For the year ended 31 December 2018, Standard Bank Group delivered sustainable earnings growth and improved returns.
For the year ended 31 December 2018, Standard Bank Group delivered sustainable earnings growth and improved returns. The group’s performance was underpinned by the strength and breadth of our client franchise. Group headline earnings grew 6% to R27.9 billion and ROE improved to 18.0% from 17.1% for the year ended 31 December 2017. The group’s capital position remained robust, with a common equity tier 1 (CET1) ratio of 13.5%. Accordingly, a final dividend of 540 cents per share has been declared, resulting in a total dividend of 970 cents per share, an increase of 7% on the prior year.
Banking activities headline earnings grew 7% to R25.8 billion and ROE improved to 18.8% from 18.0% in 2017. Non-interest revenue (NIR) continued to record strong growth, driven by retail banking. Net interest income (NII) growth was dampened, and credit impairment charges were lower, as a result of the adoption of a new accounting standard.
The 2018 group results were less impacted by currency movements than in prior years. On a constant currency basis, group headline earnings grew 8%. Africa Regions’ contribution to banking headline earnings grew to 31% from 28% in 2017. The top five contributors to Africa Regions’ headline earnings were Angola, Ghana, Mozambique, Nigeria and Uganda.
Global economic growth plateaued at 3.7% as geopolitical tensions rose and risk sentiment deteriorated. Growth trajectories de-coupled as fiscal stimulus in the US supported continued growth, whilst other advanced economies, in particular the Euro area, started to slow. Emerging market capital inflows reversed, which negatively impacted exchange rates and borrowing costs.
Economic growth in sub-Saharan Africa was 2.9%. In 1H18 inflation continued to ease, providing scope for interest rate cuts. By 2H18, heightened global risks resulted in a pause in monetary policy easing. Across our basket of currencies, exchange rates were relatively stable, other than in Angola where the Angolan Kwanza (AOA) devalued approximately 50% relative to the South African Rand (ZAR).
The economic recovery in the West Africa region was supported by buoyant growth in Côte d’Ivoire and Ghana and a recovery in Nigeria. In Angola, as the impacts of the currency devaluation in early 2018 moderated, inflation stabilised.
Kenya, Tanzania and Uganda all recorded real growth in excess of 5% in 2018. Private sector credit growth in Kenya remained below pre-rate cap levels. Uganda enjoyed robust growth in domestic demand, public infrastructure investment, agricultural productivity and a recovery in Foreign Direct Investment.
The countries neighbouring South Africa (SA) continued to feel the drag of SA’s poor economic environment, in particular Lesotho, Namibia and eSwatini. In Mozambique, despite the declining rates cycle, the operating environment remained difficult and lending activity remained subdued. Zimbabwe‘s challenges escalated in 3Q18, including acute currency shortages and inflationary pressures which drove weakened business confidence.
Growth in the SA economy was weaker than expected at 0.7%. The poor macro environment, slow policy progress and higher taxes weighed on consumer and business confidence and, in turn, demand for credit. A 25 basis point (bps) interest rate cut in March, on the back of broadly favourable conditions, was later reversed in November as the US fiscal tightening, oil price and exchange rate outlook were considered a threat to the South African Reserve Bank’s inflation targeting. The ZAR was relatively strong against the major currencies in 1H18, but this reversed in 2H18.
IFRS 9-related accounting impact
Following the transition to IFRS 9, Standard Bank Group is required to suspend interest earlier which resulted in a R553 million reduction in NII and credit impairment charges in Personal & Business Banking South Africa (PBB SA). In addition, following a clarification from the IFRS Interpretations Committee in November 2018, the group is required to recognise previously unrecognised interest earned on loans which cured out of Stage 3 (otherwise referred to as released interest in suspense (IIS) on cured assets) as a reduction in credit impairment charges. Prior to 2018, IIS on cured assets was accounted for as interest income. The reclassification amounted to R1 169 million in 2018, of which R1 064 million related to PBB and R105 million related to Corporate & Investment Banking (CIB). The commentary below includes reference to the impact of these changes on net interest income, total income and credit impairment charges, as well as some of the group’s key ratios, namely net interest margin, credit loss ratio, cost-to-income ratio and jaws. There was no impact on 2018 headline earnings.
