Standard Bank results show consumers are back

Interim results from Standard Bank indicate that life has moved on from the Covid- 19 pandemic and the social unrest that rocked SA a year ago.

Not only did Standard Bank report an increase of 33percent in headline earnings for the six months to end June 2022 compared with a year ago, management also noted that earnings of R15.3 billion was a new record for the group. The strong growth came as a result of recovery in the problematic first half of the previous financial year, and organic growth. Standard Bank CEO Sim Tshabalala says growth was driven by an increase in new clients ( moving their banking business to Standard Bank) and continued growth in the balance sheet on the back of new deposits and growth in loans and advances. Revenue was also supported by an increase in transaction volumes and an increase in fees. The income statement shows that net interest income – the difference between the interest paid to depositors and interest paid by borrowers – increased by a solid 15percent. Non- interest revenue increased 13percent, because clients did more transactions. The increase in revenue, good cost control and relatively low provisions for bad debt nudged all the important numbers in the right direction. Return on equity increased to 15.3percent ( 12.9percent in the comparable six months), the cost- toincome ratio improved to 560percent ( 58.3percent) and the credit loss ratio fell to 82 basic points ( 88bps). The result was that headline earnings per share increased by 37percent to R9.36, making an interim dividend of R5.15 per share possible. Net fee and commission revenue increased by 10percent due to higher transactional activity as lockdown restrictions eased as well as the impact of annual price increases. The growth in digital channel volumes continues to outpace that of traditional channels in line with client preference. “Strong average balance sheet growth and positive endowment from higher interest rates supported net interest income growth. Net interest margin increased by 22 basis points to 383 basis points, of which 17 basis points related to endowment,” says Tshabalala in his commentary to the results.

Credit impairment

Strong growth in revenue translated to record earnings growth as strict lending criteria kept provisions for bad debts low, while operating costs were kept in hand. Credit impairment charges increased by 2percent after Standard Bank raised additional provisions as a result of higher loans and advances, as well as restructuring of debt and higher impairments at the commercial and industrial cluster. “This was largely offset by decreases related to increased collections and improved risk profiles as payment holiday customers resumed payments. The credit loss ratio was 82 basis points, down relative to the first half of 2021, but up relative to the second six months of 2021,” says management. Operating expenses increased by 10percent – way less than the increase in revenue, boosting earnings. Management notes that costs increased by less than the average inflation rate of the markets that Standard Bank operates in. The increase was driven by annual salary increases, higher variable remuneration, and the normalisation of certain business expenses as Covidrelated restrictions were removed ( for example, marketing and travel). While Standard Bank says it continues to expand and drive its digital banking channels, spending on information technology systems increased by a rather low 7percent. Management says additional spending on cloud storage, data and platforms was offset by savings in more traditional areas of IT spend, such as the decommissioning of legacy systems and on- premise data centres.

Tshabalala says Standard Bank made good progress on its 2025 commitments, both strategically and financially. “It exceeded internal expectations in terms of revenue growth, delivered strong positive jaws, retained the credit loss ratio within the group’s throughthe- cycle range and return on equity moved closer to the 2025 target range of 17percent to 20percent.”

Outlook

Management points out that shareholders should however not expect the same pace of growth for the full financial year to end December 2022. “Global growth is expected to slow as tighter financing conditions take effect,” says Tshabalala. “Inflationary pressures are, however, expected to fade. The International Monetary Fund is forecasting global real GDP growth of 3.2percent and 3.8percent in sub- Saharan Africa for 2022. “Further monetary tightening in SA is expected to negatively impact confidence and demand and constrain real GDP growth to 2.3percent in 2022. Electricity supply issues may constrain growth even further.” Net interest income is expected to grow by low double digits in calendar 2022 and non- interest revenue growth is expected to moderate to high single digits as the stronger second half of the previous financial year is included in the comparative figures.

“While the environment remains volatile and uncertain, we are well positioned with strong capital ratios, an unprecedented stock of balance sheet credit provisions and a committed team ready to drive our business forward. “We remain committed to delivering positive impact and attractive shareholder returns,” says Tshabalala.

Analysts’ take

Renier de Bruyn, bank analyst at Sanlam Private Wealth, says Standard Bank’s earnings recovered well from previous lows. “Similar to what we have seen from the recent Nedbank and Absa results, Standard Bank’s earnings are recovering well from the 2020 lows when high provisions for bad debts, low interest rates and a reduction in transaction volumes hurt profits. “In 2021, earnings started to recover as credit losses normalised, but this year we are seeing the benefits from rising interest rates and the economy continuing to open up. Banks are also able to manage their cost growth below revenue growth as digitalisation reduces the need for branch space and headcount,” says De Bruyn. He says all the large banks in SA are currently enjoying a favourable earnings and capital generation cycle. “While rising rates are positive for their net interest margins, higher interest rates and inflationary pressures should eventually lead to upward pressure on credit losses. “However, the banks are running with high capital ratios and have retained some of the higher Covid- related provisions for credit losses that may be used to offset some of the impact on future earnings,” he says. William Verdoes, analyst at stockbroker BP Bernstein, says bank shares have increased somewhat in the last few months as investors expected good results. “Standard Bank posted very, very strong results. “But investors must remember the strong growth came off a lower base and that growth for the full year won’t match these figures. “However, over the medium- to long terms the environment looks good for banks to continue to deliver good earnings growth, and pay good dividends,” says Verdoes. “Bank shares offer good value, and if they fall back on a weaker rand – like they