impairment provisions increased by $28 million, largely in relation to C&I Clients based in Europe region.

The following tables set out the movements in total individual and portfolio impairment provisions:


	30.06.14			30.06.13
	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	2,849	698	3,547	2,433	724	3,157
Exchange translation differences	(21)	8	(13)	(59)	(19)	(78)
Amounts written off	(574)	-	(574)	(577)	-	(577)
Releases of acquisition fair values	(1)	-	(1)	(1)	-	(1)
Recoveries of amounts previously written off	105	-	105	87	-	87
Discount unwind	(52)	-	(52)	(42)	-	(42)
Transferred to assets held for sale	-	-	-	-	-	-
New provisions	1,014	81	1,095	871	74	945
Recoveries/provisions no longer required	(195)	(53)	(248)	(179)	(40)	(219)
Net impairment charge against profit	819	28	847	692	34	726
Provisions held at 30 June	3,125	734	3,859	2,533	739	3,272


				31.12.13
				Individual impairment provisions	Portfolio impairment provisions	Total
				$million	$million	$million
Provisions held at 1 July				2,533	739	3,272
Exchange translation differences				(22)	3	(19)
Amounts written off				(596)	-	(596)
Releases of acquisition fair values				(2)	-	(2)
Recoveries of amounts previously written off				124	-	124
Discount unwind				(51)	-	(51)
Transferred to assets held for sale				(42)	(25)	(67)
New provisions				1,136	96	1,232
Recoveries/provisions no longer required				(231)	(115)	(346)
Net impairment charge/(release) against profit				905	(19)	886
Provisions held at 31 December				2,849	698	3,547

Credit risk mitigation

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 nor 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 35 and for the effect of over-collateralisation.

In Retail Clients, collateral levels have increased by 6 per cent compared to 31 December 2013 largely as we derisked the Personal Loan portfolio in certain markets. The proportion of collateral held against impaired loans has declined compared to 2013 as the increase in impaired loans primarily relates to the

unsecured portfolio. 79 per cent of the loans to Retail and Private Banking Clients are fully secured.

Collateral held against Corporate and Institutional and Commercial Client loans also covers off-balance sheet exposures including undrawn commitments and trade related instruments. Collateral coverage is slightly lower at 24 per cent compared to 26 per cent at 31 December 2013. Collateral held against individually impaired loans rose to 17 per cent from 13 per cent at the end of December 2013.

The unadjusted market value of collateral in respect of Corporate and Institutional and Commercial Clients, which does not take into consideration over-collateralisation or adjustments was $209 billion (30 June 2013: $174 billion, 31 December 2013: $190 billion).

	Collateral			Amount Outstanding¹
		Of which			Of which
	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
As at 30 June 2014
Corporate & Institutional²	61,276	236	948	260,092	2,994	5,617
Commercial	6,512	236	228	17,673	436	1,155
Private Banking	13,423	211	35	18,136	108	114
Retail	75,907	2,669	362	101,314	3,732	921
Total	157,118	3,352	1,573	397,215	7,270	7,807
As at 30 June 2013
Corporate & Institutional²	53,205	355	667	233,652	810	4,350
Commercial	6,386	482	136	17,380	597	795
Private Banking	11,111	29	69	14,682	22	91
Retail	70,926	2,020	404	101,698	3,404	939
Total	141,628	2,886	1,276	367,412	4,833	6,175
As at 31 Dec 2013
Corporate & Institutional²	61,484	623	642	247,364	3,331	5,018
Commercial	6,422	454	156	17,841	519	963
Private Banking	13,435	149	65	17,160	85	93
Retail	71,585	2,305	396	100,517	3,360	898
Total	152,926	3,531	1,259	382,882	7,295	6,972

¹ Includes loans held at fair value through profit or loss

²Includes loans and advances to banks

Credit risk mitigation continued

Corporate and Institutional and Commercial Clients

Collateral held against Corporate and Institutional and Commercial Client exposures amounted to $68 billion (30 June 2013: $60 billion; 31 December 2013: $68 billion). This represents the fair value of collateral adjusted in accordance with our risk mitigation policy (page 35) and for the effects of over collateralisation.

Our underwriting standards encourage taking specific charges on assets and we consistently seek high quality, investment grade secured collateral. 48 per cent of collateral held is comprised of physical assets or is property based, with the remainder held largely in cash and 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.

The proportion of highly rated debt securities of 28 per cent on collateral increased slightly from 27 per cent compared to December 2013 due to higher levels of reverse repurchase transactions.

The following table provides an analysis of the types of collateral held against Corporate and Institutional and Commercial Clients loan exposures:


		30.06.14	30.06.13	31.12.13
		$million	$million	$million
Cash		15,393	13,444	13,444
Property		17,087	17,667	18,491
Debt securities
	AAA	49	6	45
	AA- to AA+	10,993	2,830	9,651
	BBB- to BBB+	2,898	1,963	2,758
	Lower than BBB-	935	1,229	865
	Unrated	4,431	5,506	5,034
		19,306	11,533	18,311
Other (asset based)		16,002	16,947	17,618
Total value of collateral		67,788	59,591	67,906

Commercial real estate (CRE)

The Group has lending to CRE counterparties of $16.3 billion (30 June 2013: $14.9 billion; 31 December 2013: $16.2 billion). Of this exposure, $6,141 million is to counterparties where the source of repayment is substantially derived from rental or sale of real estate and is secured by real estate collateral. The remaining CRE exposure comprises working capital loans to real estate corporates, exposure with non-property collateral, unsecured exposure and exposure to real estate entity of diversified conglomerate.

At 30 June 2014, 79 per cent of the loan-to-value (LTV) ratio is less than 50 per cent (30 June 2013: 73 per cent; 31 December 2013: 71 per cent) with 19 per cent of loans ranging within LTV of 50 to 79 per cent (30 June 2013: 27 per cent; 31 December 2013: 28 per cent). Remaining 2 per cent of loans have LTV ranging from 80 to 100 per cent.

Average portfolio loan to value has remained relatively stable at 41.1 per cent at H1 2014, unchanged since December 2013.

Credit risk mitigation continued

Retail and Private Banking Clients loan portfolio

A secured loan is one where the borrower pledges an asset as collateral which 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.

The following tables present an analysis of loans to individuals by product split between fully secured, partially secured and unsecured:


		30.06.14				30.06.13
		Fully secured	Partially secured	Unsecured	Total¹	Fully secured	Partially secured	Unsecured	Total¹
		$million	$million	$million	$million	$million	$million	$million	$million
Loans to individuals
Mortgages		74,649	-	-	74,649	73,799	-	-	73,799
Credit card and personal loans		10	22	21,468	22,500	5	-	24,667	24,672
Auto		1,164	-	-	1,164	1,433	-	-	1,433
Other		18,420	1,740	977	21,137	14,586	1,397	494	16,477
		94,243	1,762	23,445	119,450	89,823	1,397	25,161	116,381
Percentage of total loans		79%	1%	20%		77%	1%	22%


						31.12.13
						Fully secured	Partially secured	Unsecured	Total¹
						$million	$million	$million	$million
Loans to individuals
Mortgages						73,096	-	-	73,096
Credit card and personal loans						5	-	23,803	23,808
Auto						1,284	-	-	1,284
Other						17,579	1,462	448	19,489
						91,964	1,462	24,251	117,677
Percentage of total loans						78%	1%	21%
¹	Amounts net of individual impairment provisions

Credit risk mitigation continued

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 portfolio is 49.6 per cent compared to 49.9 per cent in December 2013.

Our major mortgage markets of Hong Kong, Singapore and Korea have an average LTV of less than 50 per cent. Compared to 31 December 2013, the proportion of the portfolio with average LTVs in excess of 100 per cent has declined from 0.4 per cent to 0.3 per cent, primarily within the MENAP region due to improving economic conditions, particularly in the UAE.


	30.06.14
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	%	%	%	%	%	%	%	%	%
Less than 50 per cent	64.1	49.8	69.6	33.9	31.4	25.7	-	25.9	50.6
50 per cent to 59 per cent	13.2	23.7	13.1	21.3	20.1	13.3	-	39.8	18.6
60 per cent to 69 per cent	10.3	17.8	9.9	20.4	19.9	21.2	-	23.9	15.5
70 per cent to 79 per cent	5.6	5.2	5.7	17.0	15.2	23.5	-	10.4	9.1
80 per cent to 89 per cent	4.4	2.0	1.5	6.1	5.5	15.8	-	-	4.2
90 per cent to 99 per cent	2.4	1.0	0.1	1.0	3.4	0.1	-	-	1.6
100 per cent and greater	-	0.5	0.2	0.3	4.5	0.3	-	-	0.3
Average Portfolio loan to value	45.6	48.7	38.1	55.8	60.2	65.0	-	54.5	49.6
Loans to individuals - Mortgages ($million)	34,132	12,240	2,472	22,234	1,869	351	-	1,351	74,649


	30.06.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	%	%	%	%	%	%	%	%	%
Less than 50 per cent	65.0	48.1	66.3	31.3	25.9	27.6	-	15.2	50.8
50 per cent to 59 per cent	13.8	22.2	13.5	21.6	15.9	14.2	-	31.6	17.9
60 per cent to 69 per cent	10.0	20.5	10.0	19.2	16.6	21.1	-	33.6	15.2
70 per cent to 79 per cent	6.3	5.6	7.1	20.9	17.6	19.4	-	19.6	10.6
80 per cent to 89 per cent	3.6	2.3	2.6	5.3	8.0	16.2	-	-	3.9
90 per cent to 99 per cent	1.3	1.0	0.5	1.1	4.0	0.8	-	-	1.2
100 per cent and greater	-	0.4	-	0.4	12.0	0.7	-	-	0.5
Average Portfolio loan to value	44.7	49.6	39.9	56.7	68.4	64.4	-	58.7	50.0
Loans to individuals - Mortgages ($million)	32,485	13,867	2,337	21,753	1,621	277	-	1,459	73,799


	31.12.13
	Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
	%	%	%	%	%	%	%	%	%
Less than 50 per cent	62.9	48.8	65.8	32.3	31.0	27.0	-	20.6	50.6
50 per cent to 59 per cent	14.7	22.7	13.5	22.0	16.3	13.6	-	32.2	18.5
60 per cent to 69 per cent	9.6	19.1	10.7	20.3	19.5	21.3	-	22.7	14.8
70 per cent to 79 per cent	6.4	5.6	7.1	18.5	16.1	22.4	-	24.6	10.0
80 per cent to 89 per cent	4.0	2.2	2.4	5.4	7.4	15.1	-	-	4.1
90 per cent to 99 per cent	2.3	1.1	0.4	1.1	3.4	0.2	-	-	1.7
100 per cent and greater	-	0.5	-	0.4	6.3	0.4	-	-	0.4
Average Portfolio loan to value	45.6	49.3	40.5	56.0	62.1	64.3	-	57.8	49.9
Loans to individuals - Mortgages ($million)	32,940	12,821	2,298	21,636	1,753	293	-	1,355	73,096

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 2014; 30 June 2013 and 31 December 2013:

	30.06.14	30.06.13	31.12.13
	$million	$million	$million
Property	9	39	44
Other	-	1	-
Total	9	40	44

Debt securities and treasury bills
Debt securities and treasury bills are analysed as follows:
	30.06.14			30.06.13
	Debt securities	Treasury bills	Total	Debt securities	Treasury bills	Total
	$million	$million	$million	$million	$million	$million
Net impaired securities:
Impaired securities	440	-	440	411	-	411
Impairment	(257)	-	(257)	(153)	-	(153)
	183	-	183	258	-	258

