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4 March 2010
Standard Bank Group’s emerging market focus is paying off
Standard Bank Group’s (SBG) profitability remained sound and its strong liquidity and capital position has allowed it to continue to invest for growth.
Announcing SBG’s annual results for the year ended 31 December 2009, Chief Executive Jacko Maree said: “It was an extremely tough year, but one in which our focus on developing markets stood us in good stead. Our vision to be a leading emerging markets financial services organisation remains unchanged. Our resilience in the face of the severe challenges of the past two years confirms that the group is strategically well placed.”
Normalised headline earnings of R11 718 million were down 17% on 2008, while normalised headline earnings per share of 757 cents were down 20% on the previous year. The group achieved a 13.6% return on equity (ROE) (2008: 18.2%).
The board of directors has decided to maintain the group’s total distribution per ordinary share at the same level as the prior year, resulting in a total distribution for the year of 386 cents per share. The board has declared the dividend as a scrip distribution with a cash alternative.
“The global economic recession of 2009 was the most serious since the Great Depression of the 1930s. Trade declined rapidly in the final quarter of 2008 and into 2009. The real economy also suffered with industrial production, household consumption expenditure and employment coming under significant pressure. Many countries, except for some in Asia, slipped into recession. In developed countries, the downturn was deeper and more broadly felt than in any period since World War II,” said Maree.
The resilience and swift return to trend-like growth by key emerging nations, such as China, Brazil, and India seemingly confirms that a structural shift in economic influence remains intact. Emerging markets accounted for two-thirds of global growth in 2009, growing their share of global GDP to 31% in 2009 from 20% in 1998.
The sharp fall in commodity prices that accompanied the global slowdown was particularly concerning for African economies, many of which are heavily dependent on commodity exports as their primary source of export revenue. The tightening of global credit as a result of the crisis has also led to a reduction in private investment flows and bank financing, resulting in reduced capital flows and a curtailing of the availability of trade finance.
While South Africa was able to weather the storm to some degree, the effects of the global recession could not be avoided. In the fourth quarter of 2008, the country entered its first recession in 17 years, which lasted through the next two quarters. No sectors evaded the downturn, with mining and manufacturing the hardest hit. By the third quarter of 2009 the economy had emerged tentatively from the recession and a contraction in GDP of 1.8% was recorded for the year. Household consumption expenditure and gross fixed capital formation remained subdued, declining 2% and 4% respectively.
As the recession took its toll, demand for credit in both corporate and retail sectors fell. Company borrowing contracted in the last three quarters of the year. Household debt to disposable income remained elevated in 2009. Households are generally reducing debt levels after having over-extended themselves in the period of low interest rates from 2004 to 2006.
“Confidence in a sustainable but slow recovery is growing. While credit demand is expected to improve, a resurgence is only likely to follow a more tangible revival of economic activity,” said Maree.
Income statement analysis
Net interest income was down 2% and non-interest revenue grew a healthy 6% during 2009 with net fee and commission income up 3%, trading revenue up 12% and other revenue up 5%.
Credit impairment charges, after more than doubling in 2008 to R11 342 million, were up a further 7% in 2009 to R12 097 million. Non-performing loans (NPLs) continued to rise during the year and at year end comprised 6.2% of the book (2008: 3.4%). The credit loss ratio for the year was 1.60% compared with 1.55% in the prior year. The ratio of 1.60% comprises a charge of 1.84% in the first half of the year and 1.31% in the second half of the year, indicating the improvements in credit experience which started to be felt towards the end of 2009, especially in Personal & Business Banking.
Cost discipline was well maintained during the year, restricting overall banking activities cost growth to 8%. Proactive cost containment initiatives kept total operating cost growth in line with inflation in South Africa. However, Standard Bank continued to invest in strategic projects for the longer term benefit of its businesses and customers, especially in the rest of Africa. The group’s cost-to-income ratio deteriorated to 52.4%, given slower revenue growth.
Business unit performance
Personal & Business Banking headline earnings reflect margin pressure due to declining interest rates and still high credit impairments. It produced headline earnings of R3 835 million, down 19% on 2008, in an exceptionally tough environment. ROE was 15.8%, down from 19.7% the year before.
Mortgage lending advances grew by 2% and continued high credit losses resulted in a net loss for the year. Instalment sale and finance leases advances reduced 17% and this business also felt the impact of continued high credit losses. Card products recorded a commendable increase in earnings as a result of the non-recurrence of high credit losses in the prior year.
