Standard Bank Group Limited (SBK) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. On behalf of the Standard Bank Group Board of Directors, the group ExCo, and all of us at Standard Bank, welcome to the 2019 results presentation. A particular welcome if this is your first Standard Bank results presentation. If the Standard Bank group is new to you, we hope that this slide will be a useful summary. The key to understanding this group of companies is our purpose: Africa is our home, we drive our growth. Everything we do emerges from this simple statement of intent. 2019 was, of course, a very difficult year for the world economy. Sub-Saharan Africa, however, continued to be a bright spot, one of the world's fastest-changing and fastest-growing regions. The regulatory and business environments for financial services in Africa also continued to develop and change rapidly over the year. On the positive side, we welcomed the ratification of the African Continental Free Trade Agreement and the removal of interest rate caps in Kenya. On the negative side, some central banks continued to pursue heterodox policies, an example being the Central Bank of Nigeria with their asymmetric application of cash reserving requirements. As always, navigating Africa's complexities requires local knowledge. Growth disappointed in South Africa, to a large extent because of the pace of structural reform which was too slow. As we learned on Tuesday, South Africa grew at just 0.2% in 2019 and was in recession during the second half of the year. According to Standard Bank's economists, the direct impact of load shedding on the economy was enormous. They estimate that without load shedding, the economy would have grown at around 0.8%. Arno will shortly discuss our numbers in detail, so I'll just make a few headline points. Headline earnings in our banking business were up 5% to ZAR 27.2 billion. However, the group's earnings only grew by 1% to ZAR 28.2 billion, a disappointing outcome. Most of the gap between the banking activities and the group result is attributable to our 40% of the losses incurred by ICBCS. I'd like to make a few points on this. First, this happened on our watch. The losses were incurred within ICBCS' board-approved risk appetite. Equally, though, as a 40% shareholder, we have limited influence over ICBCS nor can we simply cut our losses. In terms of our agreements with ICBC, the option to take a further shareholding is theirs. It is unlikely that ICBC will do this until such time as ICBCS is profitable. Third, we are acutely aware that shareholders' capital is far better deployed in Africa. ICBCS is off-strategy for us and outside our purpose. Fourth, we continued to have robust discussions with ICBC about the way forward for ICBCS. We are, for the time being, satisfied with the management's actions that have been taken this year, including significant reductions in business lines and in head count. As shareholders, we agree that much closer integration of ICBCS into the ICBC Group will be required in order for this business to achieve a sustainable profit. Fifth, it is essential to see ICBCS in the context of our overall strategic partnership with ICBC, which remains of great benefit to both parties. For instance, since 2016, we have jointly supported investment banking deals worth over $3.4 billion. In 2019, CIB revenues arising from our partnership were up 24% year-on-year. PBB's revenues from Africa China Banking were up 43% on the prior year. Having said all this, our ROE of 16.8% falls well short of our target range of 18% to 20%. Our strategy hasn't changed and is not changing. Our purpose is set in stone and shapes our choices. Our vision is to be the leading financial services organization in, for and across Africa, delivering exceptional client experiences and superior value. Our key focus areas remain unchanged as are the value drivers we measure ourselves against. As you will see, we have again structured this presentation by our 5 value drivers. I will cover client focus, employee engagement, risk and conduct. And our CFO, Dr. Arno Daehnke, will talk about our financial outcome and our social, economic and environmental impact. I'll conclude by discussing our immediate and longer-term priorities. Our first, and in many ways, most important value driver is client focus, which we measure in 2 ways: we measure our client experience through surveys and we measure the extent to which we enable our clients to reach their goals. On the client survey side, satisfaction remained constant at a high level in CIB, Wealth and PBB Africa Regions. In PBB South Africa, a dip in client satisfaction followed the reconfiguration of our infrastructure. The team did well to restore client satisfaction in the second half of the year. Measured by the extents to which we make positive differences in our clients' businesses, 2019 was another good year. We were entrusted by households, companies and governments to hold ZAR 1.3 trillion in deposits. We paid out ZAR 64 billion in interest. We enabled international trade to the value of USD 138 through letters of credit and lent ZAR 49 billion to enable people to buy homes. Across the Wealth business line, Liberty and Standard, it was our privilege to manage and administer ZAR 1.1 trillion worth of our clients' assets. One of the things we are very pleased about this year is the rapid pace of new product releases using our digital capabilities and particularly new digital products that we have developed in partnerships. Each of these products enables us to serve our clients better and to grow our revenues in new areas. For example, our Africa China Agent Proposition and Africa China Export Proposition are partnerships with the ICBC to grow trade between Africa and China. We have also made good progress to improve client experiences in ways that clients will never see, but that they will feel in a quicker, better and more personal experience. Some of this we've done in partnership with big tech companies, such as our cloud partnership with Amazon Web Services, Microsoft and Salesforce. And some of our innovations emerge from our rapidly developing internal big data and intelligent automation capabilities. We are now using more than 250 bots to simplify and accelerate our internal processes, and we have transferred more than 50 workloads from our internal servers to the cloud. One of the strongest predictors of client satisfaction and a company's ability to generate superior returns is its level of employee engagement. The building blocks of employee engagement are 2: first, having the right skills so that one can do meaningful and rewarding work; and second, working in a welcoming, safe and inclusive workplace. We continued to concentrate on both these building blocks. For example, during 2019, we retrained 4,200 branch-based employees as universal bankers meaning that they are able to serve our clients in a more efficient and understanding way and also that their jobs are more interesting and fulfilling. We made speedy progress in making our business more inclusive, more diverse and more representative of the societies in which we work. In South Africa, we exceeded our 2019 targets for the representation of black people and black women in middle and senior management. We are now focusing on achieving greater representation of black people in top management in South Africa and on appointing more women, and particularly black women, in top management. Our group board is now more than 40% women, of which 5 are black women. In addition to the traditional banking risks, which Arno will discuss shortly, we carefully monitor and manage 10 further emerging risk types. This morning, I'll discuss only 4 of these risk types: cyber risk, climate risk, business disruption risk and regulatory impact risk. First, cyber risk. Cybercrime remains a major challenge. During 2019, the group's systems were subject to many cyberattacks every day. The number is quite astonishing. Constant vigilance is required. Thanks to quicker detection and responses, we were able to recover 58% of the money that our clients lost to digital fraud in 2019. This was up from 29% in 2018. Next, business disruption risk, particularly during the first half of 2019, where a number of systems outages that took too long to repair. We recognize that prolonged systems outages severely inconvenience our clients. They undermined their trust in us and damaged our reputation. I am pleased to report that we made encouraging progress in restoring systems' capability and stability and reducing recovery time in the second half of the year. As a result, and despite the difficult first half, IT stability incidents were down 12% year-on-year. But we are not declaring victory. We recognize that client expectations on system stability are set by the extremely stable services provided by the big tech firms. Our aspiration is to match these experiences. Over 2019, another large source of business disruption risk was load shedding in South Africa. This year, COVID-19 may present an equal or greater risk. We have well-developed business continuity plans in place for both. Every year, in South Africa, every business faces substantial disruption risk, ultimately caused by South Africa's appalling levels of unemployment and inequality. Our commitment to supporting inclusive growth isn't a nice to have. It's an essential risk mitigant. Turning to regulatory risk, and in addition to Africa-specific regulatory risk that I mentioned earlier, we are also concerned about the global regulation of digital finance. In our view, the guiding principle should be simple: if a company, no matter what it is called, takes deposits, makes loans, offers insurance or provides asset management, it should be regulated by the financial sector authorities as a financial sector firm. On climate risk, we are committed to fully understanding and accurately reporting on our exposure to carbon-intensive assets in line with the TCFD principles. The Standard Bank Group supports the goals of the Paris Agreement and recognizes that climate change is a material risk to our ability to generate value for our stakeholders over time. In evaluating whether or not to fund coal-fired power generation and thermal coal mining projects, we will consider the energy situation in the region concerned, future energy demand in relation to the country's energy strategy, the country's commitments to reducing their greenhouse gas emissions in line with the Paris Agreement and technically and financially feasible and cost-effective power generation alternatives that are available in the relevant industry and country. We will comply with all the applicable laws and standards, including the Equator Principles, the IFC Environmental and Performance Standards (sic) [ Environmental and Social Performance Standards ] and the UN Principles of Responsible Banking. Our coal-fired power generation policy was published during the year and our thermal coal mining policy was released on SENS this morning. Last on this slides -- on this slide, conduct. We are always mindful that we earn and maintain our license to operate every day by treating clients fairly. We were pleased by the 6% decline in the number of complaints about us referred to the Ombudsman for Banking Services in South Africa. We were even more pleased to win 2 awards from the OBS, these were best large bank for resolving banking customer complaints and the award for innovation in dispute resolution. I now hand you over to our CFO, Arno Daehnke.

