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

Good day, ladies and gentlemen, and welcome to the Standard Bank Group investors call. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Sim Tshabalala. Please go ahead.

Thank you, Chris. Good afternoon, everyone, and thanks again to you, the operator. We appreciate everyone dialing in this afternoon, and thank you for the interest in this call. I have with me on the phone, the Group Financial Director, Arno Daehnke. The purpose of today's call is to provide you with my views on where we find ourselves and the actions we, as Standard Bank, have taken so far. Arno will comment on the accounting implications of the actions taken, the group's capital and liquidity position and the Moody's downgrade. I will provide some closing remarks, and then we will take questions. I would like to start by emphasizing that there's no doubt that the strong public health measures adopted by the government against the spread of COVID-19, including countrywide lockdowns in South Africa, many African countries and elsewhere, are urgently necessary. As a good corporate citizen, the Standard Bank Group strongly supports these measures to preserve people's health and lives. It is up to all of us individually and collectively to do everything in our power to slow the spread of the virus, to create time for health systems to respond effectively and to keep the social and economic damage caused by the pandemic to a minimum. As we have been harshly reminded, pandemics have huge economic costs. I've spoken to chief executives in a number of industries and sectors, including retail, services, logistics, travel, food and beverages, mining, oil and gas, telecom, pharmaceuticals and hospitals. It is clear we are headed for extremely difficult economic times in the short term. We are seeing sharply reduced business and consumer confidence, reduced revenues for many types of businesses and sudden and immense pressures on the prices of many assets. As Africa's largest bank by assets, we are very much aware that we work at the center of the economy and that it is our duty to do everything we can to help our clients to keep their business and their lives on track. While doing everything we can to keep our staff and clients safe and to flatten the curve, we have also taken all the necessary steps to ensure that our essential services will be able to function. Our teams are ready to serve our individual business and corporate clients as usual. Turning to what Standard Bank is doing. We first took action in early January in our Beijing office. Some of our colleagues returned home while others converted to working from home. Since then, we have triggered business continuity plans across all our countries of operation, and I am pleased to report that they are working well. In early March, we suspended all cross-border business travel and strongly discouraged personal travel. We implemented the World Health Organization guidelines in terms of social distancing and other infection prevention behaviors. And we have actively promoted and supported working from home wherever possible. We have broadly split our workforce into those who can work from home and those who need to be physically in the office, so to speak, to provide essential services and support. For those who can, or are required to work from home, they are doing so. Our IT colleagues have worked tirelessly to work and to make this work in a relatively short space of time. We're leveraging our IT tools, in particular, Microsoft Office 365 to connect, collaborate and meet online. This is well embedded and working incredibly well. Last week, we had over 14,500 Teams meetings in just 1 day and connected with colleagues across 28 countries and 98 cities. Turning to those employees who are performing essential services and are required to come into work, firstly and most importantly, we thank them enormously for their ongoing commitment to serving our customers in these trying times. We have taken a number of steps to protect them, including, amongst others, splitting teams, restricting the number of people in our branches and insisting on appropriate distancing as well as the distributing of sanitizer across our branches, call centers and offices. I know from first-hand customer reports that our people continue to assist our customers with empathy, efficiency and excellence. We are encouraging our clients to minimize visits to branches and to other -- and to rather make use of our efficient digital channels, such as Internet banking, the Standard Bank app, mobile banking, ATMs and our telephone banking facilities. In addition, we have also implemented a number of protocols to ease the burden on our employees who are juggling the practicalities of home and work whilst in lockdown and those on special leave whilst in self-quarantine and self-isolation. Our thoughts are with our colleagues who are in self-quarantine and self-isolation at this time. On the actions we have taken. In South Africa, as far as payment holidays and customer difficulties go, we have announced automatic 90-day installment holidays for qualifying small enterprises with turnover of less than 200 -- turnover of less than ZAR 20 million, low-income clients earning ZAR 7,500 or less and full-time students. The installment holiday will run from 1 April 2020 to 30 June 2020. Clients will only qualify for the installment holiday if they are in good standing with the bank as at 31 March 2020. With regard to our corporate clients, our coverage and our client service teams are in regular contact with their respective clients. Our clients will be impacted by economic developments in each of the countries in which we operate, both on the continent as well as elsewhere across the world. We are and will continue to engage with each of our clients based on their individual needs on a client-by-client basis. We have also encouraged all our clients to contact us as soon as is possible if they are concerned that they are facing or will face financial distress. We have committed to do everything in our power to assist. Importantly, since our clients are also depositors, savers and investors, people paying insurance premiums and people needing to claim, the normal credit underwriting and general risk disciplines will continue to apply. I'm confident that Standard Bank is taking all the appropriate steps to maintain business continuity in order to continue to serve our clients across all the markets in which we operate. The private sector has a vital role to play in supporting the government and doing what we can to contain the spread of COVID-19, and we must all play our parts to protect the most vulnerable within our society. To this end, in South Africa, we have donated ZAR 10 million to several nongovernmental organizations that are working closely with the South African government to combat the spread of COVID-19. The funding will go towards securing supplies of hand sanitizer, water sachets, soap, gloves, masks, testing kits and towards equipping testing and quarantine facilities. We will continue to work closely with our stakeholders to assess the situation and how we can provide further support. I'm now handing you over to Arno Daehnke.

