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

Good afternoon, and thank you for joining the Standard Bank Group Pre-close Call. My name is Sarah Rivett-Carnac, and I will be managing the call this afternoon. As you will be aware, we issued a voluntary trading update and trading statement on SENS this morning. The purpose of this call is to cover the highlights of that announcement and then provide an opportunity for questions. On the call today, we have Arno Daehnke, the Standard Bank Group Financial Director; Brooks Mparutsa, the CFO of CIB; Barbara Bell, the CFO of PBB; and Thabani Ndwandwe, the Head of PBB SA Credits. [Operator Instructions] I will now hand over to Arno. Thank you. Arno, over to you.

Thanks, Sarah, and good afternoon, everyone. I hope everyone's well, and thank you for joining us this afternoon. As noted in our announcement earlier today, the trends highlighted in the group's operational update for the 9 months to the year, I remind you that was released on the 20th of October this year, those trends have continued into the end of October. And just for the benefits of those of you on the call, I will quickly run through the 9 months 2020 update, the commentary we gave at the time. And those were group headline earnings at the time were 39% lower than in the comparative period. In quarter 3 2020, PBB disbursements continued to recover from lows in April 2020, particularly in mortgages. Turning to the balance sheet trends. As of 30th of September 2020, relative to 30th of September 2019, PBB's unsecured portfolios grew faster than secured portfolios. PBB Africa Regions portfolio grew faster than the PBB South Africa portfolio. CIB third quarter lending to corporates in South Africa slowed relative to the first half. However, lending growth in Africa Regions for CIB remained robust. And customer deposit growth was robust. And then turning to the income statement trends, and as I said earlier, these have continued up to the end of October. Gross income statement trends as of the third quarter of 2020 were: NII was under pressure due to endowment and lower margin; noninterest revenue growth remained positive as fees improved, as transaction volumes recovered, but trading activities slowed; cost containment is a focus; in light of the NII and activity-related fee pressures, we expect negative jaws for the full year of 2020; and the 9 months 2020 pre-provision operating profit growth was marginally negative. Regarding credit trends. Collections improved in the third quarter 2020 relative to the second quarter, but retrenchment claims also increased, and there remains a risk that the environment deteriorates. Africa Regions' performance continued to support group performance, offsetting ongoing strain in South Africa. And West region in Africa Regions continues to perform particularly well. We also noted that ICBCS remained profitable. Group's net asset value grew 5% to date up to 30th of September 2020. So those were the trends which we commented on at the point in time. And importantly, just to emphasize again, we see those trends continuing into the current period, the current year-to-date performance. Just looking at the COVID infection, some comments on that. The current surge in infections and ensuing lockdowns in the Northern Hemisphere are obviously a concern, while the broader impact thereof on the global economy disruptions to trade and the potential knock-on impacts on Africa is unclear. That is expected to be milder than that seen in the second quarter of 2020. Across most of the countries in which the group operates in Sub-Saharan Africa, infection rates and lockdowns have moderated and economic activity has recovered. We do note, however, an unfortunate increase in infections in Kenya, South Africa and Uganda. The localized outbreaks in the Western and Eastern Cape in South Africa are concerning. While we are buoyed by the positive vaccine-related developments, we recognize that the rollout thereof is likely to take some time. The safety and security of our employees remains a priority. At this point, our business continuity plans remain in place and are working well. As we head into the holiday season, pandemic fatigue, lapses in safety protocols pose a risk. The likelihood of further waves of infections in our countries of operation remains high. Looking at our clients' relief portfolios. The management of the client relief portfolios continues to receive attention. In summary, by the end of October 2020, the PBB South Africa client relief portfolio had declined to ZAR 47 billion. 80% of the remaining portfolio is secured. Total coverage increased from 2.5% as at end June 2020 to 4% as at end of October 2020. The PBB Africa Regions client relief portfolio declined to ZAR 4 billion. Total coverage increased from 2.6% as at end of June to 3.9% as at end of October. Requests for relief from CIB clients have tapered off. The actual client relief provided as of 31st of October was ZAR 24 billion, up slightly from ZAR 21 billion as at 30th of June 2020. Relief provided remains primarily liquidity related. The group's credit loss ratio for the 10 months to October was lower than the 169 basis points reported as at the end of June 2020. The credits -- the outlook for credit impairment charges beyond this financial year, financial year 2020, remains very uncertain. Turning to capital and liquidity. The group's capital and liquidity levels remain strong. This positions us well to weather any additional turbulence and provides the financial resources to continue to [indiscernible]. Group's common equity Tier 1 ratio was 13.2% as at 30th of September, up from 12.6% as at 30th of June 2020. Dividends and outlook. The group's position on the declaration of the final dividend for the year 2020 has not yet been decided. In March 2021, the Board will review the group's capital position, the outlook and the group capital demand expectations as well as regulatory guidance and then decide on the final dividend. There remains considerable uncertainty and forecast risk. The group will update the market with expected trends in 2021 when it reports results on the 11th of March 2021. The group will provide an update for the group's medium-term financial targets in March 2021. As per announcement this morning, the group's 2020 headline earnings are expected to be more than 20% lower than in the prior period. We will issue a further trading statement with specific guidance once we have reasonable certainty regarding the extent of the decline. Lastly, it is worth highlighting the ongoing resilience of the Standard Bank franchise is underpinned by the group's diversity across client, sector and geography. Thank you. Sarah, can we now please move to question?

