Standard Bank Group’s African-focused strategy has delivered continued headline earnings growth, driven by the strong underlying momentum in our core operations.
For the period ended 30 June 2019 (1H19) headline earnings were R13.4 billion, an increase of 6% on the prior period (1H18), and return on equity (ROE) was 16.2%. The group’s capital position remained strong, with a common equity tier 1 (CET1) ratio of 14.0%, which supported the interim dividend of 454 cents per share, an increase of 6% on the prior period.
Banking activities recorded strong growth in headline earnings, increasing 10% to R12.8 billion. ROE was 17.5% in line with the prior corresponding period. Strong balance sheet growth period on period supported net interest income (NII). Pressure on fees and continued customer migration to digital channels dampened non-interest revenue (NIR) growth. Credit impairment charges increased from a low base in 1H18. Stringent cost management resulted in positive jaws of 109 basis point (bps).
After adjusting for currency impacts, in particular, the weaker South African Rand (ZAR), group headline earnings grew 5% on a constant currency (CCY) basis. On the back of continued strong earnings growth, Africa Regions’ (AR) contribution to banking headline earnings grew to 34% from 32% in 1H18. The top six contributors to AR’s headline earnings were Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.
The persistent uncertainty associated with the US-China trade war and the threat of a global slow-down weighed on markets in 1H19. A change in the US interest rate outlook provided some support to Emerging Markets flows in 2Q19, as investors searched for yield.
In sub-Saharan Africa (SSA), inflation decelerated, currencies stabilised, and interest rates moderated. Inflation averaged 9% across the markets in which the group operates. Although Angola and Nigeria recorded inflation in the double digits, period-on-period inflation eased in both countries. In Angola, the continued depreciation of the Angolan Kwanza (AOA) kept inflation at elevated levels. Zimbabwe transitioned to the Real-Time Gross Settlement (RTGS) Dollar as its primary currency in February 2019. Since its introduction, the RTGS has devalued significantly resulting in a spike in inflation. Electricity shortages further exacerbated a difficult operating environment.
In South Africa, ongoing uncertainty weighed on confidence, spending and investment. In 1Q19 GDP declined 3.2%. Despite a weaker average ZAR in 1H19, inflation remained well anchored, allowing for an interest rate cut in July 2019.
Loans and advances
Gross loans and advances to customers grew 9% from 30 June 2018 to 30 June 2019, of which Personal & Business Banking’s (PBB) advances to customers grew 5% and Corporate & Investment Banking’s (CIB), 14%. The portfolios continued to be managed well, resulting in a marginal decline in provisions period on period.
Within PBB SA, the mortgage loan portfolio grew in line with the market. Average monthly mortgage disbursements equated to more than R3.7 billion, 17% higher than 1H18. The investment in our Vehicle and asset finance (VAF) capability led to an increase in motor disbursements of 18%, to R17 billion, period on period and positive market share gains. The personal unsecured lending portfolio grew 6% supported by the successful launch of our online origination capability to existing customers in February 2019. In June 2019 online disbursements represented 23% of the total personal unsecured disbursements. The business lending portfolio grew at a slower pace of 4%, as low levels of business confidence translated into lower business lending demand.
PBB AR’s loans to customers grew 17% in CCY to R70 billion, underpinned by the successful execution of its business-led strategy. Business lending remains the largest contributor, at roughly a third of the portfolio, followed closely by mortgages, primarily in Namibia, and personal unsecured lending.
Robust new business disbursements in VAF and personal unsecured lending led to higher stage 1 and 2 provisions relative to December 2018, partially offset by model enhancements in mortgages and early arrears collection capability improvements in the card and personal unsecured businesses. While the NPL ratio remained stable period on period, the protracted legal processes in mortgages and challenging property environment resulted in an increase in the mortgage lending NPL ratio. NPL coverage showed a marginal reduction on the back of changes in mix and loss expectations.
In CIB, Investment Banking’s (IB) momentum continued from 2018, resulting in double digit loan book growth from 30 June 2018 to 30 June 2019. The business originated R92 billion in loans in 1H19, supporting SA corporate expansion into Africa and clients in East and West Africa. Underlying growth in CIB gross loans and advances to customers, including HQLA, was 16%. CIB provisions declined 7% due to lower stage 3 provisions. The main sectors impacted were Consumer, Power & Infrastructure (P&I) and Telecoms, Media & Technology (TMT). In AR, impairments were raised in East Africa in the P&I and Consumer sectors.
