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

Good afternoon, and thank you 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. As you will all be aware, we issued a voluntary trading updates on SENS this morning. The purpose of this call is to cover the highlights of that announcement, and then we will open the line for questions. On the call today, we have Arno Daehnke, the Standard Bank Group Finance Director; and Brooks Mparutsa, Barbara Bell and Thembelihle Ngema, the client segment CFOs. I will now hand over to Arno. Thank you. Arno, over to you.

Thank you, Sarah, and good afternoon to all. I will start with some brief comments on the recent macroeconomic developments and then turn to the Standard Bank Group trends. Since our 9 months operational update in October 2021, the IMF has upgraded its expectations or GDP growth in 2021 to 3.7% for sub-Saharan Africa and to 5.2% for South Africa. Global commodity demand and pricing have dipped but remained favorable for sub-Saharan Africa and specifically also for South Africa. In contrast, inflation fears obviously, uncertainty have caused some volatility in global markets. And that pandemic, unfortunately, continues. New strains of COVID-19 will continue to add to market uncertainty and hence volatility. The rollout of the vaccines in sub-Saharan Africa is behind targets, which poses a risk. In South Africa, in the last month, we have seen peaceful municipal election. The finance minister presented the 2021 medium-term budget policy statement to Parliament and the governor of the South African Reserve Bank published the outcome of the Monetary Policy Committee. The medium-term budget policy statement highlighted that. While fiscal risks remain, the 2021 revenue collection is expected to be significantly better than initially forecast. This positive development would enable the government to reduce debt and fund the additional support provided through the expanded social and economic programs. The Monetary Policy Committee reviewed the outlook and decided to increase interest rates by 25 basis points to 3.75% from 3.5%, which is a 5-decade low. Turning to the Standard Bank Group's performance for the 10 months to October 31, 2021. In South Africa, mortgage, vehicle, and asset finance and business disbursements were well above 2020 and 2019 levels. Personal unsecured lending disbursements have recovered to 2019 levels. In Africa Regions, personal loan volumes were also higher period-on-period, driven by the strong recovery across all channels. Investment banking originations supported a recovery in the Investment Banking loan book balances, offsetting lower foreign currency balances due to the translation impact related to the relatively stronger rand. Investment Banking balances closed October 2021 at levels close to those as of the end of 2020. Turning to revenue. Revenues continued to recover, supported by higher average balances, a growing client base, improved sales and higher activity levels relative to the comparative period. Margins benefited from retail balances growing faster than corporate balances as well as Africa Regions balances growing faster than those in South Africa. I am pleased to report that in South Africa, we continue to acquire new retail clients at roughly 100,000 clients a month. This has translated into high single-digit growth in South African active clients year-to-date and should be supportive of fees going forward. In South Africa, customers continued to transact primarily via our digital channels and enjoy the convenience and flexibility of accessing their funds from any ATM at no extra cost and via our expanded range of retail partners, in line with our strategy to digitize our branch-based cash transaction volumes and related fees continue to decline. Card spend recovered to 2019 levels, while merchant acquiring turnover was well in excess thereof. In Africa Regions, Consumer and High Net Worth digital transaction volumes and Business & Commercial Client transaction volumes were about 2020 and above 2019 levels. The Business & Commercial Client segment recorded particularly strong volume growth in Ghana, Kenya, Lesotho, and Uganda. Trading revenue has been better than expected