Thank you, Sim, and welcome, everyone, this afternoon on our conference call. As mentioned earlier by Sim, we have provided our small enterprise, low-income and student clients with an automatic 3-months payment holiday from 1 April 2020 to 30th of June 2020. Together, the extended portfolios equates to approximately ZAR 35 billion. Student accounts, which account for a small portion of the total, will be charged 0 interest and 0 fees over the period. All other accounts will be charged interest and fees over the period and the interest and fees will be capitalized to the loan balance. Only those in good standing at 31 March 2020 will qualify for the payment holiday. This brings me to my first point, IFRS 9. Based on the SARB and IFRS guidelines issued on the 26th of March and 27th of March 2020, the provision of a payment holiday to a specific subset of borrowers alone should not trigger a move from stage 1 to stage 2. Secondly and importantly, both to the uncertainty of the effects of COVID-19, any significant government support measures being undertaken should be taken into account in the IFRS 9 modeling. Turning to capital and liquidity. Over the past few years, we have built up increased capital levels in line with Basel requirements. As at 31 December 2019, the Standard Bank Group had a common equity Tier 1 ratio of 14% and a total capital adequacy ratio of 16.7%. The group also had ZAR 427 billion of contingent liquidity. The group continues to meet its capital and liquidity requirements across all the markets in which we operate. As you would expect in times like these, we are in regular contact with the regulator, and the levels of engagement has been encouraging. The SARB is considering special directives with respect to capital adequacy, loan restructuring and liquidity regulations under Basel III. These include a temporary reduction of the LCR requirements to 80% from 100%, the reduction of the Pillar 2a capital requirements to 0% and the treatment of restructures under Directive 7. The Prudential Authority allows banks to draw against the capital conservation buffer. However, this would come with restrictions. In addition, the SARB has implemented various liquidity measures, which have assisted the market. As one would expect, we have seen drawdowns and requests for drawdowns from corporate clients against existing facilities. In addition to requests for further credit extension, as our clients look to access additional funds that they may require to accommodate cash flow pressures arising from COVID-19 and exacerbated by lockdowns across multiple jurisdictions. In addition, we have observed a shortening of tenor of funding in the South African market, particularly from professional market participants. Client demands and funding capacity are being very closely monitored and managed to ensure that the group will continue to have sufficient liquidity to meet its business and regulatory requirements. On the downgrade by Moody's. As you know, on Friday, the 27th of March 2020, Moody's downgraded South Africa to sub-investment grade. The downgrade was expected and considered to have been largely priced in a while ago. It is difficult to differentiate between the movements related to the downgrade and those related to COVID-19. We are with a view that concerns around the downgrade have largely been overtaken by those relating to the pandemic. We have also -- we have been asked about the capital and risk-weighted asset impact of the sovereign downgrade. The downgrade alone does not trigger an overnight step-change in risk-weighted assets. Ratings agency actions are one of a number of inputs in our modeling. Counterparties are rated and risk-weighted according to our internal models, which had already taken into account the sub-investment-grade rating by rating agencies. Standard Bank Group and the Standard Bank of South Africa are expected to be similarly downgraded. On guidance, you would have noted that we issued a SENS announcement this morning. While the COVID-19 pandemic continues to unfold and countries respond to this crisis in different ways, there's a high degree of uncertainty regarding the impact it will have on Standard Bank's financial performance in the 2020 financial year. Accordingly, the outlook and guidance we provided the time of releasing our results a few weeks ago has been withdrawn. We will update the market as and when we're able to do so. Turning to dividends. As you are aware, as part of our 2019 results announcement, we noted that the board had approved a final dividend of ZAR 5.40 per share. It is currently our intention to pay the dividend on the payment date. The last day to trade is the 21st of April 2020. It is too early to comment on dividends in respect of the 2020 financial year. At the appropriate time, we will follow our normal processes of reviewing our capital and liquidity position as well as our expected future business needs and then take our decision. Lastly, we will provide the market with our normal first quarter updates via SENS in late April. I will now hand back to Sim to close. Thank you.

