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

Good afternoon, and thank you very much for joining the Standard Bank Group Pre-close Call this afternoon. My name is Sarah Rivett-Carnac, and I'll be managing the call today. [Operator Instructions] As you will be aware, we issued a voluntary trading update for the 4 months to the 30th of April 2021 and the trading statement for the 6 months to 30th of June 2021 this morning. The purpose of this call is to cover the highlights of that announcement and then to open for questions. On the call today, we have Arno Daehnke, the group -- Standard Bank Group Financial Director; and Brooks Mparutsa; Barbara Bell; and [indiscernible] the client's segment CFOs. I will now hand over to Arno. Thank you, Arno. Over to you.

Thank you, Sarah, and good afternoon to you all. I look forward to spending the next hour or so with you and to have a discussion after my opening remarks. Thank you. On the economic update, since our first quarter operational update in April 2021, the global environment has improved. Upward revisions to the global growth outlook are positive, and the IMF upgraded expectations for global gross domestic product growth in 2021 to 6%. In South Africa, strong export prices have driven a trade surplus, and the fiscal outlook has improved. There are signs that an economic recovery is underway, and sentiment has improved. Inflation is expected to remain contained, and interest rates are expected to remain low. Year-to-date, the rand has strengthened relative to other major currencies, most of the currencies in the country in which the group operates. On the COVID-19 update. In sub-Saharan Africa, the COVID-19 vaccine rollout is underway, but vaccine access and distribution remain key hurdles. In South Africa, the mass vaccine rollout has started, expected to gain momentum. Pandemic-related restrictions have largely been rolled back across our countries of operation, and the economies are showing signs of recovery. Infection waves are expected to continue at different paces and severities, and future lockdowns are expected to be more targeted and less restrictive. Turning to our balance sheet trends and disbursements. In South Africa, in the 4 months to the end of April, mortgage and vehicle and asset finance disbursements were well above those recorded in the 4 months to April 2020. Business disbursements grew double digits relative to the same period last year. In Africa Regions, personal loan volumes were also higher period-on-period driven by strong digital channel origination. Despite relatively strong Investment Bank origination in April 2021, corporate client balances declined as clients took the opportunity to repay loans they drew down a year ago, and foreign currency balances declined due to the translation impact related to the stronger rand. Turning to the income statement trends for the 4 months ended April 2021 relative to the 4 months ended April 2020. The stronger rand reduced both revenue and costs by approximately 5% period-on-period due to the translation impact. Net interest income declined by mid-single digits but was flat in constant currency. Significantly lower margins driven by lower average interest rates period-on-period were partially offset by higher average interest-earning asset balances. Net interest margin remained at similar level to the second half of 2020. Noninterest revenue declined by high single digits as trading revenues were lower period-on-period relative to the high base in the 4 months to April 2020. Net fee and commission revenue were low down -- were down low single digits to the 4 months to 2020 April period but grew mid-single digits in constant currency. In South Africa, card issuing turnover was up double digits relative to 2020 and relative to 2019. In Africa Regions, digital transactions growth remained robust. Costs declined low to mid-single digits relative to the prior period. Unfortunately, revenue pressures outweighed strong cost containment, and this resulted in negative jaws. Credit performance in the 4 months of 2021 was better than expected. Credit impairment charges were significantly lower relative to the prior period driven by lower forward-looking provisions and releases related to corporate clients. The credit loss ratio was marginally below the top end of the group's previous through-the-cycle range of 70 to 100 basis points in the period. The credit loss ratio is expected to be above the top of the previous through-the-cycle range for the full year of 2021 And ICBCS remained profitable. Turning to return on equity. The group's ROE recovered relative to the 8.9% reported in the 2020 financial year. It was closer but still below the group's cost of equity. Turning to capital and liquidity. The group's capital and liquidity levels remain well above regulatory minimums and internal risk appetite thresholds. The group's common equity Tier 1 ratio as at 31st of March 2021 was 13.2%, and this is unchanged from year-end. Turning to dividends and outlook. The group expects to be in a position to declare an interim dividend in August 2021. The full year 2021 dividend payout ratio is expected to be above the 2020 levels but below historic levels of 45% to 55% payout ratios. Recovery trajectories are likely to differ across the markets in which we operate. Positive global backdrop should provide some support. Group guidance for the 12 months to 31st of December 2021 as provided in March 2021 remains unchanged. Turning to the trading statement. As per our SENS announcement this morning for the 6 months to June 2021, the group's headline earnings per share are expected to be more than 40% higher than in the first half of 2020, and earnings per share are expected to be more than 2.8x higher the earnings per share in the first half of 2020. For the avoidance of doubt, this is more than 180% higher than 1H '20 earnings per share. There are still 2 months of trading to take into consideration, including the impact of the third wave in South Africa on the group's banking insurance operations. We will provide an update, including a guidance range, when we are able to do so in the coming months. Thank you, Sarah. Back to you.

