Standard Bank Group’s (SBG or the group) results for the six months ended 30 June 2020 (1H20) reflect that of a resilient, well diversified underlying franchise, negatively impacted by a very difficult environment, particularly in South Africa.
Standard Bank Group’s (SBG or the group) results for the six months ended 30 June 2020 (1H20) reflect that of a resilient, well diversified underlying franchise, negatively impacted by a very difficult environment, particularly in South Africa. The group’s Africa Regions business and Corporate and Investment Banking business, most notably Global Markets, delivered strong top line growth.
Globally, 1H20 has been dominated by the Covid-19 pandemic (Covid-19) and the distressing human and economic cost thereof. During this time, we have remained steadfast in support of our clients, our employees and the communities in the countries in which we operate. The group’s strong capital and liquidity positions going into this crisis, have allowed us to provide significant temporary relief to clients without constraining our ability to lend to existing and new clients or support new projects.
The group’s banking operations’ earnings were supported by strong balance sheet growth, robust trading revenues and well contained costs. Positive jaws of 100 bps supported pre-provision operating profit, which grew 4% period on period to R24.3 billion. Credit impairment charges increased to R11.3 billion, 2.7 times those reported in the prior period (1H19) and reflective of the tough environment and outlook. Consequently, banking operations reported headline earnings of R7.7 billion, down 40% on 1H19, and a return on equity (ROE) of 9.5%.
Group headline earnings were R7.5 billion, a decline of 44% on 1H19, and ROE was 8.5%. The group’s capital position remained robust, with a common equity tier 1 capital adequacy (CET1) ratio as at 30 June 2020 of 12.6%, well in excess of the regulatory minimum of 7%. In line with the South African Reserve Bank’s guidance, the SBG Board has not declared an interim dividend.
The group’s Africa Regions business proved relatively resilient, delivering headline earnings growth of 11%, and 7% in constant currency (CCY). South Africa’s headline earnings declined 72% as the pandemic exacerbated an already difficult environment. As a result, Africa Region’s contribution to 1H20 banking headline earnings grew to 62%. The top six contributors to Africa Regions’ headline earnings remained Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.
Covid-19 has led to the worst economic shock in living memory. In March 2020, the World Health Organization declared Covid-19 a pandemic and countries responded with widespread lockdowns.Supply chains were disrupted, and demand declined. An oil price war and oversupply drove a swift and significant decline in the oil price. Fear and uncertainty drove a precipitous fall in the markets and a liquidity squeeze in 1Q20. This was quickly followed by extraordinary fiscal and monetary actions and fiscal stimulus (in particular, in developed markets) and a variety of regulatory actions. These bold actions, combined with flattening infection curves, calmed markets somewhat and drove a recovery in 2Q20.
The considerable uncertainty in 1H20 drove an Emerging Market risk-off stance for foreign investors. Sub-Saharan Africa experienced record capital outflows and financial conditions tightened. Trade and foreign exchange inflows dried up and oil-exporters were negatively impacted by the lower oil price. Covid-19 related regulatory actions included wide-spread interest rate cuts, easing of capital and liquidity requirements and fee waivers and restrictions. West Africa was impacted by the lower oil prices, East Africa, by lower trade and a halting of travel and the South and Central economies remained closely coupled with South Africa.
In South Africa, the interrupted power supply extended the 4Q19 recession into 1Q20. Strict lockdowns brought the economy to a near-standstill. Prospects of a modest economic recovery in 2020 were replaced with expectations for a large decline (Standard Bank Research: South Africa’s real GDP is forecast to decline 8.5% in 2020 followed by a 4.5% recovery in 2021). The poor economic outlook and declining inflation trend paved the way for cumulative interest rate cuts equating to 275 bps in the period. In addition, the South African government implemented a sizeable stimulus package to support those most vulnerable. Whilst necessary, the additional spending poses a material risk to the public debt trajectory. Fiscal diligence and urgent structural reforms are more important than ever.
