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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Standard Chartered's Update for the First Quarter of 2020. Today's call is being hosted by Andy Halford, Group Chief Financial Officer; and Bill Winters, Group Chief Executive. [Operator Instructions]At this point, I'd like to hand over to Andy to begin.
Thank you, Nicole, and good morning or good afternoon, depending on your time zone. Bill has dialed in remotely and will join me for the Q&A. But before we do that, I will, as usual, add some color to the key headlines. You may have noticed that we've produced a more fulsome quarterly report this time, and for the first time, we have a presentation to accompany it. Hopefully, you have that presentation in front of you, or you can quickly download it from our website, sc.com, because I will be referring to that document for the next 20 minutes or so. So starting on Slide 1. Before moving on to our first quarter performance, I will state the obvious. We've been traveling through uncharted territory recently and are likely to remain so for a while, certainly through the next couple of quarters. So whilst we'll attempt to give some guidance, the usual caveats in the disclaimer about forward-looking statements certainly apply. This slide gives the financial highlights for the quarter, but I wanted to start by paying tribute to my colleagues around the world who are working tirelessly to support our customers in these difficult times. I have always been confident in our business continuity plans, but it is a massive testament to the ability of people to implement them; that a global bank as complex as ours is being run seamlessly without missing a beat with over 70,000 of our employees working at home, something we could never have envisaged only a few months ago. Both our operational resilience and our brand promise, to be here for good, have never been more thoroughly tested nor more comprehensively proven, and I'm extremely proud of the team. I'll now cover some of the actions we have taken to protect the well-being of those colleagues and to support our customers and communities before getting on to the first quarter results themselves. Moving on to Slide 2 then. This page contains a small selection of the many ways we're responding to the crisis, how we're making sure that we can be there when our colleagues, customers, clients and the communities in which we operate need us. Starting with our colleagues on the left-hand side. We want to ensure they have the space, the support and the tools to continue to operate effectively. The rate of remote working varies considerably by market, from almost 100% in the U.K. to 1% in Korea and less than 30% now in China and in adjacent markets such as Vietnam that were amongst the first to experience COVID-related lockdowns and are now facing the first steps towards reemerging. Wherever and however they work, however, our colleagues' physical as well as mental well-being is top of our mind, and we are doing what we can to support both, including through actions you can see laid out on this slide. Moving to the right-hand side. We have a Retail Banking presence in around half of our 59 markets and have rolled out a comprehensive range of relief measures for those customers who have been impacted by the pandemic, some of which we have listed here. Obviously, the nature of our franchise and the local regulations will dictate exactly which of these measures are available in each market. To give you a sense for take-up and our response, we have approved around 86% of the 190,000 or so applications for relief received so far, most of which are from personal loan customers. Most of the applications received are from mortgage customers, where, as you may recall, we have a very low loan-to-value portfolio on average, and for payment holidays to help customers manage their cash flow through the crisis. It's early days, as you can appreciate, so we'll give a further update at the half year results. Suffice it to say, we are determined to provide as much practical support to this potentially vulnerable segment as we can. For Corporate & Institutional clients, the main responsibility we have given our global franchise is to be a constant and consistent partner to support them as they grapple with the impact of the pandemic on their businesses and their supply and distribution chains. Our unique diversity means that we are a powerful source of liquidity, not just in the usual currencies and markets but across Asia, Africa and the Middle East. We've provided liquidity when they needed it most in the form of revolving credit facility drawdowns and are now helping them to raise alternative sources of funds as the markets reopen. We have also set aside up to $1 billion of funding capacity to support companies that can provide goods that are in high demand to fight the pandemic. This is basically going to be provided at cost; we intend to make no profit from this activity. We have already received applications for over half this amount and approved the first disbursements. We will do what we can through initiatives like this to help make a difference to the communities we operate in. And speaking of communities, we have launched a $50 million fund to provide more direct assistance to those affected by COVID-19. Bill and I, the rest of the management team, and I'm sure, many of our colleagues around the world, will personally contribute to this fund. And the bank will match every donation up to $25 million. As you can see here, we are taking a phased approach but are already putting funds to work wherever it is most needed. We have teamed up with the Red Cross to fund medical support in Africa and Asia and with UNICEF to help ensure education and protection of vulnerable children in Africa and South Asia. They are just 2 of the 29 NGOs that we have teamed up with so far to implement this initiative, and over $4 million has already been allocated across 17 markets. This bank has always been extremely good at responding in a very practical way to crises, as we did during Ebola, for example, and this will be no exception. So turning now to the results themselves, starting on Slide 3 for the usual snapshot. I'm just going to touch briefly on this slide because I'll be drilling down into most of the component parts