Standard Bank Group’s ongoing resilience is underpinned by our diverse client base and varied revenue streams. Our strong capital position enabled us to provide substantial support our clients, employees and our communities.
Standard Bank Group’s (SBG or the group) results for the twelve months ended 31 December 2020 (FY20) reflect the very difficult operating environment. Covid-19 placed considerable strain on our retail, business and corporate clients, particularly in South Africa. The group’s strong capital position enabled us to respond quickly and significantly.
The group provided substantial support to our clients, employees and our communities. Cumulative client relief of R129 billion was provided to individuals and businesses and R25 billion to corporate clients. In addition, the group expanded and enhanced various digital service solutions to enable our clients to continue to transact and our employees to continue to operate productively during enforced lockdowns. Pleasingly these efforts were reflected in improvements in client satisfaction and retention, and growth in the underlying client franchise. The group’s ongoing resilience is underpinned by our diverse client base and varied revenue streams.
Group headline earnings were R15.9 billion, a decline of 43% on the prior year (FY19) and ROE was 8.9%. Banking operations headline earnings were R15.7 billion, down 42% on FY19, and ROE was 9.6%. In the first six months of the year (1H20), the group’s results were negatively impacted by lower activity levels and higher credit charges. In the second six months of the year (2H20), activity recovered, however, credit charges remained elevated and the negative impact of the interest rate cuts in 1H20 became more pronounced. Overall banking revenues declined marginally (down 2%). Costs were well contained (up 1%). This led to negative jaws of 306 basis points (bps) and a cost-to-income ratio of 58.2%. Credit impairment charges increased to R20.6 billion, 2.6 times those reported in FY19.
Despite a significant increase in risk-weighted assets, the group’s common equity tier 1 capital adequacy (CET1) ratio remained robust at 13.3% as at 31 December 2020. A final dividend of 240 cents per share has been declared, representing a payout ratio of 24% on FY20 headline earnings.
The group’s diverse client base, geographic footprint and business mix cushioned a weak performance in South Africa. The Standard Bank of South Africa Limited’s headline earnings declined 72%. Africa Regions grew headline earnings 9% and 4% in constant currency (CCY). Africa Region’s contribution to FY20 banking headline earnings increased to 58%. Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda remained the top six contributors to Africa Regions’ headline earnings.
2020 was dominated by the Covid-19 virus. Globally, a significant number of lives were lost and businesses and jobs were destroyed. The International Monetary Fund (IMF) estimates that the global economy contracted 3.5%, sub-Saharan Africa 2.6% and South Africa 7.5%. In parallel, certain social, technological and environmental trends accelerated.
In sub-Saharan Africa, while the health impact was less severe, assisted by the population age profile, the socioeconomic implications were marked. Capacity to implement large-scale policy packages was limited. Weaker sovereigns were exposed, particularly in Malawi, Zambia and Zimbabwe. Furthermore, West Africa was negatively impacted by low oil prices. The more diversified East African economies fared better, and general resource economies were buoyed by the faster China recovery.
In South Africa, the pandemic stretched health systems to the limit and stringent lockdowns significantly disrupted economic activity. The economy contracted and shed jobs (particularly informal and low-income jobs) placing additional upward pressure on an already high unemployment level. Fiscal and monetary policy actions provided some support. Interest rates were cut by 300 bps. Temporary social grants and funding support schemes were introduced. The economic contraction and pursuant government responses placed additional strain on the country’s macroeconomic and fiscal position, which resulted in successive rating agency downgrades.
Loans and advances
Gross loans and advances to customers grew 4% from 31 December 2019 to 31 December 2020. Personal and Business Banking (PBB) grew 7%, boosted by a recovery in demand in 2H20. Corporate and Investment Banking (CIB) grew 1% year on year as strong growth in 1H20 subsided by 31 December 2020 as clients managed their debt levels down. Provisions held increased 42% year on year and 8% relative to 30 June 2020. Loans classified as stage 3 increased from 3.9% as at 31 December 2019 to 4.6% as at 30 June 2020 and 5.5% as at 31 December 2020. Stage 3 coverage was 48%, 46% and 46% respectively. Stage 1 and 2 provisions increased 32% year on year but were flat relative to levels recorded as at 30 June 2020. Stage 3 provisions increased 47% year on year and 13% relative to 30 June 2020.