Securities neither past due nor impaired:
AAA	34,751	6,068	40,819	22,220	3,608	25,828
AA- to AA+	20,123	12,537	32,660	18,988	7,010	25,998
A- to A+	21,427	529	21,956	22,342	7,917	30,259
BBB- to BBB+	9,230	5,426	14,656	7,778	4,678	12,456
Lower than BBB-	1,647	693	2,340	3,225	823	4,048
Unrated	7,335	1,012	8,347	8,812	1,714	10,526
	94,513	26,265	120,778	83,365	25,750	109,115
	94,696	26,265	120,961	83,623	25,750	109,373
Of which:
Assets at fair value¹
Trading	19,282	3,307	22,589	13,516	3,380	16,896
Designated at fair value	-	-	-	368	-	368
Available-for-sale	72,792	22,928	95,720	65,793	22,370	88,163
	92,074	26,235	118,309	79,677	25,750	105,427
Assets at amortised cost¹
Loans and receivables	2,556	-	2,556	3,946	-	3,946
Held-to-maturity	66	30	96	-	-	-
	2,622	30	2,652	3,946	-	3,946

	94,696	26,265	120,961	83,623	25,750	109,373

Debt securities and treasury bills continued
			31.12.13
			Debt securities	Treasury bills	Total
			$million	$million	$million
Net impaired securities:
Impaired securities			389	-	389
Impairment			(204)	-	(204)
			185	-	185

Securities neither past due nor impaired:
AAA			23,772	4,455	28,227
AA- to AA+			23,274	19,226	42,500
A- to A+			21,392	1,087	22,479
BBB- to BBB+			5,913	4,238	10,151
Lower than BBB-			3,293	898	4,191
Unrated			8,244	1,500	9,744
			85,888	31,404	117,292
			86,073	31,404	117,477
Of which:
Assets at fair value¹
Trading			12,407	5,161	17,568
Designated at fair value			292	-	292
Available-for-sale			70,546	26,243	96,789
			83,245	31,404	114,649
Assets at amortised cost¹
Loans and receivables			2,828	-	2,828
			2,828	-	2,828

			86,073	31,404	117,477
	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 34.

Debt securities in the AAA rating category increased by $11 billion to $35 billion in June 2014 mainly due to an increase in higher quality corporate bonds in Hong Kong and Singapore. This was offset by low level of AAA trading business as funds were deployed into higher quality assets in Singapore and as part of the restructuring of the balance sheet in Korea.

Debt securities in the BBB rating category increased by $4.5 billion in June 2014. The increase is mainly in India due to investment in government securities which are currently rated as BBB-.

Unrated securities primarily relate to corporate issuers. Using internal credit ratings $7,877 million (30 June 2013: $9,278 million, 31 December 2013: $9,275 million) of these securities are considered to be equivalent to investment grade.

Asset backed securities
Total exposures to asset backed securities
		30.06.14				30.06.13
		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)		43%	3,658	3,667	3,665	46%	3095	3060	3067
Collateralised Debt Obligations (CDOs)		1%	108	76	79	4%	241	185	205
Commercial Mortgage Backed Securities (CMBS)		5%	472	398	396	7%	440	329	333
Other Asset Backed Securities (Other ABS)		51%	4,347	4,350	4,352	43%	2,851	2,831	2,845
		100%	8,585	8,491	8,492	100%	6,627	6,405	6,450
Of which included within:
Financial assets held at fair value through profit or loss		5%	413	413	413	3%	173	173	173
Investment securities - available-for-sale		83%	7,099	7,027	7,027	74%	4,962	4,854	4,854
Investment securities - loans and receivables		12%	1,073	1,051	1,052	23%	1,492	1,378	1,423
		100%	8,585	8,491	8,492	100%	6,627	6,405	6,450

						31.12.13
						Percentage
						of notional		Carrying	Fair
						value of	Notional	value	value¹
						portfolio	$million	$million	$million
Residential Mortgage Backed Securities (RMBS)						46%	3,059	3,052	3,045
Collateralised Debt Obligations (CDOs)						3%	223	181	190
Commercial Mortgage Backed Securities (CMBS)						5%	321	242	235
Other Asset Backed Securities (Other ABS)						46%	3,126	3,081	3,124
						100%	6,729	6,556	6,594
Of which included within:
Financial assets held at fair value through profit or loss						2%	158	158	158
Investment securities - available-for-sale						79%	5,295	5,202	5,202
Investment securities - loans and receivables						19%	1,276	1,196	1,234
						100%	6,729	6,556	6,594
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 2013: 1 per cent, 31 December 2013: 1 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 $409 million and $436 million respectively as at 30 June 2014 (31 December 2013: $614 million and $647 million respectively). Note 12 to the financial statements provide 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 $1.9 billion of ABS during the first half of 2014 for liquidity reasons.

This is classified as available-for-sale and primarily related to high quality RMBS assets with an average credit grade of AAA. The credit quality of the asset backed securities portfolio remains strong. With the exception of those securities subject to an impairment charge, over 95 per cent of the overall portfolio is rated A- or better, and 80 per cent of the overall portfolio is rated as AAA. The portfolio is broadly diversified across asset classes and geographies, with an average credit grade of AA.

The decline in the bank's legacy portfolios and significant increase in asset purchases for liquidity reasons in the available-for-sale book makes the fair value of the entire portfolio similar to the carrying value.

Asset backed securities continued
Financial statement impact of asset backed securities
				Available- for-sale
				$million
Six months to 30 June 2014
Credit to available-for-sale reserves				31
Credit to the profit and loss account				1
Six months to 30 June 2013
Credit to available-for-sale reserves				24
Charge to the profit and loss account				(3)
Six months to 31 December 2013
Charge to available-for-sale reserves				2
Charge to the profit and loss account				2

Selected European country exposures

The following tables 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 2014.

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 $0.4 billion direct sovereign exposure to other eurozone countries. The Group's non-sovereign exposure to GIIPS is $2.2 billion ($1.9 billion after collateral and netting) and $30.2 billion ($17.7 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 26 per cent having a tenor of less than one year. The Group has no direct sovereign exposure and $164 million (30 June 2013: $272 million, 31 December 2013: $260 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.


Selected European country exposures continued

Country		Greece	Ireland	Italy	Portugal	Spain	Total
		$million	$million	$million	$million	$million	$million
As at 30 June 2014
Direct sovereign exposure		-	-	-	-	-	-
Banks		-	-	720	-	385	1,105
Other financial institutions		-	842	4	-	-	846
Other corporate		7	172	40	-	74	293
Total gross exposure		7	1,014	764	-	459	2,244

Direct sovereign exposure		-	-	-	-	-	-
Banks		-	-	(50)	-	(164)	(214)
Other financial institutions		-	(90)	(4)	-	-	(94)
Other corporate		(1)	(27)	(6)	-	(20)	(54)
Total collateral/netting		(1)	(117)	(60)	-	(184)	(362)

Direct sovereign exposure		-	-	-	-	-	-
Banks		-	-	670	-	221	891
Other financial institutions		-	752¹	-	-	-	752
Other corporate		6	145	34	-	54	239
Total net exposure at 30 June 2014		6	897	704	-	275	1,882
Total net exposure at 30 June 2013		22	1,608	1,002	19	134	2,785
Total net exposure at 31 December 2013		14	950	741	-	284	1,989
¹	This represents a single exposure which is part of a wider structured finance transaction and is unaffected by Irish economic risk

Of the $1,882 million (30 June 2013: $2,785 million; 31 December 2013: $1,989 million) net exposure at 30 June 2014, $1,609 million (30 June 2013: $2,125 million; 31 December 2013: $1,508 million) relate to contingent liabilities and commitments with the balance largely in loans and advances and debt securities.

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	1	167	-	-	911
Banks	2,861	1,755	747	1,544	6,164
Other financial institutions	62	275	84	286	707
Other corporate	1,217	711	4,421	743	7,092
Total net exposure at 30 June 2014	4,141	2,908	5,252	2,573	14,874
Total net exposure at 30 June 2013	4,687	4,586	7,880	1,987	19,140
Total net exposure at 31 December 2013	4,516	5,390	7,735	1,916	19,557

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 over 50 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 $3.2 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 as at 30 June 2014 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.

Steady progress in the internationalisation of the renminbi contributed to the growth in cross-border exposure to China. Increased short-term country cross-border exposure to China during 2014 reflects increased exposure to Chinese banks through trade finance and liquidity management activity, and an expansion of our corporate client base.

India remains a core territory for the Group where our competitive advantage positions us to offer US dollar facilities in

the domestic market, and to facilitate overseas investment and trade flows supported by parent companies in India.

Reported increase in short term cross-border exposure to Hong Kong and Singapore reflects growth in trade finance and short-term lending to Corporate and Private Banking clients.

Malaysia benefited from an increase in trade finance activity amidst rising intra-region trade flows with ASEAN member countries, China and India. Higher short-dated cross-border exposure to Malaysia and Taiwan during 2014 is also representative of interbank money market positions booked offshore and liquidity management activity.

Growth in short-term cross-border activity in Indonesia was attributable to an expansion of the corporate client base, and growth in international trade finance. The country cross-border exposure to Indonesia arising from Permata, a joint venture in which the Group holds 44.56 per cent, is counted at the value of the Group's equity in the joint venture.

Cross-border exposure to the United Arab Emirates decreased slightly during 2014, due to a decrease in trade financing transactions and longer term exposures arising from financial markets activity. The decrease in cross-border exposure to Brazil is attributable to a moderation in economic growth, and slowing trade and investment flows with our core markets.

The growth in exposure to Nigeria is primarily driven by project financing and foreign currency funding of Nigerian corporate and institutional clients.

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 global corporate business for customers with interests in our footprint. This explains our significant exposure in the US and Australia.

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:

	30.06.14			30.06.13			31.12.13
	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	42,916	15,338	58,254	31,605	13,266	44,871	32,220	14,449	46,669
Hong Kong	24,763	8,108	32,871	22,696	7,264	29,960	21,164	8,210	29,374
India	11,587	15,728	27,315	13,655	18,585	32,240	12,566	18,295	30,861
Singapore	21,581	5,519	27,100	17,354	4,958	22,312	19,328	5,749	25,077
US	17,505	7,074	24,579	20,672	6,421	27,093	19,001	7,287	26,288
Korea	9,118	7,026	16,144	10,576	6,670	17,246	9,093	7,415	16,508
United Arab Emirates	6,074	9,524	15,598	6,156	10,842	16,998	6,281	10,997	17,278
Indonesia	4,503	4,368	8,871	3,603	4,295	7,898	3,959	4,958	8,917
Malaysia	4,503	3,393	7,896	3,089	2,856	5,945	3,878	3,396	7,274
Nigeria	2,824	4,921	7,745	2,191	2,627	4,818	2,318	4,072	6,390
Taiwan	6,770	508	7,278	2,606	635	3,241	5,091	808	5,899
Brazil	5,250	1,942	7,192	4,829	2,044	6,873	6,175	2,002	8,177
Australia	1,345	5,780	7,125	1,621	5,528	7,149	1,943	5,919	7,862

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 client-driven transactions. The objective of our market risk policies and processes is to obtain the best balance of risk and return whilst meeting clients' 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 overall market risk VaR and stress loss triggers taking account of market volatility, the range of products and asset classes, business volumes and transaction sizes.