Thank you, Arno. In closing, we cannot predict exactly what will happen in the difficult weeks that undoubtedly lie ahead. Please be sure of this. Every Standard Bank employee is trying their very best every day to manage a very difficult and fluid situation, and I thank them for that. I hope that you have found this all -- this call very useful and that we have provided you with some comfort that we are acting in a responsible manner with all our stakeholders' interest in mind. Thank you again for your ongoing interest. I will now turn you over to the operator for questions.

[Operator Instructions] Our first question is from James Starke of SBG Securities. We're going to move on to the next question. The next question is from Harry Botha of Avior Capital Markets.

I understand that it's tricky to give us any kind of detailed guidance at this stage. But could you possibly, on the revenue side on the net interest margin side, comment on the impact of the rate cuts that we've seen in the markets, not only SA but also internationally, and your expectations for that impact on your NII and -- in 2020, maybe from an annualized perspective. And then can you give us a sense how the changes in market levels, particularly listed assets, such as equities and bonds, the long bond yields that get used as discount rates for valuations in your models, how that might affect your credit risk in 2020?

Arno, do you want to pick up both questions?

Sure. Okay. Great. Hi, Harry, and thanks for dialing in. On the endowment risk, you're quite correct. Clearly, rate cuts which we have observed across many markets will be reducing our net interest margin. Harry, you would be aware that 25 basis point rate cut in South Africa on an annualized basis is impacting our NII line by ZAR 300 million adversely. Currently, we are expecting another 125 basis points of rate cuts in South Africa. So you could work out what that would be. Across the portfolio, there will definitely be an impact on our NII, and obviously, that will be adverse. On our long bond yields, we obviously have various valuation models, which would take that into account. On the actual bond portfolios we have, we tend to swap those back to short-dated exposure, so we do not run large mark-to-market positions on our HQLA portfolios. When we look at the corporate exposures, obviously, there would be a small impact on any movement in bond yields, but that would not be significant. It is more the PD migration, which would be more significant in terms of the corporate exposures impacting RWAs and credit impairment requirements under IFRS 9.

The next question is from [ Nick Eha ] of [ Signal ].

I know that the timing of this question might not be ideal. But we come -- it's month-end today, and I was wondering how your collections are going relative to budget. Are you seeing particular stress in certain books versus others? Can you just maybe talk broadly about collections as you've seen them for March.

[ Nick ], it's Sim here. It's still far too early to tell. And I think it's only after a couple of days that we'd be able to have a clearer sense of the high-frequency data. But for the present, I think it would be true to say that it's too early to tell.

Okay. I thought it would be a bit early. But it would be interesting to know, I think it's quite an important data point. So I don't know if there's a way you updating us on that further down the line but thanks very much.

The next question is from Alexi Contogiannis of Alinea Investment Management.

Specifically, with regards to the proposed amendments that the SARB has put forward on the LCR and on the capital positions of the bank. [ What is the ] intention of these moves? Is it creating capacity almost for a relief valve in the system for banks to allow for higher provisions and without disturbing flows distributions through the bank's capital structure? Or is the intention to give additional capacity for banks to actually proactively lend into this type of environment to support the economy. If you have to pick a bucket that it falls into, what would you -- where would you guide us towards?

I think it would -- I mean, one doesn't really know what goes through the mind of central bankers. But our understanding would be that they are intent on making sure that they keep liquidity flowing through the system and allow the banks to act in a manner that is not countercyclical -- I mean, pro-cyclical.

