Standard Bank Group’s results for the 2019 financial year (FY19) are underpinned by the growth and resilience of its core operations. The constrained macroeconomic environment, particularly in South Africa, and ICBCS losses impacted the group’s results.
The group’s banking operations reported headline earnings up 5% on the prior year (FY18) to R27.2 billion and a return on equity (ROE) of 18.1%. This result was driven by quality top line growth and continued positive operating leverage. While Liberty contributed positively to group earnings growth, the group’s other banking interests were a drag. Group headline earnings were R28.2 billion, an increase of 1% on FY18, and ROE was 16.8%. The group’s capital position remained strong, with a common equity tier 1 capital adequacy (CET1) ratio of 14.0%. A final dividend of 540 cents per share has been declared. Total dividends for the year were 2% higher than the prior year.
Good balance sheet growth underpinned net interest income (NII), while non-interest revenue (NIR) was supported by growth in transaction volumes and trading revenues. Credit impairment charges increased off a low base in the prior year. A strong focus on cost containment continued throughout the year resulting in below inflation cost growth and positive jaws of 113 basis points (bps).
After adjusting for currency impacts, group headline earnings grew 3% on a constant currency (CCY) basis. Africa Regions’ headline earnings grew 5% and contributed 31% to banking headline earnings in FY19. The top six contributors to Africa Regions’ headline earnings were Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.
In 2019, the US-China trade dispute, increase in geopolitical risks and weaker domestic demand across multiple economies dampened global economic growth. Weaker demand suppressed inflation across local and international markets which prompted central banks to reduce policy rates or adopt growth-supportive monetary policy stances.
Sub-Saharan Africa’s economic growth forecasts were revised downwards consecutively. Headwinds on the external front, alongside the slow pace of reforms, severe weather-related shocks, as well as an increase in security and political tensions in parts of the region, weighed on economic activity. Growth in South and Central Africa continued to be negatively impacted by the poor South African environment. Despite being below expectations, growth in East Africa remained robust and growth in West Africa was aided by a modest recovery in Nigeria. Inflation rates trended downwards, providing scope for rate cuts in Ghana, Nigeria, Mozambique and Namibia. The Angolan, Ghanaian, Zambian and Zimbabwean currencies devalued relative to the ZAR. The regulatory environment continued to evolve, for example cash-reserving and loan-to-deposit requirements in Nigeria and policy uncertainty remained a constraint.
In South Africa, load-shedding undermined growth prospects, the pace of policy progress and reform was slow, and Eskom’s fiscal concerns remained unresolved. Business and consumer confidence levels remained low, constraining spending and demand for credit. The economy shrank 1.4% in 4Q19 which resulted in a second recession in less than two years. Real GDP growth for the year was 0.2%.
Loans and advances
Gross loans and advances to customers grew 6% from 31 December 2018 to 31 December 2019, of which Personal and Business Banking’s (PBB) advances to customers grew 6% and Corporate and Investment Banking’s (CIB), 7%. Provisions held against loans and advances declined year on year following the write-off of certain stage 3 corporate exposures which were provided for in the prior year.
Within PBB South Africa, the mortgage loan portfolio grew in line with the market. Our new mortgage offering continued to gain traction and represented 66% of our registrations in December 2019. Average monthly mortgage disbursements reached R4.1 billion, 11% higher than FY18. The investment in our retail vehicle and asset finance (VAF) capability led to a 7% increase in motor disbursements year on year and positive retail market share gains. The personal unsecured lending portfolio grew 9% to R44.8 billion, supported by our online origination capability. The business lending portfolio grew 7% year on year, aligned with the introduction of new product offerings and a refreshed approach to credit limit application.
PBB Africa Regions’ gross loans to customers grew 7% to R78.0 billion, driven by disbursements into our client ecosystems supported by digital lending. Business lending remains the largest contributor, at roughly a third of the portfolio, followed closely by mortgages, primarily in Namibia, and thereafter personal unsecured lending.
Robust new business disbursements in retail 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. The stage 3 exposure ratio reflects a moderate increase year on year, primarily related to protracted legal processes in mortgages. The PBB stage 3 coverage ratio remained largely aligned with 2018 levels.
In CIB, gross loans and advances to customers grew 7%, underpinned by growth in exposures to clients in the Industrials, Oil and Gas, Sovereign and Public Sector and Power and Infrastructure sectors. Underlying growth in CIB gross loans and advances to customers, including high quality liquid assets, were 8%. In the South African portfolio, a deterioration of risk grades resulted in an increase in stage 1 and 2 provisions, while work-outs led to a decline in stage 3 provisions and a decline in stage 3 coverage ratio. In Africa Regions, provisions were raised for certain guarantees and working capital facilities in the South and Central and East Regions. The main sectors impacted were Consumer, Power and Infrastructure and Mining and Metals.
