2017 Interim Results Summary

Group results

Standard Bank Group’s (SBG or the group) results for the period ended 30 June 2017 were robust, underpinned by our universal client offering, geographic diversity and increasingly digital capabilities. Headline earnings per share grew by 11% to 756 cents supporting an interim dividend per share of 400 cents, up 18% period on period. Group credit impairments and operating costs were well managed, resulting in an overall decline in the credit loss ratio from 105bps to 96bps and positive jaws of 1.0%. Group ROE improved from 14.4% to 16.1%. As at 30 June 2017, the group’s capital position remained strong with a common equity tier 1 (CET1) ratio of 13.7% (1H16: 13.2%).

Currency movements adversely impacted the group’s reported results, reducing group headline earnings by 7% period on period. On a constant currency (CCY) basis, group headline earnings grew by 19%, supported by Africa Regions which grew by 46%. Despite the dilution impact from ZAR strength, Africa Regions still increased its contribution to banking headline earnings to 29% and contributed positively to group HEPS growth and ROE. The top five contributors to Africa Regions' headline earnings were Angola, Ghana, Mozambique, Nigeria and Uganda, which together represent c.60% of the Africa Regions’ headline earnings. Against a backdrop of adverse macro-economic developments, policy uncertainty and rating agency downgrades The Standard Bank of South Africa’s (SBSA) asset and income growth were constrained. Despite these headwinds, SBSA demonstrated its resilience and grew its headline earnings 18% on the back of good cost management and muted credit impairment charges.

Operating environment

In 1H17, global growth prospects firmed, supported by post-election optimism in the US and better than expected growth in Europe and China. More specifically, China grew 6.9% in 2Q17, matching the robust momentum seen in 1Q17. Despite better momentum, the stubbornly low inflation levels in key developed markets and slower than expected rate hikes provided support to emerging market (EM) flows. EM markets, including South Africa, have benefited from the EM risk-on trade, providing broad support to funding costs and currencies. This is best illustrated by the fact that despite entering a technical recession in 1Q17 and being downgraded by three rating agencies during the period, SA funding costs remained broadly flat and the ZAR strengthened on average against the major currencies period on period. The ZAR also appreciated relative to all our key African Regions' currencies over the same period; most notably the NGN, GHS and MZN.

The challenges facing South Africa, namely low growth, high unemployment and high levels of inequality, are well ventilated. During the period, despite business confidence levels remaining low overall, certain parts of the economy did grow. The moderate recovery in commodity prices provided some support to miners. As the drought abated in certain parts of the country, it provided much needed respite to parts of the agricultural sector. Consumers had an opportunity to catch their breath as rates remained flat and inflation trended downwards. Inflation re-entered the SARB’s 3% - 6% target range in April and remained in the range for the rest of the period. Underlying credit growth remained lacklustre, supported by low single digit real corporate growth whilst household credit continued to contract, albeit at a slower rate.

Across the 19 African countries in which we operate outside of South Africa, the dynamics continue to be diverse. In the oil-export reliant countries on the west coast, such as Nigeria and Angola, prospects improved as oil recovered from lows in 1H16. In contrast, foreign currency liquidity constraints continued for most of the period, depressing market activity. East Africa suffered the effects of a drought. In Kenya specifically, the combination of the drought, the effects of the regulatory caps and floors introduced in September 2016 and pre- election anxiety resulted in a slowdown in credit growth. Mozambique’s currency, although weaker than in 1H16, stabilised in 1H17.

The combination of higher rates, higher cash balances on the back of foreign currency liquidity constraints, flight to quality and improved macros provided support for the Africa Regions’ performance.

Revenue

Total income declined by 1% period on period to R49 336 million, driven primarily by weaker non-interest revenue (NIR) which decreased 7%. Net interest income (NII) increased 4% underpinned by net interest margin (NIM) expansion. NIM expanded 22bps to 394bps driven by higher average rates, loan pricing and funding margin. Total income grew by 8% in CCY, supported by 11% growth in NII and 4% growth in NIR.

NIR was impacted negatively by trading revenue which declined 19% in ZAR and 8% in CCY. Relatively lower volatility in SA and in various Africa Regions' markets reduced the opportunity to generate revenue. Despite recording strong growth in Africa Regions (up 23% in CCY) and 4% growth in SBSA, group net fee and commission income declined 2% period on period due to currency headwinds. Other revenue was broadly flat.