Thank you very much, Arno. We have no questions yet. [Operator Instructions]

No questions from anyone? It must be the first time we have a call of no questions.

There's a question, Arno. The question from Mark [indiscernible]. Could you provide any more information on the level of retrenchments that you have seen coming through in South Africa? Perhaps we could pass that on to Thabani. Could you comment on that?

Thanks, Sarah. What we have seen generally, I mean, this is not always fully representative, of course, of the economy, but what we track, we track some of the claims and the loss of income. And in terms of claims, we've more than doubled our claims. It still represents quite a minute part of our book, close to about ZAR 1 billion worth of our book. A big chunk of that is paying still, but we've seen them making certain claims around the portfolio. But of course, when we -- in the industry engagements, we are hearing and we are quoting between 1 million to 2 million of clients. But in our portfolio, there is not, of course, represented like that because we've seen that most of those retrenchments happened in the lower-income categories. But in the sort of more upper-income categories, we haven't seen the full scale. So in our portfolio, it's still not as elevated as we are picking up from national treasury and the industry. But we are seeing more than doubling of our claims since June so far. Thanks, Sarah.

Thank you, Thabani. An additional one for you from Tyrel Hansen from Westwood. Could you provide any information with regards to the LTV levels on the PPB portfolio that is still under relief? And yes. So that's from Tyrel. So Tyrel, just to clarify, the 80% we referred to is both in relation to mortgages and VAF. But Thabani, perhaps if you could comment on the LTV ratios in the client relief portfolio.

Thanks. Thanks, Sarah. And on average, just to give you, we try and measure both, of course, the balance to value and the loans to value. And on the average portfolio, we saw over around the 60% balance to value with the different age categories. And for our portfolio that is under client relief, we don't seem to have a significant difference in the balance to value. It's hovering around the same levels that we see on the broader portfolio for around some of the balance to be of around 60%.

Thank you very much. Thabani, one more for you. From [ Louis Chetty ]. Please can you provide some color on the bank's strategy going forward with regards to future payment holidays on the existing relief book, the further extensions on the PBB relief book?

Thanks, Sarah. And so let me just maybe try and just position it broadly and as the multiple phases that we've gone into. As you know, upfront, our payment holiday strategy was much more broader and we were -- so some of it was proactive and some of it was reactive. As we migrate into the next phases, we slowed down on any proactive payment holiday or restructures. And we allowed customers to engage with us, and we had no proactive. And those were the few that we sort of started extending or giving new payment holidays at the time. But of course and I guess that's really to the question is that what then do you do post-payment holidays? Because if you continue with payment holidays, it can start looking like you're kicking the can down the road, and we have no intentions of kicking the can down the road. And so our next steps and our key focus now is finding solutions that are longer term and no longer short term in nature. And some of those solutions, we start with a very simple thing. As those who are unemployed, we're starting to ask them to start getting into positions where we can either sell the properties for them. We drive what we call an ease-of-sales strategy. And we do it for both vehicle and asset finance, and we try and start thinking about selling properties where the insurance doesn't exist. But we are also careful, of course, to not overreact because certain jobs, professions, as an example, tend to have different reemployability. And so we are segmenting our population to understand based on their reemployability whether we want to help them start selling or not. And otherwise, where we can, we keep them in their properties and test for reemployability. We move them into stage 3, provide a stage 3 provision level. But then where people have lost their income or portions of the income, and they haven't been retrenched and they haven't lost their jobs, we are looking at solutions, for example, of lower installments. But keeping here, we want to make sure that those who are earning an income that paying even if they start paying a component of that income. We are also trying to make sure that one of the key strategies for us is to make sure that we create a fair amount of [ reservation ] and we are making sure that customers who are -- who have properties with us at low PTVs, where there's an unsecured debt, we are thinking -- we are looking at an environment if we're going to do a restructure, we are collateralizing our position so that we don't find ourselves in a position where we have a scenario that customers are being restructured given longer terms, and we remain sort of in an unsecured position. So there's all of this as different positions, but it's starting to become a case-by-case, deep analytical work is being put in to help the decision makers to make sure that we've got full data, bureau data and payments data in solving for many of these customers. And of course, we are -- we have kicked off our legal strategies where needed, and we are executing on it. And we were lucky enough that we didn't close down our collection shop during the COVID even though we had [indiscernible] where we were unable to fulfill all our execution due to capability where we didn't have a full-on capability to work from home, but we kept our attendants working. So we are executing also when necessary on the legal strategy to make sure we can execute. But we don't use it as a primary strategy because firstly, the legal environment is complicated. But secondly, in an environment like this, you have to be very selective about who you [indiscernible] with. I don't know, I hope it answers the question. But if more clarity is required, I'm happy to add. Thanks, Sarah.