Deposits and funding
Deposits from customers grew 6% year on year to R1.3 trillion. PBB customer deposits grew 4%, with stronger growth in savings and investment products as customers switched to higher yielding products. Growth in PBB Africa Regions’ deposits from customers was underpinned by continued strong current and savings account inflows. Our offshore operations in the Isle of Man and Jersey continued to provide the group with access to hard currency funding, totalling GBP5.2 billion as at 31 December 2019. CIB customer deposits grew 7%, driven by client wins and greater share of wallet in South Africa and a growing franchise in Africa Regions.
During FY19, the group successfully raised R52 billion of longer-term funding. The group also issued a USD400 million tier 2 Eurobond, R1.0 billion tier 2 capital and R1.9 billion additional tier 1 notes, the proceeds of which were invested in The Standard Bank of South Africa. All tier 1 and tier 2 instruments were Basel III compliant.
Revenue grew 5% to R110.5 billion. NII grew 6% to R62.9 billion, while NIR grew 4% to R47.5 billion. NII growth was driven by strong loan and deposit growth across the portfolio. Net interest margin (NIM) decreased marginally to 431bps (FY18: 438bps). Lower average rates in some of the Africa Regions markets, higher cash reserving costs in Nigeria, and a competitive loan pricing environment in South Africa and Nigeria (following the introduction of the minimum loan-to-deposit ratio) contributed negatively to margin. This was partially offset by stronger growth in higher-margin unsecured lending (vs secured) and in Africa Regions (vs South Africa), and effective margin management in our offshore operations.
NIR growth was driven by electronic banking fees, card volumes and trading revenue. Regulatory restrictions on fees in Africa Regions and competitive pressure in South Africa weighed on account transaction fees. We enhanced our digital capabilities to enable retail clients to open savings accounts and originate loans online. These were well received by our clients as evidenced by our online origination and disbursements. Asset-based fees grew on the back of CIB balance sheet growth. Knowledge-based fee growth was muted. Increased volatility in 2H19 aided revenues from fixed income, currencies and equities.
Credit impairment charges
Credit impairment charges increased 23%, off a low base in the prior year. The group credit loss ratio (CLR) increased to 68bps (FY18: 56bps), just below the group’s through-the-cycle CLR range of 70bps – 100bps. Higher year on year post write-off recoveries in card had a favourable impact on impairment charges.
Cost growth was well contained, resulting in continued positive operating leverage. Costs increased 4% year on year and jaws were a positive 113bps. A decline in headcount supported slower growth in staff costs. Other operating expenses increased 6%. IT costs grew 17% reflecting higher software licensing and maintenance costs, an increase in cloud-related costs and an increase in outsourcing. 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% (FY18: 13.5%) and a total capital adequacy ratio of 16.7% (FY18: 16.0%). The CET1 ratio, including the full IFRS 9 transitional impact, was 13.8%.
The group’s liquidity position remained strong and within approved risk appetite and tolerance limits. The group’s fourth quarter average Basel III liquidity coverage ratio amounted to 138%, 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 6% to R16.5 billion, underpinned by continued balance sheet and customer franchise growth. NII increased 6% to R44.1 billion, supported by balance sheet growth. A favourable change in product mix and higher average rates in South Africa supported an increase in margin. This was largely offset by lower average interest rates across the Africa Regions portfolio and the impact of IFRS 16 (NII was R231 million lower and operating expenses was R103 million lower). This resulted in a NIM of 601bps, 3bps higher than in FY18. Active cost containment enabled the business to absorb the branch reconfiguration costs and deliver positive jaws of 210bps for the year. Credit impairment charges increased 17% to R6.4 billion (FY18: R5.4 billion) and the CLR increased to 89bps (FY18: 81bps). ROE improved to 22.4% from 21.9% in FY18.
PBB South Africa headline earnings grew 2% year on year to R14.0 billion, reflecting an improvement on 1H19 when reported earnings were flat period on period. Customer attrition evidenced in the first half of the year was largely stemmed during the second half of the year. Customers were increasingly price sensitive due to the difficult macroeconomic environment and continued to reflect a preference for digital channels. In response to changing client behaviour and expectations, we launched, among others, a low cost, fully digital transactional account, digitised many of the key branch activities and further enhanced the value-added services available on our digital channels. While account transaction fees remained under pressure, as clients increasingly transacted on our digital channels, NIR was supplemented by electronic banking fees and alternative revenue streams.