Loans and advances
Gross loans and advances to customers grew 11% from 30 June 2019 to 30 June 2020, of which Corporate and Investment Banking (CIB) grew 17% and Personal and Business Banking (PBB) grew 6%. The depreciation of the South African Rand (ZAR) drove higher period-end balances. The deteriorating economic and trading environment, coupled with accounting and regulatory requirements relating to forward-looking expectations and Covid-19 client relief provided, drove a 26% increase in provisions held against loans and advances compared to 30 June 2019. Provisions increased across all stages and across all product portfolios. As at 30 June 2020, stage 3 loans represented 4.6% of the portfolio and provisions held against these loans remained sufficient at 46% (30 December 2019, 3.9% and 48% respectively).Provisions raised reflect the group’s best estimate based on available data and our scenario-based analysis as at the reporting date.
Within PBB South Africa (PBB SA), lockdowns severely constrained disbursements in 2Q20, and in turn, portfolio growth in 1H20. Deeds and vehicle registration offices were closed in April and the first half of May, stalling mortgage and vehicle and asset finance (VAF) portfolio growth. While personal unsecured and business lending showed some growth, low business and consumer confidence weighed on demand.
As at 30 June 2020, Covid-19 client relief provided by PBB SA totalled R107 billion representing 18% of the PBB SA portfolio. Mortgages and VAF represented 62% and 23% of the PBB SA client relief portfolio respectively. As one of the first banks to proactively offer client relief initiatives, we lived up to our brand promise and deepened our customer relationships. As at 30 June 2020, loans approved under the South African Covid-19 loan guarantee scheme totalled R8.3 billion. These loans are included in the business lending portfolio and were partly drawn by 30 June 2020.
PBB Africa Regions (PBB AR) gross loans and advances grew 20% to R89 billion, supported by ongoing focus on client ecosystem origination, digital client onboarding and digital disbursements, as well as a weaker ZAR period on period. Strong growth in 1Q20 was stemmed by lockdowns in 2Q20. As at 30 June 2020, Covid-19 client relief provided by PBB AR totalled R11 billion representing 12% of the PBB AR portfolio. The East Africa Region represented 52% of the client relief, followed by 33% and 15% in the South & Central and the West Africa Regions, respectively.
PBB provisions held against loans and advances increased 28% period on period, with a large part of the increase driven by increases in South Africa. In PBB AR, increases were driven principally by provisions raised in Ghana, Kenya, Namibia, Tanzania and Uganda.
CIB balance growth was client driven, in terms of both Covid-19 liquidity and/or other funding needs. Gross loans and advances to customers grew 17% to R487 billion. The client sectors driving growth were Consumer (mainly Agriculture and Consumer Packaged Goods), Financial Institutions, Oil & Gas and Telecom & Media. CIB Covid-19 client risk exposure restructures equated to R48 billion. Provisions increased 45% year to date following a deterioration of corporate risk grades and higher stage 3 loans. From a sector perspective, the Consumer (primarily Retail and Hospitality), Industrials, Oil & Gas, Power & Infrastructure and Real Estate sectors were most impacted.The stage 3 ratio increased while the stage 3 coverage ratio was maintained (relative to 31 December 2019).Provisions held against stage 3 exposures are consideredsufficient.
Deposits and funding
Deposits from customers grew 19% period on period to R1.5 trillion. PBB customer deposits grew 16%, with strong growth in savings and investment products as well as call deposits, as retail customer balances increased during lockdown and business customers held additional liquidity to support cashflow demands in an uncertain environment. Growth in PBB AR 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. Deposits totalled GBP5.2 billion as at 30 June 2020. CIB deposit growth was underpinned by higher corporate current account balances as market uncertainty led clients to reassess planned capital investments and hold larger cash balances.
Revenue grew 3%. Net interest income (NII) was flat as balance sheet growth was offset by margin compression. Wide-spread interest rate cuts resulted in negative endowment. Net interest margin (NIM) declined 57 bps to 387 bps. Net fee and commission income declined as consumer activity levels and transactional volumes decreased significantly as a result of the lockdowns. Higher digital transaction volumes were offset by lower business and electronic funds transfer fees. Higher other fee and commission revenue was largely driven by growth in assets under management in Nigeria and commitment and arrangement fees from client deals in South Africa and International. Client transaction flows increased significantly as clients sought advice in terms of navigating a complex and volatile environment. This, together with strong foreign exchange flows in South Africa and the West Africa Region, supported trading revenues, which increased 40% to R8.1 billion (1H19: R5.8 billion). Market conditions led to declines in equity investment portfolio valuations which negatively impacted other revenue. Gross written premium increased as the portfolio tilt shifted towards higher cover and premium insurance products.