shortly. Back in February, we said that the good momentum we experienced in the fourth quarter of 2019 had continued into the opening weeks of the year. And in fact, it turned out to be better than that, with strong income growth in January and February before, as you would expect, tapering off in March as the pandemic initially affected our Northern Asia markets and then started to spread around the world. So with income growing at a healthy clip overall in the quarter, 6% excluding impact to currency and DVA, and with tight controlled costs, we generated a significant improvement in pre-provision operating profit. As for impairment provisions, we have taken a substantial charge in the quarter, in large part to reflect the speed and severity of the deterioration in the macroeconomic outlook. More on that in a minute. So stepping back, it's clear to Bill and me that the hard work the teams have put in, in recent years is really paying off. We remain strongly capitalized and highly liquid, and we intend to keep it that way so that we can continue to both support our customers and clients and further improve the underlying business. So let's start looking in more detail at our income performance in the quarter on Page 4. This is the usual view on income by product, with currency translation and DVA split out to highlight the underlying momentum. What is really pleasing and encouraging actually, when we think ahead to the period after the COVID-19 pandemic has receded, is that once again, the growth was pretty broad-based with our Financial Markets and Wealth Management businesses doing particularly well, but with nearly all products contributing. Our Financial Markets business, after having been overhauled in recent years, usually does well in periods of heightened market volatility. And that was certainly the case in the first quarter. While the event-driven capital market transactions slowed down as the pandemic took hold, client demand for risk management products, not surprisingly, increased significantly across all our markets, including those where we are seeing a -- seeking to optimize returns, such as Korea and Indonesia that saw a significant uptick in income as a result. One of the most encouraging things for me is that the heavy investment in e-trading in recent years is really paying off, with client income from this channel up 35 -- 34% year-on-year in the macro trading business. Our Wealth Management business also saw a very tangible return on its recent investment in digital capabilities, with our more affluent customers able to engage with us remotely on an unprecedented scale. Although sentiment in this area has understandably declined recently, helping our customers protect their wealth and search for yield is a key part of what we are doing to support them through this crisis. Moving along to Slide 5 now to cover net interest income and margin. We said in February that lower interest rates would cause a significant headwind. And within 3 weeks of presenting those results in -- the Federal Reserve had cut its policy rate a further 150 basis points to a range of 0% to 0.25%. While we have reduced the sensitivity of our earnings through a 50 basis point drop in the Fed rate considerably in the last 2 years, from between $300 million to $400 million in the middle of 2017 to $120 million more recently in February, the sensitivity naturally increases again as rates trend to 0, meaning that the most recent cuts are expected to lead in aggregate to approximately $600 million lower net interest income over the remainder of 2020. That would have been the expectation when Bill and I stood up to deliver our full year results in February. The Hong Kong-based liquidity hub we set up last year is helping. In fact, some of the standout revenue performances came from China and Korea partly as a result. And I should also mention for balance that we may see an income uplift in some respects as we step up to support our clients. But overall, there is no way we can maintain the same level of growth into an increased headwind of that magnitude. What we can control, of course, is our costs in an attempt to neutralize as much of the impact of the recent rate cuts at the pre-provision operating profit level as we can, which I'll come on to shortly. Turning to Slide 6 where we show what's been happening with our fee-based and other nonfunded sources of income. So while our more rate-sensitive products were under pressure from the rapidly falling rates, some of the nonfinancing products that you can see on this page have clearly benefited from the uptick in volatility. Most of the income represented by the charts on this slide is generated by activities where we are particularly well differentiated through serving Corporate & Institutional clients, utilizing our unique physical franchise in 59 markets around the world, and by helping our more affluent individual customers grow, manage and preserve their wealth. Capital usage tends to be lower to these income streams. And whilst they can be more volatile, they remain a key strength and an area of strategic focus for the group. The bottom chart shows the contribution from our Financial Markets business, showing the benefit of product diversification through volatile times. I will now move on to cover costs on Slide 7. As you know, we have kept expenses broadly flat at around $10 billion for the last couple of years, excluding the bank levy. As you also know by now, our costs are often seasonally lowest in the first quarter. But even so, it's comforting to know that they are lower in Q1 this year both on a reported and a constant currency basis. As a result, for the first time in a very long time, our cost/income ratio has dipped below 60%. There's further to go, of course, but it's a significant step in the right direction. However, as I said earlier, given the interest rate environment, even if we maintain costs at the $10 billion mark again this year, then pre-provision operating profit, basically our initial loss-absorbing layer, would likely decline. So we have initiated a series of incremental cost-saving measures to offset as much as possible of the $600 million headwind on net interest income that I mentioned earlier. Freezing new hires for a few months to both save costs and enable us to protect existing jobs through the COVID-19 pandemic