Good morning, everyone. It's great being here, and it's my pleasure to present the 2019 financial year results to you. This slide illustrates the breadth and diversity of the Standard Bank franchise. The bar charts represent the client revenue we make by client type, product as well as geography. In 2019, our fastest-growing line segments were large domestic clients as well as business banking clients. In the middle bar, you can see that transactional banking and lending remained our core revenue-generating products, but insurance, interestingly, was the fastest-growing product in 2019. Geographically, revenues from Africa Regions increased to ZAR 35 billion, growing by 12% in constant currency and they now comprise 32% of the group's revenues, up from 30% in the last year. As a management team, we remain committed to driving sustainable value for our investors. And this slide illustrates how we think about growth, resilience and returns to drive shareholder value. I will take you through each of these drivers now on the following slides. Running through the group's income statement, you can see here that total income grew to ZAR 110.5 billion from ZAR 105.3 billion in the prior period, a growth rate of 5%. Net interest income growth of 6% was supported by strong loans and advances growth as well as strong deposit growth across the portfolio, however, offset slightly by declining margins. Noninterest revenue growth of 4% was driven by a strong year in Global Markets trading. A rigorous focus on costs was maintained in 2019, resulting in cost growth of 3.7%, and therefore, delivering positive jaws of 113 basis points and a reduced cost-to-income ratio of 56.4%. This cost growth was achieved despite investments in customer experience initiatives, staff reskilling programs already mentioned by Sim as well as investments into our IT resilience and the costs associated with the infrastructure reconfiguration in our retail branch footprint in South Africa. You can see here the 23% increase in credit impairments to ZAR 8 billion, but this was in line with our expectations off a very low base in 2018. The group's credit loss ratio therefore increased to 68 basis points, which is slightly below our 70 to 100 basis points guidance range. Banking activities headline earnings consequently grew by 5% to ZAR 27.2 billion, which is a very pleasing performance considering the current markets. This slide illustrates the movements in average balances for the year where you can see overall average loans grew by 8%, and within that, PBB up 6% and CIB up a pleasing 12%. Within Personal & Business Banking, the mortgage portfolio grew 4% and the VAF lending portfolio grew 9% as the SA franchise turnaround gathered pace. Personal unsecured lending reflected the highest growth rate at 11%. Within our Corporate & Investment Bank, average loan growth of 12% was supported by a strong growth towards the end of 2018. And in 2019, Investment Banking grew further 7% with another record origination year of disposing ZAR 170 billion of loans supporting our clients on their growth journeys. Average deposit balances continued a solid trajectory and PBB grew deposits by 6% and CIB by 11% with good local currency account origination and balanced growth in Ghana, Kenya and Mozambique specifically. NII grew by 6% for the period as volume growth was offset by a slight margin reduction of 7 basis points. Endowment negatively impacted margin in 2019 by 2 basis points as positive endowments in South Africa and in Wealth International offset declining endowment benefit in Africa Regions as interest rates were cut in these markets. Margins on lending increased in 2019 due to a changing mix in our portfolio. Lending growth in Africa Regions outpaced growth in South Africa as it has done so for the past few years, and higher-yielding unsecured lending became a bigger proportion of our book relative to the last year. Deposit margins were squeezed by higher cash reserving requirements in Nigeria, mentioned already by Sim, and the mix impact of wholesale priced deposits growing faster than retail priced deposits. Noninterest revenue grew 4%, supported by strong growth in trading income of 12%, an excellent performance. Fee growth remained under pressure where our largest category of fee income, and these are account transaction fees, declined 3% year-on-year and this is in line with our customers' increasing preference for convenient and more cost-effective digital channels over the traditional channels. The regulatory impact of fee caps and competitive pressures also impacted fee growth. Fee expenses, think about card, cash as well as our loyalty program called UCount, increased 8% over the year, resulting in an increase of fees of 1% -- a net increase of fees of 1%, as shown in this graph. Trading income picked up in the second half of 2019 on the back of increased volatility and ended up the year up 12%. Other noninterest revenue was supported by growth in the VAF fleet portfolio and increased bancassurance revenue. I'm starting the credit discussion by looking at the balance sheet provisions for our personal and business bank. Good loan growth over the period necessitated an increase in stage 1 and stage 2 provisions, as you would expect, but this was more than offset by improvements in credit modeling by PBB and enhanced collections. Stage 3 loans have increased as a percentage of the book, mainly in the secured lending portfolios of mortgages and VAF, which necessitated an increase in stage 3 provisions. And we kept our coverage ratio at 50% as a consequence. Turning to CIB. As you can see in the graph on the bottom left-hand side, stage 3 loans declined year-on-year to 1.6% of the book due to the write-off of a few exposures during the year. These write-offs were names where coverage ratios had been particularly high. The required coverage ratio for the remaining stage fee loans was therefore lower in 2019, which resulted in lower balance sheet provisions. We are comfortable that sufficient collateral is held against stage 3 exposures. Stage 1 and Stage 2 exposures and provisions increased in line with loan growth and also some deterioration in risk rates. The income statements charge for credit of ZAR 8 billion increased by 23% in 2019 and resulted in a credit loss of 68 basis points, which is just below the disclosed 70 to 100 basis points guidance range. In Personal Bank -- Personal & Business Banking, the charge increased by 17% to an 89 basis point loss ratio and was driven by balance sheet growth across-the-board and elevated risk in our VAF portfolio due to the difficult economic climate in South Africa. In CIB, the charge for credit increased by 52% off a very low base in 2018 to a 32 basis point loss ratio. In South Africa, a deterioration of corporate risk quality drove year-on-year increases, offset by recoveries. In Africa Regions, credit impairment charges increased off a low base driven by single name in payments in east and south and central regions. Operating expenses of 3.7% should be considered relative to the weighted average inflation in the markets in which we operate of 5.1% as well as the level of investment required to transform our business for a digital future. A decline in head count and incentives supported slower staff cost growth. As you can see here, other operating expenses increased by 6%. And within this, IT costs grew by 17% to ZAR 7.5 billion. This reflecting higher software licensing and maintenance costs, the inflationary impact of a weaker rand on the U.S. dollar, increase in cloud-related costs as well as an increase in outsourcing costs. The adoption of IFRS 16, our new accounting standard, gave rise to an increase in depreciation and a decrease in premises