Thanks, Thabani. Sorry, one more for you, and then we'll share this one with yourself and Brooks. There's a question from Warren Thompson. Can you sketch a picture around the change in provisions from June to October between the different stages? Thabani perhaps, if you can comment on PBB, then we'll ask Brooks to comment on CIB. So the movements between the different stages 1, 2 and 3. Thank you.

Thanks, Sarah. So when we came out in June, our overall sort of coverage was sitting at about 5.3. And we have sort of increased that coverage by 20 basis points across the overall position. But there is -- there has been shifts, of course, within the different stages. Our stage 1 population has increased by around 10 bps. And then our stage 2 coverage has increased by about 70 bps. And our stage 3 provisioning has increased by just over 100 bps overall. Key to this is that, of course, we're starting to see a bit of a distribution shift of the portfolio over time because we are seeing a slight increase in our stage 1. As I said, we are moving customers into stage -- sorry, in stage 1 and stage 3 because we are moving customers into stage 3 when we see any signs of strain. We are also making sure that any customer who may have any type of request of restructure, et cetera, we are moving them into stage 3. So key to that is also the increase in our stage 3 distribution, which is why you are seeing an overall increase in our provisioning across. For our payment holidays portfolio, particularly what you will see or what we call the client relief portfolio, you will have seen -- you will see that we can increase our provisions for the client relief portfolio by relative -- on the relative basis, we've increased it by just over 40%. So -- at stage 3 level because those customers we're keeping at stage 3 now, they are a bit more hard core, so increasing our stage 3 portfolio relatively. And as Arno would have said, overall, we've increased our coverage for that portfolio from 2.5% to 4%. Thanks, Sarah.

Thank you, Thabani. Brooks, would you like to comment on -- from a CIB perspective?

Yes. Thank you, and good afternoon, everybody. I think in terms of CIB, what we have seen in the last 5 months are -- is a number of names moving into stage 3 that were in stage 2. And as a result, we've seen a slight, and I would call it marginal but not significant increase in our stage 3 holdings in as far as our book is concerned. But in terms of coverage ratios, that has remained steady, likely because of the lumpy nature of the business. I think as at the half year, we probably had a stage 3 coverage ratio of about -- I think it was 39%, and there has been a slight increase in the stage 3 coverage ratio. So stage 1 and 2, likely steady, but we have moved some names into stage 3.

Thank you. Thabani, back to you. Question from Chris Steward. Are you concerned about the expiration of the TERS and UIF support?

It's a -- thanks for that question. It's one of those questions that definitely, I could never say I'm not concerned about. The support programs that government has been putting down as they sort of wind down, it does, of course, concern us relatively. I do think, though, that most of our work has tried to capture the impact of what those things may look like, including the economic impact as well as what we've seen as the customers who've had reduced income. So you would, of course, understand that most of the people who are getting a lot of the support programs have had reduced income. And we've used the reduction in income to try and model a different provision requirement for all of those entities. So I think we have done some stuff, but it remains a concern, our [ own line ]. It is always something we are watching closely. It's something we want to manage carefully. But I think so far from a provisioning perspective, we have done it. But it does mean that from an operations perspective, we have to put strong capabilities to manage more people as they come off these programs and be able to solution for them. But yes, it's something to watch out for. Thanks, Sarah.

Arno, it's a question for you. It's from Mark [indiscernible]. Is ICBCS profitable month-on-month? Or is it just profitable year-to-date?

ICBCS in the second half of this year has been profitable for each month.

Given the trends in credit loss ratio and advances, what flags are you looking for to convince yourselves that you are out of the worst? Are you seeing any encouraging signs or any worrying signs? Arno, perhaps would you like to comment generally?