Credit impairment charges

Declines in early arrears and non-performing loans (NPL) underpinned the decline in credit impairment charges period on period, while coverage levels remained broadly flat overall. The credit loss ratio decreased marginally from 105bps to 96bps. In PBB, declines in early arrears, and portfolio provisions, were driven by continued improvements in collections, including early interventions. PBB’s specific impairment charges increased across card, personal unsecured and business lending. Business lending charges increased following the migration of a few larger exposures to NPLs in the period. Improvements in mortgages, as poorer vintages continue to roll-off, and vehicle and asset finance (VAF), as the quality of the book improved, resulted in declines in the credit loss ratios for those portfolios. CIB's impairment charges declined from elevated levels in the prior period, in particular, Africa Regions’ portfolio impairments. CIB SA’s portfolio impairment charges increased period on period. Coverage ratios increased across card debtors, personal unsecured and business lending as well as CIB portfolios in the current period.

Operating expenses

Operating expenses declined 2% period on period driven by tight control on headcount, focus on discretionary spend and favourable currency tailwinds. On a CCY basis, operating costs grew by 7%. Despite the challenging revenue environment, the group managed to deliver positive jaws, in ZAR and CCY, in line with our strategic focus to reduce the cost-to-income ratio. The cost-to-income ratio declined from 56.8% to 56.3%.

In 1H16 the group recorded an operational loss of R300 million related to a fraud incident in Japan which did not recur in 1H17. IT function spend decreased 3% in ZAR, as the R261 million increase in IT amortisation charge was more than offset by decreases in other IT spend. Certain USD licensing and maintenance costs were also lower once translated into ZAR.

Loans and advances

Gross loans and advances to customers grew 1% period on period, supported by PBB which grew by 3% to R598 billion while CIB declined by 3% to R359 billion. On a CCY basis, Africa Regions' PBB grew 7% and CIB declined 5%. As at 30 June 2017, Africa Regions represented c.9% of the PBB portfolio and c.12% of the CIB portfolio. Although the PBB SA portfolio recorded low single digit growth overall, business lending grew 15% period on period in line with our strategic focus to grow in this business. On average, mortgage and VAF disbursements in SA amounted to more than R5.7 billion a month. CIB loans recorded a decline of 3% in ZAR and 1% in CCY basis, as trends seen in 2H16 continued into 1H17.

Capital, funding and liquidity

The group remains well capitalised with a CET1 ratio of 13.7% (1H16: 13.2%) and a total capital adequacy ratio of 16.2% (1H16: 15.9%). The group’s capital position remains strong and in excess of the group’s target ranges. In line with the group’s objective to optimise its capital stack, SBG successfully executed its inaugural Basel III compliant Additional Tier 1 (AT1) bond issue in March 2017, raising R1.7 billion. The group will issue further AT1 subject to pricing and market conditions. The group continues to monitor a number of developments locally and internationally which could negatively impact the group’s capital ratios, most pertinent of which are IFRS 9 and the finalisation of the Basel III reforms. The IFRS 9 impact will be moderated by the removal of the capital deduction relating to the existing shortfall of credit provisions to expected losses, which amounted to R2.0 billion as at 30 June 2017.

Deposits and current accounts from customers increased 4% period on period, and 8% in CCY. Retail-priced deposits increased 6% in ZAR and 12% in CCY. The group remains focused on sourcing stable deposits from a diverse range of sources. The group’s established, on-the- ground franchises across our African footprint provide locally sourced deposits complemented by the USD and GBP funding raised through the group’s offshore operations in Isle of Man and Jersey.

During the period, the group’s liquidity position remained strong and within approved risk appetite and tolerance limits. Market cost of liquidity widened marginally during the period. As at 30 June 2017 the group’s quarterly average Basel III liquidity coverage ratio (LCR) amounted to 116%, exceeding the minimum phased-in Basel III LCR requirement of 80%. The group is appropriately positioned to meet the minimum Basel III net stable funding ratio requirements on 1 January 2018.







Overview of business unit performance

Personal & Business Banking

PBB’s headline earnings grew 11% to R6.1 billion and ROE improved from 16.5% to 17.7%. On a CCY basis, headline earnings grew 15%. Credit impairments were flat on the back of improved collection strategies. PBB headcount declined 1% driven by PBB SA. PBB continues to grow the client base in its target segments, namely prestige and private banking as well as business banking.

PBB SA’s earnings grew by 13% to R5.7 billion. Total income grew 6% supported by target customer growth and product yield. Operating expenses grew 5%, delivering positive jaws. In line with our clear focus on client experience, staff are being re-skilled, branch formats revised and rationalised and digital capabilities enhanced. Headcount, branch numbers as well as branch size, all recorded declines in the period. Credit impairments declined 6% period on period. Ongoing improvements in the mortgage and VAF performance were partially offset by a reduction in post write-off recoveries and a deterioration in card and business lending. Wealth recorded an improvement in the product mix and pricing in the brokerage and underwriting business as well as good asset growth. Wealth income was impacted by losses associated with the storm and fire events in the Western Cape.

