Standard Bank shaping up after turnaround
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.