Within PBB South Africa (PBB SA), lockdowns severely constrained origination in 2Q20. By the beginning of 2H20, restrictions had been partially lifted and registration offices had reopened. Disbursements recovered as the backlog was cleared and new applications were processed. Mortgage disbursements reached record levels, fuelled by low interest rates. Personal unsecured and business lending showed moderate growth. The latter includes R7.1 billion of drawn exposures relating to the South African Covid-19 loan guarantee scheme (loans contracted under the scheme total R7.4 billion). Affordability criteria have been tightened and new business growth continues to be closely monitored. Low business confidence continues to impact business lending demand.
By 31 December 2020, Covid-19 client relief provided by PBB SA had reduced to R19 billion, representing 3% of the PBB SA portfolio. Mortgages and Card represented 69% and 23% of the remaining active client relief portfolio respectively. In keeping with the group’s promise to deepen client relationships and support them through the crisis, payment holiday extensions were provided to select clients.
PBB Africa Regions (PBB AR) gross loans and advances grew 8% to R84 billion, supported by continued focus on client ecosystem origination, digital client onboarding and digital disbursements. By 31 December 2020, the PBB AR Covid-19 client relief provided had reduced to R2 billion, representing 2% of the PBB AR portfolio.
PBB provisions held against loans and advances increased 38% year on year, with most of the increase in South Africa. In PBB AR, increases were driven principally by provisions raised in Ghana, Kenya, Namibia, Tanzania and Uganda.
Against a fiercely competitive backdrop, particularly in South Africa, CIB continued to win mandates and originate client loans in FY20. Cumulative Covid-19 relief provided to clients, in the form of increased liquidity facilities, loan restructurings, covenant relaxations and payment holidays, equated to R24.8 billion. Provisions increased 52% year on year following a deterioration of corporate risk grades and higher stage 3 loans. Stage 3 provisions increased as additional clients rolled into stage 3, particularly in the Oil & Gas and Power & Infrastructure sectors, and as the outlook for pre-existing stage 3 exposures deteriorated. The stage 3 ratio and stage 3 coverage ratio increased relative to 31 December 2019 and 30 June 2020.
Deposits and funding
Deposits from customers grew 14% year on year to R1.5 trillion. Customers remained cautious and lockdowns restricted activity resulting in a build-up of deposits. Foreign currency balances also increased on the back of a weaker South African Rand. PBB customer deposits grew 15%, with strong growth in savings and investment products as well as call deposits. Strong current and savings account inflows in PBB AR continued. Our offshore operations in the Isle of Man and Jersey continued to provide the group with access to hard currency funding. Deposits increased to GBP5.6 billion as at 31 December 2020 (GBP5.2 billion as at 31 December 2019). CIB customer deposits grew 14%, driven by call and cash management deposits.
Banking activities revenue declined 2% year on year. Net interest income (NII) declined 2% as strong average balance sheet growth was more than offset by margin compression. The significant interest rates cuts across our markets drove a negative endowment impact from lower interest earned on capital and current accounts (net of marginal hedge activity) of 27 bps and a negative base rate impact from lower NII earned of 20 bps. NIM fell year on year from 431 bps to 370 bps. Non-interest revenue (NIR) declined 1%. Pressure on fee income was largely offset by a strong trading performance (particularly in 1H20). Lower fee income was driven by constrained consumer activity levels and transactional volumes, fee waivers and moratoriums, and an accelerated switch to lower fee-generating digital channels. Elevated market volatility drove increased client activity and, in turn, trading revenue growth.
Knowledge-based fees were supported by higher advisory fees from corporate deals in South Africa and International. Higher other fee and commission revenue was largely driven by growth in fees earned from the group’s pension fund management business in Nigeria. Negative revaluations on the equity investment portfolio were a drag. Gross written premium growth was offset by higher credit life and funeral claims.
Credit impairment charges
Credit impairment charges increased to R20.6 billion, 2.6 times that of FY19. The increase was driven by the year-on-year deterioration in customer risk profiles and forward-looking assumptions, additional charges associated with the remaining client relief portfolio in PBB, and corporate and sovereign risk downgrades. In addition, due to the enduring uncertainty and associated forecast risk, an additional R500 million provision was raised and held centrally. The group credit loss ratio (CLR) increased to 151 bps (FY19: 68 bps).