The Market and Traded Credit Risk Committee (MTCRC), under authority ultimately delegated by the GRC, is responsible for setting business desk level VaR and stress loss triggers for market risk within the levels set by GRC. The MTCRC 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 Market and Traded Credit Risk function (MTCR) 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.

A small proportion of market risk generated by trading positions is not included in VaR or cannot be appropriately captured by VaR. This is recognised through a Risks-not-in-VaR framework which estimates these risks and applies capital add-ons.

Back testing

To assess their predictive power, VaR models are back tested against actual results. In the first half of 2014 there were three exceptions in the regulatory back testing (one during all of 2013). This is within the 'green zone' applied internationally to internal models by bank supervisors. Two of the exceptions arose from monthly or quarterly valuation adjustments which were applied on a single day creating a large daily income movement. The other exception arose on a day when there was exceptional volatility in the Chinese Renminbi foreign exchange market. This exception followed intervention by the People's Bank of China to widen the Renminbi trading band.

Stress testing

Losses beyond the 97.5 per cent confidence interval are not captured by a VaR calculation, which therefore gives no indication of the size of unexpected losses in these situations.

MTCR 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. MTCRC review 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 business.

Market risk changes

The average levels of Total VaR and Non-trading VaR at 30 June 2014 (H1 2014) were 8 per cent and 7 per cent higher respectively than in the six months to 31 December 2013 (H2 2013). However, compared to H1 2013 they were 38 per cent and 35 per cent higher respectively. The rise was primarily due to increased market volatility following comments by the US Federal Reserve chairman on 22 May 2013 that the US Federal Reserve was considering tapering its quantitative easing programme. This volatility has been reflected in the VaR one year

historical observation period through H2 2013 and most of H1 2014. Looking forward to the second half of 2014, if positions and market volatility continue in line with H1 2014, the VaR can be expected to fall as the volatility observed in 2013 drops out of the VaR one year historical period.

Average VaR for the Trading Book in 2014 H1 was 21 per cent higher than in 2013 H2 and 11 per cent higher than in 2013 H1, driven by Rates and Credit Trading business activities in June.

Daily value at risk (VaR at 97.5%, one day)
		6 months to 30.06.14				6 months to 30.06.13
		Average	High⁴	Low⁴	Actual⁵	Average	High⁴	Low⁴	Actual⁵
Trading and Non-trading		$million	$million	$million	$million	$million	$million	$million	$million
Interest rate risk²		28.9	36.8	21.2	26.9	27.3	31.6	18.2⁶	30.5
Foreign exchange risk		3.5	5.9	2.2	4.9	4.4	7.6	3.0	3.8
Commodity risk		1.6	2.9	1.2	1.3	1.5	2.3	1.0	1.2
Equity risk		19.1	20.0	17.8	18.0	15.8	18.2	13.0	14.9
Total³		39.7	47.4	31.5	37.8	28.7	39.6	22.1	39.6
						6 months to 31.12.13
						Average	High⁴	Low⁴	Actual⁵
Trading and Non-trading						$million	$million	$million	$million
Interest rate risk²						27.0	37.4	22.5	23.3
Foreign exchange risk						4.1	7.0	2.3	7.0
Commodity risk						1.5	2.6	0.9	1.5
Equity risk						15.0	18.4	14.0	18.3
Total³						36.9	44.8	27.1	38.5
		6 months to 30.06.14				6 months to 30.06.13
		Average	High⁴	Low⁴	Actual⁵	Average	High⁴	Low⁴	Actual⁵
Trading¹		$million	$million	$million	$million	$million	$million	$million	$million
Interest rate risk²		10.8	21.3	7.0	21.3	9.4	11.9	6.5	8.1
Foreign exchange risk		3.5	5.9	2.2	4.9	4.4	7.6	3.0	3.8
Commodity risk		1.6	2.9	1.2	1.3	1.5	2.3	1.0	1.2
Equity risk		1.6	2.4	1.3	1.4	1.7	2.1	1.3	1.7
Total³		11.4	20.8	7.9	20.2	10.2	13.3	8.0	9.7
						6 months to 31.12.13
						Average	High⁴	Low⁴	Actual⁵
Trading¹						$million	$million	$million	$million
Interest rate risk²						8.8	15.0	6.7	8.1
Foreign exchange risk						4.1	7.0	2.3	7.0
Commodity risk						1.5	2.6	0.9	1.5
Equity risk						1.4	1.9	1.1	1.8
Total³						9.4	14.9	7.3	9.1
¹	Trading book for market risk was defined in accordance with the relevant section of the PRA Handbook's Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU). On 1 January 2014 this regulation was superseded by the EU Capital Requirements Regulation (CRDIV/CRR). The PRA permits only certain types of financial instruments or arrangements to be included within the trading book, so this regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement'
² ³	Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale The total VaR shown in the tables above is not a sum of the component risks due to offsets between them
⁴ ⁵	Highest and lowest VaR for each risk factor are independent and usually occur on different days Actual one day VaR at period end date
⁶	The H1 2013 balance has been restated at a lower level, because the Non-trading book Interest Rate VaR for two days in June 2013 was over-stated. This was restated correctly in the FY 2013 disclosure. In the H1 2013 disclosure the Total trading and Non-trading book Interest Rate VaR was reported as $22.1 million

Market risk continued

		6 months to 30.06.14				6 months to 30.06.13
		Average	High⁴	Low⁴	Actual⁵	Average	High⁴	Low⁴	Actual⁵
Non-trading		$million	$million	$million	$million	$million	$million	$million	$million
Interest rate risk²		23.8	27.4	18.9	19.0	24.3	27.7	16.9⁶	26.1
Equity risk		17.9	19.1	16.4	17.5	15.3	17.6	12.4	14.5
Total³		34.8	39.0	25.9	26.2	25.8	33.7	19.6	33.7

						6 months to 31.12.13
						Average	High⁴	Low⁴	Actual⁵
Non-trading						$million	$million	$million	$million
Interest rate risk²						25.2	34.3	18.8	22.1
Equity risk						14.5	17.4	13.4	17.4
Total³						32.5	34.9	29.2	32.7
The following table sets out how trading and non-trading VaR is distributed across the Group's products:
		30.06.14				30.06.13
		Average	High³	Low³	Actual⁴	Average	High³	Low³	Actual⁴
		$million	$million	$million	$million	$million	$million	$million	$million
Trading and Non-trading		39.7	47.4	31.5	37.8	28.7	39.6	22.1	39.6
Trading¹
Rates		6.9	13.7	3.8	12.7	6.4	7.7	5.0	5.6
Global Foreign Exchange		3.5	5.9	2.2	4.9	4.4	7.6	3.0	3.8
Credit Trading & Capital Markets		4.3	8.2	3.1	6.3	3.1	3.7	2.5	2.9
Commodities		1.6	2.9	1.2	1.3	1.5	2.3	1.0	1.2
Equities		1.6	2.4	1.3	1.4	1.7	2.1	1.3	1.7
Total³		11.4	20.8	7.9	20.2	10.2	13.3	8.0	9.7

Non-trading
Asset & Liability Management		23.3	26.6	19.0	19.0	19.9	23.1	17.1	22.0
Other Financial Markets non-trading book		1.2	1.5	1.1	1.2	2.0	2.4	1.2	1.3
Listed private equity		17.9	19.1	16.4	17.5	15.3	17.6	12.4	14.5
Total³		34.8	39.0	25.9	26.2	25.8	33.7	19.6	33.7
						31.12.13
						Average	High³	Low³	Actual⁴
						$million	$million	$million	$million
Trading and Non-trading ³						36.9	44.8	27.1	38.5
Trading¹
Rates						6.3	12.2	3.5	5.5
Global Foreign Exchange						4.1	7.0	2.3	7.0
Credit Trading & Capital Markets						3.0	4.3	2.2	3.4
Commodities						1.5	2.6	0.9	1.5
Equities						1.4	1.9	1.1	1.8
Total³						9.4	14.9	7.3	9.1

Non-trading
Asset & Liability Management						24.5	33.9	18.7	21.2
Other Financial Markets non-trading book						1.3	1.5	1.0	1.3
Listed private equity						14.5	17.4	13.4	17.4
Total³						32.5	34.9	29.2	32.7
¹	Trading book for market risk was defined in accordance with the relevant section of the PRA Handbook's Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU). On 1 January 2014 this regulation was superseded by the EU Capital Requirements Regulation (CRDIV/CRR). The PRA permits only certain types of financial instruments or arrangements to be included within the trading book, so this regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement'
²	Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale
³	The total VaR shown in the tables above is not a sum of the component risks due to offsets between them
⁴ ⁵	Highest and lowest VaR for each risk factor are independent and usually occur on different days Actual one day VaR at year end date
⁶	The H1 2013 balance has been restated at a lower level, because the Non-trading book Interest Rate VaR for two days in June 2013 was over-stated. This was restated correctly in the FY 2013 disclosure. In the H1 2013 disclosure the Total trading and Non-trading book Interest Rate VaR was reported as $22.1 million

Average daily income earned from market risk related activities¹
Trading		6 months to 30.06.14	6 months to 30.06.13	6 months to 31.12.13
Trading		$million	$million	$million
Interest rate risk²		4.3	5.8	3.6
Foreign exchange risk		5.1	6.7	4.4
Commodity risk		1.5	1.8	1.2
Equity risk		0.6	0.5	0.5
Total		11.5	14.8	9.7

Non-Trading
Interest rate risk		3.9	3.1	2.5
Equity risk		0.3	-	1.0
Total		4.2	3.1	3.5
¹ ²	Reflects total product income which is the sum of Client Income and Own Account Income. Includes elements of Trading Income, Interest Income and Other Income which are generated from market risk related activities 2013 comparatives have been restated to exclude certain fee income attributed to the trading book

Financial Markets loss days

Financial Markets trading book total product income reported no loss days in H1 2014 (one in H1 2013; two in H2 2013).

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, so market price movements have limited effect on either profit and loss or reserves.

Structural foreign exchange currency risks are managed by Group Treasury, as described below, and are not included within Group VaR. Otherwise, the non-trading book does not run open foreign exchange positions.

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

	30.06.14	30.06.13	31.12.13
	$million	$million	$million
+25 basis points	34.5	32.0	33.9
-25 basis points	(34.5)	(32.0)	(33.9)

NII sensitivity has increased as Group capital investment in branches and subsidiaries has increased.

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 2014, the Group had taken net investment hedges (using a combination of derivative and non-derivative financial investments) of $1,048 million (30 June 2013: $1,341 million, 31 December 2013: $1,280 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:

	30.06.14	30.06.13	31.12.13
	$million	$million	$million
Hong Kong dollar	7,651	7,207	7,079
Korean won	5,523	5,522	5,194
Indian rupee	4,405	4,036	3,793
Taiwanese dollar	2,874	2,797	2,853
Chinese renminbi	3,492	2,943	3,084
Singapore dollar	3,011	947	2,925
Thai baht	1,624	1,666	1,640
UAE dirham	1,671	1,641	1,766
Malaysian ringgit	1,749	1,519	1,650
Indonesian rupiah	1,146	1,023	993
Pakistani rupee	562	555	530
Other	3,876	3,803	4,010
	37,584	33,659	35,517

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 $275 million (30 June 2013: $244 million; 31 December 2013: $247 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 clients 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 client requirements and to manage our exposure to fluctuations in market price movements.

Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Recognition of fair value gains and losses depends on whether the derivatives are classified as trading or held for hedging purposes.

