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

Good day, ladies and gentlemen, and welcome to the Standard Bank Group investor call. My name is Sarah Rivett-Carnac, Head of Investor Relations, and I will be coordinating today's call. [Operator Instructions] Please note, this call is being recorded. This call is not intended to replace or provide an update further to the voluntary trading update and trading statement announcements we issued on the first of June 2020 on Monday. I will now hand over to Arno Daehnke, the Group Financial Director of the Standard Bank Group. Please go ahead, Arno.

Good afternoon, everyone, and thank you, Sarah. We appreciate everyone dialing in this afternoon, and thank you for the interest in this call. I have with me on the line, Brooks Mparutsa, the CFO of CIB; Barbara Bell, the CFO of PBB; Douglas Hendry, the Group Treasurer; and Sayuri Govender, the Head of Group Reporting and Analytics. I will comment on the operating environment in the countries in which we operate, including the COVID-19 impact and the impact on our businesses year-to-date. We started the year cautiously optimistic. The global outlook was promising, and economic growth in South Africa and across sub-Saharan Africa was expected to improve. Much has changed since then. As you know, by March, COVID-19 had taken hold in parts of China and hotspots were developing elsewhere. Globally, borders were closed, travel and transports were halted and global supply chains were disrupted. On 11th of March 2020, the World Health Organization classified COVID-19 as a pandemic. Initial analyses focused on the impact -- the human impact and the medical capacity. However, as the possible scenarios were brought out, the gravity of the economic implications started to emerge and the markets reacted negatively. Volatility spiked, liquidity dried up and emerging market and risk av sentiment drove EM outflows and currency weakness. This was followed swiftly by a broad range of government interventions which proved to provide some comfort to the markets. While global financial markets partially recovered from the lows seen in late March, a degree of emerging markets risk aversion remained. In sub-Saharan Africa, many countries entered this crisis with limited fiscal capacity, restricting their ability to implement large-scale interventions. This has weighed on currencies and impacted governments' financing costs. From a business perspective, while the volatility supported our trading activities, the lockdowns and ensuing economic threat have negatively impacted confidence, demand and activity levels. Across our markets, the lockdowns have had and continue to have a significant impact on our clients. While the lockdowns in some of the markets started to ease or be lifted in early May, South Africa's lockdown has continued to constrain large parts of the economy. We welcome the South African government's decision to transition to level 3 and open up more of the economy from the 1st of June. The outlook for the 12-month period ending 31st of December 2020, has continued to deteriorate since we last spoke. In sub-Saharan Africa, the human impact of the COVID-19 pandemic is growing. Standard Bank recognizes the need to flatten the curve. We will continue to prioritize the safety and well-being of our employees and our customers while also supporting community initiatives in the countries in which we operate. Turning to Standard Bank. On our investor call on the 31st of March, Sim Tshabalala, the Standard Bank Group Chief Executive, outlined the business continuity plans, which had been invoked across the business. These largely remain in place. As at the end of May, more than 75% of our employees were working from home, leveraging our digital tools. While we are planning a gradual phased return to the office, this will be subject to certain risk assessments and country-specific regulations, including social distancing requirements. Before I comment on the actions we have taken, I want to provide some context with regards to Standard Bank's approach to governance and risk management at a time like this. Firstly, we remain systematic in our approach and our decision making. We have established risk management frameworks and policies and procedures and committee structures in place. This ensures an appropriate flow of information between business, risk, finance and treasury, and as appropriate, up to the executive and the Board level. Secondly, we have got a series of plausible scenarios and considered the impact of each on our clients, and in turn, on our businesses. This drives our expectations in terms of business pipelines and capital demand. We balance this against liquidity and capital supply. These are managed dynamically and updated regularly and mitigating actions are implemented when required. Thirdly, central banks across our footprint have introduced a variety of interventions to support affordability and credit capacity. These have included cutting interest rates, and temporarily, relaxing regulations and lowering reserving and liquidity requirements. We welcome and support these actions. Now turning to what we have done for our clients. In Personal & Business Banking, otherwise referred to as PBB, we have implemented a number of installment relief measures, fee waivers and restructures. We have also encouraged our clients to contact us should they find themselves in financial