Test­ing times ahead

But CEO Sim Tsha­bal­ala be­lieves the bank’s Africa busi­ness will pro­pel it back to the top of the sec­tor

Financial Mail - - MONEY&INVESTING - Stephen Cranston cranstons@fm.co.za

When it comes to the main com­po­nents of the SA Inc side of the JSE, banks have proved to be more sta­ble than re­tail­ers, and way ahead of industrials such as con­struc­tion com­pa­nies.

Granted, there is noth­ing very ex­cit­ing about 3% growth in ad­justed earn­ings at Absa and 2% for SA op­er­a­tions at Ned­bank. But this has been achieved in an en­vi­ron­ment in which credit de­mand is shrink­ing in real terms.

Stan­dard Bank, which has a wider foot­print than ei­ther of the oth­ers, did well to in­crease bank­ing earn­ings by 6% to R11.7bn.

For CEO Sim Tsha­bal­ala, Africa is the dif­fer­en­tia­tor that will pro­pel the bank back to the top of the bank­ing sec­tor — though he still has work to do to in­crease the re­turn on eq­uity from 17.5% to match Firstrand’s 22%-plus.

Jaap Mei­jer, bank­ing an­a­lyst at Dubai-based Arqaam Cap­i­tal, says the re­turn on risk-weighted as­sets at Stan­dard Bank is al­ready the best in SA, at 2.9%.

The main dis­ap­point­ment was a fall in the net in­ter­est mar­gin from 4.6% to 4.5%.

The SA per­for­mance was quite strong, given that im­proved con­sumer con­fi­dence has not yet trans­lated into higher spend­ing or fixed in­vest­ment. For ex­am­ple, while home loan lend­ing was up 3%, new mort­gage ap­pli­ca­tions fell 4%.

The bank re­mains the top mort­gage lender, with a 29.6% mar­ket share — well ahead of Ned­bank at 21.7% and Absa at 20.4%. But Stan­dard Bank still lags in ve­hi­cle and as­set fi­nance, where it is fourth with an 18.7% share, and it fights Absa for supremacy in cards. Its share of de­posits is just ahead of Firstrand.

The per­sonal & busi­ness bank­ing unit in SA achieved a 5% in­crease in head­line earn­ings to R6bn, and still ac­counts for more than half the group’s bank­ing earn­ings.

It has kept its cus­tomer base at 8.1mil­lion. “But we are tak­ing the new com­pe­ti­tion, such as Dis­cov­ery Bank and ul­ti­mately plat­forms such as Google and Alibaba very se­ri­ously,” says Tsha­bal­ala. The bank is re­train­ing its cus­tomer re­la­tions staff, and digi­tis­ing pro­cesses.

In view of the re­cent cy­ber­at­tack at its Lib­erty Hold­ings sub­sidiary, the group is also step­ping up in­vest­ment in dig­i­tal fraud pre­ven­tion. This has taken its toll on cost, how­ever, and the Jaws ra­tio — the dif­fer­ence be­tween cost growth and rev­enue growth — was a neg­a­tive 1.8%.

The faster-growing African op­er­a­tions played their part. The earn­ings in the rest of Africa were up 32% and now ac­count for al­most a third of the bot­tom line.

An­gola, Ghana, Mozam­bique, Nige­ria and Uganda were the five most prof­itable coun­tries.

Tsha­bal­ala says in­fla­tion is eas­ing and ex­change rates are sta­bil­is­ing in Africa. The ex­cep­tion was An­gola, in which the av­er­age ex­change rate was down 23% against the dol­lar over the half-year — but it was the largest source of prof­its none­the­less.

The re­tail busi­ness is a neg­li­gi­ble con­trib­u­tor in Africa, where the cor­po­rate & in­vest­ment bank (CIB) makes the big bucks. But re­tail Africa’s con­tri­bu­tion has more than dou­bled to R201m, a mod­est sum as there are now 5-mil­lion cus­tomers in what it quaintly calls the “Africa re­gions”.

CIB is al­ready fully com­pet­i­tive with Firstrand’s RMB unit. Its earn­ings were up 8% and, be­cause so much of its rev­enue is non­rand, it pub­lishes that these earn­ings were up 13% in con­stant cur­rency, with An­gola the main cul­prit.

It ben­e­fited from a di­ver­sity of rev­enue streams, with both SA do­mes­tic and multi­na­tional clients: fi­nan­cial in­sti­tu­tions, industrials and con­sumer busi­nesses are the core clients, and there was im­proved rev­enue from power, oil and gas, and min­ing and met­als.

In­vest­ment bank­ing was the strong per­former, with rev­enues up 9%. CIB’S bad debts are neg­li­gi­ble at three ba­sis points (0.03%).

Pre­vi­ously im­paired loans in Nige­ria were re­versed, though there were some im­pair­ments in the SA con­sumer sec­tor, in­clud­ing re­tail­ers.

Stan­dard Bank’s re­sults are still af­fected by busi­nesses in which it does not have man­age­ment con­trol: it owns 40% of its old Lon­don bank­ing op­er­a­tion, now called ICBC Stan­dard Bank Plc, which made a R70m loss. But its 20% in ICBC Ar­gentina was pos­i­tive and at R202m made a larger con­tri­bu­tion than the en­tire Africa re­gion’s re­tail busi­ness.

Tsha­bal­ala has made it clear that there is no in­ten­tion to change the sta­tus of Lib­erty. “It is key to our vi­sion to be­come a uni­ver­sal fi­nan­cial ser­vices group,” he says. It will nei­ther be sold nor be­come a 100% sub­sidiary.

But it con­tin­ues to be a drag on the group, even if the faster growth of the bank makes this less rel­e­vant. Lib­erty’s con­tri­bu­tion to group head­line earn­ings of R857m was 3% lower.

Tsha­bal­ala re­mains op­ti­mistic in the cur­rent soggy cli­mate. “There is scope to grow our lend­ing book ju­di­ciously. We still have a very strong fran­chise in this mar­ket.”

Stan­dard Bank has been a stal­wart of most SA eq­uity port­fo­lios for decades and it re­mains a re­li­able earn­ings and div­i­dend gen­er­a­tor. Along­side long­time in­vestors such as Al­lan Gray, Old Mu­tual and Stan­lib, and its an­chor in­vestor, the In­dus­trial & Com­mer­cial Bank of China, it has also at­tracted US gi­ants such as Van­guard and Di­men­sional, and Sin­ga­pore’s GIC.

But the new, more com­pet­i­tive en­vi­ron­ment is likely to test the bank as never be­fore.

Freddy Mavunda

Sim Tsha­bal­ala: Pre­par­ing for new com­pe­ti­tion

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