Credit impairment charges
Credit impairment charges increased to R11.3 billion, 2.7 times that of 1H19. The increase was driven by the deterioration in customer risk profiles and forward-looking assumptions, additional charges associated with the client relief portfolio in PBB, and corporate and sovereign risk downgrades. In addition, due to the considerable uncertainty and associated forecast risk, an additional R500 million provision was raised and held centrally. The group credit loss ratio (CLR) increased to 169 bps (1H19: 76 bps).
Operating expense growth was well contained at 2%, supporting positive jaws of 100 bps and a decline in the cost-to-income ratio to 56.4% (1H19: 57.0%). Staff costs were up 1% as annual salary increases were offset by lower headcount and performance-related incentives. Other costs increased 3% as lockdown-driven reductions in discretionary spend, for example travel and entertainment, were offset by increases in information technology (IT) costs. The investment in customer proposition development and client experience workstreams continued. Software licence, data lines and cloud costs increased as remote working and business continuity management drove higher usage. Costs incurred specifically related to Covid-19 totalled R279 million in 1H20.
The group maintained strong capital adequacy ratios, with an IFRS 9 phased-in CET1 ratio of 12.6% (1H19: 14.0%) and a total capital adequacy ratio of 15.5% (1H19: 17.3%). The CET1 ratio, including the full IFRS 9 transitional impact, was 12.5%.
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 136%, well in excess of the temporarily reduced minimum phased-in regulatory requirement of 80%. The group maintained its net stable funding ratio in excess of the 100% regulatory requirement.
During 1H20, the group successfully raised R24 billion of longer-term funding. The group also issued R5.5 billion Basel III compliant Tier 2 capital, the proceeds of which were invested in The Standard Bank of South Africa.
Overview of business unit performance
Personal & Business Banking
PBB revenues declined 1% to R35.1 billion. Negative endowment, and related margin compression, more than offset the revenue increases related to balance sheet growth. NIM declined 42 bps to 559 bps. NIR declined 5% as increased digital transactional volumes and modest annual price increases were insufficient to offset the significant lockdown-related decline in physical channel volumes, turnover reductions, a drop in trade activity and regulatory restrictions introduced on certain fees in Africa Regions. Operating expenses were well contained and supported by the savings derived from the branch reconfiguration concluded in 1H19. This was partially offset by the continued investment in client experience and digitisation workstreams, as well as certain Covid-19 specific expenses, for example front-line staff and customer safety measures. Against the difficult revenue environment, jaws were negative 327 bps and cost-to-income ratio increased to 62.6% (1H19: 60.6%). Credit impairment charges increased to R8.6 billion (1H19: R3.7 billion), 2.3 times 1H19 charges. Lockdowns disrupted businesses and impacted client incomes. The deterioration in macro-economic assumptions drove higher forward-looking provisions. CLR increased to 231 bps (1H19: 105 bps). PBB headline earnings declined 60% to R2.9 billion and ROE declined to 7.5% (1H19: 20.1%).
Lockdowns encouraged customers to transition to our digital channels. Digital transaction volumes increased 78% in SA, and comprised 99% of total transactions, while in Africa Regions volumes increased 24% and comprised 94% of total transactions. Physical transactions are expected to continue to decline as the transition to digital accelerates post Covid-19.
PBB SA was impacted by negative endowment, elevated impairments, lower transactional volumes and a significant decline in loan disbursements in 2Q20. To accommodate the lockdown requirements and protect our people, certain branches were temporarily closed and teams were reorganised to maintain the delivery of key functions to our clients.A partial resumption of economic activity, following the relaxation of the lockdown regulations in the second half of May and in June, resulted in a partial recovery of transactional volumes and values and, in turn, NIR by the end of the period. Despite the pandemic-related disruptions, PBB SA released several new digital capabilities and product enhancements. In addition, system resilience and security remained key to driving digital adoption. Digital active customers increased 13% to 2.6 million.