difficulty. By the end of May, we have provided ZAR 92 billion in relief funds to individuals, small and medium enterprises and commercial clients in South Africa across 285,000 accounts. This represents approximately 15% of the PBB South Africa portfolio. In addition, the bank has also supported several private and government-driven initiatives. These include the SME COVID-19 guarantee loan scheme, the payments of SASSA grants, reduced ATM fees, support of the payment of the special grant through our Instant Money solution, the distribution of South African future trust loans and reductions in cash and acquiring fees. The SME guarantee loan was launched in mid-May, and we are accepting applications and making disbursements to those who qualify and who meet our credit requirements. We will provide the market with an update on the amount disbursed when we report in August. Moving to PBB Africa Regions. We have introduced country-specific debt relief programs to aid the recovery and sustainability of the sectors most impacted by the pandemic. High-risk sectors have been identified and support is being provided on a case-by-case basis. In some instances, central banks have mandated banks to offer relief to distressed customers. This includes the Lesotho, Eswatini, Kenya and Nigeria, amongst others. These relief mechanisms include, amongst others, repayment moratoriums, loan tenure extensions and restructures. By the end of May, the PBB Africa Regions' debt relief taken up by customers totaled approximately ZAR 11 billion. This represents less than 13% of the PBB Africa Regions portfolio. In Corporate & Investment Banking, otherwise referred to as CIB, we have worked closely with our clients to proactively assess their liquidity and capital needs to structure appropriate solutions. We have provided a range of solutions, including installment holidays and loan restructures, working capital limits and term extensions as well as advice on restructurings, including market solutions. In terms of origination, we have prioritized lending of new facilities and new drawdowns on existing uncommitted facilities to critical COVID-19 response services in positive impact sectors. By the end of May, we have concluded restructures for eligible clients with risk exposures amounting to approximately ZAR 30 billion. To date, the CIB requests have largely originated in South Africa. While we wish to support our clients in these difficult times, we have no intention of acting recklessly. We have to assess our clients' -- we have to assess both our clients' short-term needs and the medium-term viability. Turning to the financial year '20 guidance. There remains a high degree of uncertainty regarding the impact of the COVID-19 pandemic and the associated government responses will have on the economics in the markets in which the group entities and in turn, on the group. As most of you on this call know, on 31st of March, we withdrew our guidance for the 2020 financial year. While we remain at this stage, unable to provide guidance, we provide some high-level commentary on the factors influencing the financial year 2020 outlook in our announcement on Monday. We provided some high level commentary. On macro trends and outlook, year-to-date, all the currencies across the 20 markets in which the group operates on the continent have weakened relative to the U.S. dollar. The South African rand, Zambian kwacha and Zimbabwean dollar have weakened the most. In contrast, the countries in the group's East Africa region have -- the currencies -- in contrast, the countries in the group's East Africa region have held up relatively well. While the rand is expected to strengthen by year-end, it is likely to be weak on average relative to the U.S. dollar and Africa regions' currencies year-on-year. This will support the earnings contribution from Africa regions. Inflation has remained relatively subdued despite currency weakness. There have been policy interest rate cuts in all but 3 markets, while South Africa seeing the largest cumulative decline to date at 275 basis points. The group's current assumption is that there will be no further policy rate cuts in South Africa in 2020. In 2020, the economies in 12 of our 20 African countries are expected to contract. South Africa, Botswana and Namibia are expected to see the biggest declines. Our current expectation for South Africa is an 8.5% decline in real GDP in 2020, followed by a recovery of 6.5% in 2021. The East Africa region economies, comprising Kenya, Tanzania and Uganda, are currently expected to avoid a contraction. Moving to the balance sheet trends for the 4 months to the end of April, loan growth in the first 4 months of 2020 was robust. The combination of higher digital disbursements, corporate facility drawdowns and a weaker rand led to strong double-digit growth period-on-period. CIB grew faster than PBB. In PBB, the unsecured lending book grew faster than the secured lending book. Loan growth is expected to slow from current levels. Lower business on consumer confidence levels are expected to continue to be a constraint on the secured portfolio growth. While installment relief is likely to temporarily support portfolio levels, this is likely to be offset by lower new business disbursements. Unsecured lending growth will be subject to individual affordability and business and sector viability over the medium term. Deposit growth remains