costs. The net impact of IFRS 16 was not material for the group. Unpacking the IT costs further, this slide shows the full cost of the IT function, including the ZAR 7.5 billion element we saw in the previous slide. For the year under review, as you can see here, the total IT function-related spend increased by only 5%, which is a better view of how we measure our IT costs. The CAGR in the spend over 4 years has been 7%. As our group continues to evolve and as IT becomes a bigger driver of our strategy, we expect continued investment in technology. We also expect fewer larger projects capitalized as intangible assets, which means that over the short term, our income statement will need to support new investments as well as the amortization of previously large capitalized projects, such as our core banking replacement projects. Other banking interests recorded a headline earnings loss of ZAR 864 million. ICBCS recorded a disappointing set of results for 2019. The loss recorded in the group's headline earnings of ZAR 1.4 billion is made up of an operating loss in this entity; a provision relating to business restructuring, which Sim already referred to; and a loss of ZAR 1.1 billion relating to a single client event, which we spoke about at our interim results. In September 2019, we recognized $163 million impairment in our stake of ICBCS, thereby reducing the carrying value from $383 million to $220 million at the time. This equated to a ZAR 2.6 billion impairment, which is reported outside of headline earnings. As Sim covered earlier, we have made meaningful progress with ICBCS management as well as the ICBC Group on how best to put the business on a path of sustainable profitability. ICBC Argentina performed well for the 8 months prior to our exercise of option to sell our stake to the ICBC Group and delivered a headline earnings contribution from the group's 20% stake of ZAR 583 million. The sale of our stake remains subject to Chinese regulatory approvals, and we expect to reach completion in the coming months. The financial results reported from Liberty are the consolidated results of the group's 56% investment in Liberty adjusted for deemed treasury shares. In 2019, Liberty delivered successful outcomes on their key strategic focus areas and they discussed that at the presentation in this room last week. Liberty grew headline earnings by 23% to ZAR 3.3 billion. And the group's share of these earnings, as you can see here, amounted to ZAR 1.9 billion, up 16% on the prior year, after adjusting for the treasury shares, which I referred to earlier on. In 2019, we actively managed our capital stack to optimize returns. During the year, we issued ZAR 1.9 billion of alternative Tier 1 capital, ZAR 1 billion Tier 2 capital in the local market and successfully placed and attractively priced in overall $400 million Tier 2 bond in the international market, thereby diversifying the group's rich capital investor base. We have maintained our robust Basel III-compliant capital position with a common equity tier 1 ratio of 14%. During the year, we felt it prudent to maintain our capital buffers ahead of our SA sovereign downgrade, Basel III finalization, and of course, also to continue to cater for Africa Regions growth opportunities. Including the IFRS 9 phase-in impact, which should equalize in a year's time, the common equity Tier 1 ratio dipped slightly to 13.8%. Liquidity ratios are maintained in excess of Basel III requirements. Banking return on equity dipped to 18.1%, given the capital buffers held at the center I spoke about just now and the lower CIB ROE, which I will cover a little bit later. Group return on equity was dampened by the loss incurred by ICBCS and fell to 16.8%. You would have noted we have declared a final dividend of ZAR 5.40 per share, and thus, maintaining the same dividend per share as the final dividend declared in 2018. This resulted in a full year dividend for the -- of ZAR 9.94 per share, up 2% from the prior year. Turning to the business line performance, and starting with Personal & Business Banking South Africa where we continued to transform our business to meet our clients' changing needs. Our ability to serve our clients through digital channels took a step up in 2019. As an example, more than 1/4 of personal unsecured loans and savings and investments were originated through digital channels in 2019. The pace of digital adoption by our South African customers continues to increase. Digital transactions increased 11% overall. Face-to-face transaction decreased by 16%. And we have rightsized our infrastructure accordingly as the data points on the slide evidence. Branch closures in the first half of 2019 adversely impacted client experience. However, we are pleased to report that PBB SA customers have -- numbers have stabilized and client satisfaction scores have improved in the second half of the year. In Africa Regions where cash remains an important product for us, 92% of customers are now transacting outside of the branch and we continued to roll out our infrastructure and invest in supporting structures to enable the continuation of these digitization trends. We have improved our client onboarding processes across our network and have deployed the capability for our clients to either digitally onboard themselves or onboard within minutes at one of our points of representation. Through these efforts, especially when we're using our ecosystems to onboard customers instantly in the workplace, we are seeing much higher account utilization rates as the improved onboarding process solves directly and much better for the immediate client needs. The overall financial results for PBB for 2019 was pleasing with headline earnings up 6% to ZAR 16.5 billion. Overall revenue growth for PBB was 5% with Africa Regions now contributing almost 1/4 of PBB's revenues and this is with a steadily increasing contribution. Positive jaws of 210 basis points was achieved despite absorbing costs relating to the SA branch configuration of approximately ZAR 500 million. PBB jaws would have been nearly 3% if these once-off costs would have been excluded. The cost-to-income ratio of PBB reduced to below 60%. PBB ROE, as you can see here, increased to a pleasing 22.4%, with the ROE in PBB Africa Regions approaching 10%. On a geographic basis, PBB South Africa was up 2%. Africa Regions and Wealth continued to deliver very strong performance, as you can see on this slide. In CIB, client revenues increased 7%, which was a balanced performance across our diversified franchise. As a result of ongoing Sino-U.S. trade wars, there has been a slowdown in multinational corporate clients growth. Despite this, our revenue from multinationals still grew 4%, and this remains the core part of our franchise. Domestic clients grew by 12% on the back of notable activity in South Africa, West Africa and East Africa. From a sector perspective, we saw continued strong performance from financial institutions, underpinned by a focused effort to better serve nonbanking financial institution sectors. Growth in power infrastructure was supported by renewable energy transactions. Mining and metals growth was driven by change-in-ownership transactions as some mining majors exited South Africa. And investment into Africa Regions with Mozambique and Ghana being examples of where investment flows were particularly strong. The telecoms and media teams facilitated some key deals in South Africa and Africa Regions. From a product lens, Global Markets posted a strong second half, resulting good finish with revenues up 7%. Our Transactional Products and Services business, which has a large Africa Regions presence compared to South Africa, was impacted by regulatory changes in markets like Nigeria