Arno, thank you very much. I think now we would like to move to questions. Claudia, can we hand over to you, and if you could provide the instructions for how people can ask their questions. Thank you.

[Operator Instructions] The first question comes from Waleed Mohsin from GS.

It's Waleed Mohsin from Goldman Sachs. A couple of questions from my side. The first on the credit loss ratio. So the 4-month number is below the top end of the 2 -- the previous 2 cycle guidance range. But if you look at your guidance for the full year, you're still pointing towards -- this exceeding the top end of the 70 to 100 basis points guidance range. I wanted to ask, any underlying reasons for this level of prudence? Is it -- are you seeing any signs in particular sectors? Are you worried about the impact of the recently announced lockdown restrictions? What's driving the more conservative outlook for the second half, the remaining 8 months of the year on the credit loss guidance? That's my first question. And the second question on dividends. The ROE seems to have recovered nicely closer to the cost of -- equity still remaining low, though. And capital levels remain very healthy relative to your own targets as well as the local banking comparatives. From that perspective, with corporate repayments as well, as you noted, why is the dividend guidance relatively conservative? I mean one would expect that Standard Bank could afford a 40% to 50% payout ratio, which was there historically. So just your thoughts on these 2 questions, please.

Yes. Thanks, Waleed, and thanks for those 2 questions. On the credit loss ratio, the answer is actually relatively straightforward. We did have -- and I referred to it in the commentary just now, the number of corporate recoveries in the first 4 months of this year, corporate recoveries relating to our wholesale clients, and we don't expect that trend to continue. So in a way, our credit loss ratio was a bit flatout because of those corporate recoveries. For the full year, as I indicated, we expect our credit loss ratio to be marginally above the top end of our range. And for avoidance of doubts, so marginally above 100 basis points. On the dividend guidance, you're quite correct, the capital is high. We remain cautious in terms of what the outlook is for COVID wave 3 in South Africa, and we'll assess our full year dividend guidance we paid in August and obviously in March next year once we have full clarity on the outcome of it.

[Operator Instructions] The next question comes from Chris Steward from Ninety One. Chris, you may proceed with your question. If your phone is muted, please unmute your phone so that you can pose your questions.

There we go. Apologies for that. Took a while to find the mute button. Just a quick question. You indicate in the trading statement, despite relatively strong Investment Banking origination, corporate client balances declined. Could you just clarify, is that a decline on the April 30 balance -- April 30, 2020, closing balance sheet date? Or is it a decline as of the December 31, 2020, closing balance sheet date in terms of your corporate advances growth, please?

Yes. Thanks. I'll hand over to Brooks, who runs that part of the business. Brooks, if you can comment on the loans and advances balances?

Thanks, Arno, and good afternoon, everybody. Chris, the loans and advances balances is down on the 2020 balance, both the April number as well as the December number. I think that in April, what we saw last year was a significant utilization of revolving credit facilities as we entered the pandemic. And so this year, we've seen the repayment of those loans and advances. So it is down on both December 2020 as well as April 2020.