The credit risk arising from all financial derivatives is managed as part of the overall lending limits to financial institutions and corporate clients. This is covered in more detail in the Credit risk section (see page 40).

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 increased by $5.8 billion at 30 June 2014 compared to 31 December 2013. Fair value hedges largely hedge the interest-rate risk on our sub-debt and 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 decreased by $6 billion at 30 June 2014 compared to 31 December 2013. The increase of cash flow hedges is attributable to floating rate loans, bonds and deposits mainly in Korea and Singapore.

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 that the balance sheet remains structurally sound and is aligned to our strategy.

The Group Asset and Liability Committee (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 pre-defined liquidity limits and in compliance with Group liquidity policies and practices, as well as local regulatory requirements. MTCR 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 could impact us adversely, thereby potentially 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 funding base is diverse and largely customer-driven, while customer loans are of short tenor (51 per cent of these assets have a contractual maturity of less than 1 year). 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 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 funding 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

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

· The amount of medium term assets that have to be funded by medium term funding

In addition, we prescribe a liquidity stress scenario that includes accelerated withdrawal of deposits over a period of time. Each country has to ensure on a daily basis that cash inflows would 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 MTCR and Finance. Limit excesses are escalated and approved under a delegated authority structure and reported to the country ALCO. Excesses are also reported monthly to the LMC which provide further oversight.

We have significant levels of marketable securities, including government securities that can be monetised or pledged as collateral in the event of a liquidity stress. In addition, a Funding Crisis Response and Recovery Plan (FCRRP), reviewed and approved annually, is maintained by Group Treasury. The FCRRP strengthens existing governance processes by providing a broad set of Early Warning Indicators (EWIs), an escalation framework and a set of management actions that could be effectively implemented by the appropriate level of senior management in the event of a liquidity stress. A similar plan is maintained within each major country.

Primary sources of funding

Asubstantial portion of our assets are funded by customer deposits, largely made up of current and savings accounts. Wholesale funding deposits are widely diversified by type and maturity and represent a stable source of funds for the Group. In addition, the short term nature of our wholesale assets results in a balance sheet that is funded conservatively.

The ALCO in each country monitors trends in the balance sheet and ensures that any concerns that might impact the stability of these customer deposits are addressed effectively. The ALCO also reviews balance sheet plans to ensure that projected asset growth is matched by growth in customer deposits.

Customer assets are as far as possible funded in the same currency. Where mismatches arise, they are controlled by limits in each country on the amount of foreign currency that can be swapped to local currency and vice versa. Such limits are therefore a means of controlling reliance on foreign exchange markets, which minimises the risk that obligations could not be met in the required currency in the event that access to foreign exchange markets becomes restricted. In sizing the limits we consider a range of factors including:

· The size and depth of local FX markets; and

· The local regulatory environment, particularly the presence or risk of imposition of foreign exchange controls.

We maintain access to wholesale funding markets in all major financial centres and countries in which we operate. This seeks to ensure that we have market intelligence, maintain stable funding lines and can obtain optimal pricing when we perform our interest rate risk management activities.

Debt refinancing levels are low. In the next 12 months approximately $5.4 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 110.

The table below shows the diversity of funding by type and by geography. Customer deposits make up almost 57 per cent of

total liabilities as at 30 June 2014, the majority of which are current accounts, savings accounts and time deposits. Our largest customer deposit base by geography is Greater China (in particular Hong Kong) which holds 36 per cent of Group customer accounts.

	30.06.14	30.06.13	31.12.13
Group's composition of Liabilities	%	%	%
Customer accounts	56.6	58.6	58.0
Deposits by banks	7.3	7.0	6.6
Derivative financial instruments	6.9	8.3	9.1
Other liabilities	6.9	6.3	5.8
Debt securities in issue	11.7	10.1	10.6
Subordinated liabilities and other borrowed funds	3.6	2.8	3.0
Total equity	7.0	6.9	6.9
Total	100.0	100.0	100.0
30.06.14		30.06.13	30.12.13
Geographic distribution of customer accounts	%	%	%
Greater China	36.0	35.7	37.2
North East Asia	8.7	8.9	8.7
South Asia	3.8	3.9	4.0
ASEAN	25.1	25.0	24.5
MENAP	6.2	5.9	6.0
Africa	3.0	2.7	2.9
Americas	4.4	4.1	3.8
Europe	12.8	13.8	12.9
Total	100.0	100.0	100.0

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 3.3 per cent (30 June 2013: 2.8 per cent; 31 December 2013: 3.1 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.


			30.06.14			30.06.13
		Unencumbered assets				Unencumbered assets
		Not readily available to secure funding	Readily available to secure funding	Encumbered assets	Total assets	Not readily available to secure funding	Readily available to secure funding	Encumbered assets	Total assets
		$million	$million	$million	$million	$million	$million	$million	$million
Cash and balances at central banks		10,557	51,625	-	62,182	9,663	47,958	-	57,621
Derivative financial instruments		48,105	-	-	48,105	54,548	-	-	54,548
Loans and advances to banks¹		50,841	37,086	3,493	91,420	41,705	32,023	1,152	74,880
Loans and advances to customers¹		303,924	-	1,137	305,061	290,246	-	1,547	291,793
Investment securities¹		43,198	76,654	7,604	127,456	44,920	66,764	3,248	114,932
Other assets		26,227	-	10,857	37,084	26,137	-	11,904	38,041
Current tax assets		290	-	-	290	198	-	-	198
Prepayments and accrued income		2,807	-	-	2,807	2,687	-	-	2,687
Interests in associates and joint ventures		1,932	-	-	1,932	1,819	-	-	1,819
Goodwill and intangible assets		6,200	-	-	6,200	5,943	-	-	5,943
Property, plant and equipment		6,967	-	-	6,967	6,759	-	-	6,759
Deferred tax assets		634	-	-	634	736	-	-	736
Total		501,682	165,365	23,091	690,138	485,361	146,745	17,851	649,957

						31.12.13
						Unencumbered assets
						Not readily available to secure funding	Readily available to secure funding	Encumbered assets	Total assets
						$million	$million	$million	$million
Cash and balances at central banks						9,946	44,588	-	54,534
Derivative financial instruments						61,802	-	-	61,802
Loans and advances to banks¹						46,917	36,890	2,362	86,169
Loans and advances to customers¹						294,884	-	1,131	296,015
Investment securities¹						48,699	72,062	3,516	124,277
Other assets						19,870	-	13,700	33,570
Current tax assets						234	-	-	234
Prepayments and accrued income						2,510	-	-	2,510
Interests in associates and joint ventures						1,767	-	-	1,767
Goodwill and intangible assets						6,070	-	-	6,070
Property, plant and equipment						6,903	-	-	6,903
Deferred tax assets						529	-	-	529
Total						500,131	153,540	20,709	674,380
¹	Includes assets held at fair value through profit or loss

Encumbered assets continued

In addition to the above the Group received $17, 029 million (30 June 2013: $8,710 million; 31 December 2013: $15,906 million) as collateral under reverse repurchase agreements that was eligible for repledging. Of this the Group repledged $1,914 million (30 June 2013: $1,161 million; 31 December 2013: $1,804 million) under repurchase agreements

Readily available to secure funding

Readily available to secure funding includes unencumbered assets that can be sold outright or under repo within a few days, in line with regulatory definitions. The Group's readily available assets comprise of cash and balances at central banks, loans and advances to banks and investment securities.

Assets classified as not readily available to secure funding include:

· Assets which have no restrictions for funding and collateral purposes, such as loans and advances to customers, which are not acquired or originated with the intent of generating liquidity value; and

· Assets that cannot be encumbered, such as derivatives, goodwill and intangible and deferred tax assets

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 funding from customers.

	30.06.14 $million	30.06.13 $million	31.12.13 $million
Loans and advances to customers¹	305,061	291,793	296,015
Customer accounts	390,523	380,785	390,971
Advances to deposits ratio	78.1%	76.6%	75.7%

¹ See note 16 to the financial statements on page 140

Liquid asset ratio (LAR)

The Liquid Asset Ratio (LAR) ensures that a proportion of the Group's total assets are held in liquid assets, on a consolidated currency basis.

Liquid assets are the total cash (less restricted balances), treasury bills, loans and advances to banks (including net unsecured interbank and trade finance) and debt securities (less illiquid securities). Illiquid securities are debt securities that

cannot be sold or exchanged easily for cash without substantial loss in value.

The Group LAR remained at similar levels as in the previous year, reflecting an increase in liquid assets holdings to match balance sheet growth. The LAR in Europe increased as a consequence of liquidity optimisation activities resulting in increased balances at central banks and holding of liquid securities.


	The following table sets an analysis of the Group's liquid assets by geographic region:
		30.06.14
		Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
		$ million	$ million	$ million	$ million	$ million	$ million	$ million	$ million	$million
Cash and balances at central banks		7,389	5,203	945	5,585	2,603	1,573	24,178	14,706	62,182
Restricted balances		(3,438)	(560)	(493)	(3,220)	(1,645)	(738)	(424)	(39)	(10,557)
Loans and advances to banks - net of non-performing loans		28,554	7,806	478	7,781	1,712	901	13,187	30,900	91,319
Deposits by banks		(8,670)	(4,472)	(501)	(7,096)	(1,777)	(822)	(18,128)	(8,909)	(50,375)
Treasury bills		6,940	5,680	2,359	4,821	1,058	3,175	929	1,303	26,265
Debt securities		29,723	7,629	3,775	15,035	4,438	2,628	5,040	26,428	94,696
of which :
	Issued by governments	13,536	6,194	2,875	6,243	3,765	1,143	422	5,134	39,312
	Issued by banks	10,299	484	186	3,663	297	381	3,805	14,119	33,234
	Issued by corporate and other entities	5,888	951	714	5,129	376	1,104	813	7,175	22,150
Illiquid securities and Other Assets		(819)	(19)	(538)	(222)	-	(6)	(468)	(1,103)	(3,175)
Liquid assets		59,679	21,267	6,025	22,684	6,389	6,711	24,314	63,286	210,355
Total assets		203,638	74,602	27,857	162,176	39,262	21,203	64,016	97,384	690,138
Liquid assets to total asset ratio (%)		29.3%	28.5%	21.6%	14.0%	16.3%	31.7%	38.0%	65.0%	30.5%

Liquid asset ratio (LAR) continued

		30.06.13
		Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
		$ million	$ million	$ million	$ million	$ million	$ million	$ million	$ million	$million
Cash and balances at central banks		6,944	3,803	1,031	5,025	2,440	1,303	27,367	9,708	57,621
Restricted balances		(3,363)	(667)	(565)	(2,578)	(1,538)	(626)	(301)	(25)	(9,663)
Loans and advances to banks - net of non-performing loans		26,021	5,257	759	7,647	2,437	813	11,048	20,787	74,769
Deposits by banks		(6,548)	(4,545)	(496)	(4,890)	(1,514)	(611)	(15,777)	(11,009)	(45,390)
Treasury bills		6,796	6,954	2,789	3,496	1,449	2,390	1,396	480	25,750
Debt securities		30,690	4,963	2,709	16,914	4,044	3,115	3,432	17,756	83,623
of which :
	Issued by governments	12,348	3,840	1,834	6,881	3,364	1,400	513	2,575	32,755
	Issued by banks	11,940	270	390	4,402	524	303	2,702	8,933	29,464
	Issued by corporate and other entities	6,402	853	485	5,631	156	1,412	217	6,248	21,404
Illiquid securities and Other Assets		(101)	(5)	(696)	(177)	-	(112)	-	(1,698)	(2,789)
Liquid assets		60,439	15,760	5,531	25,437	7,318	6,272	27,165	35,999	183,921
Total assets		194,208	72,227	27,886	150,124	36,550	18,790	64,858	85,314	649,957
Liquid assets to total asset ratio (%)		31.1%	21.8%	19.8%	16.9%	20.0%	33.4%	41.9%	42.2%	28.3%