Operating expense growth was well contained at 1%. Staff costs were down 1% as annual salary increases were offset by lower headcount and lower performance-related incentives. Other costs increased 4% driven primarily by higher IT costs, professional fees and communication costs. The group purposefully continued developing and rolling out innovative digital solutions to improve service efficiency and client experience. In addition, the group incurred Covid-19-related business continuity costs during the year, including employee work-from-home costs. Jaws were negative 306 bps and the cost-to-income ratio increased to 58.2% (FY19: 56.4%).
The deterioration in the environment fed into internal sovereign ratings and client risk grades and, in turn, into higher risk-weighted assets (RWA). Despite a 12% increase in RWA, the group maintained strong capital adequacy ratios. As at 31 December 2020, the IFRS 9 phased-in CET1 ratio was 13.3% (FY19: 14.0%) and total capital adequacy ratio was 16.1% (FY19: 16.7%). The CET1 ratio, including the full IFRS 9 transitional impact, was 13.2%. From 1 January 2021, there will be no transitional impact.
Despite the volatile and constrained liquidity environment, the group maintained sufficient liquidity to meet risk appetite limits. Proactive engagement across treasury, risk and business ensured that our clients’ liquidity needs were appropriately planned for and timeously met. The group’s Basel III liquidity coverage and net stable funding ratios remained in excess of the regulatory requirements of 80% and 100% respectively.
During FY20, the group successfully raised R52.8 billion of long-term funding, R1.5 billion of Basel III compliant Additional tier 1 capital, and R7.0 billion of Basel III compliant tier 2 capital.
Overview of business unit performance
Personal & Business Banking
In difficult economic conditions, PBB revenues declined 4% to R70.1 billion. Significant negative endowment continued to put pressure on interest margins and more than offset balance sheet growth. NIM declined 63 bps to 537 bps. NIR declined 3% as a recovery in transaction and trade flows in 2H20 supported an improvement in fees relative to 1H20. Across PBB Group, active customer numbers grew to 14.8 million. While this growth was largely sourced within the Africa Regions (active clients grew 7% to 5.4 million), the South African active client base grew 1.1% from June 2020 to December 2020.
Lockdown constraints accelerated digital adoption. Customers gained confidence and comfort in using the digital alternatives and new features provided. Digital transaction volumes increased 29% in South Africa, and comprised 99% of total transactions, while in Africa Regions volumes increased 27% and comprised 95% of total transactions. Physical transactions have not fully recovered to pre-Covid-19 levels. Branch transactions in South Africa and Africa Regions declined 44% and 29% respectively, year on year. Operating expenses were well contained. Savings derived from the branch reconfiguration concluded in 1H19 provided scope for continued investment in client experience and digitisation workstreams. PBB also incurred additional Covid-19 specific expenses, for example, safety measures for front-line staff and customers. Against the difficult revenue environment, PBB jaws were negative 630 bps and the cost-to-income ratio increased to 63.2% (FY19: 59.3%). Lockdowns disrupted businesses and impacted client liquidity positions. The temporary client relief granted provided some respite, but the delayed economic recovery was evidenced in customer repayment profiles and the requirement for client relief extensions. This, combined with the deterioration in macroeconomic assumptions and proactive provisioning, drove higher provisions and credit impairment charges. Credit impairment charges increased to R15.9 billion (FY19: R6.4 billion), 2.5 times FY19 levels. CLR increased to 213 bps (FY19: 89 bps). PBB headline earnings declined 61% to R6.4 billion and ROE declined to 8.9%.
PBB SA was impacted by negative endowment, elevated impairments and lower transactional volumes partially offset by recovering asset growth and higher deposits. Following the relaxation in lockdown restrictions, the 2H20 performance was supported by improved transactional flows, new client acquisitions, and increased customer lending demand. While every effort was made to keep branches open, some did close temporarily where health and capacity concerns were identified. Despite the pandemic-related disruptions, PBB SA released several new digital capabilities and product enhancements. In addition, system resilience and security improved relative to the prior year. This remains key to driving digital adoption. Digital active customers increased 15% to 3.0 million.