strong period-on-period, in particular, demand deposits. Corporates drew down on facilities to access liquidity and placed it back on deposit. Deposit growth is also expected to slow. Turning to revenue. Balance sheet growth will partially offset a meaningful decrease in net interest margin on the back of higher funding costs and negative endowments following the significant policy interest rate cuts seen across the continent to date. In South Africa, a 25 basis point movement equates to an annualized ZAR 300 million net interest income impact. Noninterest income growth, while supported by trading income in the 4 months to the end of April, will depend on the pace and magnitude of the recovery in the second half of 2020. The lockdowns negatively impacted sales, disbursements and transaction activity levels. In South Africa, Deeds offices and dealerships were closed in April, which halted mortgage disbursements and resulted in a more than 70% decline in VAF disbursements compared to March. In addition, ATM and branch volumes were down 38% and 61%, respectively. While there was an improvement in activity levels during the course of May, they remained below those seen prior to the lockdown. Fee income growth is closely aligned to activity and spending levels, which, in turn, is subject to the easing of lockdown restrictions and an improvement in confidence levels. Turning to costs. We have seen cost savings in areas such as travel, training and conferences. However, we have also incurred some unforeseen COVID-19 related costs. These include additional IT spend to enable staff to work from home and additional operation spend to procure protective equipment such as sanitizers to protect our employees and our customers. Containing operating expenses, growth remains a focus -- containing operating expense growth remains a focus. Where possible, cost levers will be pulled, but not at expense of the resilience of our systems or our ongoing digital customer journeys. We have been asked about broader structural cost savings arising out of the so-called new normal, for example, reduced real estate needs as staff opt to work -- to continue to work from home. We are considering these. However, any impact is likely to be more medium term rather than in the short term. Credit impairment charges have the greatest potential for variability and depend on the depth of the recession and the pace of the recovery. In the modeling of expected credit losses, IFRS 9 requires the consideration of the current portfolio performance, comprising individual counterparty and portfolio performance and a forward-looking view. In determining the latter, the forward looking view, one is required to apply judgment and make a number of macroeconomic and forward looking assumptions. We continue to monitor macroeconomic variables closely and demand both our forward-looking expectations as well as forecasting models to align accordingly. We do so with due consideration with accounting requirements and regulatory guidance. We note the guidance provided by the SARB in guidance notes 3-2020 and clarification provided in guidance note 6-2020 in this regard. Guidance note 6-2020 states that payment holidays and restructured credit exposures granted as part of COVID-19-related relief measures should not be the sole automatic trigger for transfer to either stage 2 or stage 3 in terms of IFRS 9. However, it goes on to state that in an effort to determine the staging of accounts subject to COVID-19 relief, banks should consider all reasonable and supportive information, including that which is forward-looking. Other factors that could be considered include the impact of COVID-19 on the industry that the client is engaged in and effects -- and the effects of extended lockdown measures. In summary, one, relief actions alone should not automatically trigger transfer to stage 1 or stage 3 -- stage 2 or stage 3. However, two, if there are other circumstances which may indicate a significant increase in credit risk, then an exposure portfolio should transfer to stage 3 -- 2 or stage 3. PBB assesses risks on a portfolio basis, taking into account a variety of factors, including geographic location and industry. We already anticipated that exposures in our portfolio may have experienced a significant increase in credit risk, a subset or proportion of that -- of the group will transfer to lifetime expected credit losses. In other words, stage 2 or stage 3. In addition, where it is possible to perform an individual account level assessment and an individual client is deemed to have experienced a significant increase in credit risk, that account will also transfer to stage 2 or stage 3. In terms of the PBB restructure population, the guidance provided by local regulators as well as accounting bodies will be applied in the IFRS 9 and capital treatment of these exposures. To this end, the restructure in isolation will be insufficient to reflect distress, as indicated already. Additional factors such as transactional account behavior, nonpayment scoring factors and potentially portfolio level adjustments will be applied. This will ensure that an appropriate distinction is made between temporary and permanent distress, and that coverage remains appropriate. CIB assesses risk on a geographic -- geography sector and on an individual client basis. Clients are individually risk rated. We have been proactively re-rating customers that