is pretty easy to implement, as is reducing travel expenses, of course, although we are reinvesting some of those savings into better remote working facilities for our employees. The work we're doing to reprioritize investment is more complicated but essentially, will enable us to continue to invest in the things that will increasingly differentiate us over a multiyear time frame: things like our virtual bank in Hong Kong that will be launched shortly under the brand name, Mox; our digital banks in Africa that are doing extremely well with monthly run rates of new clients rising from 16,000 in the fourth quarter of last year to 22,000 in January, 30,000 in February and 59,000 in March; and the new banking-as-a-platform initiative that is currently being set up in Indonesia. I will caution that executing cost-saving initiatives will not be straightforward during the crisis that is affecting every one of our markets more or less. But we hope that we will end the year with costs, excluding the U.K. bank levy, starting firmly with a 9. Our task will then be how to make those savings stick for good, albeit the ease with which colleagues have picked up remote working habits is both impressive and encouraging in that regard. With that, let's turn to risk, where we have 3 pages dedicated to the topic, starting with #8. This is the usual breakdown that we provide, the P&L impairments at the top, and what we refer to as the higher-risk elements of the balance sheet at the bottom, i.e., Stage 3, category 12 and early alerts but in the new quarterly progression format. The main things to take away are, firstly, the most recent macroeconomic variables reflecting the significant deterioration in output has resulted in us taking significant provisions in anticipation of further credit losses. Secondly, that we chose to roughly double that modeled outcome with an additional overlay. This is to reflect risks that we don't believe were fully reflected in the mathematical result of the modeling process, based, in other words, on our judgment that has been refined through many crises and recessions. Thirdly, that our stock of riskier loans on the balance sheet at the bottom of the page increased mainly in the early alert category. That designation doesn't mean they will default necessarily, just that we are scrutinizing them much more carefully. We have placed all our exposures in the aviation sector into either the purely precautionary or the non-purely precautionary early alert category. The figure we always disclose is the non-purely precautionary one you see here. And the final point to note is that our cover and the investment-grade ratios remain stable as did the key Retail Banking indicators around days past due in Q1, although we do expect the Retail segment to feel more stress going forwards, particularly if lockdowns do persist. There is no doubt, of course, that the credit environment deteriorated in the quarter, but we have a strong balance sheet and a substantially overhauled risk framework that gives us excellent insight into areas of stress. At a regional level, we think Asia is well placed to recover from the COVID shock. Our clients in the Africa and Middle East region are dealing with both COVID-related disruption and the ripple effect of the oil price tensions. The outlook for this region is a little gloomier, and so we remain extremely vigilant there. On the second of the 3 risk pages, #9, on this page, we have just drilled down deeper to show the process that led to the Stage 1 and 2 movements, given that this is the first time that IFRS 9 has been really tested in [ an anger ]. Hopefully, the walk here is fairly self-explanatory. About 1/3 of the increase year-on-year was due to credit migration from Stage 1 to Stage 2, and the rest driven by significant changes to the latest macroeconomic variable forecasts, the main ones for us being listed at the bottom of the page. We think this is a conservative approach in the circumstances, but time will tell whether we have overall underprovided. A lot will depend on the depth, and more importantly, duration of the downturn. And even since we ran this test, the oil price tumbled again, further proof if we needed it that we remain in a highly volatile environment where the range of potential short-term economic outcomes is wider than it has been for a very, very long time. And now the last slide on risk, Page #10. Here, we break down the exposure to 4 particularly vulnerable industry sectors. Incidentally, we have relatively low exposure to some other sectors that are being impacted by the COVID pandemic such as hotels and tourism where we have a net nominal exposure of around $2 billion, which is why they're not on this slide. These 4 represent biggest risks for us right now. We have, as you may recall, been systematically reducing our exposure to commodities-related sectors since they were the main source of credit problems we had in 2015, as you can see on the bar chart on this slide. Our total corporate exposures on a net nominal basis are around $224 billion. So these 4 sectors together represent about 1/4 of the total. The equivalent proportion in 2015 was 1/3, and we had substantially less capital then, of course. So you can see how far we have come. But we've also worked hard in the meantime to improve the quality of our exposures, overhauling our approach to subordination and collateral, for example. And you can see how far we have come by looking at the deltas in the key ratios here at the top of the page. Nevertheless, given COVID is creating, in the case of aviation, or at least exacerbating the considerable challenges facing companies in these sectors, we have them at the top of our monitoring list. I won't go through every number here, but hopefully, you'll find the additional disclosure helpful, and we will revisit them at the interim results. So let's move to another topical theme on the next slide, #11, liquidity. We have tried on this slide to demystify what is admittedly a pretty complicated aspect of our published results. We have always deliberately maintained very high levels of liquidity. Our asset deposit ratio, for example, at 62%, is one of the lowest amongst our peers. And an LCR ratio that remains above 140% is also indicative of the fact that we cope well during times of stress and are prepared should further shocks