Deposits and funding
Deposits from customers grew 11% period on period to R1.3 trillion, supported by 15% growth in CIB deposits. CIB’s deposit growth was driven by client wins and greater share of wallet in SA and a growing franchise in AR. PBB customer deposits grew 5%, with stronger growth in savings and investment products as customers switched to higher yielding product offerings. SBSA’s retail deposit market share declined marginally following the roll-off of fixed deposits raised in a 2017 campaign. Growth in PBB AR’s deposits from customers, (CCY, 16%), was underpinned by continued strong current and savings account inflows in 1H19 (CCY, 17%). Our offshore operations in the Isle of Man and Jersey continued to provide the group with access to hard currency funding, totalling GBP5 billion as at 30 June 2019.
During 1H19, the group successfully raised R20.3 billion of longer-term funding. The group also issued a USD400 million tier II Eurobond, R1.0 billion tier II capital and R1.9 billion Additional tier 1 notes, the proceeds of which were invested in SBSA.
Group revenue grew 7% to R54.3 billion. NII grew 9% to R31.3 billion, whilst NIR grew 4% to R23.0 billion. NII growth was supported by strong loan and deposit growth across the portfolio. Net interest margin (NIM) decreased marginally to 440 bps (1H18, 443 bps). Stronger growth in higher-margin unsecured lending, AR growing loans and advances faster than SA, positive endowment and effective margin management in our offshore operations helped buffer margins from the negative impact of lower average rates in some of the AR markets, higher cash reserving costs in Nigeria and a competitive South African loan pricing environment.
NIR growth was driven by strong underlying volumes; in particular, new loan originations and electronic banking, card and FX transactions. As clients continued to shift their transactional banking from traditional to digital platforms, growth in electronic banking fees continued to outpace account transaction fees. As we continue to digitise our current capabilities, we expect the contribution from electronic banking to continue to grow. In addition, the roll-out of new digital products will drive new revenue streams. CIB balance sheet growth supported IB-related asset-based fees, whilst knowledge-based fee growth was muted. Trading revenue growth remained subdued, particularly in SA, constrained by low levels of market activity.
Credit impairment charges
Credit impairment charges increased 20%, off a low base in the prior period, to R4.2 billion. The group credit loss ratio (CLR) increased to 76 bps (1H18, 62 bps), entering the group’s revised through-the-cycle CLR range of 70 – 100 bps. Higher post write-off recoveries reduced impairment charges.
The strong focus on cost continued into 1H19. The group contained growth in operating expenses to 6% period on period and delivered positive jaws of 109 bps. This was a good result considering the customer experience initiatives and staff re-skilling and upskilling programmes under way, as well as the costs associated with the branch reconfiguration exercise in SA. Staff costs grew 5% and other operating expenses, 8%. IT costs grew 12%, on the back of higher software licensing and maintenance costs, to support increased capacity, and a lower capitalisation of costs. The adoption of IFRS 16 (accounting standard on leases), gave rise to an increase in depreciation and decrease in premises costs.
The group maintained strong capital adequacy ratios, with an IFRS 9 phased-in CET1 ratio of 14.0% (1H18, 13.8%) and a total capital adequacy ratio of 17.3% (1H18, 16.2%). The group raised tier II funding in 1H19 ahead of redemptions in 2H19, which resulted in an increase in tier II and total capital.
The group’s liquidity position remained strong and within approved risk appetite and tolerance limits. The group’s second quarter average Basel III liquidity coverage ratio amounted to 124%, exceeding the minimum phased-in regulatory requirement of 100%. The group maintained its net stable funding ratio in excess of the 100% regulatory requirement.
Overview of business unit performance
Personal & Business Banking
PBB’s headline earnings grew 8% to R7.2 billion, underpinned by balance sheet and customer franchise growth. NII increased 9% to R21.7 billion, as balance sheet growth offset the impact of IFRS 16. Active cost containment resulted in positive jaws of 86 bps. Credit impairment charges increased 12% to R3.7 billion (1H18, R3.3 billion) and the CLR increased marginally to 105 bps (1H18, 99 bps). ROE improved to 19.9% from 19.6% for the same period last year.
PBB SA delivered headline earnings of R6.1 billion, flat period on period, reflecting the impact of the branch reconfiguration costs combined with the continued difficult macroeconomic backdrop and an increasingly competitive environment. In the six months to June 2019, the number of branches in SA declined by 98 to 531 branches and square meterage declined 14% to approximately 314 000 square metres.