Liquid asset ratio (LAR) continued


		31.12.13
		Greater China	North East Asia	South Asia	ASEAN	MENAP	Africa	Americas	Europe	Total
		$ million	$ million	$ million	$ million	$ million	$ million	$ million	$ million	$million
Cash and balances at central banks		7,188	4,909	970	5,679	2,169	1,621	23,345	8,653	54,534
Restricted balances		(3,431)	(547)	(523)	(2,959)	(1,546)	(644)	(262)	(34)	(9,946)
Loans and advances to banks - net of non-performing loans		27,899	6,561	575	6,689	2,097	742	13,067	28,432	86,062
Deposits by banks		(4,652)	(3,719)	(542)	(6,917)	(1,491)	(566)	(17,739)	(8,900)	(44,526)
Treasury bills		10,741	6,794	2,567	4,748	1,220	2,777	1,027	1,530	31,404
Debt securities		30,126	5,895	2,896	16,093	3,986	2,803	3,979	20,295	86,073
of which :
	Issued by governments	12,625	4,289	2,162	6,584	3,382	1,307	194	3,331	33,874
	Issued by banks	12,334	935	327	4,183	265	267	3,484	10,376	32,171
	Issued by corporate and other entities	5,167	671	407	5,326	339	1,229	301	6,588	20,028
Illiquid securities and Other Assets		(170)	-	(773)	(348)	(39)	-	-	(1,051)	(2,381)
Liquid assets		67,701	19,893	5,170	22,985	6,396	6,733	23,417	48,925	201,220
Total assets		201,832	73,130	27,142	156,366	37,519	19,357	65,125	93,909	674,380
Liquid assets to total asset ratio (%)		33.5%	27.2%	19.0%	14.7%	17.0%	34.8%	36.0%	52.1%	29.8%

Liquid asset ratio (LAR) continued

Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

The Group monitors the LCR and NSFR in line with the Bank of International Settlements' BCBS238 guidelines. In June 2014 the Group started reporting its LCR on a monthly basis to its lead regulator, the Prudential Regulation Authority (PRA), calculated in accordance with the Capital Requirements Regulation (CRR), the Regulation that implements BCBS238 in Europe. The Group meets the Basel III requirements for the NSFR and LCR under both BCBS 238 and CRR definitions. As at 30 June 2014 both the Group LCR and NSFR were above 100 per cent.

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: a severe 8-day name specific stress, a 30-day market wide stress and a 90-day combined name specific and market wide stress. 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.

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 a stand-alone basis, with no presumption of Group support. As at 30 June 2014 all countries passed the stress test

The Group's resilience to market-wide disruption, such as loss of interbank money or foreign exchange markets, is tested using the 30-day market wide stress scenario, and is monitored by country ALCOs.

Finally, the 90-day stress test considers 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. This stress is managed at a Group rather than individual country level. It tests the adequacy of contingency funding arrangements beyond the marketable securities held to cover the 8-day stress, including the ability to support countries from elsewhere in the Group.

Our country stress testing considers potential currency mismatches between outflows and inflows. Particular focus is paid to mismatches in less liquid currencies and those which are not freely convertible. Mismatches are controlled by management action triggers set by MTCR. Group-wide stress tests also consider the portability of liquidity surpluses between Group entities, taking account of regulatory restrictions on large and intra-group exposures.

Standard Chartered Bank's credit ratings as at June 2014 were AA- (Fitch), AA- with negative outlook (S&P) and A1 (Moody's). A downgrade in credit rating would increase derivative collateral requirements and outflows due to rating-linked liabilities. The impact of a 2-notch downgrade results in an estimated outflow of $1.4 billion.

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.

	Contractual maturity
		30.06.14
		One month or less	Between one month and three months	Between three months and six months	Between six months and nine months	Between nine months and one year	Between one year and two years	Between two years and five years	More than five years and undated	Total
		$million	$million	$million	$million	$million	$million	$million	$million	$million
Assets
Cash and balances at central banks		51,241	384	-	-	-	-	-	10,557	62,182
Derivative financial instruments		3,957	4,816	4,125	4,934	3,118	7,397	11,279	8,479	48,105
Loans and advances to banks¹		37,086	23,888	16,109	3,384	5,501	3,743	1,634	75	91,420
Loans and advances to customers¹		83,002	26,318	21,902	12,009	12,926	22,770	48,519	77,615	305,061
Investment securities		7,178	14,717	11,935	10,564	9,833	19,772	35,187	18,270	127,456
Other assets		16,281	12,201	2,312	165	530	20	272	24,133	55,914
Total assets		198,745	82,324	56,383	31,056	31,908	53,702	96,891	139,129	690,138

Liabilities
Deposits by banks¹		41,497	4,750	1,909	351	358	108	622	780	50,375
Customer accounts¹		283,907	46,929	25,878	11,601	8,826	4,945	4,508	3,929	390,523
Derivative financial instruments		4,543	4,622	4,210	4,877	3,107	7,136	10,980	8,310	47,785
Senior debt		382	1,478	1,674	2,373	418	7,014	7,822	3,422	24,583
Other debt securities in issue¹		8,699	17,707	15,110	3,145	2,329	892	1,658	6,201	55,741
Other liabilities		12,940	15,431	3,674	856	806	233	1,026	12,912	47,878
Subordinated liabilities and other borrowed funds		-	-	-	-	-	566	4,237	19,888	24,691
Total liabilities		351,968	90,917	52,455	23,203	15,844	20,894	30,853	55,442	641,576
Net liquidity gap		(153,223)	(8,593)	3,928	7,853	16,064	32,808	66,038	83,687	48,562
¹	Amounts include financial instruments held at fair value through profit or loss (see note 12) on pages 119 to 120

		Contractual maturity continued
			30.06.13
			One month or less	Between one month and three months	Between three months and six months	Between six months and nine months	Between nine months and one year	Between one year and two years	Between two years and five years	More than five years and undated	Total
			$million	$million	$million	$million	$million	$million	$million	$million	$million
Assets
Cash and balances at central banks			47,881	24	-	-	-	-	-	9,716	57,621
Derivative financial instruments			5,940	7,091	6,031	4,677	3,844	7,074	11,371	8,520	54,548
Loans and advances to banks¹			32,022	16,822	11,527	6,084	5,370	1,296	1,604	155	74,880
Loans and advances to customers¹			68,254	29,874	19,450	15,360	13,340	18,698	48,506	78,311	291,793
Investment securities¹			5,840	13,051	14,387	11,294	9,732	16,922	29,606	14,100	114,932
Other assets			16,915	12,577	2,828	318	130	106	193	23,116	56,183
Total assets			176,852	79,439	54,223	37,733	32,416	44,096	91,280	133,918	649,957

Liabilities
Deposits by banks¹			37,502	4,534	2,197	250	182	89	542	94	45,390
Customer accounts¹			267,889	45,675	27,898	15,589	9,589	4,120	5,720	4,305	380,785
Derivative financial instruments			6,023	7,336	5,880	4,532	4,426	6,519	10,869	8,196	53,781
Senior debt			2,288	50	239	753	1,587	375	13,474	2,982	21,748
Other debt securities in issue¹			8,453	13,738	10,757	1,507	3,217	3,134	(335)	3,305	43,776
Other liabilities			13,353	9,346	3,508	887	382	709	1,220	11,321	40,726
Subordinated liabilities and other borrowed funds			-	-	927	-	-	-	4,614	12,852	18,393
Total liabilities			335,508	80,679	51,406	23,518	19,383	14,946	36,104	43,055	604,599
Net liquidity gap			(158,656)	(1,240)	2,817	14,215	13,033	29,150	55,176	90,863	45,358
	¹	Amounts include financial instruments held at fair value through profit or loss (see note 12) on pages 119 to 120

	Contractual maturity continued
			31.12.13
			One month or less	Between one month and three months	Between three months and six months	Between six months and nine months	Between nine months and one year	Between one year and two years	Between two years and five years	More than five years and undated	Total
			$million	$million	$million	$million	$million	$million	$million	$million	$million
Assets
Cash and balances at central banks			44,309	264	-	-	-	-	-	9,961	54,534
Derivative financial instruments			6,820	7,376	8,403	4,514	3,612	9,085	13,453	8,539	61,802
Loans and advances to banks¹			36,890	21,705	13,349	5,543	5,153	1,647	1,798	84	86,169
Loans and advances to customers¹			73,036	29,469	23,541	10,772	11,677	22,549	48,297	76,674	296,015
Investment securities¹			11,496	13,948	12,567	7,252	11,241	21,052	30,844	15,877	124,277
Other assets			14,677	10,964	2,316	44	318	35	201	23,028	51,583
Total assets			187,228	83,726	60,176	28,125	32,001	54,368	94,593	134,163	674,380

Liabilities
Deposits by banks¹			36,084	4,873	1,489	394	276	173	521	716	44,526
Customer accounts¹			279,638	48,630	26,473	12,864	10,793	2,574	6,310	3,689	390,971
Derivative financial instruments			6,922	7,306	9,405	4,195	3,418	8,480	12,802	8,708	61,236
Senior debt			478	291	3,485	430	19	7,020	10,121	3,335	25,179
Other debt securities in issue¹			10,114	13,252	11,516	1,422	1,938	1,141	1,992	4,858	46,233
Other liabilities			12,759	8,665	3,260	962	432	544	1,117	11,258	38,997
Subordinated liabilities and other borrowed funds			-	-	-	-	-	6	4,785	15,606	20,397
Total liabilities			345,995	83,017	55,628	20,267	16,876	19,938	37,648	48,170	627,539
Net liquidity gap			(158,767)	709	4,548	7,858	15,125	34,430	56,945	85,993	46,841
	¹	Amounts include financial instruments held at fair value through profit or loss (see note 12) on pages 120 to 121

Behavioural maturity of financial assets and liabilities

The cash flows presented on page 101 reflect the cash flows which will be contractually payable over the residual maturity of the instruments. However, contractual maturities do not necessarily reflect the timing of actual repayments or cash flow. In practice, certain asset and liability instruments behave differently from their contractual terms and, especially for short term customer accounts, credit card balances and overdrafts, which extend to a longer period than their contractual maturity. On the other hand mortgage balances tend to have a shorter repayment period than their contractual maturity date. Such behavioural adjustments are identified and managed in each country through analysis of the historic behaviour of balances. The Group's expectation of when assets and liabilities are likely to become due is provided on the following page.