PBB AR recorded good revenue growth. Ongoing customer acquisition and digital origination supported balance sheet, NII and NIR growth. Negative endowment compressed margins. Lower turnover, trade and transactional levels placed a strain on fees in 1H20. 2H20 saw turnover and transactional volumes improve, however, similar to SA, physical channel transactions have not returned to pre-Covid-19 levels. NIR was further supported by higher insurance, asset management and foreign currency service fees as well as higher point of representation fees linked to the larger active client base. Below-inflation cost growth supported positive jaws. Credit impairment charges increased across most countries.
Wealth International revenues were negatively impacted by lower interest rates (USD and GBP), structural balance sheet requirements (post the South African sovereign downgrade), and lower transactional activity due to Covid-19-related lockdowns. This was partially offset by higher fees from higher client foreign exchange transaction volumes, client lending growth and continued underlying client growth. Costs were well contained and credit charges remained insignificant due to the high quality nature of the client base as well as the underlying portfolio.
Corporate & Investment Banking
CIB delivered a sound performance. Headline earnings were R10.6 billion, down 6% year on year. Client, sector and regional diversification helped cushion the impact of the pandemic. A strong performance by Africa Regions was offset by weak results in South Africa. Pre-provision operating profit increased 9% relative to the prior year, with revenues up 5% and cost growth limited to 2%. CIB delivered positive jaws of 294 bps and the cost-to-income ratio declined to 53.3%. Credit impairment charges were 2.6 times that of FY19, reflective of the economic conditions and market stress. CIB’s CLR to customers was 80 bps (FY19: 40 bps). ROE was 15.7% (FY19: 19.0%), impacted by lower earnings and higher capital utilisation.
CIB focused on providing tailored solutions to meet the complex and evolving liquidity, capital and risk management requirements of its clients. Client activity in the Consumer, Telecom & Media and Oil & Gas sectors supported client revenues. In contrast, the difficult operating environment, together with disruptions in operations and trade, negatively impacted the Industrial (hospitality and automotive) and Mining sectors. The Sustainable Finance team continued to lead the development of environmentally and socially responsible practices on the continent. In FY20, the team facilitated several landmark deals in this area for clients as well as for the group.
Global Markets led the way with revenue up 28% on the back of strong risk management and increased client activity in volatile markets. While the West Africa performance was particularly strong, the businesses in South and Central Africa also recorded good revenue growth. The solid revenue growth resulted in an increase in headline earnings of 61% to R7.0 billion.
Transactional Products & Services revenues were down 8% year on year, as negative endowment more than offset the increase in average loans and advances and deposits. Revenues were also negatively impacted by regulatory headwinds, particularly in Kenya (digital fee restrictions) and Nigeria (cash reserving and loan-to-deposit requirements). The performance was further hampered by a 51% increase in credit impairment charges, resulting in a decrease in headline earnings of 37% to R2.0 billion.
Investment Banking was the business most severely impacted by the economic effects of Covid-19. Revenues decreased 11%, negatively impacted by margin compression and significant equity investment valuation declines in South Africa. Credit impairment charges were 4.5 times higher than in FY19. As a result, headline earnings decreased 59% to R1.6 billion.
Central & other
This segment includes costs associated with corporate functions and the group’s treasury and capital requirements that have not been otherwise allocated to the business units. The segment costs, including the R500 million (pre-tax) central credit provision, amounted to R1 248 million (FY19: R611 million).
Other banking interests
ICBC Standard Bank (ICBCS) recorded a profit of USD125 million in FY20 (FY19: loss of USD248 million). The turnaround was driven by the non-repeat of a single client loss in FY19, revenues earned on the back of the market volatility and an insurance recovery (USD37 million). The group’s 40% share of ICBCS’s earnings equated to R881 million.
The group completed the sale of its 20% stake in ICBC Argentina to the Industrial and Commercial Bank of China (ICBC) in June 2020. The impact thereof was commented on in the group’s FY20 Interim Results.
The financial results reported are the consolidated results of the group’s 57% 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.
In FY20, Liberty’s performance was negatively impacted by lower earnings across its insurance business areas as well as weak performance in the Shareholders’ Investment Portfolio and LibFin Markets. Liberty’s South African asset management business, STANLIB South Africa, reported flat earnings for the period and an increase in net external third-party client cash inflows. Liberty recognised a Covid-19-related pandemic post-tax reserve of R2.2 billion and reported a headline loss of R1.5 billion (FY19: earnings of R3.3 billion). After adjusting for treasury shares, the group’s share of the loss amounted to R0.7 billion (FY19: earnings of R1.9 billion).