In South Africa, our customers continued to migrate to our digital platforms, in particular the SBG mobile app. SBG mobile app active users increased 55% to 2.0 million and the value of transactions executed via our mobile banking platform increased 46% to R382 billion. Instant Money, our digital wallet and money transfer platform, continued to gain traction with customers’ transactional volumes increased 18% to 26.7 million, and turnover increased 22% to R20.2 billion. The reconfiguration of traditional channels in South Africa resulted in a 16% decline in the number of branches (to 528 branches) and 15% decline in branch square meterage (to 311 000 sqm). Employees impacted by the targeted restructure were provided with an opportunity to apply for existing vacancies, broad-based training and appropriate severance packages. Less than 100 employees were formally retrenched.
PBB Africa Regions’ headline earnings reached R1 246 million (FY18: R816 million), driven by ongoing customer acquisition, increased transactional activity levels, as well as strong balance sheet growth. Income grew despite declining interest rates and regulatory impacts, most notably in Eswatini, Lesotho, Nigeria and Zambia.
PBB Africa Regions active customers increased by 8% to 5.4 million, driven by client acquisitions across all 14 countries. Transaction volumes increased 18% driven by digital channels which increased 21% to over 340 million transactions. Branch transactions declined 11% in line with our strategy to reduce physical channel volumes and drive digitisation. Improved digital tools for clients and staff have enabled the group to service more clients with reduced headcount. While the branch footprint has remained fairly stable, branch staff has declined 15% since 2017. Digital transaction volumes increased to 92% of total volumes (FY18: 90%).
Wealth International grew headline earnings 25% to R1.3 billion. The performance was driven by ongoing client acquisition, effective balance sheet optimisation and positive endowment from higher rates in the US and UK.
Corporate and investment banking
CIB’s headline earnings grew 5% (7% in CCY) to R11.8 billion. The operating environment remained challenging and market conditions, volatile and fluid. Against this difficult backdrop, CIB continued to deliver the innovative, bespoke solutions our clients need and have come to expect. As a business with on-the-ground operations across 20 countries in Africa, and operations in five financial hubs outside of Africa, it remains uniquely positioned to connect global multinational companies to the African markets and African businesses to international markets.
Strong growth in both average assets and liabilities in Transactional Products and Services (TPS) and double-digit average asset growth in Investment Banking (IB) supported revenues. Underlying client revenues grew 7% driven by the Financial Institutions, Mining and Metals, Power and Infrastructure and Telecoms, Media and Technology sectors. CIB’s CLR to customers was 40bps (FY18: 20bps), at the lower end of CIB’s through-the-cycle range of 40bps – 60bps. In CIB South Africa, a deterioration of corporate risk quality drove year on year increases in stage 1 and 2 credit impairment charges. In contrast, stage 3 charges declined following the non-recurrence of prior year impairment charges in the retail and construction sectors. In CIB Africa Regions, credit impairment charges increased year on year driven by impairments in the East and South and Central regions. Cost growth of 3% led to positive jaws of 128bps and an improvement in cost-to-income ratio to 53.7% (FY18: 54.4%). Strong growth in IB assets in Africa Regions and portfolio ratings downgrades in South Africa in late 2018 drove higher capital demand, which was a drag on ROE. ROE declined to 18.1% (FY18: 19.3%).
Global Markets (GM) earnings grew 15% to R4.9 billion, underpinned by a recovery in 2H19 on the back of increased volatility, accelerated growth in the prime brokerage business and credit-linked note issuances. While lower volumes and margins negatively impacted the SA FX and Cash Equities desks, the business maintained its market shares.
IB earnings grew 12% to R3.9 billion. The business saw strong average balance sheet growth, across both local and foreign currency loans. Strong competition for South African investment grade debt and higher cash reserving requirements in Nigeria negatively impacted margins. Balance sheet growth outweighed margin squeeze to deliver robust NII growth of 8%. Subdued market activity adversely impacted the Equity Capital Markets and Advisory businesses and fees. The work done in 1H19 to rightsize the international operations supported slower cost growth in 2H19. Well managed credit and costs boosted an otherwise subdued revenue performance to deliver strong earnings growth.
TPS earnings declined 13% to R3.0 billion, negatively impacted by higher credit impairment charges. While TPS’s FY19 earnings performance was disappointing, the underlying business continued to win clients and increase its share of wallet in both asset and liability gathering. Stage 3 credit impairment charges increased due to the difficult macroenvironment and the write-off of certain corporate exposures in South Africa and East Africa.
