Finance: Standard Bank Produces Results in Tough Environment
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On an IFRS basis, the group reported a 12,4% return on equity (June 2008: 21,4%), while headline earnings of R5 079 million were 30% lower and headline earnings per share down 33% at 352,5 cents per share (June 2008: 529,2 cents per share).
On a normalised basis, the group’s return on equity was 12,6% (June 2008: 19,8%), headline earnings of R5 407 million were down 24% and headline earnings per share fell 27% to 351,3 cents per share (June 2008: 481,8 cents per share).
The dilution in the per share results was largely due to the inclusion of the shares issued to the Industrial and Commercial Bank of China (ICBC) on 3 March 2008, for the full reporting period.
An interim dividend of 141 cents per share has been declared, 27% lower than in June 2008. This is in line with the group’s policy for both interim and final dividends to be covered 2,5 times by normalised headline earnings per share.
Says Jacko Maree, Standard Bank Group Chief Executive: “The group’s operating environment during the first six months of 2009 was challenging, following the turbulence in financial markets experienced in the second half of 2008. The aftershocks of the credit and liquidity crisis continued to be felt in financial systems around the world. The impact of sharply lower demand for goods and services in the real economy dragged the global economy further into downturn.
“The South African banking sector has remained stable throughout the global financial crisis. Robust risk management practices, a relatively low concentration of exotic products in local banking models and a proactive regulatory framework have all contributed to the resilience of the banking system.”
He says that although South Africa has avoided the worst effects of the financial crisis, the economy is feeling the lagged effects of the cyclically higher inflation and interest rates experienced in 2008, compounded by output levels in the first quarter of 2009 contracting by an annualised 6,4%. The contraction was particularly evident in mining and manufacturing with unemployment rising in these sectors. Consumers’ ability to repay debt remained under strain, resulting in further growth in defaults, albeit at a slowing rate.
The group has been mindful that despite extreme short-term financial pressures, defensive action taken should wherever possible avoid damaging long-term relationships with customers, or hampering economic recovery. In the context of not compromising its risk practices, the group has done everything possible to proactively assist its customers.
In the past six months, personal customers have been encouraged to contact the group in advance of financial distress, and various measures have been implemented to assist them.
Maree says that the financial position of corporate clients has been closely monitored through rigorous industry specific analysis and review. Proactive steps have included participating in recapitalisation, funding, renegotiated lending facilities and providing bridging finance.
Standard Bank’s results were impacted by a host of factors including a slowdown in economic activity, an increase in non-performing loans, falling interest rates, and changes in the rand exchange rate
The group continued to invest in technology and infrastructure mainly in its African operations. This is in line with the group’s strategy to increase its footprint in key African countries such as Nigeria, Kenya, Ghana, Zambia and Uganda. This investment has contributed to substantial cost growth in the rest of Africa in the period whereas the benefits will only be realised over time.
Personal and Business Banking reported headline earnings of R2 011 million, 21% lower than in the prior period, primarily due to higher credit impairments. Non-performing loans as a percentage of the advances book were 7,7% at 30 June 2009, 5,7% at 31 December 2008 and 4,0% at 30 June 2008, reflecting the strain facing consumers in South Africa.
Early arrears have improved by 13% since June 2008 and 29% since December 2008. There are signs that the rate of increase in impaired loans is slowing, with these rising 35% from December 2008 to June 2009 compared to 49% between June 2008 and December 2008.
Revenue growth held up well at 8%, while costs were well contained and rose only 9%, with 4% higher staff costs and a 14% increase in other operating expenses. This resulted in a cost-to-income ratio of 50,2% (June 2008: 49,7%). The business unit achieved a commendable 16,5% ROE.
Corporate and Investment Banking produced a resilient performance in a very difficult operating environment. Headline earnings of R3 391 million were down 8%. The global markets business achieved a strong performance in commodities, foreign exchange and equity trading as a result of improved liquidity related trading spreads and a favourable exchange rate impact. Market risk was well controlled within value-at-risk limits.
The slowdown in economic activity in South Africa resulted in a marked decline in consumers’ disposable income. This has impacted on Liberty’s policyholder persistency and, together with substantial mark-to-market adjustments to its balance sheet exposures, has had a negative result on earnings. Despite the economic challenges, Liberty remains strong operationally. New business sales and cash flows are satisfactory and management expenses have been well controlled.
Balance sheet analysis
Banking assets of R1 130 billion were 1% down on June 2008 levels and 13% lower than December 2008. Excluding the impact of the strengthening rand, banking assets grew by 1% when compared to June 2008.
Gross loans and advances - down 1%
Gross loans and advances were down 1% across the group against June 2008 and 10% lower than December 2008.
Personal and Business Banking gross loans and advances grew by 3% from June 2008. The June 2009 mortgage loan book was 1% higher than December 2008 and grew 8% since June 2008. Instalment sales and finance leases were 10% lower than in June 2008 and 7% down from December 2008. This resulted in an 11% decline in the total number of instalment sales and finance lease accounts. Card debtors were 5% lower than in June 2008 and 4% down from December 2008.
Corporate and Investment Banking gross loans and advances across all regions declined 5% from June 2008 and were 17% lower than at December 2008. Most of the decline since December 2008 occurred outside of South Africa, due to both currency translation effects and deleveraging. The Corporate and Investment Banking loan book in South Africa at June 2009 was 9% lower than December.
Net asset value
The group’s net asset value reduced by 1% from December 2008, while net asset value per share of 5 452 cents was 3% lower than December 2008.