Results outside SA were impacted by relative currency depreciation. To better reflect the underlying trends, the commentary below refers to movements in the PBB Africa Regions and PBB International businesses on a constant currency basis, unless indicated otherwise.

PBB Africa Regions continues to gain momentum. Customer loans and deposits grew by 7% and 12% respectively, supporting income growth of 11%. This growth was underpinned by a combination of an expanding active customer base in targeted countries and an increasing adoption of digital banking. Active PBB customers increased by more than 10% in each of the following countries: Kenya, Nigeria, Botswana, Mozambique and Tanzania. NII was supported by positive endowment in Nigeria and Mozambique on cash management, savings and investment portfolios. Regulatory changes in Swaziland, Zimbabwe and Malawi impacted fees. In 1H17 the credit loss ratio increased by c.44bps to 264bps, driven predominantly by increased charges in Nigeria following an accelerated write-off of NPLs. Measured in ZAR, PBB Africa Regions earnings were materially impacted by the depreciation of the NGN period on period.

PBB International’s headline earnings grew 41% supported by an 18% increase in the deposit base in GBP, margin expansion and growth in the trust business.

Collaboration with Liberty has been enhanced, with a focus on improving alignment of product development and sales initiatives. Opportunities to better leverage the respective customer bases both in SA and in Africa Regions continue to be pursued.

Digital adoption continued to gain traction. PBB SA recorded close on 500 million mobile transactions, up 55% relative to the prior period while ATM and teller volumes were down 5% and 15% respectively. Africa Regions recorded 100 million digital transactions, up 47% period on period.

Corporate & Investment Banking

CIB’s headline earnings grew 10% to R5.3 billion and ROE improved from 17.8% to 21.4%. On a CCY basis, headline earnings grew 19% supported by strong revenue growth, better credit performance and tight management of costs. CIB recorded targeted asset growth in the Consumer, Financial Institutions and Real Estate sectors. Due to the impact of currency, all growth percentages reported hereafter are on a CCY basis.

NII grew 18% supported by higher customer deposits, an improved mix towards current accounts as well as positive endowment. Fees increased 18% following improvements in client activity across the debt and equity capital markets business. Trading revenue declined by 5% due to a combination of compressed margins and lower volumes as a result of low market volatility. Total income grew 10% to R17.4 billion underpinned by CIB’s diversified and sustainable franchise, reflecting the successful deepening of client relationships. Tightly managed headcount and discretionary spend assisted in containing cost growth. Operating costs increased 3%, delivering positive jaws of 7% and a lower cost-to-income ratio of 52.2%.

The credit loss ratio to customers declined from 71bps in the prior period to 45bps, as prior period impairments on specific names in SA, Nigeria and Ghana were not repeated.

Global markets headline earnings declined 6% to R2.0 billion. Income growth was subdued at 2% due to lower client activity and reduced market volatility across various countries, including SA. Liquidity shortages and regulatory constraints impacted trading revenues in Nigeria, Mozambique and Uganda.

Transactional products and services headline earnings grew 67% to R1.9 billion. Total income was 20% higher than the prior period due to continued good deposit growth and positive endowment underpinned by new clients gained. Impairment charges declined from elevated levels in the prior year. Costs were well contained.

Investment banking headline earnings increased 18% to R1.4 billion. Total income increased 10%, mainly as a result of strong fee and commission income growth from certain landmark deals concluded in the period. Despite a subdued macro environment, loans and advances grew, supporting NII growth. The quality of the book improved, which was reflected in lower margins and NII growth. Impairment charges declined and cost discipline delivered positive jaws for the period.

Central & other

This segment includes costs associated with corporate activities and servicing the group capital requirements, namely the preference shares. The net headline loss for the period was broadly in line with the prior period.

Other banking interests

Headline earnings from other banking interests increased from R2 million in 1H16 to R212 million in 1H17. The headline earnings contribution from the group’s 40% stake in ICBCS amounted to R48 million, a significant improvement on the R356 million loss recorded in the prior period. The headline earnings contribution from the group’s 20% stake in ICBC Argentina declined 54% from R358 million to R164 million on the back of lower trading revenue, a weaker macro-economic environment in Argentina, higher impairments and a weaker Argentinian Peso.