arrive. As I said earlier, this enables us to commit to extend credit to clients and customers when they need it at very difficult times like this. As you can see from the table at the top of this slide that was included in full in our recent annual report, we had around $140 billion worth of different types of undrawn commitments at the end of the year. This included $50 billion in credit cards and overdraft facilities for our personal customers at about the same amount in the form of revolving credit facilities for businesses. As you can see from the table, Retail Banking customers have not been significantly drawing down so far. You can see, however, how much of our Corporate & Institutional clients drew down on the facilities through March as the pandemic spread, a good proportion of which was immediately put back on deposit with us incidentally. The important thing to note is that the rate of drawdown was not particular excessive, not as bad as many in the market feared certainly and has slowed to 0 by the middle of this month, as you can see from the chart at the bottom. Several of our large corporate clients are already starting to consider reversing drawdowns because they're now better able to quantify the liquidity requirements and can access other sources for funding, which we can help them to tap, of course. Moving now to a more familiar slide on capital and RWAs on #12. The 2 charts on this slide may be familiar, but as I said a minute ago, the operating environment in the latter part of the quarter certainly was not. If we take the top chart showing risk-weighted assets first, as you know, there is a seasonality to RWAs. They ordinarily decline in the fourth quarter and then bump back up in the first. But these are not ordinary times. And this time, the sequential increase was almost all attributable to the economic disruption caused by the emergence and rapid spread of the coronavirus. The middle 3 boxes there were mostly higher due to the deteriorating macroeconomic environment, including the market volatility that accompanied it. There was a $5 billion increase in our derivative exposures due to the heightened volatility, approximately half due to volumes and half mark-to-market pricing. Credit RWAs increased due to revolving credit facility drawdown and, as some clients moved down the credit spectrum, due to the deteriorating environment. Forward guidance is particularly tricky in this area currently. We do not -- sorry, we do expect further credit migration. That will inflate RWAs, albeit how much and in what shape over the balance of the year is tough to predict given Q1 represented just 1 month or so of the real economic impact of the pandemic. But we start in the middle of our CET1 range and have the prospect of a further 40 basis points uplift from the sale of Permata, so we clearly have plenty of capacity to absorb a significant further increase if that came to pass. So turning to CET1 then. The RWA inflation in the first quarter fed into our CET1 movement in the period, but there were also a few other moving parts. There was a 10 basis point reduction as a result of us buying back around $240 million worth of shares. But we terminated the program halfway through, at the same time as we made the difficult decision to withdraw the final dividend recommendation for 2019 and not pay an interim dividend this year, which, together, had a roughly 30 basis point positive impact. So stepping back, we remain very strongly capitalized in the middle, the medium-term range, we set for ourselves and several percentage points above the 10% regulatory minimum and with Permata due to complete sooner than we had initially expected. We intend and expect to remain that way. Let me be clear on one thing, though, the plan laid out in early 2019 as part of our strategic refresh to return surplus capital as and when we prudently can remains absolutely in place. Whilst we can't make any ordinary share distributions or reinitiate the buyback program for the remainder of this year, once the pandemic has receded, then we will consider further returns if we do not need them for CET1 or investment purposes. So final slide before we go back to you for questions, #13. It is unusually difficult to give an outlook statement currently beyond what I have said already about the interest rate headwind and the possibility of further RWA inflation and impairments. What I can promise, however, is that we will do what we can to manage our costs and stretch every sinew to support our clients and communities through the crisis. Our strategy is working, as you can see in the results of some of the most challenged markets, and we will keep executing it in these difficult times. We'll also continue to take bold and ambitious actions to lead the way on global sustainability issues. We believe economies will start moving forwards again gradually in the second half of the year as containment efforts are lifted. But the risk is on the downside, and we do not anticipate a rapid recovery globally in any event. We are reasonably confident, however, that our largest and most profitable market will be at the forefront of that recovery and that our unique position straddling Asia and connecting it with the rest of the world will enable us to play a key role in it. So with that, I will hand back to operator so Bill and I can take your questions.
[Operator Instructions] And your first question comes from the line of Fahed Kunwar at Redburn.
I just had -- I have a few questions, but obviously, I'll keep it to 2. On Slide 11, the drawdown reversals, one of your peers kind of pointed something similar out yesterday as well. How sustainable do you think that is? I mean it seems like it's in stark contrast to Europe, and I understand your geology, geographical exposure is quite different. But do those April drawdown reversals suggest that perhaps we've got to the peak of the kind of credit extensions? Or do you think there's another wave to come on that based on what you can see? And then my second question was on NIIs. The $600 million incremental hit you have going forward for the next 9 months, how do you see that progressing assuming rates don't change now going into 2021 and 2022? Does that kind of drop off very sharply? Or do you expect kind of further material drags in those outer years for those 2 years as well?