PBB AR recorded strong revenue growth. Ongoing customer acquisition and digital origination supported balance sheet and NII growth. Negative endowment was a headwind in the period. Lower turnover, trade and transactional levels alongside regulatory directives placed a strain on fees. This was more than offset by higher insurance, asset management and foreign currency service fees as well as higher point of representation fees. Below-inflation cost growth of 5% (CCY, 2%) delivered positive jaws of 4.0% and a cost-to-income ratio of 73.1%. Credit impairment charges increased across most countries, with notable increases in Kenya, Tanzania, Uganda and Zimbabwe.
Wealth International revenues were negatively impacted by lower interest rates (USD and GBP), albeit partially offset by higher fees from higher client FX transactional volumes. Structural balance sheet changes required, following the South African sovereign downgrade, also impacted performance. Underlying client growth has continued, with both client lending and discretionary assets under management increasing period on period.
Corporate & Investment Banking
CIB revenues grew 11% to R21.4 billion. During this period of significant volatility and disruption, CIB continued to proactively engage with clients to provide tailored funding, liquidity and risk management solutions. CIB’s capabilities and reach remains attractive to domestic clients and multi-national corporates already operating, seeking to operate or seeking to expand on the continent. The business continued to benefit from diversification across clients, sectors and regions. Africa Regions delivered a strong performance. Significant margin pressure offset strong balance sheet growth to deliver flat NII. Cost growth was contained at 5%, delivering positive jaws of 639 bps and an improved cost-to-income ratio of 49.6%.Pre-provision operating profit grew 19% period on period.
The stressed global economic conditions drove downward equity valuation adjustments (affecting NIR in South Africa) and a substantial increase in credit impairments. Significant increases in impairment charges were recorded in East Africa, South & Central Africa, as well as in South Africa. CIB’s CLR to customers was 88 bps (1H19: 40 bps). CIB’s headline earnings declined 7% to R5.7 billion. The deteriorating credit environment drove a 39% increase in risk-weighted assets (RWA) period on period. The decline in earnings and increase in capital utilisation, led to a decline in ROE to 15.1% (1H19: 19.2%)
Global Markets (GM) revenue grew 43% on the back of strong risk management and increased client activity in volatile markets. Africa Regions had a strong half with revenue increasing by 53%, driven principally by Nigeria and Angola. In South Africa, the business maintained its foreign exchange market share and improved its equities market share. Investment in technology platforms resulted in cost growth of 7%. GM headline earnings increased 88% to R4.4 billion.
Transactional Products & Services (TPS) revenues were negatively impacted by margin pressure as well as adverse regulatory requirements, in particular in Nigeria. Credit impairment charges increased significantly as certain older Africa Regions exposures moved into default. Costs were well contained despite ongoing investment in digital capabilities and higher regulatory charges. TPS headline earnings decreased 36% to R1.2 billion.
Investment Banking (IB) revenues were negatively impacted by muted growth in fees and equity investment valuation declines on the back of the difficult economic environment. Robust gross loan origination and an increase in drawdowns of unutilised facilities supported average balances, which drove NII growth of 22%. Credit impairment charges increased significantly relative to 1H19, driven by the non-repeat of a prior year recovery coupled with deteriorating risk grades and increased provisioning across the IB portfolio. Costs were flat. IB headline earnings declined 91% to R181 million.
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 provision amounted to R851 million (1H19: R593 million). We continue to proactively manage the costs recorded in the centre.
Other banking interests
ICBC Standard Bank (ICBCS) recorded a profit of USD70 million in 1H20 (1H19: loss of USD130 million). The turnaround was driven by the non-repeat of a single client loss in 1H19, revenues earned on the back of the market volatility experienced in 1H20 and an insurance recovery payment related to the aluminium-related losses the business incurred in Qingdao in 2015. The group’s 40% share of ICBCS’ earnings equated to R508 million.
In August 2019, the group exercised its option to sell its 20% stake in ICBC Argentina to the Industrial and Commercial Bank of China (ICBC). From September 2019, the investment was recognised as held for sale and the group ceased recognising its share of profits. The sale was completed on 29 June 2020, post receipt of the necessary regulatory approvals. A foreign currency translation reserve (FCTR) accumulated over the life of the investment due to the devaluation of the Argentine Peso (ARS) vs ZAR. At the time of the change of control in 2012, the ARS/ZAR rate was c.0.5 and by the completion date it was c.4. On completion, the group recognised a gain on sale of R1.4 billion and the accumulated FCTR reserve (debit) of R3.4 billion was released to earnings.