Yes, maybe I can -- it's Sim. The LCR relief to 80% is certainly very welcome and will certainly allow liquidity to continue to flow in the markets. I mentioned on the call just now that we have seen our funding [indiscernible] shortened somewhat in tenor, somewhat. And obviously, with the reduced LCR we continue to support our clients in terms of late-term funding requirements. The capital relief, it's really only the Pillar 2a buffer because you would understand that the capital conservation buffer comes with restrictions and those restrictions are around dividends and so on. The 2a buffer, the impact for Standard Bank Group is not that material. And it may well be eaten up by migrations of portfolios as they're going to higher risk grades. But nevertheless, any relief is welcome, and we want to continue to support the real economy and our clients and that is important as well as, obviously, consider our shareholders and distributions as and when we can consider those.

The next question is from John Storey of JPMorgan.

Just a quick question from my side, and obviously, don't expect you guys to be exact here. But just a broad brush in terms of some of the exposures in the sectors that Standard Bank has exposure to that, that are under strain. I'm just thinking in particularly, oil and gas, commercial property finance, leisure, tourism, I mean, just rough kind of numbers would be pretty useful.

Arno, do you want to give a high-level thoughts?

Sure. Yes. So oil and gas is between 5% and 6%, and that includes off-balance-sheet exposures. We're clearly very focused on that and have done many risk [ deep draws ] into that type of portfolio in the various markets we operate in. So that's a big focus by our risk teams. Leisure and tourism, much less so, that would be negligible for the Standard Bank Group. And property is also not as significant as, I've mentioned, the oil and gas is, for example.

And anything else to think about, Arno, just in terms of stress points or sectors that you think are under more strain?

Yes. You can imagine we're spending a lot of time on that. And the risk teams have done very detailed name-by-name analysis on pressure points. And clearly, oil and gas and some of the sovereign sectors will also be experiencing strain. Yes, I think those are sort of the ones we are really thinking about, but there is a huge amount of work which has gone on, and we do feel we're on top of the various risk portfolios and close contact with our clients to manage those exposures in the different markets in which we operate.

And John, if I could just add to what Arno has said. The analysis has of necessity been on a name-by-name basis in the corporate and investment bank, and in some sectors, you'll find winners and losers. If you take just the retail sector, for example, there are some that will be struggling and there are some that are definitely going to come out stronger from the crisis.

[Operator Instructions] Our next question is from Chris Steward of Ninety One.

Just a quick one for me. I guess, if I look at the relaxation of the Pillar 2a buffer and then the potential relaxation of the countercyclical buffer in the context particularly of your bank but also of some of the other banks in the context of current common equity Tier 1 capital ratios, it's hard to envision an environment where you start easing into those capital buffers purely as a result of incremental impairments, which makes me think that the driver then is probably more risk-weighted asset inflation and specifically credit risk-weighted asset inflation as loans possibly move through the arrears and nonperformance buckets. Can you give a sense of the extent to which you might experience credit risk-weighted assets? Because again, in order to start to utilize those buffers, the implied inflation in risk-weighted assets is material. What would be the biggest driver behind credit risk-weighted asset inflation or is this something I'm missing?

Arno?

Yes. Chris, bearing in mind that it's still early days, right? So we will only, in the next month or 2, fully understand under IFRS 9 how we are seeing a migration to stage 2 and stage 3. And we're doing our forward model calibration now at this current quarter end. So that will also feed into that. There will certainly be a risk migration. There's no doubt about it, and that will eat into some of the buffers. There's no doubt about it. At the same time, I just want to emphasize again, as I had done earlier on, the group has got a common equity Tier 1 ratio of 14%, which is quite comfortably above any regulatory minimum, notwithstanding the Pillar 2a relief. And we obviously want to continue to support our clients in this market and not throttle back the pipelines. Some of the RWA migration, [ not ] pipelines and we have seen some delay in the pipelines, Investment Banking, for example, and no doubt that will also come through in the retail space. So some of the RWA migration will be offset by less lending, which we expect to happen in these markets. But Chris, specifically you asked what are the main drivers here and what the parameters around that, that's in the process of being quantified right now as we speak under IFRS forward-looking assumptions.