Okay. So let's take those in that order. So on the RCF drawdown, I think what happened here was initial reaction of a lot corporates early March at the heart of the crisis was rather than have a piece of paper saying that they could draw down, let's get the money in the bank and let's really draw down and then we can see where we go to. I think as the month went on and it became clear that the issue was not going to be one about the credentials of the banks but more going to be one about customer demand for their businesses, that a lot of corporates got a bit more relaxed about where they were. And even though some of the drawdown money has actually been put back on deposit with us, we did actually start to see, as the chart on Slide 11 shows, that actually, we had a reversal of that trend and have seen a reversal of that trend in April. So I think most businesses now have had a little bit more time to think about the consequences of the current situation on their businesses. Some of those, clearly, are looking at alternate ways to raise financing. And in many of those instances, we will be working with our clients on that. But as far as we can see it at the moment, that appears to have sort of settled to a level and I think sort of commonsense and calm heads are prevailing, and hopefully, we will not see a big disturbance in that as we move forward. On the interest rates, we have got sort of the impact of the pretty much 150 basis points really coming into our numbers, pretty much a straightforward leap today. It's impacted slightly on the first quarter. So the $600 million is a balance of the year charge, but obviously, there is a roll-through effect so there will be a slightly bigger number that would be the full year impact on top of that for next year. As I have said, we are going to be working on the costs front, obviously, provide offsets to that as much as we realistically can do. Some things are within our control, some things are not. The good thing, as I also drew out in one of the other charts, is that we are not wholly an interest rate dependent business. And those parts of the business that we have been focusing upon for the last 2 or 3 years to increase the proportion of our activity that is from other products, has manifested itself, I think, very positively, particularly the Financial Markets space over the course of probably the last 4 or 5 quarters now. And that has proven to be extremely timely in the environment that we are now in.
Andy, sorry, can I just ask one follow-up? So the -- when you say a slightly bigger number in 2021, is that -- so there's going to be a bigger hit in NII than $600 million in 2021?
Yes, it will be -- I mean, partly because the $600 million is a balance of the year number for this year and partly because you've just got the roll through of interest rates as they impact the bookers' reprices.
Your next question comes from the line of Manus Costello at Autonomous.
Just to follow-up on the point on NII and then one on RWA inflation. On NII, I have to admit, I was surprised by the size of that hit given the way that you'd spoken about it at the full year and the disclosure you gave at the full year. So can you give us some more indication? Is this really a U.S. dollar, Hong Kong dollar issue? Or is there something across other currencies that we need to be aware of?And can I ask that you change your disclosure perhaps in the future to give us the impact of a 100 basis point move, like most people, rather than a 50 basis point move, if there really is an exponential difference between the 2? So what's driving that and what should we see as the FX sensitivities? And then secondly, on RWA inflation. HSBC yesterday gave us an indication of where they thought RWAs could go to through a migration effect. You've seen a similar effect in Q1 in terms of the proportion of the base which have seen RWA migration. Is a mid- to high-single digit migration for the full year something that you think is plausible for Standard Chartered?
Yes. Okay. So again, let's take those in order. So the guidance we have given, and clearly, you have made the point, has been about sort of 50 basis point increments. And what we saw in the period was not 50 basis points but significantly higher than that, the problem with that being the nearer one gets to 0 rates, the more consequences there are. And therefore, there is a sort of magnified effect as one gets very close to 0. Maybe we should have had the foresight to realize that, that was how it would play out, but we didn't. Your point about whether we should show sensitivities of 100 basis points rather than 50, we can certainly give that some thought. It is going to manage the fees across U.S. dollar, Hong Kong dollars, Sing., et cetera, so it is a sort of cross-currency view that we have taken. But the biggest issue is just the effect when you get very near 0 as to the relativities of the liability and asset side of the book.On the RWAs, the logic is that we will see some deterioration in credit rating, and therefore, some increase in RWAs over the balance of the year. Now the offset, obviously we've got, albeit for a very different reason, will be with the Permata disposal that will take $9 billion or so off the books. So I would hope directionally those 2 will be sort of offsetting, although it's not a precise science. And then clearly, the other point is that if there are lending opportunities out there and the economics are compelling, then we will not feel constrained in going out and making sensible lending decisions even if that uses a little bit more RWA. So we do not want to have this as a sort of constraint that is more binding upon what is economically for the longer-term good of the business.
And Permata is $9 million -- $9 billion, yes?
Correct. Yes. It's -- yes, it's a fraction, $9 billion, $9.1 billion, yes.
Your next question comes from the line of Martin Leitgeb at Goldman Sachs.
I was just wondering, and I appreciate this is difficult, if you just could give us a view on how you're thinking about the credit cycle from here. How severe a cycle could there be for Asia and to what extent is this incorporated in your numbers? And might -- I mean to the extent possible, is it possible to draw some form of GDP comparison, let's say, a minus 2 GDP or whatever the number it would be incorporated? And in that regard, what impact, from your perspective, do the various government schemes make? I mean there's a number of schemes, whether that's some potential form of helicopter monies to loan guarantees and so forth. To what extent do you think those government schemes can eventually soften the cycle? And just on capital, the 13% to 14% target range was something Standard Chartered followed very closely and be in the middle of that range. Should we think about that range going forward being unchanged? Or is there scope for that range to come down on the back of some buffer requirement having been reduced recently?