in recent months. Turning to costs. Costs remain well managed. Cost growth was driven by higher activity and performance-related costs, including incentives. While we still expect negative draws for 2021, we expect the draws to narrow relative to 1H '21, the first half of 2021. The stronger rand on average period-on-period continued to dampen reported revenue and cost growth. Turning to credit performance. Credit performance in the 10 months to the end of October continued to track better than expected. The impairment charges declined period-on-period due to improved collections, higher cures and forward-looking provisions, together with corporate client releases reported in August. The credit loss ratio for the period was within the group's through-the-cycle range of 70 to 100 basis points. The active client relief portfolios in both Consumer and High Net Worth and Business & Commercial Client portfolios now represents a very small proportion of their respective portfolios. As at the end of October, the Consumer and High Net Worth active client relief portfolio in South Africa equated to ZAR 2 billion, less than 0.5% of the total Consumer and High Net Worth South African client loan portfolio. In Africa Regions, the active client relief portfolio also equated to less than 0.5% of the Africa Regions Consumer and High Net Worth loan portfolio. The lapsed portfolios continued to perform well with strong payments and ratios. In the Business & Commercial Client segment, the active client relief portfolio represents 0.1% of the total South African portfolio and approximately 1% of the Africa Regions portfolio. With regards to ICBC Standard Bank Plc, the business remained profitable for the period. With regards to Liberty's performance, please refer to Liberty's voluntary operational update announcement released on SENS on the 18th of November 2021. Turning to capital and liquidity. The group's capital and liquidity levels remain strong. The group's common equity Tier 1 ratio was 13.5% as at 30th of September 2021. Group return on equity for the period improved relative to the 12.9% reported for the first half of the year. Group guidance for the 12 months to 31st of December 2021, as provided in August 2021, remains unchanged. With regards to the Liberty minority shareholder buyout. As noted in our SENS announcement earlier this morning, the buyouts of the Liberty minorities is progressing well. In October, the Liberty preference and ordinary shareholders approved the transactions. With regards to the Liberty preference shareholders, the conditions of the preference share scheme were satisfied. The consideration has been paid and the Liberty preference shares have been delisted. With regards to the Liberty ordinary shareholders, we are in the process of obtaining the requisite regulatory approvals and still expect to satisfy the conditions and complete the transaction in the first quarter of 2022. In closing, I will comment briefly on the outlook, recognizing, of course, that there are a number of unknowns. The emergence of a new COVID-19 variant, and the threat of the fourth wave in South Africa are concerning. As we look out to the end of the year and the annual summer holiday period, infection rates are on the rise. This may lead to broader restrictions being reintroduced in some of our countries of operation. The combination of vaccinations and economic necessity are, however, expects to result in the lockdowns being less restrictive than in the previous waves, particularly in South Africa. While these uncertainties may blur the outlook, we remain confident that our diversified client base, broad portfolio of solutions and geographic footprint position us well to continue to manage risk and find opportunities to partner our clients in their growth journeys. All 3 of our client segments are showing good underlying momentum, which bodes well for 2022. In addition, our robust business continuity plans and strong capital position will enable us to continue to support our clients, our employees and the societies in the countries in which we operate. Lastly, we look forward to sharing our year-end results with you on the 11th of March 2022. Thank you. Sarah, back to you.