The next question is from Jacques Conradie of Peregrine Capital.

Sorry, I missed a bit of the call. I was cut off. So if this question has been asked before, just tell me and I'll listen to the replay. But it's basically how you are balancing giving additional credit to clients to tide them through versus potentially letting clients go, that's not going to recover? Because I guess by giving more money now, you will delay currently payments, but you might make your eventual problem much bigger. So how are you dealing with that challenge? And then secondly, obviously, everyone wants the banks to lend to support the economy. But again, you've probably got to only make loans where you think your risk-adjusted return will be reasonable. I don't know if it's your job to just bail out the economy and take huge losses. So again, how are you dealing with that challenge?

Jacques, perhaps I could address it partly and then ask Arno to fill in the gaps. The first proposition is actually embedded in your second question. We continue to insist that our job is to play in our lane as a financial institution and a bank and that we're going to apply the old-fashioned principles, the 3 Cs to credit and we will only do the right thing. So that's the first fundamental point. And secondly, even where we try and help and provide assistance, we will do so playing within our lane and would insist on doing that because we don't think it's appropriate during a crisis to do things that are outside what is reasonably expected of a bank because those expectations will continue to exist post the crisis. So we wouldn't be wanting to do things during a crisis that would be unreasonable. But given the fact that we want to stay close to our clients and understand them, we started with the most vulnerable given the fact that you've got a crisis that has affected individuals, SMEs and it's starting to affect corporates. And in providing relief to them, we've done it in a way that is not going to create perverse incentives. And we've made sure in each instance that we preserve the right for us to be able to decline applications by people when they come and ask for this relief and also doing it in a way that preserves our competitiveness. The amount involved are significant, but they're not substantial, and they are manageable within our risk management framework. And so in interacting with industry bodies and in interacting with government, we're insisting on playing in our lane, not doing things that are outside what one could reasonably expect from a bank. And it is hard, as you can imagine, but we're insisting on it.

The next question is from Jan Meintjes of Denker Capital.

Just on the corporate book, if you can maybe give some kind of an indication of the percentage of that book that is collateralized. It's easy on the retail book to sort of break that down in different buckets. But from a collateralized point of view, the higher-end or higher-risk portion of lending in the corporate book, maybe to help me understand what that might be as a percentage of the book. I don't know how much of that is uncollateralized and even if it is material.

I'm not sure if we disclose that level of detail. Arno, do you want to address it?

Yes, it's not a straightforward answer. We can't just give a percentage of collateralized, but you can imagine the many different types of collateral and different levels type of collateral for different corporates. So I can't give you just 1 percentage, Jan. That wouldn't be representative of the actual risk profile.

The next question is a follow-up from [ Nick Eha ].

I cover the REIT sector and that's come under tremendous pressure on the stock market. We are seeing a lot of retailers who say they're not going to pay the rent now. And then you kind of think, well, how are the REITs going to pay their interest. They don't retain any cash really, so they might struggle to pay their interest. But the issue that's important to me and maybe just help me understand how you'll deal with other clients as well in this situation is, a lot of these REITs need to roll debt in 2020. And so I kind of think, well, I mean, will they be able to roll debt? And the current debt is at JIBAR plus 2. And obviously, the credit risk has increased on these loans. And I was wondering, are you guys thinking JIBAR plus more than 2 now, how would you think about the increased credit risk?

Arno, do you want to pick it up?

Yes. Yes, sure. So it also goes back to an earlier question on how do we support our clients. We have sophisticated risk management processes and portfolio management processes in the bank, which we apply as a business as usual. We continue to apply them in our existing governance structures. To the extent that the risk profile has increased, it's quantified through our internal models by PD and LGD quantification. And then if we would have the risk appetite, we would then charge higher for those exposures to the extent that the risk appetite has deteriorated. If it's JIBAR plus 2 at the moment, I can't say where it's gone to because that would be specific on an individual name. So we price these name by name, obviously, taking into account collateral requirements, and we spoke about that earlier on; taking into account tenor requirements; currency requirements; and the specific details of that particular corporate. The REIT sector, no doubt, will be under pressure and you've seen that reflected in the market pricing of that. And to the extent that they need to refinance with banks and so on, obviously, that will be pricing to the -- into that support we want to give to that sector then.