have been impacted and will likely be impacted in the short to medium term. The recent developments have resulted in an increase in client balances in stage 2 and stage 3. Whilst acknowledging that the current environment is challenging on many fronts, CIB's overall portfolio remains healthy, benefiting from the client, sector, region and product diversification. Our current scenario analysis indicates that the group's credit loss ratio for financial year 2020 will be above the group's through-the-cycle range of 70 basis points to 100 basis points and may exceed the peak recorded in the global financial crisis of 160 basis points. Turning to other banking interests and Liberty. The group seized accruing earnings from its 20% stake in ICBC Argentina post the decision to sell its stake in August 2019. We are still awaiting regulatory approval of the sale. On ICBCS, I'll remind you that the business incurred a significant single client loss in 2019, which should not repeat in 2020. ICBC's ability to breakeven remain subject to better integration with ICBC's client base. With regards to Liberty's performance, we refer you to Liberty's voluntary operational update dated 14th of May 2020, and its trading statement dated 29th of May 2020. Turning to capital funding and liquidity. The group's capital liquidity levels remain above minimum regulatory requirements and above our internal risk appetite levels. The group's Pillar 3 period -- the group's Pillar 3 report, rather, for the period ending 31st of March 2020 was published on the Investor Relations website last week. As at end March 2020, the group's common equity Tier 1 ratio was 12.9% on a transitional basis, significantly above the regulatory minimum, excluding bank-specific requirements of 7.5%. In the 3 months to the end of March, the common equity Tier 1 ratio declined 110 basis points as risk-weighted assets grew faster than capital supply. On the supply side, first quarter of 2020 earnings and the positive foreign currency translation movement on the back of a weaker ZAR were partially offset by the accrual of the final 2019 ordinary dividend. Risk-weighted assets grew as a result of COVID-19-related asset growth and the depreciation of the rand. In response to the COVID-19 crisis, the SARB reduced the Pillar 2a buffer requirements to 0% with effect from the 6th of April 2020. This reduces the group's minimum common equity Tier 1 requirement from 7.5% to 7% and the group's total capital requirement from 11.5% to 10.5%. Both ratios exclude any bank-specific requirements. On liquidity. For the 3 months to 31st of March 2020, the group's liquidity coverage ratio was 142%, significantly above the regulatory minimum of 100%. From April onwards, the SARB proactively provided temporary relief to banks by reducing the LCR requirement from 100% to 80%. In April, issuance of bank paper improved and during May, it largely returned to pre-COVID-19 pricing levels. As at 30th of April 2020, the group remained well capitalized and liquid. Based on our scenario analysis, the group's capital ratios are expected to remain strong and above required minimum levels. In line with the Prudential Authority's guidance on dividends, the group is not planning to declare a 2020 interim ordinary dividend. It is too early to comment on whether the group will declare a final ordinary dividend in March 2021. The Board will give this due consideration ahead of the release of our 2020 results in the first quarter of 2021. We are reviewing the group's medium-term financial targets and will provide an update as and when we are able to do so. As noted in the Standard Bank SENS announcement to shareholders on Monday, the 1st of June 2020, the group's earnings for the 6-month period ending 30th of June 2020, are expected to be more than 20% lower than the comparable period. We will issue a further trading statement with more specific guidance ranges once there is reasonable certainty regarding the extent of the decline relative to the comparable period. Standard Bank's results for the 6 months ended 30th of June are expected to be released at the 20th of August. In closing, the complexity and uncertainty surrounding the crisis has been stressful for our employees, and we thank them for the ongoing commitment. In a dynamic and broad crisis such as this, the depth of skills and experience across the group has proven invaluable. In addition, the group is confident it has the governance and risk management structures in place to ensure the appropriate and timely flow of information required to support agile and effective decision-making. A large proportion of the group's employees across the continent and in our international offices continue to work productively from home. This would not have been possible without our strategic partnerships and the systems investments the group has made in recent years. Our digital customer channels have also proven resilient. In closing, there is no doubt that the human, social and economic impacts of this pandemic is going to be significant. However, we are of the view that the diversity of our operations, the strength of our balance sheet and the depth of our skills position us well to weather this storm. Our strategy remains valid and intact, and we remain determined to emerge from this crisis as a stronger Africa-focused financial services group. I will now turn over to Sarah to manage the questions. Thank you.