Group revenue grew 3% and The Standard Bank of South Africa Limited’s (SBSA) revenue was flat. Adjusting for the IFRS 9-related accounting impact, group revenue grew 4% and SBSA, 2%. Africa Regions grew revenue 6%, 12% on a constant currency basis, reflective of the better economic environment and the underlying momentum in the franchise.
NII decreased 1% as margins declined 16 bps to 458 bps and average interest-earning assets grew 2.5% year on year. IFRS 9-related accounting impact accounted for 13 bps of the 16 bps decline. The impact of competitive pricing and demand for higher yielding deposit products in SA and negative endowment in Africa Regions was largely offset by strong growth in current and savings accounts (CASA) and a mix benefit as unsecured lending grew faster than asset-backed lending.
Non-interest revenue grew 7% supported by broad-based growth across all three underlying categories, namely net fee and commission revenue up 6%, trading revenue up 4% and other revenue up 11%.
In line with our customers’ increasing preference for convenient digital channels over traditional channels, electronic banking fee revenue increased 11% whilst revenue from account transaction fees increased at a slower rate of 2%. In SA, the business saw strong digital volume growth across Instant Money, the SBG mobile app and value-added services as well as card-based transactions. Digital adoption also continued to gain traction in Africa Regions, in particular, in Namibia, Nigeria and Zimbabwe. Knowledge-based fees grew 3%, following CIB’s participation in several landmark transactions, coupled with increased client activity in the Energy and Infrastructure sectors.
Equities provided an uplift in trading revenue, whilst the fixed income and currencies desks struggled against a high base in 2017. Other revenue was boosted by better bancassurance-related earnings and CIB’s portion of ICBC Standard Bank Plc’s (ICBCS) aluminium recovery which equated to R151 million. In line with IFRS 9, interest income on certain debt instruments is now recorded in other gains and losses on financial instruments.
Credit impairment charges
Credit impairment charges were R6.5 billion, 31% lower than the prior year, and the group credit loss ratio declined to 56 bps (2017: 87 bps). Adjusting for the IFRS 9-related accounting impact, the group credit loss ratio would have been 71 bps.
After adjusting for the IFRS 9-related accounting impact, PBB SA’s credit loss ratio decreased year on year, largely driven by higher post write-off recoveries, operational enhancements in customer credit ratings and continued improvements in collection processes. PBB Africa Regions also reflected improvements driven by improved risk performance, enhanced collection strategies and a lower provisioning requirement on highly collateralised non-performing loans.
CIB’s impairment charges declined 35% on the prior year and the credit loss ratio to customers declined to 20 bps (2017: 44 bps). Stage 3 credit impairment charges increased in SA, reflective of the difficult macro environment, but decreased in Africa Regions, driven by a recovery of a prior year impairment in Nigeria and improved credit risk management. CIB remains cautious on the outlook for the construction sector in SA and the consumer sectors in East Africa and SA.
Operating expenses growth of 5% should be considered relative to inflation in the underlying markets in which we operate, as well as the level of investment required to support our businesses’ growth. In 2018 we closed our core banking replacement programme, delivered a variety of digital enhancements and completed various regulatory, risk and compliance improvements. The group cost-to-income ratio for the year was 57% and after adjusting for IFRS 9-related accounting impact to revenue, it was 56%. SBSA costs grew 3%, down from 7% in 1H18.
Staff costs were up 7% driven by a combination of annual salary increases, separation costs relating to the IT restructure and key hires. Net headcount declined ~900 people on the back of a combination of natural attrition, digital efficiencies and management actions.
Ongoing prudent discretionary spend is reflected in other operating expenses growth of 4%. Tight control of IT expenses, in particular in 2H18, resulted in year-on-year growth of 5%. The increase in professional fees is attributable to specific projects related to customer experience in PBB and CIB as well as regulatory changes.
Loans and advances
Gross loans and advances to customers grew 10% year on year, of which PBB’s advances to customers grew 7% and CIB’s, 13%. In line with underlying macros and strategy, Africa Regions recorded strong year-on-year loan portfolio growth of 31%. In SA, PBB disbursements grew across most products with particularly strong growth recorded by vehicle and asset finance (VAF) and personal unsecured lending.