as well as Zimbabwe. Revenue growth was a more muted 3% for this business. In Investment Banking, we have seen a continued demand for loans and advances, but a slowdown in knowledge fees, resulting in revenues up 2%. CIB overcame significant headwinds to deliver headline earnings growth of 5% for the year to ZAR 11.8 billion. Cost growth of 3% led to positive jaws of 128 basis points and improved cost-to-income ratio to 53.7%. Strong growth in Investment Bank assets in Africa Regions and portfolio rating downgrades in South Africa in late 2018 drove higher capital demand, and this was a drag on ROE, which declined to 18.1%. Global Markets earnings grew 18 -- grew 15%, apologies, for the year, supported by a strong client activity, particularly in Africa Regions. Strong lending growth in Investment Banking supported NII and earnings growth. Headline earnings for TPS were down 13%. The regulatory headwinds experienced in some of our key markets, hyperinflation in Zimbabwe and the devaluation of the Angolan kwanza had a significant impact on TPS relative to the business units -- to the other business units in CIB. TPS performance was further adversely impacted by a spike in credit losses in East Africa and in South and Central Africa. Included in operating expenses for TPS is also material operational risk loss in East Africa, which should not occur -- reoccur. Over the last 5 years prior to 2019, the TPS business has reported compound earnings growth of 9%, and we are confident that the business will resume operating performance in line with the previous trends. Analyzing the results by region, it can be seen that SBSA grew by 4% while Africa Regions grew by 5% or 9% on a constant currency basis. SBSA income grew by 2%, and cost growth was tightly contained also to 2%. The credit loss ratio ended at a similar position to the last year. And a more favorable effective tax rate resulted in headline earnings increasing by 4%. ROE expanded for SBSA to 16.9% for the year. We are expecting a downgrade of the SA sovereign to junk status, and we are absorb -- positioned to absorb the funding impact which is likely to arise thereof. This will continue to mean a difficult operating environment for SBSA. Turning now to Africa Regions. Given that this region grew by 15% for the first half in 2019, it is evident that a meaningful slowdown in earnings growth occurred in the second half. The slowdown arose from regulatory headwinds in revenue generation, negative endowment impact in key markets and credit impairments in CIB already referred to. While these impacts are unfortunate, we are encouraged by continued strong balance sheet growth in Africa Regions with lending growing by 15% and our deposits growing by 10% in constant currency. While Africa Regions' contribution to banking headline earnings remained at 31%, their contribution to revenue growth increased from 30% in 2018 to 32% of the group's revenue in 2019. These trends bode well for future strong earnings growth from this region. ROE in Africa Regions was dampened by capital injections in Côte d'Ivoire, DRC, Ghana and Tanzania and higher risk-weighted assets given sovereign downgrades, particularly in Zambia, for example, and healthy increases in lending and trading activities. In East Africa, we saw strong revenue growth at 14% constant currency, dampened by credit provisions and operational risk losses, but assisted by increasing shareholding in Kenya, which resulted in headline earnings growth of 16% in 2019 in constant currency terms. South and central region generated good revenue growth of 12%, but experienced trade impairments in mining and construction sectors. The operating environment in Zimbabwe was incredibly difficult in 2019, and this country now qualifies as a hyperinflation economy and we have adjusted our accounts accordingly. We were delighted to list our Namibian subsidiary in the last quarter of 2019. This IPO was executed in a persistent recession in this market and with a high proportion of BBBEE participation. West Africa revenue growth of 9% in constant currency was pleasing given increased cash reserving costs, which Sim referred to, and other regulatory changes in Nigeria. Credit impairments in the region appear elevated year-on-year given the write-backs in the first half of 2018. Headline earnings increased a pleasing 16% in constant currency in this region. This slide sets out our medium-term financial targets, which you will be familiar with. You will notice we have not altered our medium-term targets. And while we are cognizant of the immediate and significant headwinds facing the global economy, we deem it too early to adjust the targets now. In the medium term, we anticipate that balance sheet growth in Africa Regions should continue to outpace that in South Africa, and NII should outpace NIR. We expect revenue headwinds, but we will continue to manage costs lower to deliver positive jaws. The credit loss ratio should remain at the lower end of our target range of 70 to 100 basis points. Over the medium term, we remain committed to delivering sustainable earnings growth and a return on equity in our 18% to 20% target range. We are committed to driving sustainable and inclusive growth across Africa. To achieve this, we must ensure that the clients we bank, the projects, partnerships and infrastructure developments we finance create net positive social, economic and environmental impacts. These considerations are front and center when we make our daily business decisions. Considering the nature of our business and the needs of the geographies in which we operate, we have selected those risks which are most relevant to us and where we can have the biggest impact. We have groups and defined them as our 7 SEE impact areas, as you can see on the slide. We measure our progress in terms of the inclusion in the sustainability indices listed below. On this slide, we have shown some of the demonstrable progress that we have made in 4 of our 7 impact areas. I will just briefly summarize 2 examples. In line with our SEE impact of Africa trade and investment, we partnered with ICBC in China to help African importers and exporters build direct relationships with suppliers and buyers in China. In November last year, we hosted 90 export-ready clients from 6 African countries at the China International Import Expo in Shanghai. We help our clients navigate complex and bureaucratic Chinese regulations, language barriers and volatile markets, and importantly, we match our clients with trusted importers from within the client base of ICBC. By acting as a reliable facilitator for these activities, we unlocked a trade corridor to drive Africa's growth, a great example of how we're driving our purpose. Another example is in Uganda, which has, as you would know, one of the lowest electrification rates in Africa. New off-grid affordable energy solutions have the potential to leapfrog old-fashioned electricity grids to electrify households and businesses. In alignment with our SEE objective of driving infrastructure development, we provided finance to one of the world's leading off-grid pay-as-you-go companies based in Kenya, and you would know that this company is called M-KOPA. As part of this transaction, our colleagues in Uganda teamed up with M-KOPA to install solar solutions in 22 schools spread across the country. Clean energy solutions for schools on the continent tick many boxes for us as an organization supporting Africa's growth. I remind you that we are committed to being more than a provider of financial services and products. We are a catalyst for economic change in our countries of operation, and we strive to make life better for our fellow Africans. I will now hand over to Sim to conclude.