Thank you, Arno. [Operator Instructions] The first question is from Harry Botha. And the question is, how significantly could the SARB guidance on setting post cyclicality assumptions affect Standard Bank's forward-looking provisions at -- for the first half of 2020? But just to repeat that, how significantly -- how significant could the SARB's guidance notes post cyclicality assumptions, impact Standard Bank's forward-looking provisions for the first half of 2020? Barbara, could I ask you to comment on that? And then Brooks, we'll ask you if you have anything to add.

Thanks, Sarah. I think that in context of the guidance, what we have -- and the guidance that has come out, we have tried to take into account industry sort of guidance as well, not just from the SARB and certainly from the accounting boards across the -- from other accounting boards. In that context, we are trying to place a little bit more waiting into longer-term outlooks that we'll take into account the through-the-cycle view rather than just the short-term impact. But obviously, that is very sensitive to the pace of the lockdown release. So it could be really best tested against some of the sensitivity analysis that we include in our financial reporting, which would give you a sense of a more bearish outlook, which obviously has quite a meaningful impact in terms of forward-looking. But obviously, some of that impact has already been absorbed within our March SENS announcement. Thanks, Sarah.

Thank you, Barbara. Brooks, would you like to add anything to that from a CIB perspective?

I think from a CIB perspective, I think, Sarah, really, the way we've looked at the provisioning for clients is really on a client-by-client, really focusing on sectors that have been impacted. So that has been our focus. And a lot of that impact has been contained in the March trading update that was issued.

Thank you, Brooks. The next question is from Matthew Pouncett. Question is, is there any political pressure on the banks to reduce prime repo spreads, i.e., effectively lower interest rates end clients? Arno, could you take that question?

Matthew, no, there is no political pressure. We do have, obviously, the SME guarantee scheme, which has been rolled out in South Africa specifically, and that has got parameters around these lending spreads. But that is a ring-fenced portfolio, and that guarantee is partially absorbs the cost of that by the banks and partially by national treasury. So apart from that, there is no further pressure in terms of setting rates, which we would not be writing in our business-as-usual case.

Thank you. The next question is additional question from Matthew Pouncett. What is the endowment sensitivity for the Rest of Africa portfolio? For example, what is the NII impact of a 25 basis point reduction in the Rest of Africa portfolio? Matthew, that's -- we haven't provided that externally. Obviously, we normally refer to the South African sensitivity. Yes. We haven't provided that to the market. The next question is from Harry Botha. The question is perhaps one also for Barbara around exposures in the lending book. The question is how much exposure does Standard Bank retail lending books have disrupted sectors? Or how much exposure does Standard Bank have to essential service employees?

Sarah, I'm afraid I don't have that information at hand. But obviously, the portfolio that is most sensitive is related to the small and medium enterprises from a business lending perspective and the vast majority of that population. As you would be aware, we have already provided some restructure and payment relief support in the short term, which is based on an opt-out basis, which we released quite early in the process. And obviously, we are hoping that some of the SME lending guarantee support will provide additional support to ride out this storm.

Thank you, Barbara. The next question is for Arno from Harry Botha. The question is what is the impact of the lower U.S. dollar interest rates to Africa's net interest income? And what is the outlook for LIBOR rates?

Harry, obviously, we do have endowment impact. The endowment impact is less impacting on South Africa, where we don't have resell priced portfolios from a deposit point of view. But the impact is certainly felt in our international portfolios. Harry, you will recall that we've got around GBP 5 billion equivalent of deposits in the Isle of Man Limited -- in the Isle of Man Jersey as part of our wealth strategy. And clearly, that is materially impacted by a decline in reference rates in those markets. So we are exposed there and that's a fairly large exposure in terms of the endowment point of view.

Thank you, Arno. Arno, the next question is for you. It's around preference share dividends from [ Bonga Mriga ]. Any guidance relating to the payment of preference share dividends?

Yes. So thank you for that question. And it is important to point that out just to differentiate between ordinary dividends and preference share dividends. You would have noticed that the guidance note from the SARB related to dividends was specific to ordinary dividends. And you heard me just now say that we are unlikely to pay an ordinary dividend in the -- for the first half of this year. However, coming to preference shares, our intention is to continue to pay preference share dividends going forward, and that is not impacted by the guidance note by the SARB.

Thank you, Arno. The next question is from [ Gershwin Long ]. The question is, what is the net impact on the cost due to the lockdown? And what is the impact on the cost-to-income ratio? We will provide a breakdown of the costs relating to the lockdown when we report in August. So the next question is from [ Warren Thompson ]. The question is with regards to the take-up in relation to the new COVID-19 loan scheme and in terms of the number of applications and the number of successful disbursements. We have had a strong response to the loan scheme. And again, we will provide the market with an update with regards to disbursements against that fund when we report in August. That's all the questions we have for now. [Operator Instructions] Arno, we don't have any more questions at this time. So I think we can close the call. Thank you very much to everyone who's joined the call this afternoon. Arno, would you like to make any closing comments?

Yes. Thank you very much, everyone, for dialing in. We appreciate to give you the updates. We think it's important to have a fluid communication with our shareholders, and you would have noted quite a few announcements we have made. Obviously, we will be disclosing significantly more detailed impact on sectors and our provisioning when we go to the market in August. And I look forward to those discussions when we can disclose the full detail of that. I wish everyone well. And I wish you and your families to remain safe and healthy. And thank you for joining us this afternoon.

Thank you. This concludes...