Liberty

The financial results reported are the consolidated results of the group’s 56% investment in Liberty, adjusted for the group’s shares held by Liberty for the benefit of Liberty policyholders and treated as treasury shares in the group’s consolidated accounts. Liberty’s normalised headline earnings for the period decreased 30% to R1.3 billion, driven, in particular, by continued pressure in new business margins affecting Individual Arrangements and the performance of STANLIB. Liberty’s IFRS headline earnings, post the impact of BEE preference shares and the Liberty Two Degrees listed Real Estate Investment Trust accounting mismatch, was 15% lower at R1.5 billion. Shareholders are referred to the full Liberty announcement dated 4 August 2017 for further detail. The impact of Liberty’s deemed treasury shares period on period amounted to R139 million. Liberty’s IFRS headline earnings attributable to the group, adjusted for the impact of Liberty’s deemed treasury shares, was R882 million, down slightly from the R886 million recorded in the prior period.

Prospects

Looking ahead, stronger global growth and firmer commodity prices should provide some support in 2H17. In July, the IMF reaffirmed its outlook for global growth of 3.5% in 2017 and 3.6% in 2018. Global trade is expected to grow faster. The EM trajectory is also favourable underpinned by supportive policy in China as well as broader infrastructure spend in Asia. In sub-Saharan Africa, the macro environment is expected to continue to improve and interest rates to trend down as inflation moderates. The IMF expects sub-Saharan Africa’s GDP growth to recover in 2017 and 2018, from a low of 1.3% in 2016 to 2.7% and 3.5% respectively. More specifically, the GDP growth across our Africa Regions franchises is expected to accelerate to 3.3% in West, 3.9% in South and Central and 5.9% in East in 2018. Nigeria’s economy is expected to recover from a 1.6% contraction in 2016 to positive growth of 0.8% in 2017 and accelerate to 1.9% in 2018. In terms of South Africa’s outlook, the expectations of a recovery in 2017 have moderated and the current SARB forecast is for 0.5% growth for the year. The threat of further rating agency downgrades remains. Declining interest rates, in SA and in some of the countries in our Africa Regions, will be a headwind in 2H17.

In the period, we have successfully embedded the five value drivers of client focus, employee engagement, risk and conduct, financial outcomes and social, economic and environmental (SEE) impact in the businesses. They underpin our decisions and drive the group’s shared value outcomes.

Across our CIB franchise, we remain committed to partnering our clients on their growth journeys and delivering exceptional client experiences. We bank clients, not economies, and will continue to seek out pockets of growth. In August 2017, we opened our doors in Abidjan, Ivory Coast, the biggest economy in the West African Economic and Monetary Union (WAEMU) and one of the fastest growing economies on the continent, providing our clients with on-the-ground CIB capabilities and access to the broader WAEMU region. In Africa Regions, we continue to develop our PBB franchises in a consciously systematic manner; banking the employees, suppliers and customers of our corporate clients. Our strategy of banking the ecosystems surrounding our clients continues to gain traction.

We will continue to invest in our digital capabilities and the re-skilling of our employees, with the primary objective of improving the client experience. We recognise that we are not where we want to be in terms of customer satisfaction and are making changes to ensure that we improve this going forward. Our core banking replacement journey in SA and Africa Regions remains on track to close by the end of the year. Although it has been a long and costly exercise, we remain of the opinion that it provides us with the resilient platform required to compete in a digital world. Our innovation initiatives extend across analytics, robotics, cyber security and blockchain. We will continue to seek opportunities to successfully collaborate with FinTechs and support relevant IT skills development initiatives.

In a complex business environment, we rely on the people across our network to navigate the challenges each business faces and make appropriate decisions in line with strategic priorities. Doing the right business the right way remains a priority. We take swift action against those who are proved to be at odds with this. Regulatory change, both locally and internationally, has continued apace and appears unlikely to slow. We continue to engage with policymakers and regulators across our footprint to broker appropriately balanced outcomes. In South Africa specifically, we will continue to actively engage in the debates around the banking sector’s role in promoting transformation and inclusive growth, and on specific issues such as the importance of the SARB’s mandate and independence.

As underpinned by our purpose of driving Africa’s growth, our view is that a financial institution’s role in society is broader than providing superior returns to shareholders. In terms of our SEE impact, we have a responsibility to facilitate growth in the markets in which we operate, improve financial literacy and access, and develop local markets in a responsible and sustainable way.

We remain committed to our medium term targets of delivering through-the-cycle HEPS growth and ROE within our target range of 15% - 18%. We are focused on the levers available to deliver on our targets, including positive jaws, efficient capital management and improving returns from PBB Africa Regions.



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