Thank you, Arno. Global economic growth is expected to remain slow and downside risks will persist, for example, COVID-19 could disrupt global supply chains and overwhelm Africa's fragile public health systems. Trade tensions could escalate again. Eskom's operational performance could deteriorate further. The South African government could be unable to keep its fiscal promises. Our economists have developed scenarios in which COVID-19 spreads moderately or widely beyond China. In the moderate scenario, China's economic growth would fall by around 1 percentage point this year, the world economy would grow around 0.5 percentage points more slowly and South Africa's growth would be 0.1 percentage points lower than a pre-COVID-19 baseline. In the more severe scenario, China's growth would fall 1.6 percentage points, the world would fall 1.1 percentage points and South Africa is 0.3 or 0.4 percentage points. We currently forecast 0.4% growth for South Africa in 2020, which incorporates the impact that we foresee from COVID-19. More positively, we think that the pace of structural reform in South Africa and South Africa's electricity industry has finally picked up and that Eskom is now under better management. There should also be some expansion of generation capacity this year. Further, even if power cuts are as bad as last year, the impact on growth might be somewhat less severe owing to the lower base and because households and firms have had more time to adjust. We're also hopeful that much of the Rest of Africa will continue to grow relatively fast. This year, we think that average GDP, weighted by our capital allocation in our Africa Regions countries, will grow just under 4%, rising to 5% in the medium term. That's an attractive proposition, and we are sure that there are very few other firms that can offer their investors or their clients’ access to this well-balanced and robust portfolio of markets. If we are right about the macros, then the medium- and longer-term future for Africa-focused financial services companies is likely to be bright. But there's another much bigger if. The future is only likely to be bright for us if we can remain relevant and competitive in a rapidly changing and digitizing world. We have thought hard about what we need to do to ensure that we're able to win in our chosen markets over the medium and longer term. We have concluded that there are 4 things we need to do over the medium term. We need to ensure that our clients remain at the center of everything that we do. This means that we have to keep improving our client experience scores in all our established areas. But it also means that we have to change and extend the range of products and services that we offer. And it means that we must offer this extended range of services with the speed, agility, reliability and extent of personalization that people have come to expect from the leading digital companies. Our next priority is to combine digital technology and human skill to offer an integrated and comprehensive set of products and services, building a platform and creating ecosystems. Here is one example from the Corporate & Investment Banking division. As Mozambique booms over the next decade, we are not thinking only of banking the energy majors. Rather, our intention is to construct a network of relationships, that is, an ecosystem, that will enable the government, firms and people of Mozambique to achieve their aspirations for rapid, fair, inclusive and sustainable human development. Our ecosystem will bring together insurance and health providers, wealth management and education providers and lenders and homebuilders. In doing this, we will simultaneously fulfill our purpose and profit from a larger share of Mozambique's growth. Here's another example from our PBB and Wealth business units. We don't just want to be the bank or insurer that funds and protects your home, we want to orchestrate the whole system of goods and services that meet the human need for somewhere safe and comfortable to live. And home services should be just the start. We already provide a range of home services and a concierge service for our high net worth clients. Digital technology is making it possible for us to extend this proposition and work with a wide range of partners, from the largest big tech firms to the smallest SMEs, to do the same for millions of customers. These imperatives imply the need for big changes to our infrastructure and resources, which is our third medium-term priority. As you have heard this morning, we have already substantially reconfigured our retail infrastructure and offerings in South Africa. We will continue to simplify and update our structure and to make ourselves much more open to a range of partnerships. I won't dwell on the fourth medium-term priority, which is to create social, economic and environmental value. As Arno has shown, we think that when we are doing our jobs right, SEE emerges organically. SEE value, therefore, is both a good thing in itself and an excellent test of our commercial relevance. What do these medium-term priorities add up to? Well, over the long term, we want to become a truly human and truly digital services company, not just financial services, services. We will understand our clients deeply through long-term relationships built on mutual respect, trust and empathy. And we will efficiently and effectively deliver exactly the services, solutions and opportunities people need to achieve growth, prosperity and fulfillment over the course of their lives. Our technology will be efficient, robust and secure. We will process mostly in the cloud and most clients will be serviced predominantly online. Our technology will embrace and empower innovation and will be underpinned by our comprehensive data and strong data analytics. So that's the big picture and the long-term ambition. But of course, long-term ambitions are realized by disciplined and detailed execution right here and now. These are our top priorities for 2020. We will deliver consistently excellent client experiences in order to grow market share and revenues, particularly here in South Africa. The absolute bedrock of this system is system stability, and I can assure you that this is the top item on our agenda every single day. We will continue to accelerate our digitization in partnership with our cloud providers and other big techs and by continuing to develop and roll out new digital services. We will continue to shift capital and other resources to Africa Regions. We will remain determined to deliver strong positive jaws. Importantly, this isn't just saving for its own sake. We are getting more automated, leaner and more agile. Finally, we will make progress in returning our ROE closer to our target range. With that, ladies and gentlemen, I will open up for questions, starting first with the webcast.