Within PBB, the mortgage lending portfolio grew 4% driven by consistent quarter-on-quarter increases in disbursements, an increase in home loan registration values and a marginal slow-down in prepayments. The VAF lending portfolio grew 10%, driven by growth in SA, as the franchise turnaround started to gain traction. Personal unsecured lending and business lending both grew 14%. PBB Africa Regions loans to customers grew 22%.
Within CIB, Investment Banking (IB) grew 8%. IB originated over R167 billion of loans in the year across the Oil & Gas, Industrials, Consumer, Mining and Power & Infrastructure sectors, up from approximately R130 billion in the prior year. This is reflective of CIB’s broad client franchise and ongoing commitment to partnering their clients in their investment and expansion on the continent. The Africa Regions IB portfolio grew 28%, whilst South Africa IB grew a respectable 7% in a very slow environment. ZAR weakness in December 2018 inflated year-end balances.
Corporate overdrafts and trade finance facilities, reflected under Transactional products and services, grew 52% year on year but 15% on average. CIB funding provided to corporates through commercial paper issuances, qualifying as high-quality liquid assets (HQLA), is reflected as financial investments on the balance sheet. Underlying growth in CIB gross loans and advances to customers, including HQLA, was 15%. Loans to banks declined as liquidity raised in 2H17 was repaid.
Funding and liquidity
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 117%, exceeding the minimum phased-in regulatory requirement of 90%. The group maintained its net stable funding ratio in excess of the 100% regulatory requirement.
During 2018 the group raised R28.3 billion of longer term funding through a combination of negotiable certificates of deposit, senior debt and syndicated loans and R5.0 billion of Basel III compliant Tier II capital. The group will continue to monitor opportunities to issue senior unsecured and/or Tier II subordinated debt in the domestic and/or international markets, in order to optimise the group’s capital and funding position.
Deposits from customers grew R88.6 billion, equivalent to 8%, year on year, supported by 10% growth in PBB retail-priced deposits. Africa Regions recorded CASA inflows in Nigeria, Uganda, Zambia and Zimbabwe. Growth in customers drove increased deposits held in our offshore operations in the Isle of Man and Jersey.
CIB’s deposits and current accounts from customers grew 5% on the back of strong growth in call and current accounts, growing 19% and 20% respectively. The increase in deposits was driven by new clients in South Africa and across our Africa Regions franchise as well as increases in deposits from existing clients.
The group maintained strong capital adequacy ratios, with a CET1 ratio of 13.5% (2017: 13.5%) and a total capital adequacy ratio of 16.0% (2017: 16.0%). The group manages its capital levels to support business growth, maintain depositor and creditor confidence and create value for shareholders whilst ensuring regulatory compliance.
IFRS 9 became effective on 1 January 2018. The fully-loaded day one impact of implementing IFRS 9 was a 70 bps reduction in the group’s CET 1 ratio. After adjusting for the three year phase-in provision, the impact was reduced from 70 bps to 18 bps.
Overview of business unit performance
Personal & Business Banking
PBB’s headline earnings grew 10% to R15.5 billion, underpinned by customer and balance sheet growth, higher transaction volumes and lower credit impairment charges. The impact of negative endowment, due to lower average rates in Malawi, Mozambique, Nigeria and SA, was offset by the benefit of stronger growth in higher margin lending products, combined with deposit growth outstripping loan growth. PBB jaws were negative 265 bps, however after adjusting for the IFRS 9-related accounting impact, jaws reduced to negative 26 bps. ROE improved to 21.9% from 20.0% in 2017.
Against a difficult macro and increasingly competitive environment, PBB SA delivered headline earnings of R13.7 billion, up 3%. Underlying revenue benefited from higher disbursements and better cross-sell following the embedding of all banking products into the frontline. PBB SA NII declined 1% and credit impairment charges were 28% lower, leading to a lower credit loss ratio of 83 bps (2017: 119 bps). After adjusting for IFRS 9-related accounting impact, the NII growth was 4%, credit impairment charges were 3% lower and the credit loss ratio was 112 bps. The favourable performance is attributed to improved collection strategies, higher post write-off recoveries and operational credit rating enhancements. This is partially offset by growth in stage 3 in mortgage loans, VAF and business lending given a protracted legal environment and business strain resulting from economic conditions.