Behavioural maturity continued
		30.06.14
		One month or less	Between one month and three months	Between three months and six months	Between six months and nine months	Between nine months and one year	Between one year and two years	Between two years and five years	More than five years and undated	Total
		$million	$million	$million	$million	$million	$million	$million	$million	$million
Assets
Loans and advances to banks¹		37,044	22,999	16,426	3,436	5,500	3,665	2,247	103	91,420
Loans and advances to customers¹		57,864	23,013	18,452	10,044	16,891	22,202	97,293	59,302	305,061
Total loans and advances		94,908	46,012	34,878	13,480	22,391	25,867	99,540	59,405	396,481

Liabilities
Deposits by banks¹		31,506	4,766	2,289	419	449	9,456	709	781	50,375
Customer accounts¹		125,004	29,475	15,298	12,941	23,671	103,097	76,419	4,618	390,523
Total deposits		156,510	34,241	17,587	13,360	24,120	112,553	77,128	5,399	440,898
Net gap		(61,602)	11,771	17,291	120	(1,729)	(86,686)	22,412	54,006	(44,417)
		30.06.13
		One month or less	Between one month and three months	Between three months and six months	Between six months and nine months	Between nine months and one year	Between one year and two years	Between two years and five years	More than five years and undated	Total
		$million	$million	$million	$million	$million	$million	$million	$million	$million
Assets
Loans and advances to banks¹		32,632	16,470	11,127	5,982	5,392	1,350	1,772	155	74,880
Loans and advances to customers¹		53,050	23,088	17,122	11,632	16,881	24,974	85,544	59,502	291,793
Total loans and advances		85,682	39,558	28,249	17,614	22,273	26,324	87,316	59,657	366,673

Liabilities
Deposits by banks¹		37,318	4,642	1,302	252	1,076	81	623	96	45,390
Customer accounts¹		126,517	32,804	18,356	13,250	29,381	94,811	60,950	4,716	380,785
Total deposits		163,835	37,446	19,658	13,502	30,457	94,892	61,573	4,812	426,175
Net gap		(78,153)	2,112	8,591	4,112	(8,184)	(68,568)	25,743	54,845	(59,502)

		31.12.13
		One month or less	Between one month and three months	Between three months and six months	Between six months and nine months	Between nine months and one year	Between one year and two years	Between two years and five years	More than five years and undated	Total
		$million	$million	$million	$million	$million	$million	$million	$million	$million
Assets
Loans and advances to banks¹		36,990	21,856	13,342	5,532	5,072	1,554	1,665	158	86,169
Loans and advances to customers¹		55,193	27,724	18,204	8,491	17,991	21,239	88,092	59,081	296,015
Total loans and advances		92,183	49,580	31,546	14,023	23,063	22,793	89,757	59,239	382,184

Liabilities
Deposits by banks¹		35,804	5,063	1,472	427	318	138	597	707	44,526
Customer accounts¹		131,684	28,574	16,700	11,055	23,572	115,686	58,868	4,832	390,971
Total deposits		167,488	33,637	18,172	11,482	23,890	115,824	59,465	5,539	435,497
Net gap		(75,305)	15,943	13,374	2,541	(827)	(93,031)	30,292	53,700	(53,313)
¹	Amounts include financial instruments held at fair value through profit or loss (see note 12)

Operational risk

Operational risk is the potential for loss resulting from inadequate or failed internal processes, people, or technology or the impact of external events. 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 the Group's processes into logical groupings. 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 including internet crime
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 which are outside of 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 which have occurred are analysed to identify the root cause of any failure for remediation and future mitigation. Actual operational losses, near misses and control metrics are 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 risk control areas Group-wide: people, technology, vendor, property, security, accounting and financial control, tax, legal processes, corporate authorities and structure and regulatory compliance, as described further in the table below:

Operational risk continued

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	Maintaining relationships with tax authorities and managing the Group's tax affairs to ensure compliance with our obligations
Corporate authorities & structure	Maintaining effective corporate legal entity structure and corporate decision making authorities

Each risk control owner, supported by a specialist control function, is 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.

Since the Group reorganisation, as of 1 April 2014, Group Risk Committee provides overall oversight of operational risk across the Group. It is supported by the Global Business Risk Committee, the Group Functions Operational Risk Committee the Group Financial Crime Risk Committee and the Group Information Management Governance Committee, which oversee operational risk arising from the businesses, Group functions, financial crime compliance and information management and data quality, respectively.

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 which we apply in the provision of financial services to clients who operate in sectors with specific risks, and for key issues. We have mechanisms in our origination and credit processes to identify and assess environmental and social risks, and a dedicated Environmental and Social Risk Management team that reviews proposed transactions with identified risks.

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 Business Responsibility and Reputational Risk Committee has responsibility for managing reputational risk.

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 group. 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 quarterly. 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 sections of Capital form part of the financial statements: from the start of 'Capital Management' on this page to the end of 'Reconciliation of Basel II Core Tier 1 and CRD IV, Common Equity Tier 1' on page 92, excluding the end point CET1 ration on page 88, the risk-weighted assets amount on page 89 and the capital ratios on page 90.

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

• 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 Group uses a capital model to assess the capital demand for material risks, and supports this with our internal capital adequacy assessment. Other internal 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, for example by identifying potential concentrations and assessing the impact of portfolio management actions. Stress testing and scenario analysis are an integral part of capital planning, and are used to ensure that the Group's internal capital adequacy 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 through appropriate management actions. The capital modelling process is a key part of our management discipline.

A strong governance and process framework is embedded in our capital planning and assessment methodology. The key capital management committees are the Group Asset and Liability Committee (GALCO) and the Capital Management Committee (CMC). The members of GALCO include all the Group Executive Directors and the Group Chief Risk Officer with senior attendees from Group Treasury, Finance, Risk and the business. The GALCO regularly reviews the capital plan and approves capital management policies and guidelines. The CMC oversees the tactical management of the Group's capital position and provides a bridge to GALCO's strategic management of the Group's capital position. The GALCO delegates certain authorities to CMC in relation to capital management.

The Group's capital position, including its relationship to the Group's risk appetite statement, is regularly considered by the Board Risk Committee (BRC). At a country level, capital is

monitored by the Country Asset and Liability Committee (ALCO). Appropriate policies are in place governing the transfer of capital within the Group.

In light of the uncertain economic environment and continuing uncertainty as to the end state for banks' regulatory capital structures, it is appropriate to remain both strongly capitalised and well above regulatory requirements.

Standard Chartered Bank is 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 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 28 to 85.

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.

Advanced Internal Ratings Based (IRB) models

Since 1 January 2008, we have been using the IRB approach for the calculation of credit risk capital requirements with the approval of our relevant regulators. This approach builds on our risk management practices and investment in data warehousing and risk models.

For market risk Internal Model Approach (IMA) where IMA permission has been granted by our relevant regulators we use Value at Risk (VaR) in our market risk models for the calculation of our market risk capital requirements. Where our market risk exposures are not included in a regulatory IMA permission we apply the Standardised Approach for determining the capital requirements for market risk as specified by the relevant regulator. We apply the Standardised Approach for determining the capital requirements for operational risk.

The Group's IRB models are subject to initial approval, and ongoing supervision by its regulators. The Group believes that the overall performance of its models has been, and continues to be, conservative. The PRA has revised its approach towards the use and calibration of IRB models. Consequently, the Group is to change the method for calculating Exposure at Default (EAD) in certain IRB models, resulting in around a $12bn increase in risk-weighted assets (RWA) and an impact on the Common Equity Tier 1 (CET1) ratio of around 40bps.

In December 2013, in PS7/13 the PRA proposed changes to the treatment of certain exposures where the country-specific default experience is not deemed sufficient for modelling purposes, including the application of various Loss Given Default (LGD) floors. In June 2014 the PRA issued a Consultation Paper (CP12/14) proposing (among other changes) that AIRB permissions for exposures to central governments, central banks, public sector entities and financial institutions be replaced by Foundation IRB (FIRB) permissions by the end of June 2015. Under a FIRB permission, EAD and LGD for such exposures will be determined based on supervisory formulae rather than internal models. Such changes to the treatment of LGD would result in an increase in the risk-weighted requirements calculated by such models. The impact of such changes will depend on the final outcome of the consultation process.

CRD IV (Basel III)

In Policy Statement PS7/13 the PRA has set out its approach to implementation of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) which together comprise CRD IV. CRD IV came into force on 1 January 2014. A number of areas of CRD IV remain subject to further consultation or await promulgation of the relevant European Banking Authority (EBA) Technical Standards and UK implementing rules. Further, the CRD leaves considerable scope for national discretion to be applied. Accordingly, the position presented here is based on the Group's current understanding of the rules which may be subject to change.

In June 2014, the PRA set out a requirement for the eight large UK institutions (of which the Group is one) of a 7 per cent CET1 ratio based on capital definitions in CRR and the PRA Rulebook and a 3 per cent end point Tier 1 leverage ratio from 1 July 2014. The Group currently exceeds these requirements.

The Group is well positioned: diverse, well capitalised and liquid with a conservative approach to balance sheet management. The Group currently operates at capital levels materially above the current minimum requirements and, additionally, has a number of levers at its disposal, to manage future regulatory requirements as they finalise or emerge over the next few years.

Bank of England (BoE) Stress Tests

The PRA is conducting a stress test of the UK banking system, as recommended by the Financial Policy Committee (FPC) of the BoE, which will include the Group. The Group is not included in the EBA's simultaneous EU-wide stress test. The purpose of the PRA stress test is to assess the capital adequacy and resilience of UK based banks. The Group expects that the results of the BoE stress test will be used by the PRA to inform the setting of a bank's revised Capital Planning Buffer (CPB). The Group understands that the CPB will phase out starting from January 2016 when CRD IV buffers commence their phase-in although the PRA have not yet formally confirmed these transitional arrangements. The results of the BoE stress test will be published by the BoE towards the end of 2014 although the exact timing, form and extent of disclosure are not yet known.

Global Systemically Important Institutions (G-SIIs)

On 11 November 2013, the Financial Stability Board (FSB) published an updated list of G-SIIs identifying the Group as a G-SII with a 1 per cent additional CET1 requirement. G-SIIs will be required to hold an additional CET1 buffer of between 1 per cent and 3.5 per cent of RWA by 2019. If the Group remains a G-SII, its related CET1 requirement will be phased in from 1 January 2016 to 1 January 2019.

Her Majesty's Treasury (HMT) has designated the PRA as the authority responsible for identifying G-SIIs and setting G-SII buffers. On 5 June 2014, the EBA published the final draft Regulatory Technical Standards (RTS) on the methodology for identifying G-SIIs and the related disclosure requirements for G-SIIs. The identification of G-SIIs in the EU is aligned with the framework established by the Financial Stability Board (FSB) and developed by the Basel Committee on Banking Supervision (BCBS). However, while the global standards only require the publication of the 12 indicators used in the methodology, the EBA extends the public disclosure requirement to all the data needed to calculate these indicators. In accordance with the Basel Committee standards, the Group has published its G-SII indicators as at 31 December 2013.

The Group's G-SII disclosure 'Standard Chartered's G-SIB indicators' can be found at www.sc.com/en/news-and-media/news/global/31-07-2014-gsib-indicators.html

Other Regulatory Developments

In April 2014, the PRA published Policy Statement PS3/14 and Supervisory Statement SS6/14 which set out its approach to implementation of some of the buffers which had not been addressed in PS7/13. The BoE was identified as the designated authority for the Countercyclical Capital Buffer (CCyB), with its powers delegated to the FPC. The FPC may set a CCyB for UK exposures and for non-EU exposures.

In the UK, the Combined Buffer will include the Capital Conservation Buffer (CCB), the CCyB, the GSII buffer and the Systemic Risk Buffer (SRB), to the extent applicable to a firm, as required by CRD IV. If a firm does not meet its Combined Buffer it will be required to notify the PRA within 5 days and calculate a Maximum Distributable Amount (MDA). If a firm does not meet its Combined Buffer it must not make distributions of profits in excess of the applicable MDA. Where firms are in the first quartile of their combined buffer (when they meet between 75 per cent and 100 per cent of it), 60 per cent of such profits can be distributed. In the second quartile, 40 per cent can be distributed; in the third quartile, 20 per cent; and in the fourth quartile, 0 per cent. Relevant distributions include: distributions in connection with CET1, payment of variable remuneration or discretionary pensions and payments on Additional Tier 1 instruments.