What about the conference call?

We have 2 questions on the conference call. The first question is from James Starke of SBG Securities.

Two questions from my side. Firstly, just on fees and commissions, up 1%. I wonder if you could give some context on breaking that down between how much of the compression came from lower pricing and what the volume component was there. And then if we turn to your outlook for IT amortization, you've mentioned the cloud. Just trying to get a sense of what it means for what your outlook is compared to, at the moment, around ZAR 2.5 billion. Where does that go to from here? And if there's any risk of impairment around existing IT CapEx that's been put in place.

Okay. Arno, have you got them?

My mic on? Yes, Sim. I'll answer your question first -- second question first, James. On the amortization charge, we expect that increase to around ZAR 3 billion and level off there off the current levels. We do, on a biannual basis, impairment tests on all our intangibles. And to the extent that the intangibles are redundant and not fit for purpose, we obviously are applying the accounting standards, which means we have to write them off. And in the period under review, you would have noticed we wrote off around ZAR 230 million of IT intangibles, and we can give you the details in our one-on-one discussions on that. On the fee and commission revenue, you asked specifically on the volumes. We have some data points in the PBB section of the analyst booklet and you would see that our volumes continued to be strong, specifically our digital volumes. And it is really driven, as I indicated off the podium, from the transition of traditional channels into digital channels, which obviously are much more cost effective for the clients, but less revenue accretive for us.

The next question is from Harry Botha of Avior Capital Markets.

Just 2 quick questions, please. First, on ICBCS. Is there any further downside risk from the single name that had a big impact in 2019? And when would you expect breakeven for this business, is it in the next year or 2 for ICBCS? And then in terms of deploying capital into Africa Regions, could you give us a sense of which country specifically you're looking at in the next 3 years?