Operating expenses were 6% higher as the franchise continued to invest in embedding the new operating model, improving the customer experience, staff re-skilling and upskilling and digitisation initiatives. The benefits of these investments are reflected in improving customer and employee NPS scores, a decline in the number of complaints and an acceleration in disbursements over the year.
Our customers continued to migrate to our digital platforms apace, in particular, the SBG mobile app. Digital transaction volumes increased 26%, whilst face-to-face volumes declined 13%. SBG mobile app users increased 30% to 1.3 million, mobile transaction values increased, 44% to 262 billion and transaction volumes increased, 50% to 958 million (over 2.5 million a day). Instant Money, our money transfer platform, also continued to gain traction; unique users increased 10% to 1.7 million.
Our customers’ preference for digital channels is unequivocal. In order to deliver the always-on, always-secure offering they expect, we have to leverage the strategic IT assets we have, accelerate our product development and rollout and digitise our execution processes. This will require a reallocation of resources from our physical to our digital channels and a concomitant reconfiguration of our branch infrastructure.
PBB Africa Regions headline earnings grew more than threefold from R183 million in 2017 to R817 million in 2018.
The businesses in Angola, Ghana, Kenya, Uganda and Zambia grew market shares in both assets and deposits. Loans to customers increased 22% and deposits from customers grew 21%. The group’s market leading digital solutions assisted in driving customer growth. The number of active customers grew 11%. Transaction volumes increased 27% driven by digital transaction volumes which increased 34%, whilst branch transactions declined 12%. A growing customer base, combined with strong take up of mobile banking, resulted in a 90% increase in mobile banking transaction volumes year on year (2018: 52 million transactions).
Despite negative endowment, as rates fell in Malawi, Mozambique and Nigeria, net interest income grew 5% on the back of strong balance sheet growth, in particular CASA, and margin expansion. Non-interest revenue grew 13%, underpinned by an increase in the account base, higher transaction volumes, strong trade finance flows and growth in fees from our pension fund business in Nigeria. PBB Africa Regions contributed almost half of the Africa Regions legal entities’ total income. The credit loss ratio decreased to 138 bps from 247 bps in the prior year, reflective of improved book quality and improved collections as well as non-repeat of higher prior year charges in Nigeria and Malawi. Operating expenses grew 5%, delivering positive jaws of 336 bps and a decline in the cost-to-income ratio to 79% (2017: 82%).
Wealth International grew headline earnings 60% , supported by growth in client deposit balances to GBP5.1 billion, increased client activity and endowment benefit.
Corporate & Investment Banking
CIB’s headline earnings of R11.2 billion were down 2% on the prior year, and up 1% on a constant currency basis. Revenue from strong operational client activity in Africa Regions was offset by lower trading and capital markets related revenue linked to subdued market conditions. Declining interest rates in Africa Regions and competitive pricing in SA negatively impacted margins. Disciplined cost management constrained cost growth to 5% but was not sufficient to avoid negative jaws of 414 bps. Recognising the need to improve efficiency levels, CIB has initiated structural changes to change the cost base going forward. The credit loss ratio to customers declined to 20 bps due to a combination of improved performance and recoveries. Sovereign and financial institution ratings downgrades in early 2018 resulted in a higher capital demand, which negatively impacted return on risk weighted assets and ROE (2018: 19.3%).
CIB continued to grow and diversify its client base driving year-on-year client revenue growth of 8%. Client segments underpinning growth were multinationals and large domestic corporates and key sectors included Financial Institutions, Industrials and Power & Infrastructure. Africa Regions’ performance was underpinned by strong revenue growth in Angola, Kenya, Zambia and Zimbabwe.
Investment banking’s performance was underpinned by strong balance sheet growth, including corporate debt issuances and foreign currency loans to SA and African multinationals. Average loans increased 9% and margins were flat. Energy and Infrastructure transactions supported NIR. Credit impairment charges were lower year on year due to better portfolio performance and a recovery from a previously impaired exposure in Nigeria.
Transactional products and services continued to grow its Africa Regions client base and deposit base. Declining rates impacted NII whilst increases in trade and transaction activity supported NIR.
Global markets’ revenue was adversely impacted by negative emerging market sentiment and lower flows. CIB’s on-the-ground presence and deep local knowledge enables it to identify opportunities and trade even in dislocated markets.