But I think one has to imagine that credit risk across the board has to rise. So I would think [indiscernible] everybody [indiscernible] to now. I can't imagine many sectors where the credit risk hasn't declined.

Yes. Yes, I think you're quite correct. Overall, the credit losses and the credit risk in the market will be increasing. There's no doubt about it.

And you will price for that. So you are going to be quite tough and price for it. You're not running a charity organization. You're not going to be kind to your customers, I guess, is what I'm trying to arrive at.

Yes. Bearing in mind, when we think about our client pricing, it's based on the entire client relationship. And there would be global markets products. There would be transaction products and services. There would be -- there's FX and hedging products. There would be balance sheet. Now we're talking about lending, that's the specific component we're talking about now. So we don't price those in isolation. We look at our overall client relationship over the longer term and then price that. And again, that's done on a client-by-client basis, so it's difficult to be very specific about that. And obviously, our existing clients, we would think about differently than new clients to the bank. So there's a lot of consideration around all of these parameters, which -- but ultimately, we do need to deliver shareholder return and our pricing models are based on ROE -- or cost of equity plus a spread model, and we need to continue to maintain that.

The next question is from Elan Levy of Morgan Stanley.

So just 2 questions on dividends, please. Arno, your comments around the 2019 declared final dividend, it seem to leave at least a sliver of doubt or risk in terms of the payment. Could you just clarify whether that was a misunderstanding and what that risk might be? I assume it could only be an act of the regulator, if there is indeed any risk there.

Yes. Look, we are aware of the regulators in the U.K. specifically talking about dividend not being paid. That's not the discussion in South Africa and in any other markets currently we are operating in. So these are -- we can call it a firm intention to pay the dividend. There's been no consideration not to pay the dividend and no discussion with our Board on that. Will the SARB come out tomorrow and sort of say the banking sector can't pay any dividends, I'd be very surprised about that. And we, as I said, we haven't had any discussion like that with the SARB yet. Can I give 100% guarantee that the SARB won't come out with that? No, probably not. But I think it's really a remote outcome that, that would happen.

Yes, I'd agree with that. And then just in terms of the perpetual preference dividends, obviously, prefs over the last couple of weeks have really been slammed. All the bank prefs have been slammed in the market. No doubt reflecting the decreased yield as a result of the big prime rate cuts announced quite recently but perhaps also reflecting some anxiety over dividend stability, considering these are noncumulative instruments. I know they're kind of 70% phased out, but there are still capital instruments. I assume your comments around deliberating over 2020 dividends don't relate to the prefs. And then if you could just comment as to whether if the SARB were to implement a moratorium on dividends across the sector, if that would include dividends on prefs?

Yes. So my comment on dividends applies specifically to ordinary dividends, where we would normally, as a matter of course, look through our capital and earnings projections and then see what are we generating in terms of capital and obviously when thinking about what are we retaining and what are we getting back to shareholders. So that would be normal process we are going through. In terms of -- and you might as well include AT1 and preference shares into that whole bucket. Again, there's been no indication whatsoever that there will be any constraints on that. And I would not foresee a situation, a likely situation where we would not honor those dividends on those spreadsheet -- or on the AT1 instruments.

The next question is from Matthew Pouncett of Laurium.

Two questions from me, if I can. Just the first one is a follow-up from Elan's question on the dividends. I mean I understand that there's obviously a confidence signal from paying dividends. But I'm just thinking if a global precedent has been set around banks withholding dividends. If you look at kind of where the stock market is pricing, the SA bank as a sector, it seems to us that there's a recapitalization implied in many of the share prices. Does not make sense just to be prudent to withhold the dividends. I mean, they do add, I think, 50 bps or something in that nature onto your capital. It is -- does that not make sense in the environment that we're in? Or at least it does not make sense in the environment where the banks are [ recapped ] as if recapitalization is required. This is an easy way to effectively recapitalize. That's the first question. And then the second question is around -- just trying to understand the impact on capital and risk-weighted assets when you move from stage 1 to stage 2, understanding that your credit risk weighting would increase, but you've also then provided against that exposure. So the net exposure reduces. So what is the net effect? Is that positive or negative for capital as a whole?