Okay. Arno, do you want to take both?

Yes. On ICBCS, we understand there's no further downside risk. This position obviously has been carefully audited externally and the $200 million loss relating to that single client exposure is what we believe is the appropriate provision for that. On the Africa Regions, we are certainly interested in considering some of the minority opportunities where we can still buy out minorities, for example, in Kenya is an example where we can go up to 75% shareholding. We also are looking at the WAEMU region as well as the Ethiopian region. Was that all, Harry? Did I miss anything on ICBCS?

The guidance for breakeven?

Yes. In the next year or 2. You sort of called it right there.

Thank you. Then we have no further questions on the conference call.

Thank you so much. Shall we open it up in Rosebank, any questions? If you don't mind raising your hand, there are microphones roving. And if you could please identify yourself. I can't see the people from here, the lights are too bright. I think there's a hand. Yes.

It's Charles Russell from Citi. Also 2 questions from my side. If you could perhaps just elaborate on the ZAR impact of the Zimbabwe hyperinflation accounting. And then the second point or question would be on the head count reduction. It looks like you've reduced head count by another 1,200 people in the second half. Could you break that up into retrenchments and natural attrition and also across the various disciplines, branch, IT or any other areas? And if you could also allocate a retrenchment cost to the retrenchment components in the second half piece.

Arno, do you want to...

Okay.

I think there's 3 there.

Yes. On the ZAR impact in headline earnings actually was fairly immaterial. However, one needs to look through, we had to adjust for nonmonetary items, specifically property, which was an uplift for the group and then obviously we adjusted for the earnings at the revised closing exchange rate, which was much weaker at 16.8% to the outages to the U.S. dollar. So the net impact of those 2 was a fairly minor impact for the group overall. Charles, so that's on Zim. On the head count, there were no large retrenchment programs in the second half. The branch rationalization was in the first half. The reduced head count in the second half to what you're referring to is mostly due to national attrition across all the areas, both the corporate function areas as well as the business unit areas. And there were no severance package costs related to that in the second half of materiality for the group.

Anybody else? I think there's a hand here. You can press the button. Yes.

It's Clem. May I first of all compliment you and honor on a very comprehensive and meaningful presentation. I think you've taken us into your -- a picture of the bank as it is in Africa, and I found it very interesting and informative. I have some questions, if I may. Your slide on Page 36 in your strategic targets. If I heard you or Arno correctly, you're indicating or expecting that your credit loss ratios will remain at the lower end of your range of 70 to 100.

Yes.

Now given the economic climate in which we are and the news that came out earlier this week of another bank has credit loss experience, how, pardon the word, realistic is that expectation?

I would say it's realistic, but maybe to give Arno a break, can I ask maybe Zweli and Kenny just to give some color to why we're confident that we will remain within 70 to 100 basis points, just break it up to PBB and CIB. Do you want to start, Kenny, as the younger of the 2?

No. I like that very much. Thank you very much, Sim. I mean our sort of guidance range for the credit loss ratio is not changing for a very simple reason that despite the current economic hardship that we're experiencing and the spike in our impairment, we are still at the bottom of the current guidance range. Within CIB, that range is 40 to 60 bps. Our customer credit loss ratio is at 40 bps. So there's effectively enough room to accommodate further impairment without necessarily breaching the guidance range. I think that's the reason why we're sticking with it. We think we've got sufficient room to accommodate further impairment, if at all, without necessarily having to breach that guidance range.

It's Zweli here. So from a PBB perspective, we've got a range of between 100 bps and 120 bps, and at the moment, we're sitting at 89. And we watch the credit origination very, very tightly. We regularly do deep drills across different businesses to make sure that we understand the risks that we were importing. And we are comfortable that with all of this, we should be -- we should not breach the 120 bps.

Is there anything else, Clem?

Interesting. Looking at Slide 17 where I saw the average balances per individual, if I'm correct, for Personal Banking and Corporate Banking. I'm surprised to see the average per head or customer in Personal being higher than in Corporate. You must have some very wealthy and a fairly high number of depositors and also borrowers.

Can I ask Arno just to explain?

Yes. Clem, I'll just clarify that. These are the average gross loan for the entire year, not per client. So it's the average for the year, not the average loan to a client. So you have to see it in that context.

Okay. Alright. Then if I may, one further point, on your employee engagement on Slide 10 where you reported on -- engaged 4,200 people in training and whatever. Now that's against your total complement of the order of 55,000 [indiscernible] me to the total. It is a very small proportion, and I know one needs to start with small steps. Would you like to indicate how you see this going? And I can tell you of my own experience, as I've mentioned in the past, with your lower level staff, and I find it very hard to accept that they're either engaged or committed or knowledgeable. And forgive me for those very harsh words.

No, they are harsh but they're said in very gentle terms, so we will take them. But I'll ask Funeka if she could please address the 4,200 and perhaps, Sharon, if you could embellish if Funeka leaves any gaps just to cover the 52,000, what we do for our staff.

Thank you, sir. So in South Africa, as part of the work that we've done to -- under reconfiguration of our branches, one of the significant things that we've done was to relook at the nature of the work that actually happens at branches and realize that 65% of the job descriptions are aligned purely to servicing very specific products. We've had a look at that and have relooked at all of those job descriptions and have asked people to look after a whole full suite of solutions for customers and not only from a servicing perspective, but from a growth perspective. So to that end, every single person in our branch infrastructure as well as in our call center has been asked to go back to school, to go and get a qualification, which is an equivalent of an NQF 5, which entails classroom learning as well as e-learning and about 6, 7 months of practical training to make sure that people have actually -- can apply what they have learned. It has entailed quite a significant sacrifice of productivity because what that has meant is, on average, 2 weeks a month our people are out on training and we have to bring in extra people to deal with what happens. But it's basically in recognition of the fact that because of digitization, the nature of work has changed. Our client queries are much more complex and the work is a lot more tilted towards growth as 99% of servicing is in branch, so -- is on digital. The very important thing here is to say, this is only the beginning and we expect this to be an ongoing issue. And the 4,200 is simply the first cohort. The next cohorts, we have to watch that we can digest -- we don't chew more than we can digest. So once the first cohort comes out, which is a 12- to 18-month program, we will bring the next cohort to start through. But this is what we believe is the right response for helping our people deal with the reality of the Fourth Industrial Revolution. A vast majority of our jobs have been taken over by -- basically, a machine is doing that work. We have to figure out new jobs that are suitable for people and train them accordingly.