Thank you very much, Arno. Please, can we move to questions. Claudia, over to you. Thank you.

[Operator Instructions] The first question comes from Stephan Potgieter from UBS.

Just a couple of questions from me. Firstly, at half year, I think you mentioned that you may provide a narrower range in terms of earnings outlook, obviously, earnings will recover by more than 20%. But is it possible to provide more guidance on that? And then just secondly, in terms of net interest income growth for the full year and half year, net interest income declined by 4% year-on-year. But you mentioned in the third quarter update that, that was growing mid-single digits, I think, for that quarter, year-on-year. But would that mean that you would have slight net interest income growth for the full year?

On our full year forecast, we will be providing that update via SENS when we are closer to the time of announcing our results. So that will be clarified at that point in time. And in NII, we are seeing some recovery, and we may be showing a modest growth in NII for the full year.

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

I wonder if you could just elaborate a bit on what the current demand for credit is like, particularly in the corporate space in South Africa and then maybe a comment on Africa as well. I mean is the demand for credit in the corporate space coming back? What are the trends like and which sectors are you seeing it come back in first?

Brooks, over to you.

Yes. Thank you. Yes, we've certainly seen an uptick in credit demand in the second half of the year. But I must stress that a lot of that when we talk about the pipeline as well as origination, some of that will filter down into the early part of 2022 in terms of NII impact and drawdowns. But we are seeing certainly increasing origination in the second half of the year. The sectors that are quite strong. I think for us, oil and gas has been -- has shown good growth. We've seen some recovery in real estate as well as some recovery in consumer, where we are starting to see those sectors close down in terms of the negative growth that they experienced in the first half of the year. But certainly, origination is picking up. And with some of the key infrastructure projects that have been announced in South Africa, we're starting to see activity in that space in terms of the power and infrastructure sector, but the drawdowns for that will come through, I think, into 2022.

Mark, do you have any further questions?

And just to clarify, I mean, that was that more overall group kind of statement? Or is that more South Africa-specific? And maybe can you comment in the rest of Africa then.

That was across CIB group, so both Africa Regions and in South Africa. But power and infrastructure was particularly strong in South Africa given the projects that are currently underway and have been approved by the South African government.

[Operator Instructions] The next question comes from Kevin Harding from Investec.

Just a couple of questions from my side. Perhaps you could elaborate on what drove the better-than-expected performance in trading revenue at the half year. The general expectation is that, that would moderate. So I guess that's quite a surprise. And then perhaps if you could just talk a little bit to a credit performance in terms of retail versus corporate. You've mentioned better cures, good connections. We're still saying that things are turning out better than expected. Really where do you see the risk sort of emanating as we head into a rising interest rate cycle? Or do you think that a shallow interest rate -- shallow rising interest rate cycle is not going to do much from a quality point of view?

I'll ask Brooks to talk about trading. Lihle to talk about the retail credit performance, and then I may conclude with some closing comments on that. So Brooks, over to you and then Lihle.

In terms of trading performance, trading performance has been particularly strong in South Africa in significant growth of year-on-year. If I can just give the full context, I think Africa Regions had a particularly stellar year in 2020 and that has not been necessarily repeated. But we've seen South Africa come very strong into the second half of the year. So Kevin, in terms of the gap that we had in our sort of global markets trading desk, we've seen that negative revenue print that we had at half year narrow in the second half of the year. And as Arno mentioned, it is likely being led by South Africa. We've also seen, as you're well aware, greater volatility, and that has resulted in opportunities for us in the second half of the year. And that volatility was greater than what was expected and thereby, our revenue print [indiscernible] that is concerned has been better than our expectations and we've been able to close the gap that we had at half year more than what we anticipated.

And then Lihle?

From a retail portfolio, we've really seen our clients been quite resilient this year. I think, yes, we didn't think it would be at this point. If you had asked us that this time last year, I think the main story is obviously the payment holiday book, which was mentioned earlier. What you've seen there is really the book is now less than [ 2 billion ], and it's mainly in mortgages, in the mortgages portfolio. And I think from the overall portfolio, we've really seen just data collection rates coming through. And we've seen that consistently throughout this year. I think the portfolio where we had pressure, which is in card, particularly on the payment holiday book. We really cleaned that out on this side of the year. So we're quite confident as well that we have taken the necessary buffers of interest rate cycles kind of starting to rise, and we have forward-looking on our balance sheet. So we are -- yes, we are -- we do believe that but a robust balance sheet.

Thanks, Lihle. Kevin, for your information, we expect another 3x 25 basis point rate hikes next year. And obviously, our provisioning and our IFRS 9 modeling as a base case takes it into account. And then obviously, we also, as you would know, model [indiscernible] cases and have a -- for the provisioning trajectory was the best on those probability weighted. And you mentioned -- Kevin, you mentioned corporate credit that continues to perform strongly.

Perfect. And in terms of watch list, because that sort of changed in the second half of the year. Any big names or sectors that are worrying you? Or is it still largely aviation and construction, and I can't remember there was a third one. Has that changed? Or is it still fairly consistent versus half year?

It was fairly consistent. Brooks, you may want to give a bit of detail on the watch list or corporate?

Yes, Kevin, I think what we're seeing is actually our watch list continues to -- from the -- and the 0.5% we were at half year. So that continues to get better. I think what we're seeing is some recovery of our client base. I think the ones that you mentioned in the construction industry, we've actually seen some of those cure during the period. So as much this continues to reduce. But overall, in terms of sectors, I think we're seeing the overall exposure and overall sector exposure in terms of watch list come down consistently. You mentioned aviation in particular. I think as far as aviation, we've seen some repayments in as far as some of that exposure has -- is concerned. So that also continues to reduce.