Yes. Okay. Thanks, Martin. I think as we look forwards, there are 3 things that really stand out to my mind that are going to sort of determine how credit impacts us. And this is probably the same for other banks. The first one is the success and the speed with which the lockdown periods are removed. It goes without saying that the quicker the economies can get back into gear, the less periods we will have when there are constraints on that front. And if we look at what's happening, particularly maybe in China, maybe in Korea, I guess there are some sort of grounds for optimism that, actually, there are ways through the lockdown period and some of those markets clearly are more lucrative markets as well. But the converse equally applies if countries find that there's a resurgence when they come out of lockdown, and it's sort of more problematic. And the longer this goes on, then obviously, the more potentially disruptive that is. The second one to your middle point is government support. The extent to which governments, many of those have made the right noises putting schemes in place, the execution of them probably relatively early stage. But the extent to which we do tangibly see more fragile situations being rescued by government support, obviously, that will have an impact ultimately on where the exposures sit. And therefore, we have not -- and you politely not asked the question, we've not put a specific number or specific number range on the credit impairment going forwards because those factors are quite difficult to interpret. I think if I was being a little bit more positive about it, I would say that some of the North Asia markets do seem to be working their way through that a bit more quickly, and the body of our sort of customers and profitability is sitting there. I don't know, Bill, do you have any sort of thoughts and comments on this?
Yes. Thanks, Andy. And thanks, Martin. This is obviously sort of the big question hanging over all of us. And we set out in some detail on Page 9 what the macroeconomic variables were that went into the base of our model. We also indicated that we made a material management overlay on top of that. So in other words, we think that things could be more challenging than this economic scenario that we set out in Page 9. And if you look in further detail on Page 10, to your point about government actions, we have not assumed that the aviation sector is completely eliminated in the most likely scenario. And the only reason that it wouldn't be eliminated is because of government actions. The aviation industry at close enough to 0 income couldn't survive without government assistance. Our expectation is that, that would be forthcoming in most wealthier countries and it may not be forthcoming in some countries that don't have the same facility or some airlines that don't have the same backing. So when we look at the credit cycle, there's a heavy element of uncertainty around the way the government programs actually play out. So we've assumed -- as Andy indicated in his comments and in his answer to this question, we've assumed a pretty severe economic scenario but we've provided for a worse scenario than that. And we recognize that the government programs, while they've been highly impactful, first, on the monetary side and now more recently, on the fiscal side, that they won't be perfect and that there's plenty of things that some policymakers might wish didn't fall through the net may nevertheless fall through the net. But we're taking the view that the government actions will allow the underlying economy to continue to function and then to recover, albeit in a somewhat slow way. So overall, I feel very good about the quality of our portfolio as we come into this period. We obviously had a couple of losses in Q1, which are most regrettable, obviously related -- and maybe not obviously, but I would make it clear, related to 2 separate frauds in terms of the 2 larger ones. But the single main concentrations that we're carrying right now and the industry concentrations, as Andy pointed out quite clearly on Page 10, are just nothing like what we had back in 2015. And I think it's that realization, together with the broader improvement in quality of the portfolio and shortening tenor, that make us comfortable that we can ride through this credit cycle in good shape.
Thanks, Bill. And Martin, just -- there was another part, I think, to your question as well, 13% to 14% range. Let me just comment upon that. So 13% to 14%, we've had as a guiding sort of principle for a period of time. We are, as you've just seen, bang in the middle of that range at the moment. And with the Permata sale about to come through, that will actually put us pretty much top of the range. So I think in the near term, we are actually very well positioned and we have got capacity there that we can selectively use. I think whether we go below the bottom of the range, it's -- there's a number of factors come into play: one, what is the opportunity that we're using the funding for; secondly, would regulators be happy with it, and obviously, there's really more indication that the U.K. regulators would; thirdly is the rating agencies, and that's not an unimportant part of the equation; and fourthly, for us to be comfortable from a sort of stress point of view that we have to have got enough headroom above what could happen in further stress. So it's particularly now that we would be very thoughtful about it.
Your next question comes from the line of Tom Rayner at Numis.
Two questions, please, one on Slide 12, one on Slide 10. Just on Slide 12, I know, Andy, you've made some comments already. But I just wondered where you can on those individual drivers which took you from end '19 to end Q1, just wondered if you could sort of comment on how you think they might play out as we move through the year. You've split asset growth from drawdowns. And I think in your release, you said that drawdowns are now pretty much 0 or may even be starting to reverse. I'm just wondering if that's an assumption and we should just focus on the asset growth from sort of the underlying business. The derivatives, not quite sure how to interpret that. But I mean, if volatility returns to normal, does that reverse out or does that just stay stable? What's in the credit migration? I wasn't expecting a huge amount of credit risk pro-cyclicality, for instance, in Q1, but comes in more in the rest of the year. So I'm just wondering what exactly is in that $2 billion figure. And then the market risk, is that purely seasonal? Will that also reverse out as we move forward or could that become a bigger source of pressure? So that's Slide 12. And I have another question on Slide 10. I don't know if you want to do that one first.
Yes. I mean my sense would be that we will see more on asset growth and credit migration and we will see less on derivatives and RCF drawdown. So the RCF drawdown we just sort of talked about, that seems at the moment to be stabilizing. To the extent that people look for other sources of financing, that can come through instead in the asset growth line. Derivatives, I mean, it's been through a highly volatile period. And unless we go through an even more volatile period, I'd hope that might sort of settle a little bit as we move forwards. Market risk, I mean, there's always going to be an element of that, but hopefully, not a big one. And I'm not going to forward forecast the FX.