The next question comes from Asanda Notshe from Mazi Asset Management.

I just want to check if you can hear me.

Yes, we can.

Two questions, please. First one is, if you look at the BA900, there seems to be strong growth in the sort of [ lazy ] deposits category. Any sense from your guys' point of view where that comes from, especially on the retail side, especially what sort of driving that? And then second question is, we've seen some relatively encouraging numbers from the retailers. Would you just maybe give us a comment, please, on -- sorry, just I'm trying to link up the dots there. Is unsecured lending on your side ticking up? Is -- could we sort of draw that inference or not really from an advances perspective?

Great. Thanks, Asanda. [indiscernible], can you answer those 2 questions, please? [indiscernible] is our CFO of Consumer and High Net Worth Client segment.

I think on the first question, what we are seeing in the portfolio is that a lot of it was really because of just liquidity management from a customer perspective. So because of COVID, we saw a lot of customers really been quite moderate in terms of their spend. But what we're starting to see as the spend really increases, I think, to the point that Arno mentioned earlier, we're starting to see some of that actually moderate as we see the spend come through. So yes, there has been strong deposit growth, but we're starting to see some of that moderate. Yes, and you'll start seeing some of that in terms of the BA900. From an unsecured perspective, yes, we have been -- we are seeing growth in terms of the balance sheet, and I think a lot of it is really just on the back of some of the disbursements we started getting on the back end of last year. But if I look at the overall -- if I look at just overall, it will still be mid-single digits in terms of the growth that you see in that portfolio. Thanks.

And that was our guidance for the full year, the mid-single digit.

[Operator Instructions] The next question comes from Mark Du Toit from OysterCatcher Investments.

I wonder if you could just provide any more clarity on the negative jaws ratio. I mean is that similar across the South African business and the rest of Africa? Or is it somehow related to the stronger rand effect on the [ numbers ]?

Yes. Thanks, Mark. I'll take this. So the stronger rand, obviously, as I mentioned, takes off around 5% both on revenue and on costs. So the translation impact would be equally distributed there. So less so due to the stronger rand. The negative jaws pressure is primarily on the revenue side. Obviously, we are exposed to endowment exposure; in other words, the rate cutting, the lower interest rates, which have reduced our net interest margin, and that's the case both in South Africa and in Africa Regions. And then in both South Africa and in Africa Regions, but particularly Africa Regions, we had a very strong trading performance in the prior period, unusually high record trading P&L this time last year. And obviously, that is not a repeat. It's a more subdued market volatility conditions at the moment. The base of the high trading volumes as well as the obvious key endowment impact is putting pressure on the top line. And we're working very hard on managing our cost base accordingly and have, I think, good cost discipline under control and are managing our costs very prudently. But for the full year, Mark, and I'm sure you may be asking this, what's our jaws looking like for the full year, we are possibly going to have slightly negative jaws for the full year. So even though we're working towards positive jaws, I think reality is slightly negative jaws.

And in terms of economic improvement, is it similar in South Africa and the rest of Africa business? Are you seeing any Arno, difference in the pace of the recovery across the 2 parts of the business? What are you looking at?

Yes. Sure. If you -- having looked at our P&L for last year, I'm sure you'll recall that Africa Regions actually did quite well last year and had a relatively strong performance in 2020. So we're actually seeing a much stronger recovery in terms of earnings and in terms of revenue coming out of South Africa and also stronger recovery in terms of credit impairments coming out of South Africa. The strong bounce in South Africa, in Africa Regions less so because the dip was less severe.

Thank you. Arno, we have no further questions in the queue. Can I hand back to you for closing comments, sir?

Yes. Thank you very much for dialing in and for those relevant questions you've asked. And obviously, we look forward to sharing our detailed numbers with you in SENS, probably towards the end of July, giving a closer guidance of our outcome. And then no doubt, we'll see you on the 19th of August when we will be disclosing our first half 2021 results. Until then, we obviously wish that you stay safe and stay healthy. Thank you for dialing in this afternoon.