The next question comes from James Starke from RMB Morgan Stanley.

Just a couple from my side. Firstly, on NIMs, can you give us some color around pricing trends that are playing out, both on the asset side as well as the liability side with regards to funding. The second one is on noninterest revenues and particularly fees and commissions. I know you mentioned sort of year-on-year recovery, but perhaps if you could give us some color on how the sequential improvement is looking 2Q '21 versus 3Q and into October? And particularly, I mean, are we seeing those 100,000 clients a month come through in that sequential revenue improvement? And then lastly, with regards to your macroeconomic overlays, I mean given recent events, fourth wave, et cetera, I mean what is your thought from carrying those over into 2022, particularly given the positive RWA migration we've seen in the last [indiscernible]?

Great. So 3 questions from James. And good to hear from you, James. Maybe on the NIM side, Lihle and Barbara actually, both of you could just talk to your respective portfolios. Let's just start on NIM basis first. Lihle starting with you.

Thanks, Arno. On fees, Arno?

Yes, NIM trends on both the asset and the royalty side.

From an asset portfolio, we definitely do -- we are seeing it recover from where we were from a June perspective. We definitely do see on the deposit side, there is quite -- on the long-term side, we do see the competition being quite tough in the market. But we -- yes, we do think that you'll see a bit of a recovery from where we were in June.

Sorry. No material changes from a DCC perspective and demand has pretty much [Technical Difficulty]. We have seen a bit of a slowdown in the asset book growth in South Africa, but Africa Regions remained quite robust specifically in the West region. So we will get a bit of that margin and benefit on the back of the mix change. And then from a deposit perspective, again, no significant changes. But obviously, this recent rate hike will help us a little bit in the last month, but nothing too material.

Thanks, Barbara. And in the wholesale funding space, on the funding side, we see continued support of markets for issuances and continue to issue subordinated as well as senior debt into these markets at pricing, which is -- yes, which is sort of passing parameters. There was a question on fees and commission. So we've seen continued growth in fee income higher transaction activity compared to 2020 and higher transactional activity compared to 2019, and I think I made the point there, specifically in card turnover as well as increased transactional flows. We've seen ATM volumes related to South African clients to start to show a recovery. But I think as I mentioned earlier, our cash transactions continue to decline as we try and de-cash our branches. And obviously, there's a headwind in terms of fees and commissions related to that. Yes. I mean, obviously, the removal of Saswitch penalty fees in this year to provide more options for customers to put pressure on fee income as well. And what we heard about that is when you spoke to us in the half year.

Sorry, Arno, if I could just clarify in terms of the sequential comparing 3Q versus 2Q, I mean, how is the trend playing out?

Yes. It's generally improving trend, James, back of more client activity and more clients on our books. But as the retail bankers on the call would tell you, it takes time once you get clients on the book to fully entrench in them, entrench in other words, to cross-sell to them. So that uplift is still going to be materializing in 2022 and beyond the full uplift.

The next question comes from Charles Russell from SBG Securities.

Just one question from my side. Given any improving trends on NII and NIR as well as the well-managed costs, do you -- are you willing to commit to positive preprovision operating profit growth for the second half of the year?

Give me a moment. For the second half, the -- I don't want to be too specific, but it will be improving in the first half. And yes, that's slightly positive number maybe on the cards, yes.

We have no further questions in the queue. Sarah, can I hand back to you before we conclude.

Thank you very much, and thank you very much, everybody, for joining and for your questions this afternoon. Arno, would you like to make any closing comments before we close today?

Yes. Thank you, everyone, for dialing in. Obviously, we look forward to sharing all the details with you on the 11th of March, as I indicated earlier. We'll also have further clarity then, obviously, on the pandemic, of wave and the implications thereof, which I think is very early to be specific on that at the moment. That's all from my side. Thank you. Stay Safe. And as I said, we look forward [Audio Gap]