Just because it's such an important question, can I ask Sharon just a very brief overview of what we're doing in training and preparing our people for the future?

Thank you, Sim, and thank you, Clem, for the question. I think Standard Bank has got a long and proud history of investment in its people. And certainly, development of our people is one of our core values, which you'll see we hold very dear. I don't have the exact number with me, but I think the group's training spend for 2019 financial year across the total global footprint is in the order of ZAR 800 million. So there's a significant investment that we make in staff development. You'll see potentially one of the other stats on that slide was more than 200,000 digital learning videos accessed by employees. So I would not like to create the impression that the 4,200 are the only people we touch. We touch almost every single staff member every year because we have a very big compliance training requirements that our license is dependent on. So there's an enormous range of training that takes place with staff across-the-board to deal with both regulatory issues as well as upskilling for the current job, and to the point that Sim is making, with a very clear focus on building the skills that staff need for the future. So I think the 4,200 should be seen in the context of the front-line capability that we were developing that needed a very specific skill refresh in line with the PBB strategy going forward. So I hope that answers the question.

Your very last one, Clem?

Yes. Sure -- no, that's fine. May I make a comment? First of all, thank you for those replies. My recent experience, and this goes back quite a while, is that the problem in my experience lies in supervision and management. In my younger days, and that was a very, very long time ago, one could not do anything and -- or issue anything unless one supervisor had reviewed and signed off what one had done. And if one was then advised to interact with the client or the user on that basis, that supervisor made sure that you had the right response. That's the first thing. The second thing is, I would suggest you also keep a very close and broad look at your recruitment and your skill levels for recruitment. And that's enough.

Thank you very much, Clem. We'll take those comments to heart. Thank you. Any further questions? I call for -- yes?

It's Warren Thompson from -- Warren, Business Day. Just wanted to talk to you about Slide 24 in relation to the IT spend and your stated strategy, obviously, as this migration takes place, the cloud and cloud delivery. The biggest component is the kind of light gray, which refers to IT licenses, maintenance and related costs. Obviously, a big increase year-on-year and then a fairly large annual growth in that line item. Could you give any guidance on how that evolves in the years ahead? And also, how the composition of your IT spend changes as you migrate more and more of your offering and your delivery to the cloud in terms of are you looking at more annuity -- U.S. dollar annuity-based contracts with your service providers, et cetera, et cetera.

Arno will take that one.

Okay. So Page 23 gives some details of what's specifically in that IT line of ZAR 7.5 billion of why that has grown, and you heard me on the podium talking through those components. Going forward, we make the point that we have to continue to invest in technology. And we think an overall cost growth, just to look at the overall IT spend, mid to high single digits is probably what we're going to be spending going forward. The composition of that will change, as you say so. There will be less spend on physical machines, much more on cloud processing. And in the short term, there's a short overlap. Thereafter, obviously, the cloud processing takes over much more dominantly. And that is, in the long term, a much more effective and cheaper way of processing our technology. As you can imagine, you mentioned the technology landscape is extremely fluid. And year-on-year, I think we're talking to you about a slightly different makeup of this. So it will be difficult to project this now at 5 years out to how it's going to be because we continue to adjust our technology to what is being required. The dollar-based spend, absolutely. We do hedge some of the dollar costs on a net basis, looking at our dollar revenues vis-à-vis our dollar expenses. So you will only always see the dollar costs in this specific item here. Did I answer your questions?

Do we have any further questions in…

It's Bruce Williamson, Integral Asset Management. Do you think there's anything that the private banking sector are not doing that has prompted the government to think about establishing a state bank? And where's the conflict and where's the sort of competition?

I think, first of all, South African policy on the financial sector and banking is very, very clear. It follows world best practice. We're at the cutting-edge of the implementation of Basel. We continue to be highly rated by international bodies, including The World Economic Forum. So there's no market failure, I would submit. That's the first proposition. The second one, policymakers want greater inclusion, but they want greater inclusion at some cost, and somebody has to pay for that. The levels of inclusion required are not -- cannot reasonably be expected to be paid for by commercial banks and their shareholders, and therefore, the authorities have decided that they want to establish a state bank to cover that policy imperative. Our view is that it's perfectly legitimate to do that. Other countries have got very large and successful state banks. The Industrial and Commercial Bank of China, for example, is a policy bank and the state bank. Our only requirement, and in fact, it's a demand, and I use the word advisedly, is that such institutions be regulated like all other financial institutions, in other words, requirements for capital, liquidity, risk management frameworks and so forth because you don't want to put depositors at risk and you also don't want to put the system at risk. We speak candidly with authorities on this, and our views are well known to them. We wish them luck. We, I'm sure, will be competing with them in the market. And one only hopes that they will not be forced into risky ventures as is the case with many state banks globally. And the world is littered with failed state banks because of the conflict between commercial imperatives and policy imperatives. Well, ladies and gentlemen, you've been a very kind and cooperative audience. Thank you for your attention. Please, would you join us for refreshments outside? And for those on the line, have a good day. Thank you very much.