Standard Bank ‘benefits from strong momentum’ across all of its markets

Standard Bank reports “robust” balance sheet growth in its latest voluntary trading update thanks to rising interest rates, which boosted the income it earns from loans, a phenomenon known in the banking sector as the endowment effect.

Africa’s biggest lender by assets said in a voluntary trading update on Monday it experienced “positive endowment tailwinds” in the 10 months to endOctober as rising interest rates resulted in double-digit net interest income growth compared with that the previous matching period.

The endowment effect occurs when banks automatically earn higher net interest income as rising borrowing costs force consumers to repay higher amounts on their borrowings.

In a follow-up call with investors, group finance director Arno Daehnke said that strong performance in 2022’s first 10 months is likely to result in a dividend payout ratio of 45%- 60%, in line with previous market guidance.

“For the second half of this year, the dividend will be at the upper end of that payout range,” said Daehnke. “While there are some clouds on the horizon in terms of slowing growth, the group continues to benefit from strong momentum across all its businesses and geographies. The earnings momentum stays intact.”

The Reserve Bank hiked borrowing costs by a cumulative 325 basis points (bps) so far this year in a bid to rein in abovetarget inflation, which reached an annual rate of 7.6% in October. The Bank targets an inflation rate range of 3%-6%.

Standard Bank said growth in noninterest revenue, essentially money it earns from insurance, trading and investment banking as opposed to extending loans, also remained robust. Group insurance earnings growth was underpinned by annual fee increases, continued good funeral policy performance and lower credit life claims compared with the prior period.

Daehnke said that Liberty’s earnings continued to recover as Covid-19 waned. Integration of the insurer since its buyout of minority shareholders, which was finalised in the first quarter, was going well.

“We remain confident that we will deliver the R600m revenue synergies, as well as the capital synergies, previously outlined,” Daehnke said on Liberty’s integration in the group.

Even so, he said, Liberty still faced “continued pressure” on margins and the bank was using new technology, products and a renewed sales push to drive higher-value new business and to improve margins.

Standard Bank said rising inflation in most of the majority of markets where it operates caused its costs to rise more than expected. Despite this upward cost pressure, particularly in the bank’s rest of Africa operations, it kept this below the group’s weighted average rate of inflation of 14%.

“The higher cost growth for the group is really coming from the Africa regions, where we are facing higher inflationary pressures,” said Daehnke.

From August to October, interest rates rose in all markets in which Standard operates except Angola and Zambia. While inflation in SA moderated from its 2022 peak of 7.8% in July, Standard Bank still expects price growth to average 6.9% for the year, which is well above the 6% upper limit of the central bank’s target band.

Group credit impairment charges increased in the 10month period, though this was off of a low base reported in the second half of 2021. The bank’s consumer and high-net-worth portfolio, essentially its retail banking arm, benefited from better collections and the continuing normalisation of payment holidays introduced to tide consumers over the Covid-19 pandemic. But this was partially offset by increased impairment charges from new business and what Standard Bank described as “pockets of consumer strain”.

Impairment charges on the lender’s business and commercial client division were largely flat, as a fall in nonperforming loans in SA was offset by increases in the rest of Africa.

Its high-fee-earning corporate and invest banking (CIB) division saw a normalisation in impairment charges though it raised its provisions due to a combination of growth in the unit’s portfolio, internal rating downgrades and client-specific provisions. Daehnke said the group remains well provided for and can weather an uptick in delinquencies. Its credit loss ratio for the 12 months to endDecember is expected to remain in the lower half of its throughthe-cycle target range of 70 bps to 100 bps.

Standard Bank said it remains on track to deliver on its 2025 targets of compound annual revenue growth of 7%9%; a cost-to-income ratio of about 50%; and a targeted return on equity of 17%-20%.

The bank is scheduled to report results for the year to end-December on March 9 2023.

THE HIGHER COST GROWTH FOR THE GROUP IS REALLY COMING FROM THE AFRICA REGIONS …

7%-9%

Standard Bank says it is on track for this 2025 target of compound yearly revenue growth

50%

the bank also expects to achieve this 2025 target cost-toincome ratio and a targeted return on equity of 17%-20%