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 2018, the segment recorded a loss of R878 million, 28% less than the prior year. The primary driver of the higher loss in 2017 was the elimination, in terms of IFRS, of gains on SBK shares held by the group to facilitate client trading activities, which did not recur in 2018.
Other banking interests
Other banking interests recorded headline earnings of R418 million. ICBCS recorded growth in its underlying franchise revenue and a recovery of US$38 million relating to the aluminium previously written off. This was unfortunately offset by the trading business performance which was negatively impacted by declining global emerging market risk appetite and reduced flows, resulting in ICBCS recording a loss of US$14.9 million for the year. The group’s 40% share thereof equated to R74 million. ICBCS’s ability to deliver sustainable profits is dependent on its ability to continue to integrate into, and leverage, ICBC’s extensive client base. ICBCS did not require additional capital in 2018 on the back of lower than expected RWA growth. ICBCS’s business plan indicates the need for a capital injection of approximately US$200 million in the next 12 to 18 months, subject to RWA growth. The group’s share thereof would be US$80 million.
ICBC Argentina delivered a strong performance despite the dislocation experienced in the domestic market. The headline earnings contribution from the group’s 20% stake in ICBC Argentina increased 19% to R492 million. Adjusting for the significant devaluation of the Argentinian peso, earnings were up 95% on a constant currency basis year on year.
During 2019, we will continue to work with our strategic partners at ICBC to develop a lasting solution for these businesses.
The financial results reported are the consolidated results of the group’s 56% investment in Liberty, adjusted for SBK shares held by Liberty for the benefit of Liberty policyholders which are deemed to be treasury shares in the group’s consolidated accounts.
Liberty’s operating earnings were up 42% on the prior year, driven by strong performances in Individual Arrangements and STANLIB. As is to be expected, given the negative trend in asset prices during the year, Liberty’s shareholder investment portfolio was impacted by volatile market conditions resulting in lower market returns. We will continue to support Liberty as it executes its remedial and recovery plan and by continuing to deepen the collaboration between our businesses. 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, declined to R2.6 billion from R3.3 billion in the prior year. Investors are referred to the full Liberty announcement dated 28 February 2019 for further detail.
Headline earnings attributable to the Standard Bank Group, adjusted by R129 million for the impact of deemed treasury shares, were R1.6 billion, 11% higher than in the prior year.
Global growth is expected to weaken slightly in 2019 to 3.5% as the slowdown in momentum seen in 2H18 continues into 2019. With risks to the downside, economic conditions will remain challenging and volatile in 2019. Subdued demand will impact global trade, industrial production and could drive commodity and oil prices lower.
Whilst not immune from global risks, prospects for sub-Saharan Africa overall are good with growth expected to accelerate from 2.9% in 2018 to 3.5% in 2019. Over a third of the countries in the region are expected to grow above 5%.
With elections set for May 2019, South Africa is expected to be a tale of two halves. Subdued growth is anticipated in 1H19 as political and policy uncertainty continues to undermine confidence and delay investment and growth. An acceleration in 2H19 and into 2020, driven by corporate investment, whilst expected, will be dependent on the rate of policy progress, structural reform, broader economic stimulus and job creation. A return of stable electricity supply is critical. Assuming some progress and no further downgrades by rating agencies, we expect inflation to remain within the target range and interest rates to remain at current levels in 2019. This should support an uptick in growth to 1.3% for the year.
There is no doubt that in the years ahead the financial services industry, the competitive and regulatory environment and our customers’ and employees’ expectations will continue to change. Across the group, we are making the changes necessary to best position the franchise to deliver to all our stakeholders. We are focused on transforming our customer and employee experience and improving our productivity to deliver a “future-ready” group. In 2019, we will build on the franchise momentum from 2018, continue to simplify, rationalise and digitise and seek ways to accelerate our delivery.
We remain committed to our medium-term targets of delivering sustainable earnings growth and an ROE in our 18%-20% target range. Finally, in delivering on our purpose of driving Africa’s growth, we will continue to support faster, more inclusive and more sustainable growth and human development in South Africa and across the continent we are proud to call home.
Stakeholders should note that any forward-looking information in this announcement has not been reviewed and reported on by the group’s external auditors.