Central and other
This segment includes costs associated with corporate functions and the group’s treasury and capital requirements that have not otherwise been allocated to the business units. In FY19, the segment costs amounted to R1.1 billion. We continue to proactively manage the costs recorded in the centre.
Other banking interests
Despite the tough operating conditions in Argentina, ICBC Argentina (ICBCA) continued its strong performance in FY19. In August 2019, the group exercised its option to sell its 20% stake in ICBCA to ICBC. The group ceased recognising profits from the stake from 1 September 2019. Headline earnings from the group’s 20% stake amounted to R583 million for the eight months to 31 August 2019. The sale is subject to Chinese regulatory approvals and we expect to reach completion in 1H20.
ICBCS recorded a disappointing set of results in FY19. The loss of USD248 million consisted of a single client loss of USD198 million, USD30 million related to restructuring costs and USD20 million of operating losses related to the business operations. The latter was driven by lower revenues on fixed income and currency trading due to subdued market sentiment. The group’s 40% share of the losses equated to R1.4 billion. Further to this, in September 2019, SBG recognised a USD163 million impairment of its stake in ICBCS (reducing the carrying value from USD383 million to USD220 million at that date). This equated to a R2.4 billion impairment which is reported outside of headline earnings. ICBC and the group, as shareholders, have had robust conversations and made meaningful progress with ICBCS management with regards to how best to put the business on a path to sustainable profitability. These discussions resulted in a number of management actions in ICBCS, including significant headcount reductions and a reduction by ICBCS of business lines and locations in FY19. Closer integration into and cooperation with the ICBC group is an important element of the plan to achieve sustainable profit.
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 is making progress towards rebuilding a competitive and sustainable business. While the focus on new business volumes continues, normalised operating earnings improved 10% year on year. In FY19, the Shareholder Investment Portfolio benefited from improved investment market returns, particularly in respect of foreign and local equities. Liberty headline earnings grew 23% to R3.3 billion. The group’s share of earnings amounted to R1.9 billion, up 16% on the prior year.
Global economic growth is expected to remain slow and downside risks persist. These risks include, amongst others, the impact of the COVID-19 outbreak, a rise in geopolitical and social unrest, and further weather-related disasters. In contrast, subdued inflation and accommodative monetary policy should support financial conditions and, in turn, emerging market flows. Continued strong growth in East Africa and an ongoing moderate recovery in West Africa should favour sub-Saharan Africa’s economic growth prospects. Conditions are expected to remain difficult in Malawi, Zambia and Zimbabwe. While the impact of COVID-19 on global growth remains unknown, it is clear that a China slowdown and a disruption of Sino-Africa trade will negatively impact the trade balances of sub-Saharan African commodity exporters and be inflationary for importers.
In South Africa, while there were some positive governance and growth-related developments in 2019, there is still much more to be done. The constraints to growth and productivity are structural and the reforms required are well understood. In the absence of tangible progress, we foresee sustained economic weakness, driven by insufficient electricity supply and low confidence. Demand, and in turn inflation, is likely to remain low. Real GDP growth is currently expected to be 0.4% and 1.2% in 2020 and 2021 respectively.
The macroeconomic outlook in the countries in which we operate is uncertain and the operating environment is expected to remain challenging. Trading conditions are expected to remain difficult, regulatory-imposed constraints and technological change are set to stay, and competition will continue to intensify. Our top priority in 2020 is to increase our competitiveness by improving client experience through the seamless delivery of relevant and personalised financial solutions to our clients, in a secure manner, via their channel of choice. We will also continue to exercise tight cost discipline and seek to allocate resources efficiently and in support of our strategy to build a future-ready Standard Bank Group. Balance sheet growth in Africa Regions should continue to outpace that in South Africa and NII should outpace NIR. The CLR should remain at the lower end of our target range of 70bps – 100bps. While we expect revenue headwinds, we will continue to manage costs to deliver positive jaws. ROE is expected to remain below, but move closer to, the lower end of our 18% – 20% target range in 2020. Over the medium term, we remain committed to delivering sustainable earnings growth and an ROE in our 18% – 20% target range.
We are a purpose-driven organisation: Africa is our home, we drive her growth. We recognise that the role we play, as the gate-keeper and facilitator of financial flows into and across Africa, is much bigger than profits alone. Our long-term sustainability is inextricably linked to the social and economic upliftment of the people and societies in the countries in which we operate. Accordingly, we will continue to contribute positively to Africa’s social, economic and environmental development.