Okay. On the dividends, the models and our planning we've done up to now do not indicate that we need to be recapitalized, and we can continue to afford the dividend -- the final dividend for 2019. And I referred to that already. Clearly, it's an evolving situation. So we'll do that assessment when it comes to the first half 2020 dividend, which we're going to declare to the market in August 2020. So we'll do our regional calculation thing, and I assume we'll have or I expect to have much better data points then on the depths and the severity of the COVID crisis. That's on the dividend. On the stage 2, yes, if an exposure moves from stage 1 to stage 2, we need to hold impairments or impairments for the lifetime expected losses. And that does mean higher risk-weighted assets in stage 2. So there is an impact -- adverse impacts on risk-weighted assets in that respect.

Okay. You take the hit from an earnings perspective and then from a higher risk-weighting perspective as far as capital is concerned.

Yes, that's correct. Yes.

The next question is from John Storey of JPMorgan.

Just a quick follow-up on my side. I just wanted to get some more detail around some of your non-SA exposures, in particular, ICBCS. Would be helpful if you could just provide any update to us on developments there, I guess, just in the context of some of the market movements that we've seen over the last few weeks.

When we reported and spoke to the investment community, we gave you a detailed breakdown of the events surrounding payers and gave you a breakdown of what our expectations were of the business during the course of 2020. That was predicated on normal market conditions, the restructuring of the business, the integration of it within ICBC. The markets have been tough, especially given the fact that the business is one that is involved in energy, in the precious metals and in base metals. But all its risks remain under control and its activities remain within risk appetite.

Next question is from Adrian Cloete of PSG Wealth.

I missed some of it because I got cut off. I just wanted to check something just on the buffers, the capital conservation buffer. You had indicated that you'd probably not like to use because it's got restrictions on dividends and your Tier 1 ratio is now 14%. By how much will it have to fall to get down so that you have to use that buffer? And then what I'm worried about is the messaging that you send. I mean, obviously, your dividend is a cover-based dividend. So if the earnings fall, dividend falls. But I would be worried about the messaging, especially the SARB doesn't realize, if you do suddenly cut dividends completely, it seems a very negative message. And you also take away the underpin to the share price and you provide a [ free shoot ] on the share. And then it got its own dynamic because then you have falling bank share prices, and that also says something about the sector. What are your thoughts about that?

Yes. Adrian, you may have missed the discussion I've said on the dividends. There is no intention to cut the dividends. Not the 2019 dividend, which is the ZAR 5.40 per share. There's no intention to do that. And going forward, as per our usual risk assessment processes, we will decide on what the dividend will be for the first half of 2020, and we will do that as part of our half year reporting process. So again, I hear quite a few people are bringing up this dividend story. I don't think one should be reading into the statement I made, anything more than it is our intention to pay the dividend for FY '19. As you can appreciate, Adrian, this is an evolving situation. We'll be in a better position to give you the exact details on dividends going forward as we head towards the half year results and reporting period. But to use language like to cut dividends and so on, I don't think that's appropriate at this point in time. And yes, so that's the one thing. In terms of the capital adequacy, the regulatory requirements is -- there's various sort of decent buffers, et cetera, but it's around 8.25%. On a common equity Tier 1 basis, we had 14%. You can see the amount of headroom we have relative to the regulatory requirement. So we'd have to drop considerably to get into the CCB buffer, capital conversation -- conservation buffer.

[Operator Instructions] Our next question is from [ Tim Romney ] of Thomson Reuters.

I just wondered if you could give a little bit of color on whether the situation at the moment is making you rethink any of the capital allocation plans you had going forward or whether you expect it to impact those at all? And secondly, looking a bit further out, what, if any, impact do you think this could have on your plans for expansion in, say, West Africa and other sort of strategic initiatives you have like that?

I think at a high level, it would be true to say again that things are so uncertain, and it's too early to be making fundamental changes in strategy and capital allocation. We still are interested in looking for sources of growth, whether they be increasing distribution channels, new customers or geographic expansion. And at the time that we need to be making the investments, we'll then apply our minds as to whether or not it's appropriate to do it at that particular time. But as we sit here, there is just so much uncertainty to be definitive about capital allocation, I think, would not be correct, but you have to be a lot more cautious about growth. Arno, would you like to add to that?