All right. I don't blame you on that one. Okay. On Slide 10, you've given us very good disclosures on the nominal sort of exposure in these risk areas. I'm not sure -- and I might have missed it tucked away somewhere, but whether we have the same granular detail on the outstanding provisions like split into Stage 1, 2 and 3. I mean all I was able to find at the full year really was in Pillar III was the energy sector where that sort of detail is given, but then it's very hard to link back what exactly is in there. And it certainly doesn't seem to match up with some of this. So is there somewhere we can find not just the sort of exposure but how and what the provisions are against that as of today and how that's split between the different stages, so we can maybe do our own sort of modeling on what we think happens moving forward?
Yes. Tom, a fair question. The problem is the more that we give visibility here, the more questions that it then sort of begs. So we haven't gone and split out on the cover. We'll sort of do that at the half year and you'll get more detail on that. I think it's fair to say that where we have taken provisions, there is more of a predominance in these sectors, unsurprisingly, than in the other sectors. But also, do bear in mind that level of collateralization sort of plays a part here. A lot of the aviation increase is in the expected -- sorry, the early alerts type space and therefore is more on the watch list. But we'll provide more information at the half year.
Your next question comes from the line of Jenny Cook of Exane.
Can I just ask you a quick clarification? Thanks for that guidance around RWA inflation largely being offset by Permata. Do you think you got that -- I'm sorry to kind of be picking here, but do you think you've got that on top of the Q4 RWA base or the Q1 RWA base? That's just a quick clarification.
Q1.
On the Q1 one. Okay. So around 6% RWA inflation. So okay. Secondly, can I ask on the -- well, could I ask you to narrow down the cost guidance a little bit? How big are the levers that you can pull on in respect to travel, investment spend, variable pay, accrual, et cetera? And what benchmark should we be thinking about here? Because, I mean, it sounds, I think, a little bit too optimistic to be thinking about this as a one-for-one offset to rates.
Yes. Listen, those sort of categories that we've highlighted, I don't know, they're probably 15% of the total expense base, something of that order of magnitude, including the -- well, if you include investments, so probably a little bit more than that. I mean what we're trying to do is to get a balance here. We have said very clearly that we're going to protect employment and that we'll not have redundancies as a consequence of COVID. We have said that travel will obviously come off. It has already come off very significantly. We've looked at our investment program to decide which of those are projects which, if they were maybe to get pushed back a little bit in time, would not be crippling to the business. The ones that we see as being strategically really important, particularly digital areas, those are progressing at full steam to the extent that from home we can make them work as fast as they would have done otherwise. So I don't know exactly how much of the $600 million offset it will provide, but I think it should be a reasonable proportion of that. I said that we'll definitely aim to start with the number 9. I know that gives us a fair amount of latitude, but we are mindful that this will be a tougher year and we'll need to be very thoughtful on the cost front. And it reinvigorates our sort of focus upon longer-term cost, structural change within the business, digital enablement, people working more from home are all things which, I guess, most businesses in most segments are now reflecting upon slightly differently to the way they might have done even 3 months ago.
Okay. And in the Russia results this morning, I'll be honest, I couldn't see any reference to you still expecting to deliver positive jaws for this year. Is that still the expectation?
I think the top line is the one that is just a little less easy to predict. So we will do whatever we can do to either deliver that or get close to it. But I just think we live in very difficult and interesting times and the mixture of those 2, we will do what we can on the costs front, and we'll work our way through as much of the interest headwind as possible.
Your next question comes from the line of Joseph Dickerson at Jefferies.
I guess if you consider the early alerts and that a fair amount of that has come from aviation, quite a few of the carriers are likely to get government support. So I'm just wondering how that informs putting those on early alert and what type of charges you would expect to take in the future given that government support, or whether your assumptions on provisioning assume such support.And then the other aspect, and I think this was asked once, but I've got a question which is what type of range can we expect on impairments for the full year based on different assumptions? One of your competitors gave a very helpful range for the full year yesterday.
Bill, do you want to pick up the one on sort of aviation and government support and the like?
Sure. Look, as I mentioned earlier, there is an assumption that -- or an expectation that governments will support key parts of the aviation sector. Some countries will be willing and able to do that and others may not. But it's appropriate from our perspective to put it all on early alert because until those programs are firmed up, we don't know. So that, obviously, is one of the big uncertainties in terms of impairment outlook for this year. I'd say the other one is oil prices. If oil prices manage to sustain a level below $20 for a long period of time, that would have an incremental material adverse impact on our earnings, as it would anybody with a meaningful oil and gas portfolio. The question we ask ourselves is in our expected scenarios where there is some government support and where there is -- for the aviation sector and there is some stabilizing of the oil price, not at high levels but at levels above where we are right now, does that allow us to continue to operate within our capital guidance range of 13% to 14%? And the answer is yes. We would expect to be able to operate in that range in a very adverse scenario, but one where nevertheless things are, in some cases, either more clear or better than they are today. Obviously, if we had a different outcome and the support was not forthcoming for the aviation sector or the oil price was structurally much lower, we could have a more material drawdown and could take us below the 13%. I would note that the -- we've done pretty well in the recent Bank of England stress test with peak-to-trough drawdowns that are much more substantial than anything that we're looking at here, either certainly looking at where we are right now or what we could look at prospectively. So we have very few concerns that we would not be able to continue to operate safe and soundly and fully even in a much more adverse scenario. But clearly, the outcome is going to be a function of some things that we can speculate on right now but that we certainly don't know with any certainty.