Profit attributable to ordinary shareholders declined 51% to R12.4 billion. The difference between headline earnings and profit attributable can be ascribed to the sale of ICBC Argentina (R2.0 billion) and the impairment of certain IT intangible assets (R2.2 billion) post an internal review.
In 2021, global gross domestic product (GDP) is expected to rebound, underpinned by a vaccine-fuelled improvement in confidence, demand and trade. A world awash with liquidity and stimulus should drive global risk-on sentiment and Emerging Market inflows.
The global recovery is, however, likely to be bumpy and very uneven across different regions. The IMF forecast for sub-Saharan Africa GDP growth is 3.2% (January 2021). South Africa and Nigeria are expected to grow at 4.6% and 0.9% respectively (SBG Research, February 2021). While initiatives to source vaccines for Africa are gaining momentum, some African countries may lack the resources and capabilities to roll them out efficiently and effectively. This is likely to delay an African recovery until 2H21 and into 2022. Further waves of infection and renewed restrictions are likely and risk delaying the recovery further.
South Africa’s recovery is expected to be multi-year and, like elsewhere, will be closely linked to the effectiveness of its vaccine rollout programme. Inflation is expected to remain within the SARB’s target range and interest rates at current low levels for the duration of 2021. The latter should support credit growth. Governance and structural reform are expected to continue, albeit at a slow pace. Job creation and inclusive growth are key to driving a more favourable long-term outlook. The extension of the Covid-relief grants introduced in 2020 and the government employment programme should provide some support to low income households and in turn, household expenditure. A recovery in household spending is expected to gain momentum in late 2021, followed by capital investment in 2022. Fiscal consolidation and energy supply constraints remain key risks.
The recovery will bring opportunities to extend the group’s balance sheet, facilitate business and consumer activity, and continue to build the franchise. While margins are expected to be lower (stabilising at or around 2H20 levels), balance sheet growth should provide an offset and support NII growth. Higher activity levels should support NIR growth, however this remains at risk from further lockdown disruptions. FY20 trading revenue is a high base. Prolonged downturns will place additional pressure on weaker countries, sectors and clients, particularly leveraged corporates and certain South African state-owned entities. Credit impairment charges are expected to decline from FY20 levels, however, CLR is expected to remain above the group’s historic through-the-cycle range of 70-100 bps. To deliver on increasingly digital demands, IT spend is expected to continue to grow above inflation. Total cost management will remain a focus with below-inflation cost growth a target. As and when the recovery gains momentum, group ROE should improve. Recovery of the group’s key metrics, namely headline earnings and ROE, to 2019 levels will take some time and the path is unlikely to be linear. We remain committed to growing shareholder returns by allocating capital to revenue-enhancing and ROE-accretive growth opportunities, particularly in Africa Regions. While future dividends remain subject to earnings and capital levels, the group’s dividend payout ratio is expected to increase over the medium term towards the lower end of historic levels (45% – 55%).
As a large financial services group operating on the African continent, we recognise the need for inclusive and sustainable growth and environmental sustainability. We will continue to balance these needs in the context of Africa’s just transition. In addition, we will continue to improve the transparency and reporting of the group’s positions on key matters in line with global best practice.
From 1 January 2021, the group changed from a traditional business line-led structure to a client-led model with three core client segments (namely Consumer & High Net Worth, Business & Commercial and Wholesale clients). This will better enable and support the group’s ambition to be truly digital and truly human. In addition, in a fast-changing world, we recognise the need to adapt to evolving risks, optimise resource allocation and drive returns. In doing so, we will leverage our core strengths in financial services, while seeking new ways to expand our offering and diversify our revenue streams further.
Lastly, we thank our colleagues who continue to demonstrate immense courage, discipline and dedication. We mourn the colleagues, family and friends who have passed away. We honour their memory by striving every day to support economic and social development on our continent, as embodied in our purpose: Africa is our home, we drive her growth.
The forecast financial information above is the sole responsibility of the board and has not been reviewed and reported on by the group’s auditors.