EU member states may introduce a SRB for the financial services sector, or a subset of it. The SRB is intended to mitigate the macro-prudential risks specific to an EU member state. This buffer has an upper-bound rate of 5 per cent but could exceed this, following authorisation by the European Commission. HMT has not yet designated a responsible authority for the SRB.

Pillar 2

In addition to Pillar 1 capital requirements, the Group, like other UK banks, currently holds capital in respect of its Pillar 2 risks. Pillar 2 comprises:

· Individual Capital Guidance (ICG or Pillar 2A buffer) for risks deemed not covered or adequately addressed by Pillar 1 capital requirements (including for example: pension risk, interest rate risk, concentration risk and operational risk). From 1 January 2015 the Group must hold at least 56 per cent of its Pillar 2A buffer in CET1

· A CPB to ensure the Group remains well capitalised in a stressed environment. From 1 January 2016, the PRA Buffer Assessment will take into account the CCB, any G-SII buffers and SRB. A further CET1 component could be added to the extent that the PRA does not consider that these buffers are sufficient to cover the Group's risks

The PRA has announced that it intends to consult in the second half of 2014 on the transition to the new Pillar 2 framework. Based on current guidance received from the PRA in 2014 and the Group's current understanding of the rules, the Group's Pillar 2A guidance now amounts to around 115 bps of RWA. Assuming that the Group meets its Pillar 2A guidance to the extent possible with Tier 1 and Tier 2 capital, the Group's Pillar 2A CET1 guidance is around 65 bps. The Group's Pillar 2A guidance may vary over time.

Gone concern loss absorbing capacity (GLAC)

The FSB is expected to publish proposals for international GLAC standards at the November G20 meeting. Based on its current understanding of the ongoing discussions and the potential definition of GLAC, the Group estimates that as at 30 June 2014 its GLAC level is around 22 per cent of RWA. This figure includes regulatory capital, senior liabilities with at least one year to maturity and that part of subordinated debt that is amortised for regulatory capital purposes over the last five years of the relevant instrument's duration (with at least one year remaining to maturity) and therefore outside the scope of regulatory capital recognition.

CRD IV Own Funds disclosures

The table on page 89 summarises the consolidated capital position of the Group. The disclosure template is based on the EBA Implementing Technical Standard (ITS) on Disclosure for Own Funds published on 26 July 2013.

The Reconciliation of Basel II Core Tier 1 and CRD IV CET1 and Basel II risk-weighted asset to CRD IV table illustrates the impact of the move from Basel II to CRD IV as at 1 January 2014. CET1 decreased by just under $2 billion due to increased regulatory deductions from CET1 capital in particular the full and unsheltered deduction for excess expected losses relative to provisions and the deduction of certain deferred tax assets. RWA increased by just over $9 billion due to credit valuation adjustments (CVA), asset value correlation (AVC) charges and the introduction of the threshold deduction approach offset in part by the application of CRR standardised rules to various Financial Markets portfolios.

The Group has deducted foreseeable interim dividends (net of scrip) from the capital base which impacted the CET1 ratio by around 17bps.

At 30 June 2014, the Group's end point CET1 ratio is 10.7 per cent which reflects the inclusion of unrealised gains on available for sale securities in the end point calculation which are expected to be recognised from 2015 onwards. The 1 January 2014 end point ratio on this basis was 11.0 per cent and 11.2 per cent including the impact of estimated mitigation of the CVA RWA increase as disclosed in the 2013 Annual Report.


CRD IV Capital base	CRD IV	¹	CRD IV	²	Basel II	³	Basel II	⁴
	30.06.14		31.12.13		31.12.13		30.06.13
	$million		$million		$million		$million
Common Equity Tier 1 (CET1)/Core Tier 1 capital: instruments and reserves
Capital instruments and the related share premium accounts	5,225		5,213		5,213		5,212
Of which: Share premium accounts	3,989		4,001		4,001		4,000
Retained earnings⁵	27,883		28,560		28,560		25,200
Accumulated other comprehensive income (and other reserves)	11,171		10,794		10,794		10,681
Non-controlling interests (amount allowed in consolidated CET1)	604		607		906		927
Independently reviewed interim profit⁶	2,401		-		-		2,181
Foreseeable dividends net of scrip⁷	(584)		-		-		-
Common Equity Tier 1 capital before regulatory adjustments	46,700		45,174		45,473		44,201
Common Equity Tier 1 / Core Tier 1 capital: regulatory adjustments
Additional value adjustments	(216)		(180)		-		-
Intangible assets (net of related tax liability)⁸	(6,414)		(6,173)		(6,070)		(6,100)
Deferred tax assets that rely on future profitability	(276)		(273)		-		-
Fair value reserves related to gains or losses on cash flow hedges	(76)		(15)		(15)		50
Negative amounts resulting from the calculation of expected loss⁹	(1,919)		(1,738)		(610)		(696)
Gains or losses on liabilities at fair value resulting from changes in own credit	(85)		(85)		(85)		(187)
Defined-benefit pension fund assets	(5)		(6)		26		35
Fair value gains and losses arising from the institution's own credit risk related to derivative liabilities	(13)		(5)		-		-
Exposure amounts which could qualify for risk weighting	(222)		(190)		(92)		(111)
Of which: securitisation positions	(184)		(184)		(92)		(111)
Of which: free deliveries	(38)		(6)		-		-
Regulatory adjustments relating to unrealised gains	(461)		(546)		(669)		(384)
Other	-		(2)		(35)		(34)
Total regulatory adjustments to Common Equity Tier 1 /Core Tier 1	(9,687)		(9,213)		(7,550)		(7,427)
Common Equity Tier 1 /Core Tier 1 capital	37,013		35,961		37,923		36,774
Additional Tier 1 (AT1) capital: instruments
Capital Instruments and the related share premium accounts	4,378		4,458		4,690		5,494
Significant direct and indirect holdings of CET1 instruments of relevant entities	-		-		(537)		(502)
Tax on excess expected losses	-		-		259		234
Additional Tier 1 (AT1) capital before regulatory adjustments	4,378		4,458		4,412		5,226
Tier 1 capital (T1 = CET1 + AT1)	41,391		40,419		42,335		42,000
Tier 2 (T2) capital: instruments and provisions
Capital instruments and the related share premium accounts	13,054		9,010		16,218		13,571
Amount of qualifying items and the related share premium accounts subject to phase out from Tier 2	1,155		1,447		-		-
Qualifying own funds instruments included in Tier 2 capital issued by subsidiaries and held by third parties	4,903		5,267		-		-
Unrealised gains on available-for-sale equity securities included in Tier 2	-		-		744		362
Significant direct and indirect holdings of CET1 instruments of relevant entities	-		-		(537)		(502)
Negative amounts resulting from the calculation of expected loss amounts	-		-		(869)		(930)
Securitisation positions	-		-		(92)		(111)
Credit risk adjustments	212		237		237		272
Tier 2 capital before regulatory adjustments	19,324		15,961		15,701		12,662
Tier 2 capital: regulatory adjustments
Direct and indirect holdings by an institution of own Tier 2 instruments and subordinated loans	(24)		(11)		(11)		(6)
Deductions from total capital	-		-		(6)		(6)
Total regulatory adjustments to Tier 2 capital	(24)		(11)		(17)		(12)
Tier 2 capital	19,300		15,950		15,684		12,650
Total capital (TC = T1 + T2)	60,691		56,369		58,019		54,650
Total risk-weighted assets¹⁰	351,585		331,296		322,251		323,776

CRD IV Capital base continued

CRD IV

Basel II

⁴

30.06.14

31.12.13

30.06.13

$million

Capital ratios

Common Equity Tier 1 (CET1) for CRD IV/ Core Tier 1 capital for Basel II

10.5%

10.9%

11.8%

11.4%

Tier 1 capital

11.8%

12.2%

13.1%

13.0%

Total capital

17.3%

17.0%

18.0%

16.9%

The 'CRD IV 30.06.14' column shows the implemented CRD IV transitional position at 30 June 2014

The 'CRD IV 31.12.13' column shows the 31 December 2013 Basel II position adjusted for the CRD IV rules as at 1 January 2014. This has been re-presented to align with the EBA disclosure template

The 'Basel II 31.12.13' column corresponds to the Basel II position set out in the Group's 2013 Annual Report. This has been re-presented to align with the EBA disclosure template

⁴

The 'Basel II 30.06.13' position reflects that disclosed in the Group's 2013 Interim Report. This has been re-presented to align with the EBA disclosure template

⁵

Retained earnings under CRD IV include the effect of regulatory consolidation adjustments

⁶

Independently reviewed interim profits for CRD IV are in accordance with the regulatory consolidation

⁷

Foreseeable dividends include the proposed interim dividend for H1 2014 and preference share dividend. The interim dividend element is reported net of scrip (using 25% scrip dividend assumption)

⁸

"Net of related tax liability" is only applicable for CRD IV

⁹

Excess of expected losses in respect of advance IRB portfolios are shown net of tax benefits under Basel II

¹⁰

The risk-weighted assets are not reviewed by the auditors


Movement in total capital	CRD IV		Basel II
		6 months ended	6 months ended
		30.06.14	31.12.13
		$million	$million
Opening Common Equity Tier 1 (CET1)/Core Tier 1 capital		35,961	36,774
Ordinary shares issued in the period and share premium		12	1
Profit for the period		2,401	1,854
Dividends, net of scrip		(732)	(696)
Foreseeable dividends net of scrip		(584)	-
(Increase)/decrease in goodwill and other intangible assets		(241)	30
Foreign currency translation differences		315	(196)
Decrease/(increase) in unrealised gains on available for sale assets		85	(285)
Movement in eligible other comprehensive income		117	525
Net effect of regulatory consolidation and change in non-controlling interests		(140)	(291)
(Increase)/decrease in excess expected loss, net of tax		(181)	86
Decrease in securitisation positions		-	19
Own credit adjustment, net of tax		-	102
Closing Common Equity Tier 1(CET1)/Core Tier 1 capital		37,013	37,923

Opening Additional Tier 1/Other Tier 1 capital		4,458	5,226
Increase in tax benefit of excess expected loss		-	25
Decrease in material holdings		-	(35)
Redeemed capital		(320)	(925)
Other		240	121
Closing Additional Tier 1/Other Tier 1 capital		4,378	4,412

Opening Tier 2 capital		15,961	12,662
Subordinated debt issued by subsidiaries and held by third parties		(364)	-
Issuance of subordinated loan capital, net of redemptions and foreign currency translation differences		3,752	2,647
Increase in revaluation reserve		-	382
Increase in portfolio impairment provision		(25)	(35)
Decrease in excess expected loss		-	61
Increase in material holdings		-	(35)
Decrease in securitisation positions		-	19
Closing Tier 2 capital		19,324	15,701
Total regulatory adjustments to Tier 2 (T2) capital		(24)	(17)
Closing Total capital		60,691	58,019

