Stan­dard Bank shap­ing up af­ter turn­around

Finweek English Edition - - PRO PICK - BY LOUIS CHETTY Port­fo­lio Manager at Mo­men­tum As­set Man­age­ment

Stan­dard Bank (SBK) is one of t he core hold­ings i n our port­fo­lio. We added it late in 2013 when we saw ev­i­dence of a change in strat­egy and took the view that, af­ter a num­ber of years of be­low­peer re­turns, a turn­around in the bank was likely to oc­cur over the medium term. WE ALL MAKE MIS­TAKES. Dur­ing the 2000s, SBK em­barked on a global emerg­ing-mar­ket growth strat­egy and, for a num­ber of years, its in­ter­na­tional op­er­a­tions were a drag on group per­for­mance. The UK op­er­a­tion never seemed to gain trac­tion, while the African op­er­a­tions were still be­ing bed­ded down. Close to a third of the bank’s cap­i­tal was de­ployed in sub­op­ti­mal re­turn ge­ogra­phies. There was a dis­tinct re­fine­ment of the group’s fo­cus over 2012/13. From as­pir­ing to be a global emerg­ing-mar­kets busi­ness, the bank was set to fo­cus on de­vel­op­ing its African (ex-SA) fran­chise. IT’S HOW WE RE­SPOND AF­TER WE ERR THAT IS IM­POR­TANT. While we like am­bi­tious man­age­ment teams who take mea­sured risks to cre­ate share­holder value, we be­lieve it is es­sen­tial for strate­gies to be con­tin­u­ously re­vis­ited, re­fined and some­times, even com­pletely re-en­gi­neered as the world evolves. In such in­stances, bold ac­tions and strong man­age­ment teams are re­quired to change the course of a com­pany that may find it­self in tur­bu­lent wa­ters as a re­sult of mis­placed fo­cus ar­eas and chang­ing times. SBK is one such com­pany and some­what lost its way for a few years, but has sub­se­quently made the tough de­ci­sions re­quired to get the ship back on the right course. Roughly two years ago, we saw a dis­tinct shift in the bank’s fo­cus and strat­egy, one that we be­lieved to be well founded and achiev­able. WE HAVE SEEN A MARKED CHANGE IN THE SHAPE OF THE BANK SINCE THE SHIFT TO A MORE FO­CUSED STRAT­EGY. Since then, two sig­nif­i­cant trans­ac­tions were com­pleted that have sig­nif­i­cantly i mproved t he eff iciency of cap­i­tal de­ploy­ment: 60% of the UK op­er­a­tion has been sold to their strate­gic share­holder (ICBC) and the Rus­sian op­er­a­tions have been shed. As a re­sult, we be­lieve that the core African fran­chise has re­ceived more at­ten­tion which, in turn, has trans­lated into pos­i­tive earn­ings mo­men­tum and in­creased group prof­itabil­ity. THE EX-SA AFRICAN FRAN­CHISE HAS BE­COME A SIZE­ABLE AND HIGHLY PROF­ITABLE PART OF THE GROUP OVER THE PAST FEW YEARS. A key part of SBK’s in­vest­ment case is its African fran­chise (see graph). With close to 17% of its cap­i­tal de­ployed in the re­gion, the grow­ing prof­itabil­ity of this fran­chise has be­come en­vi­able among its lo­cal peers as they all look for ways to grow their pres­ence on the con­ti­nent. STAN­DARD BANK IS A MUCH MORE COM­PELLING IN­VEST­MENT THAN IT WAS THREE YEARS AGO. So what we have in SBK is a com­pany that, un­til re­cently, had roughly a third of its cap­i­tal gen­er­at­ing unattrac­tive re­turns (and even neg­a­tive in cer­tain in­stances), with an un­wieldy foot­print that spread the man­age­ment team too thinly and re­sulted in the prover­bial ball be­ing dropped reg­u­larly, to one that has a fo­cused strat­egy which the ex­ec­u­tive team is more likely to ex­e­cute on.

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