Income statement analysis
Net interest income - up 15%
Net interest income was up 9% in Personal and Business Banking and 29% in Corporate and Investment Banking. The group’s interest margin improved by 29 basis points to 3,45% despite a reduction of 162 basis points in the average prime interest rate.
Personal and Business Banking continued to grow its loan book, at a slower rate, and the interest margin improved to 5,10% while Corporate and Investment Banking’s interest margin improved by 37 basis points to 2,06%.
Non-interest revenue - up 6%
Growth in non-interest revenue was constrained by recessionary pressures. Both Personal and Business Banking and Corporate and Investment Banking performed well, posting growth rates of 7% and 12% respectively.
Net fee and commission revenue was up 5%. Personal and Business Banking achieved 15% growth in account transaction fees, while net fee and commission revenue for Corporate and Investment Banking contracted 3%.
Trading revenue rose 11% with 37% growth in the rest of Africa. Trading revenue outside Africa grew 23%.
Credit impairments - up 58%
Credit impairments were up 58% to R7 115 million, resulting in the group’s credit loss ratio deteriorating to 1,84% from 1,31%. Compared to the second half of 2008, credit impairments were 4% higher.
Impairment losses in Personal and Business Banking rose 35% and the credit loss ratio increased to 2,80%.
In Personal and Business Banking, the mortgage loan credit loss ratio deteriorated to 1,55%. Impairment losses in instalment sales and finance leases grew 70% and the credit loss ratio worsened to 3,60%. Vehicle loan delinquencies rose further and motor vehicle sale recovery values remained low. Card debtors reflected an improvement of 27% in credit losses and the credit loss ratio eased to 7,24% as collections improved. Impairment losses on other loans rose 113% with the credit loss ratio worsening to 6,04%.
The credit loss ratio in Corporate and Investment Banking deteriorated to 1,15%
off a low base in June 2008 of 0,31%. Financial stress caused by, amongst other things, reduced commodity prices and weak demand for exports as well as the significant slowdown in consumer spending in South Africa, heightened corporate default risk. Credit impairment charges on corporate lending increased by 353% from June 2008 and non-performing loans by 465% to R9,0 billion off a low base.
Targeted strategies remain in place to contain credit losses and manage risk. Specific measures include ongoing prudent credit extension criteria, close monitoring of arrears, active management of early delinquencies, ongoing improvement in collection capabilities and targeted programmes designed to assist customers.
Operating expenses – up 13%
Growth in operating expenses was 13%, reflecting ongoing investment in infrastructure in the rest of Africa, moderated by a continued focus on cost containment and efficiency management in South Africa. The cost-to-income ratio for the period was weaker at 49,9%, off a low base of 48,7% in June 2008. The translation of foreign expenses at weaker average rand exchange rates added 6% to cost growth.
Total staff costs were up 9%. Staff costs in the rest of Africa increased significantly due to the continued expansion in and roll out of points of representation
Other operating expenses grew 18%, of which 5% was due to the weaker average exchange rate. South Africa accounted for 9% while the rest of Africa added 4% and outside Africa some 5% to overall expenses growth of 18%. Information technology costs were 29% higher as a result of increased systems development costs, maintenance costs and software licensing fees.
The group has continued to manage its liquidity prudently in accordance with the strategy initiated in 2008. Unencumbered surplus liquidity holdings were R136 billion at 30 June 2009, while any structural liquidity mismatches and the diversification of the funding base were managed and maintained within best banking practice guidelines.
The group remains well capitalised with the total capital adequacy ratio rising to 14,4% from 13,3% at December 2008 and tier I capital up to 12,0% from 11,0%. Liberty’s capital adequacy level at June 2009 was strong at 2,5 times the required cover.
Black Economic Empowerment
The group continues to support the process undertaken in South Africa by the financial sector and other stakeholders to align the Financial Sector Charter (FSC) to the Codes of Good Practice for Broad-based Black Economic Empowerment legislated in 2007. Negotiations are ongoing and future targets have not yet been agreed. As a result the bank has reported performance for the six-month period to 30 June 2009 in terms of the targets set by both the Department of Trade and Industry (DTI) and the FSC. The bank achieved a level 3 rating (above 75% compliant) in terms of the DTI scorecard. In terms of the bank’s employment equity profile at June 2009, black managers comprise more than 50% of management in South Africa, of which 54% are women.
In South Africa, the government’s infrastructure development programme will continue to provide some counter to depressed consumer demand and spending. Interest rate reductions and lower inflation should alleviate financial strain among households over the medium term as debt affordability starts to improve. As consumer demand recovers, transactional volumes across all sectors should show some improvement with a positive effect on credit performance and lending growth.
Maree says that the group is intensifying its focus on building revenue pipelines and strengthening customer relationships. “We are committed to continue lending to our personal and corporate customers, while remaining firmly focused on risk, capital and liquidity management. While we will remain vigilant and disciplined in our origination and risk management practices, we believe the group is well positioned both domestically and internationally to take advantage of opportunities as they arise.”
With regard to Liberty, the Standard Bank Board is confident that its board and management are focused on the main issues facing Liberty, being policyholder persistence and capital management.
The Board remains cautious in its outlook for the rest of 2009 and is not providing specific guidance on projected results for this year. Interim results together with current trends indicate that normalised earnings for the year will be lower than those of 2008.
Says Maree: “Looking past the current challenges towards the longer term, we remain convinced of the group’s strategic focus. Our strong presence across Africa and our growing businesses and strengthening associations in other key developing markets, coupled with the group’s broad based suite of financial services, provide a strong platform for future growth.”
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