Yes. I think that's 100% right. And the way we look at it, actually from a group point of view is that currently, obviously, and some alluded to the business continuity management initiatives which are in place. And obviously, it's critical that we maintain the franchise we have at the moment. But at the same time, we are looking forward. There will be opportunities coming out of this as well, supporting our clients in need and being able to take market share. So we do see opportunities as well coming out of this. Well capitalized. And we want to build a franchise which is stronger coming out of this and going to give strong growth over the next many years to come. So it's not just all doom and gloom and here and now. It's also a longer-term perspective we are taking here. And our capital allocation will take that into account in terms of investing for the future.

The next question is from Jacques Conradie of Peregrine Capital.

Just one follow-up. I mean, the -- almost the quantum and the speed of this economic shock is kind of unlike anything we've seen in the last probably 100 years, if one looks at that U.S. jobless claims and the jobless claims you probably see across the world in the next few months. And so it's really not something that anyone would have had in models or even have that probably in stress tests. So -- and I guess, I always worry that people lower down the organization from your level might not fully realize the extent of this and how you've got to rethink potential loans and plans. So what have you done in the business to make sure that from a top-down perspective, you get guys to say any loan that we haven't kind of signed final terms on, we probably just need to rerun through this very different world we're in. And any new loans, we just -- like some of our old modeling for corporate loans could just be completely wrong because you could obviously very easily lose money quite quickly in this environment by sticking with an old approach. So maybe just how you've dealt with that in your business.

Jacques, I think a couple of points. First of all, there is much more heightened scrutiny of our various portfolios. And we're looking, as I said, at the high-frequency data and making decisions based on the data as it presents itself. We mentioned that we are going through our client base in the corporate sector and in the commercial sector line by line, customer by customer, identifying the liquidity and solvency position of each of these entities and making short- and medium and long-term decisions in relation to those entities. The same applies to the portfolios in our PBB business. We're looking carefully at the various segments, the various books. And as you've seen, we've made decisions which we consider appropriate given the nature of those books. 100%, I don't think anybody has seen a crisis of this nature in the last 100 years. It does, however, remain at the moment. And we would argue strenuously that this is the case. It still is very much a health crisis. It's not yet a liquidity or a solvency crisis, and we approach it as such. Heightened risk management, a closer look at our books and very, very, very disciplined approach to making decisions.

Yes. Maybe, Sim, I can add one more thing. The word stress-testing came up from the question from Jacques just now. Our severity of stress-testing certainly extends to an event like this. We do them on an ongoing basis, and we discuss them with our regulators and obviously, the Board as well. And absolutely, we do model events like this and then have recovery and capital plans to help us work through something like this.

The next question is from Daniel Masvosvere of Sanlam Investments.

Just got a quick question here. It's probably an unfair question at this point, but I want to ask anyway. When you sort of make the assessment around the sort of payment holidays that you're going to be granting to clients, automatic for some, requiring good standing at the time. And obviously, you don't anticipate raising additional provisions to the extent you believe that these clients will be in good standing post, call it, COVID. But what is your base case? Is your base case that this sort of crisis persists for the sort of 21 days that we see now. We get a shutdown for 21 days and then after that, people start going back to work and sort of business as usual. Or is the view that it could be longer than that 3 weeks, which is clearly quite likely, given what we've seen around the world, I think -- so the data out of China, you see the data out of Italy and places like that, which has taken a lot longer for this to resolve. And to the extent it persists for, say, 2 months. In that case, it's quite likely that some of the clients that you extend payment holidays to actually are not able to recover and be in good standing, in which case, you do need to raise provisions in any case.

Daniel, we make these decisions based on various scenarios that we've analyzed. And we use the data available to us and make a decision as best we can, given the information available to us. As you correctly say, it's very likely quite possible that this lockdown could be extended for another period of 3 weeks, and we will address the problem when it arises.

But the base case is 3 weeks.

The base case is that, yes, that they will lift it within the next few weeks. But if they don't, we will then change the assumptions that we've made.

Currently, I'm not showing any questions in the queue. Would you like to make some closing comments?

No. It's just to thank the colleagues very much for taking time out of their busy schedules to listen to us. And thank you very much for the questions, and thank you very much for the support. And we wish you well, too, in these tough times. Thank you very much.

Thank you very much, Sim. Ladies and gentlemen, that then concludes this conference call, and you can now disconnect your lines.