The net impact of R2.0 billion negatively impacted earnings attributable to the group in 1H20. The gain on sale and the FCTR impact are both outside of headline earnings and therefore, did not impact group headline earnings. The release of the FCTR balance to earnings was a movement between reserves and therefore did not impact the net asset value of the group. The gain on sale added 11 bps to the group’s common equity tier 1 ratio.
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 1H20, Liberty’s performance was negatively impacted by higher morbidity and mortality claims, new business strain and the creation of a R2.2 billion post-tax pandemic provision to cover future costs related Covid-19 which are still expected to arise. The Shareholder Investment Portfolio performance reflected negative investment market returns, particularly in respect of foreign and local equities. Liberty reported a headline loss of R2.3 billion (1H19: earnings of R2.0 billion). After adjusting for treasury shares, the group’s share of the loss amounted to R0.7 billion (1H19: earnings of R0.9 billion).
Profit attributable to ordinary shareholders declined 71% to R3.8 billion. The difference between headline earnings and profit attributable can be ascribed to a R1.4 billion post-tax gain on the sale of the 20% stake in ICBCA, the associated R3.4 billion negative impact of the FCTR release on sale and R1.9 billion related to the impairment of certain IT intangible assets. During the period, the group performed a review of certain of its IT capabilities. It was found that aspects of work performed to develop improvements to CIB’s client engagement system were no longer suitable. Applying the group’s accounting policy on IT intangibles, it was deemed necessary to impair the previously capitalised asset.
In the month of July, customer activity and business turnover levels continued to recover. While this should be supportive for NIR growth into 2H20, ongoing uncertainty is expected to constrain balance sheet growth. Lower interest rates are expected to persist throughout 2H20, which will put pressure on NII. Trading revenues are expected to be below 1H20 levels. PBB provision levels, while deemed sufficient, are sensitive to macro-economic developments as well as client behaviour. Where appropriate, PBB has agreed to extend payment holidays and other relief measures. Client behaviour post the expiry thereof will be key. Forecast risk remains high and should the outcome be worse than expected, additional provisions will be required. While current CIB provision levels are deemed appropriate, CIB exposures, by their nature, are lumpy and additional provisions may be required if ratings deteriorate further and/or individual clients experience difficulties. The Board will take into account the SARB’s guidance and group’s capital position and the outlook before deciding whether to declare a final dividend. We are unable to provide revised medium-term targets at this time.
Covid-19 has already had a profound impact globally and there remains much uncertainty as to the ultimate human and economic toll. In addition, US/China tensions remain a risk. In contrast, lockdowns will be rolled back, and economies will reopen. The International Monetary Fund is forecasting global real GDP to contract by 4.9%, sub-Saharan Africa by 3.2% and South Africa by 8.0% in 2020, followed by a recovery of 5.4%, 3.4% and 3.5% respectively, in 2021. Accordingly, we shift our focus to recovery. Leveraging the group’s strong capital position, we will continue to work with our individual, business and corporate clients, in a responsible manner, to find suitable solutions to enable them to participate and support the much-needed transition to the recovery phase.
The world changed fundamentally and, to some extent, permanently, in a matter of weeks. While the pandemic has created distress and anxiety for many people, it has also created new opportunities, specifically the opportunity to accelerate change. As a group operating across the continent, with operations and clients across the globe, we need to adapt to remain relevant. As we re-imagine the future, we remain of the view that our future-ready strategy remains valid. However, we recognise the need to accelerate our digital delivery and, in parallel, drive operational efficiency. We remain committed to delivering a positive societal, economic and environmental impact. Combined, this will ensure we remain relevant to our customers, attractive to our employees and enable us to deliver value to all stakeholders. And, in doing so, we will also deliver on our purpose of driving Africa’s growth.
The safety and wellbeing of our customers and employees has been, and remains, of utmost importance. Despite the obvious risks, our employees have shown great fortitude and commitment as they have continued to support and service our customers. We thank them for their service. We wish all our stakeholders strength during this difficult time and ask that they continue to partner us as we drive a return to growth for all.