Yes. And on the impairment, we've not put a guidance range on it. I think it's just a quite complicated one at the moment. Back to a previous point, if you can tell us how fast lockdowns will recede and how much government support will cut in, it becomes an easier question to answer. I suppose what was once 2/3 of the charge in the first quarter was in the corporate space and 1/3 in the retail space. Retail tends to be a bit more predictable. Obviously, there will be some reduction in some elements of consumer spend over the next few months whilst things settle down. Corporate tends to be a bit more lumpy by its nature. Macroeconomic variables, there's been quite a big catch-up in the first quarter. Whether there's a little bit more to go in the second quarter, time will tell. But certainly, I think the bigger part of that, we've bitten off in the first quarter. So it's a difficult one to know. I hope as we go through the next 1 and 2 quarters, that the answer to that will become clearer.
Your next question comes from the line of Aman Rakkar at Barclays.
Just a couple of questions, actually. Could you give us -- I don't know if I've missed it, but regarding the IFRS 9 assumptions, kind of what are you looking for unemployment in some of your key markets? I guess if you were to just call out one, what would you currently be looking for in Hong Kong? I guess the reason I'm asking, it kind of follows on from the last question. A lot of the focus of questions so far has been about at-risk corporate sectors, but are you guys -- when you're looking through the remainder of the year, are you guys thinking about the risks that manifest from unsecured consumer credit? And potentially, when could that start to materialize? I guess specifically in relation to the overlay that you've taken in Q1, presumably, it doesn't capture too much of that. So we're not capturing kind of stage integration. Is that a reasonable kind of observation and inference? The second is IFRS 9. So I was just kind of interested in your expectations for transitional relief benefit that you might get this year. I know the Basel Committee, a few weeks ago, basically said that banks could potentially ask to use 100% IFRS 9 transitional relief to kind of offset the effect of the excess provisions you're taking under IFRS 9. I guess there's not much of that potential benefit that you will have realized in Q1. But as you think across the remainder of the year, do you expect that you'll get 100% IFRS 9 transitional relief? And if so, when do you think you might kind of get confirmation of that?
Yes. Okay. Let's sort of try and take those in order. Roughly, roughly 2/3 of our balance sheet is corporate and 1/3 is retail. A high proportion, 80-plus percent, of our retail book is secured and that's very much largely mortgage-secured with good loan-to-values. So the actual proportion of the total book that is in the unsecured space is relatively quite low in the overall scheme of things. We are, with a number of countries, either allowing or making payment holidays become available. We are clearly very focused upon that space, and we are -- in the top-up that we made, the management top-up, we have made some allowance for things like that in the first quarter numbers.In terms of unemployment, we haven't -- I think Slide 9 has given you GDP. We haven't encumbered you too much. But I think unemployed at Hong Kong sort of circa the 5% level, something of that sort of order. And obviously, every country, we have fed with equivalent data through multiple of our markets.In terms of the -- how the transitional relief works, in fact, we get most of that benefit from the expected loss shortfall upon the implementation essentially of IFRS 9 in the first place. So we sort of get it but not because of the transitional relief.
Okay. So if you were to take additional upfront charges and overlays in upcoming quarters because the macroeconomic scenarios deteriorate or your judgment dictates that you should take a top-up, do you not expect to get material IFRS 9 transitional relief from that? Because you wouldn't basically have incurred that under IAS 39.
Well, let me put it another way. If we have further charges up to a certain level, they will be sheltered from CET1, but for a number of reasons than the transitional relief. So the net effect is that up to a point, we are CET1-protected.
There are no further questions. Andy, please continue.
Okay. Just a couple of comments from me, and then Bill probably just to close. I mean, I think all things being equal, that actually the first quarter was quite resilient and a testimony to a lot of the things we've done over the last 4 or 5 years. Let's hope that as Northern Asia economies start to come out of this earlier, that, that will be beneficial to us. And over the balance of the year, we'll see other parts of the world hopefully become more optimistic than they are at the moment. Bill, any thoughts from you just in closing?
Just thank you for taking the time to understand us and I'd just put -- I know it's a very busy morning. And the bottom line from my perspective is that operationally, we feel very good about where we are and how we performed and extremely cautious about the environment and the outlook. And we'll continue to be very focused on both.
Good. Thank you all very much.
That does conclude the conference for today. Thank you for participating. You may all disconnect.