In 1H19, the business digitised key branch activities (EAP limits, debit order reversals, real-time clearance, pin view and statements older than six months) and launched a number of new products (MyMo, My360, SimplyBlu and BizFlex) and product enhancements (tiered-priced mortgages, Shyft for non-Standard Bank customers, personal lending and current account online origination), aimed at improving customer experience, driving retention and attracting new-to-bank customers.
Customers continued to migrate to our digital platforms, in particular, the SBG mobile app. SBG mobile app active users increased 55% to 1.8 million and the value of transactions executed via our mobile banking increased 47% to R173 billion. Instant Money, our digital wallet and money transfer platform, continued to gain traction with customers; transactional volumes increased 20% to 12.6 million, and turnover increased 27% to R9.3 billion.
PBB AR more than doubled its headline earnings once again to R471 million (1H18, R211 million), driven by ongoing customer acquisition, increased activity levels, as well as growth in loans and deposits. The business was negatively impacted by declining rates and regulatory pressure on fees, most notably in Angola, Lesotho, Malawi, Nigeria and Zambia.
PBB AR active customers increased to 5.2 million, driven by client acquisition in Ghana, Malawi, Nigeria, Uganda and Zimbabwe. Transaction volumes increased 18% driven by digital channels which increased 23%, while branch transactions declined 15%. Digital transaction volumes increased to 92% of total volumes. A growing customer base, combined with strong take up of mobile banking, resulted in an increase in mobile banking transaction volumes of 57% to 36.9 million transactions. The group’s market leading digital solutions, e.g. remote onboarding, digital and paperless channel fulfilment (Moby Banker), digital card/wallet container (SlydePay) and instant unsecured personal loans (launched in eSwatini and Zambia), assisted in driving customer and balance sheet growth.
Wealth International produced an exceptional result, growing headline earnings 54% (42% in CCY) to R664 million. The performance was driven by ongoing client acquisition, effective margin optimisation and positive endowment from higher rates in the US and UK.
Corporate & Investment Banking
CIB delivered headline earnings of R6.2 billion, an increase of 9% (6% in CCY). This is a pleasing result considering the subdued market activity levels in key markets, the difficult business environment in SA and the legislative changes and currency-related headwinds faced in some of the AR markets. CIB’s strong underlying operational performance is a testament to its growing client franchise, effective credit management and continued cost control. Revenue increased by 7% (5% in CCY). Impairment charges increased off a low base in 1H18 resulting in a CLR to customers of 40 bps (1H18, 4 bps), on the lower end of CIB’s through-the-cycle range of 40 – 60 bps. Cost growth of 5% (3% in CCY) lead to positive jaws of 156 bps and an improvement in cost-to-income ratio to 52.3% (1H18, 53.1%). During the period, CIB closed the Hong Kong office and took steps to rightsize the London office. Higher capital demand, on the back of strong growth in IB assets, higher capital requirements in Global Markets (GM) and portfolio ratings downgrades in SA, resulted in a dip in ROE to 19.3% (1H18, 20.5%).
Client revenues increased 12% (10% in CCY), underpinned by strong underlying client activities. In 1H19, client revenues from large domestic corporates grew 24%, driven by SA, West and East Africa, whilst multinational corporates grew 7%. From a sector perspective, client revenue growth was driven by client activities in the Financial Institutions, Oil & Gas (O&G), TMT and Sovereign & Public Sector. At a regional level, client revenues in SA grew 9% and in AR, 15%.
Transactional Products and Services (TPS) delivered a solid set of results with headline earnings up 11% to R1.8 billion (1H18, R1.6 billion). Strong growth in loans and deposits, driven by client acquisitions and increased share of wallet, more than offset some of the headwinds from declining interest rates, the depreciation of the AOA and higher cash reserving requirements in Nigeria.
IB headline earnings increased 10% to R2.0 billion (1H18, R1.9 billion). Revenue growth was driven by double digit average loan book and NII growth and fees from participation in several landmark deals and client activity in the O&G and Telecoms & Media sectors. Impairment charges increased, but remained well below historic levels.
Despite a difficult start to the year, GM remains a sizable business that contributed R2.3 billion of headline earnings in the period. The Equities, Interest Rate Trading and Structured Solutions desks experienced headwinds, in line with markets businesses globally. The AR GM businesses performed well, providing some respite to those in SA.