Reconciliation of Basel II to CRD IV
			31.12.2013
Reconciliation of Basel II Core Tier 1 and CRD IV Common Equity Tier 1(CET1)			$million
Core Tier 1 capital			37,923
Full deduction of excess of expected losses			(1,128)
Deduction of deferred tax assets			(273)
Ineligible non-controlling interest			(299)
Additional valuation adjustment, embedded goodwill net of tax and other			(262)
Common Equity Tier 1 (CET1) capital			35,961

			31.12.2013
Reconciliation of Basel II risk-weighted assets to CRD IV			$million
Basel II risk-weighted assets			322,251
Credit valuation adjustment			7,900
Asset value correlation			5,200
Introduction of threshold deduction approach			2,482
Application of CRR standardised rules			(6,377)
Other			(160)
CRD IV risk-weighted assets			331,296

Risk-weighted assets
		CRD IV		CRD IV	Basel II		Basel II
		30.06.14		31.12.13	31.12.13		30.06.13
		$million		$million	$million		$million
Credit risk		296,305		281,256	265,834		264,043
Operational risk		35,107		33,289	33,289		33,289
Market risk		20,173		16,751	23,128		26,444
Total risk-weighted assets		351,585		331,296	322,251		323,776


Risk-weighted assets by business
			CRD IV 30.06.14
			Credit Risk	Operational Risk		Market Risk		Total Risk
			$million	$million		$million		$million
Corporate and Institutional Clients			208,276	22,322		20,173		250,771
Commercial Clients			22,042	2,778		-		24,820
Private Banking Clients			6,130	902		-		7,032
Retail Clients			59,857	9,105		-		68,962
Total risk-weighted assets			296,305	35,107		20,173		351,585

			Basel II 30.06.13
			Credit Risk	Operational Risk		Market Risk		Total Risk
			$million	$million		$million		$million
Corporate and Institutional Clients			170,881	21,166		26,444		218,491
Commercial Clients			23,693	2,634		-		26,327
Private Banking Clients			5,086	855		-		5,941
Retail Clients			64,383	8,634		-		73,017
Total risk-weighted assets			264,043	33,289		26,444		323,776

			Basel II 31.12.13
			Credit Risk	Operational Risk		Market Risk		Total Risk
			$million	$million		$million		$million
Corporate and Institutional Clients			177,366	21,166		23,128		221,660
Commercial Clients			23,062	2,634		-		25,696
Private Banking Clients			4,779	855		-		5,634
Retail Clients			60,627	8,634		-		69,261
Total risk-weighted assets			265,834	33,289		23,128		322,251

Risk-weighted assets by geographic region				CRD IV		Basel II		Basel II
				30.06.14		30.06.13		31.12.13
				$million		$million		$million
Greater China				65,299		62,487		63,284
North East Asia				25,453		26,286		26,701
South Asia				28,678		26,668		26,721
ASEAN				81,173		86,463		80,377
MENAP				31,022		30,644		29,402
Africa				19,866		21,493		19,729
Americas				12,572		10,982		12,454
Europe				98,505		67,920		74,389
				362,568		332,943		333,057
Less : Netting balances¹				(10,983)		(9,167)		(10,806)
Total risk-weighted assets				351,585		323,776		322,251

¹	Risk weighted assets by geographic region are reported gross of any netting benefits

Risk weighted contingent liabilities and commitments
		30.06.14	30.06.13	31.12.13
		$million	$million	$million
Contingent liabilities¹		14,576	15,850	15,519
Commitments¹		11,320	12,211	11,814
¹	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
	Credit risk
	Corporate and Institutional Clients	Commercial Clients	Private Banking Clients	Retail Clients	Total	Operational risk	Market risk	Total risk
	$million	$million	$million	$million	$million	$million	$million	$million
Risk-weighted assets at 1 January 2013 (Basel II)	158,540	20,599	4,087	63,424	246,650	30,761	24,450	301,861
Assets growth	10,286	1,062	238	1,769	13,355	2,528	1,994	17,877
Credit migration	1,771	919	621	(1,062)	2,249	-	-	2,249
Risk-weighted assets efficiencies	807	(206)	208	(167)	642	-	-	642
Model, methodology and policy changes	2,435	1,744	-	2,607	6,786	-	-	6,786
Acquisitions and disposals	-	-	-	(295)	(295)	-	-	(295)
Foreign currency translation differences	(2,958)	(425)	(68)	(1,893)	(5,344)	-	-	(5,344)
Risk-weighted assets at 30 June 2013 (Basel II)	170,881	23,693	5,086	64,383	264,043	33,289	26,444	323,776
Assets growth/(decline)	5,375	539	705	(2,286)	4,333	-	(3,316)	1,017
Credit migration	7,304	(268)	(824)	493	6,705	-	-	6,705
Risk-weighted assets efficiencies	(2,793)	(436)	(206)	(1,123)	(4,558)	-	-	(4,558)
Model, methodology and policy changes	(2,508)	(491)	-	(1,592)	(4,591)	-	-	(4,591)
Acquisitions and disposals	-	145	-	451	596	-	-	596
Foreign currency translation differences	(893)	(120)	18	301	(694)	-	-	(694)
Risk-weighted assets at 31 December 2013 (Basel II)	177,366	23,062	4,779	60,627	265,834	33,289	23,128	322,251
Impact of CRD IV (at 1 January 2014)	16,602	(900)	50	(330)	15,422	-	(6,377)	9,045
Assets growth/(decline)	3,677	(1,001)	212	55	2,943	1,818	4,645	9,406
Credit migration	6,159	576	56	(473)	6,318	-	-	6,318
Risk-weighted assets efficiencies	(7,893)	(257)	(107)	(573)	(8,830)	-	-	(8,830)
Model, methodology and policy changes	11,745	370	1,112	(283)	12,944	-	(1,223)	11,721
Foreign currency translation differences	620	192	28	834	1,674	-	-	1,674
Risk-weighted assets at 30 June 2014 (CRD IV)	208,276	22,042	6,130	59,857	296,305	35,107	20,173	351,585

Risk-weighted assets

RWA increased by $29.3 billion, or 9 per cent, from 31 December 2013. Of this $9 billion was a result of the transition to CRD IV as at 1 January 2014 as set out in the 'Movement in risk-weighted assets' the table above. This comprised primarily of a credit risk weighting increase of $15.4 billion which was offset partially by a benefit in market risk RWA of $6.4 billion.

Excluding the transitioning impact the underlying increase was $20.3 billion, and this is analysed as follows:

C&I and Commercial segments

Credit risk increased due to the following:

· Model changes of $12.1 billion resulting from a change in the method for calculating EAD for certain IRB models, under guidance from the PRA

· Negative credit migration due to downgrades primarily in the Europe and ASEAN regions of $6.7 billion

· Translation impact due to appreciation of currencies in India, Pakistan and Korea of $0.8 billion

This was offset by efficiencies of $8.1 billion from proactive management including portfolio management activities, collateral management initiatives and reductions in tenor.

Retail

Retail Clients RWA decreased marginally with the increases in operational risk RWA offset by a reduction in credit risk RWA. This was a result of a mix change as we reduced our unsecured lending book, which generally attracts a higher RWA compared to secured lending, which we grew in this period. Translation impact of $0.8 billion due to appreciation of currencies in Korea, Singapore and Indonesia.

Private Banking

The growth in Private Banking of $1.4 billion RWA was primarily due to higher credit risk RWA. This was due to a combination of increase in exposures and changes arising from lower collateral eligibility due to the reduction in the number of recognised stock exchanges.

Market risk RWA at $20.2 billion was lower by $3.0 billion primarily due to reduced capital requirements under CRD IV of $6.4 billion on equity options for which standard rules are applied. This also contributes a further $1.2 billion benefit in 2014 and was offset by increased assets covered by own internal models and increased positions subject to Specific Interest Rate Risk (SIRR) capital requirements.

Operational risk RWA increased by $1.8 billion, or 5 per cent due to the change in income over a rolling three year time horizon (2013 income replacing 2010).

Leverage ratio

The Basel Committee on Banking Supervision introduced the leverage ratio to constrain the build-up of leverage in the banking sector, and supplement risk-based capital requirements with a "simple, non-risk based backstop measure" of leverage. The proposed leverage ratio compares Tier 1 capital to total exposures, which includes certain exposures held off balance sheet as adjusted by regulatory credit conversion factors.

The CRR refers to the BCBS guidance of formal disclosure of a leverage ratio from 2015 with final adjustments to definition and calibration during the first half of 2017 with a view to migrating the leverage ratio to a binding Pillar 1 requirement by 1 January 2018. Article 429 of the CRR specifies how the leverage ratio is to be calculated and Article 430 and Article 451 cover disclosure to supervisors and the market respectively. The EBA has recently published ITS relating to leverage ratio disclosure to supervisors and to the market.

Following a consultation exercise concluded in September 2013, the BCBS issued a revised leverage ratio framework and disclosure requirements during January 2014. In March 2014, the EBA recommended aligning the CRR to the January 2014 BCBS proposals. In July 2014 the FPC published a consultation on the leverage ratio with final recommendations to follow in November 2014.

The FPC consultation is wide ranging and proposes (among other things) introduction of a number of elements of the risk based capital regime to the leverage framework (e.g. leverage conservation, systemic and countercyclical type buffers) and restrictions on the use of AT1 to meet future leverage requirements. According to the FPC, the calibration of the leverage ratio is outside the scope of this review and, as such, the focus of this review is primarily on the design of a leverage ratio framework. The Group currently intends to respond to the FPC's leverage consultation.

The table below sets out the Group's leverage ratio in accordance with the prevailing PRA guidance for (i) a capital measure using the end point Tier 1 capital definition in the final CRR text and the Own Funds RTS published by the EBA and (ii) an exposure measure based on the BCBS January 2014 proposals.

The Group has interpreted the requirements of the BCBS January 2014 text, however, these rules may differ when included in the revised CRD IV text.

In June 2014, in an update to SS3/13 the PRA set out a requirement for the 8 large UK institutions (of which the Group is one) to achieve a 3 per cent end point Tier 1 leverage ratio from 1 July 2014. The Group's leverage ratio of 4.8 per cent is above this minimum requirement.


Leverage ratio continued
					30.06.14
					$million
Tier 1 capital (transitional position)					41,391
Less: Additional Tier 1 capital					(4,378)
Add: Regulatory adjustments relating to unrealised gains					461
Tier 1 capital (end point)					37,474
Exposure measure (end point)					785,939
Leverage ratio (end point)					4.8%
Total on balance sheet assets					704,890
Derivatives financial instruments					48,125
Securities financing transactions					27,580
All other on balance sheet items					629,185

Off balance sheet transactions					68,223
Unconditionally cancellable/low risk					11,108
Medium/low risk trade related off-balance sheet items					4,797
Medium risk trade and officially supported export finance off-balance sheet items					37,140
Other off-balance sheet items					15,178

Derivatives adjustment					(4,864)
Benefits of derivative netting recognised under Basel III					(30,382)
Potential Future Exposure (PFE) add-on derivatives					25,518

					26,379
Additional exposure for credit derivatives					9,977
Additional exposure for SFT					16,244
Gross-up for derivative netting under IAS 32					6,268
Eligible cash variation margin offset against market values					(6,110)

Deductions from CRD IV Tier 1 capital (end point)					(8,689)
Total exposure measure for leverage ratio					785,939


Reconciliation of accounting to regulatory assets					30.06.14
					$million
Total assets per financial balance sheet					690,138
Net effect of regulatory consolidation					14,752
Total on balance sheet assets					704,890

This information is provided by RNS

The company news service from the London Stock Exchange

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