Despite higher profits and lower bad loans, StanChart shares fell 3.5 percent in London as shareholders focused on the bank's higher expenses from investments aimed at improving performance.

StanChart CEO Bill Winters played down the impact of tensions between China and the United States. The world's two largest economies have already imposed tariffs on $34 billion worth of each other's imports.

"Our direct exposure to increasing tariffs between the U.S. and China is minimal, less than 1 percent of income," StanChart CEO Bill Winters said on a conference call with reporters.

"It's not a disastrous thing for Standard Chartered ... but if the trade war escalates it could be more disruptive for the global economy and our clients," he added.

Some of StanChart's customers have slowed cross-border investment decisions because of the escalating trade tensions, Winters said, adding that would continue until there is clarity on the breadth and size of tariffs between the two countries.

Pretax profit for StanChart rose to $2.35 billion in the first half of the year, from $1.75 billion in the same period last year, the lender said in a regulatory filing on Tuesday.

COST CONTROL

The bank's costs grew 7 percent in the first half versus a year ago, as it invested in digital initiatives to improve businesses including wealth management and retail banking, indicating the path to achieving its return on equity (ROE) target would be tough.

The bank said its ROE, a key measure of profitability, was 6.7 percent in the first half, against a medium-term target of 8 percent that analysts have described as 'modest' when global peers are making 10 percent or more.

"In the context of such subdued return expectations,

we struggle to see overly material near-term upside for the shares," said Ian Gordon, analyst at Investec Bank in London.

Much of the bank's increased costs have come from its efforts to improve financial crime prevention after it suffered a series of penalties and regulatory investigations between 2012 and 2014 following lapses in anti-money laundering and sanctions compliance controls.

The bank last week has named Tracey McDermott as group head of compliance after the previous holder of the left the bank in June following an investigation into his behavior.

StanChart has increased spending on financial crime compliance ten times since 2012, Winters said, as it deals with the fallout from past misconduct that landed it with a deferred prosecution agreement with U.S. authorities that was extended earlier this month.

(Reporting by Alun John and Lawrence White; Editing by Himani Sarkar and Keith Weir)

By Alun John and Lawrence White