Central & other
This segment includes costs associated with corporate functions, as well as the group’s treasury and capital requirements, and central hedging activities. In 1H19, the segment recorded a cost of R564 million, 19% less than the prior period as costs previously held centrally were allocated to business. We continue to proactively manage the costs recorded in the centre.
Other banking interests
Other banking interests recorded a headline loss of R320 million. ICBC Standard Bank Plc (ICBCS) recorded a loss of USD129.5 million in the period. This disappointing result comprises two primary components i) an operating loss of USD19.5 million and ii) a provision of USD110 million arising from a single client relationship. The operating loss should be viewed in the context of the difficult environment in which the business operated in the period. The single-client loss arose as a result of Philadelphia Energy Solutions (PES) operations being severely disrupted after an industrial incident, which in turn impacted its ability to fulfil its contractual obligations. PES has since filed for bankruptcy and the matter is in the courts. Standard Bank is comfortable that ICBCS is following due process and ICBCS is keeping Standard Bank updated as appropriate. The group’s 40% share of ICBCS’ loss equated to R752 million.
ICBC Argentina continued to perform well, delivering a headline earnings contribution from the group’s 20% stake of R432 million (1H18, R202 million).
The financial results reported are the consolidated results of the group’s 56% investment in Liberty, adjusted for Standard Bank Group shares held by Liberty for the benefit of Liberty policyholders which are deemed to be treasury shares in the group’s consolidated accounts.
Liberty continued to make progress against its strategic objectives and delivered a pleasing improvement in its normalised operating earnings, up 14% to R1.1 billion. Liberty’s shareholder investment portfolio returns improved significantly, supported by better market conditions. Liberty’s new business margin improved. ROE and return on embedded value moved up into their respective target bands and capital levels remained robust. Liberty’s IFRS headline earnings, after the adjustments for the impact of the BEE preference share income and the Liberty Two Degrees listed Real Estate Investment Trust accounting mismatch, increased 31% on the prior period, to R2.0 billion. Investors are referred to the full Liberty announcement dated 1 August 2019 for further detail.
Headline earnings attributable to the group, adjusted down by R248 million for the impact of deemed treasury shares, was R875 million, 2% higher than in 1H18.
Whilst flagging global growth and the US-China trade war remain key risks to the global macro-economic outlook, SSA is expected to remain on its recovery path in 2019 and into 2020. Higher consumption and looser monetary policy will provide support. Regional real GDP is expected to grow 3.5% in 2019 and stabilise at around 4% over the medium term.
East Africa should continue to see robust growth. West Africa is expected to experience a sustained pick up, driven by a recovery in Angola and Nigeria and continued strong growth in Ghana. Mozambique’s economic recovery should continue, largely shrugging off the impact of the cyclones earlier in the year. Zambia’s growth is expected to slow to 3% but recover again into 2020. The environment in Zimbabwe is expected to remain constrained.
On 26 July 2019, Fitch downgraded SA’s outlook from stable to negative, citing the country’s deteriorating fiscal metrics; more specifically, the poor revenue outlook and the growing burden of Eskom on the fiscus. Given SA’s fiscal constraints and weak consumer and business confidence, consumption and investment are likely to remain subdued. Against a backdrop of a deteriorating fiscal position, increasing unemployment and slower than expected reform, GDP growth expectations have been reduced to 0.6% for 2019.
Whilst there may be headwinds in certain markets, the diversity of our businesses and breadth of our footprint provide us with some shelter. In addition, our on-the-ground presence and deep understanding of the macro, political and regulatory dynamics in each of these markets, enable the group to continue to support our customers and our employees, whilst managing risk appropriately. We expect balance sheet growth in AR to continue to outpace that in SA, NII to outpace NIR and the CLR to remain at the lower end of our new target range of 70 – 100 bps. We remain committed to driving operational efficiencies, whilst continuing to invest judiciously to deliver a future-ready Standard Bank Group. We remain committed to our medium-term targets of delivering sustainable earnings growth and an ROE in our 18% – 20% target range.
Recognising that the group’s sustainability, over the medium to long term, is inextricably linked to that of all our stakeholders, we remain committed to our shared value model and steadfast in delivering on our purpose of driving Africa’s growth.
The 1H19 results, including comparatives for 1H18, where applicable, together with any forward-looking information in this announcement, have not been reviewed and reported on by the group’s external auditors.