Transactional and lending product deposit margins came under pressure due to the negative endowment impact of lower interest rates on transactional accounts. Standard Bank’s strategy to grow its deposit base proved effective with the number of current accounts in South Africa growing 11%. Bancassurance revenues were affected by a reduction in new business with revenues from the rest of Africa providing some uplift following the Kenyan acquisition.
Corporate & Investment Banking experienced good growth in revenues but absorbed significantly higher credit losses. It delivered a robust performance in the tough economic conditions, with headline earnings down 6% to R7 507 million and ROE of 18.3% (2008: 22.1%).
The global markets business had an excellent year generating strong revenues from client trading. Investment banking had a tough start to the year, with credit impairments rising substantially due to higher impairments for NPLs across all regions as the impact of the turmoil in credit markets spread into emerging markets. Transactional products and services had a subdued year but continued to invest in infrastructure, particularly in the rest of Africa.
The financial results reported for the Wealth business unit are the consolidated results of Standard Bank’s 53.7% investment in Liberty. Liberty, which returned to profitability for the full year after reporting a loss in the first six months, reported normalised headline earnings of R135 million (2008: R1 573 million) for the year ended 31 December 2009. Of these headline earnings R72 million was attributable to Standard Bank (2008: R641 million).
Helping customers through the cycle
During the year Standard Bank worked actively to find solutions for individual, business and corporate customers unable to repay loans according to the original terms.
Standard Bank has assisted some 30 000 South African customers to keep their homes in the past year without fear of legal action or repossession. Standard Bank supports the debt review initiative recently implemented under the auspices of the National Credit Act and the bank’s debt review department, created to address the needs of customers availing themselves of debt counselling, has seen volumes increase substantially since June 2007.
The way in which this process has been implemented – with many interpretations of the act yet to be clarified – has created bottlenecks in the system, resulting in lengthy delays. During the debt counselling process, banks are unable to engage with customers to reschedule payment terms or, where deemed necessary, foreclose on assets to redeem unpaid debts.
Standard Bank continues to work closely with the authorities to improve the efficacy of the process for the good of its customers, the bank and the hitherto strong South African culture of debt repayment.
The financial position of corporate clients has been closely monitored through rigorous industry specific analysis and review. Proactive steps have included providing recapitalisation, funding, renegotiating lending facilities and bridging finance to clients in financial distress.
External pressures
Standard Bank recognises the need for politicians and regulators to take the necessary action to avoid the spectacular failures in banking that have marked the global financial crisis. However, Standard Bank is concerned that the unintended consequence of some of the proposed changes to banking regulations may hinder its ability to service its customers and increase the cost of funding for developing countries. While the crisis appears to be ending, the regulatory consequences for structure, capital, leverage and liquidity are just beginning and increasingly stringent developments in the regulatory universe will therefore remain a key challenge for the bank.
Black economic empowerment
Despite the persisting challenges to harmonising the financial sector charter with the Department of Trade and Industry’s Codes of Good Practice for BBBEE, and converting the former into a sector code, Standard Bank’s commitment to measurable progress in the transformation of the sector and of the group remains steadfast. The Standard Bank of South Africa will continue to meet the requirements of the codes, while also working toward internally set targets for those aspects of the charter that are not reflected in the codes.
Prospects
There appears to be consensus that the global economy is emerging from the harsh conditions experienced in 2008 and 2009. The recovery in 2010 is likely to be hesitant and employment and credit conditions are expected to remain under pressure. It is also likely that most of the growth in the global economy will originate from emerging markets, especially Asia. Africa’s trade ties to other developing economies should boost its growth rate.
In South Africa, inflation is expected to breach the upper limit of the target band in the second half of the year but it should average lower than 2009. Standard Bank also expects interest rates to be, on average, lower in 2010 than in 2009. These factors will support an economic recovery but South Africa’s return to trend growth is likely to lag its emerging market peers.
“We anticipate that the group’s normalised headline earnings will recover from the 2009 base and management’s immediate focus will be to restore earnings to 2008 levels. The financial impact of possible regulatory interventions is currently being assessed and may impact results and returns over the longer term. We believe that our strong capital base and client franchise in key emerging markets position us well.” said Maree.
Full details are available here.
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