Yes, I'll comment at a high level. I mean, obviously, we're looking at the trends of our credit loss ratio and I've already commented that, that is currently declining relative to what we've reported. So those are some of the signs we're looking at. We're also looking, particularly at the portfolio, which Thabani really spoke about, that PBB is a client relief portfolio. And that is encouraging, as you would have seen in the SENS, that portfolio was ZAR 107 billion as of 30th of June. It then reduced down to ZAR 61 billion as at end of September, and that is now at ZAR 47 billion. So certainly, we do expect another reasonably large reduction in November, and we will see that as the [indiscernible] how that is proceeding. But that's a particular portfolio we are looking at as well. I guess other signs is just, which we monitor in terms of high frequency data, is the client activity in our retail and our wholesale portfolios. And we can see continued recovery in our client activity through payments, through disbursements, had record disbursements in the mortgage portfolio, for example, we've got good disbursements in there. So these are trends of underlying economic activity, and obviously, we're monitoring that by sector. And we do have the granular detail, which we've shared on previous calls with you, obviously [indiscernible]. In African Regions, the normalization seems to be on track. It's following our modeling, and I've already indicated that the client relief portfolios are only ZAR 4 billion. Overall, the credit modeling we've done at the beginning of the year and which we also updated as of June and obviously in September continues to track our expectations. And currently, we are not seeing surprises in our portfolio. But I'd like to caveat, as I did in the opening comments, it's obviously very uncertain. Second lockdown, it doesn't need to be down to lockdown 5, maybe 3 or 4 would be very detrimental, of course, on Africa. There could be second waves of infections all over the continent. We're worried about those. So we are caveating all of these numbers with the high level of continued uncertainty, which we have to face in our portfolios. Maybe I'll leave it there, Sarah. You may want to add another point or two -- if you have anything else.

No, nothing else to add. Thank you, Arno. The next question is for you, Thabani, from James Starke. What is the coverage on the unsecured portion of the PBB SA client relief portfolio? Perhaps if you comment relative to the secured, so relative to mortgages and VAF.

Yes. Sorry, Sarah. I'm just making sure that I've got the right numbers. But yes, if I look at the different portfolios, of course, as you would expect our current sort of coverage that sits in your home loans being the lowest, it's sort of just under sort 2%. But for our term loans and the term loans, which is probably our highest risk portfolio with a lower income sort of coverage, it's just under sort of 38%. And this is overall coverage, not just in stage 3 specific coverage. So it's overall coverage. And our sort of loans portfolio sits at about 11%, 10%, between 10% and 11%. So it ranges month-on-month as the portfolio winds down. But at the moment, it's sitting at just over 10.3%. So roughly, we have almost for our unsecured portfolios, they're all going to be at a sort of double digits, and our secured portfolios are sitting at single digits VAF, which is more physical products, is just under 4% overall. I hope that gives color.

The next question is from Gershwin Long. It's for Brooks. Could you provide some more detail with respect to the increase in the CIB client relief portfolio? Any sectors in particular that are recovering better or are getting worse?

In terms of the relief portfolio, as Sarah has mentioned, we saw a very slight increase in the relief portfolio from ZAR 23 billion to ZAR 24 billion as of the end of October, the ZAR 23 billion being assets as at June. In terms of sectors, I think the sector that we have seen a slight increase in is in the hospitality sector in the last 4 months since June. But we've also seen some recovery in industrials, which includes the hospitals and health care. We've also seen some recovery there. We're also seeing some recovery in oil and gas, particularly in Africa regions where -- I think with the outlook having been improved, we are seeing some recovery there. I think those are the 3 sectors that I would highlight specifically, but industrials in South Africa being one which is showing recovery where we were significantly more worried as at the half year. That's it, Sarah.

Thank you, Brooks. The next question is from Ilan Stermer. Is there anything different between your view -- the view that you provided at interims versus where we stand today? I think, Ilan, overall, the trends that we've seen are largely in line with what we expected in August, and guidance that we provided in August remains the same. The next question is from Elan Levy. The common equity Tier 1 ratio looks very healthy and well ahead of large peers. What level of CET1 would be sufficient, provide you with comfort on declaring an ordinary dividend? Arno, perhaps one for you.

Yes. Our ratios are healthy, in excess of our Board requirements. I guess not so much the level, it's more having some sites of possible downside risk. Elan, as you can imagine and as we've discussed, we model various [ baseball ] and base scenarios, and some of the base scenarios, we really stress the balance sheet. At the moment, there's a fairly wide range of outcomes, and we would need to have some comfort that even under a, really, a [ bearish ] scenario that the group would be sufficiently capitalized before we'll think about ordinary dividends.