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

Good day, ladies and gentlemen, and welcome to the Standard Bank Group pre-close conference call. [Operator Instructions] Also note, this event is being recorded. I will now hand over the conference to Vineshri Reddy. Please go ahead.

Good afternoon, everyone, and thank you for joining the Standard Bank Group pre-close call this afternoon. My name is Vinsehri Reddy, and I will be managing the call. 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 we will open the line for questions. On the call today, we have Arno Daehnke, Standard Bank Group Financial Director; Brooks Mparutsa, Babool and Kimberlite Game, the client segment CFOs; Begman Seven, Head of Financial Control; Suri Govender, Head of Reporting; and Andrew Lonmon-Davis, CFO from Liberty. I will now hand over to Arno. Thank you, Arno. Over to you.

Everyone, it's great that you're dialing in and showing interest in Standard Bank Group. I will start with some brief comments on the macroeconomic environment and particularly how things have evolved since we released our results in March. I will then turn to the trends we are seeing in our business. First, our results in March. And since our voluntary trading updates in April 2023, the global economic and geopolitical environment remains volatile with global growth slowing in response to specifically high inflation and interest rates. We have seen public debt as a ratio to GDP increase across the world during COVID-19, and expectations are that these remain elevated, posing a growth challenge -- a growing challenge for policymakers as interest rates rise and revenue collections slow in many African countries. In South Africa, the situation is not much different. We expect inflation interest rates to be higher for longer, and economic growth will remain constrained. At the end of May, the South African repo rates had increased by 125 basis points in 2023 to 8.25%. A further 25 basis point increase is anticipated in the second half of the year. The rand continues to be pressured by a strengthening USD and dampened investor sentiment. Despite the macroeconomic environment, the group's results for the period ended 31st of May 2023 reflects a healthy and growing thresholds. This growth can be attributable to continued balance sheet growth in support of our clients, a downward impact of higher interest rates, improved customer activity levels and increased use of our risk management capabilities in volatile trading environments, all of which have contributed to strong top line revenue growth. Africa Regions franchise has delivered remarkable growth during this period and contributed 46% of the group's headline revenues. Turning to our performance and trends for the 5 months to the end of May 2023 for our banking operations specifically. Starting with revenue. In the period, our banking activities revenue growth was in excess of 20% compared to the same period last year. Continued balance sheet growth and higher-than-expected average interest rates across most of our markets supported net interest income growth. Our noninterest income growth was supported by continued growth in transactional volumes, fee and commission income as well as trading revenue. With regards to costs, a combination of higher fixed remuneration in a high inflation environment, higher incentives in line with business performance as well as increased technology spend on USD-denominated software licenses and cloud migration costs all contributed towards operating expenses growing in the mid-teens for the 5 months of 2023. Weighted average inflation across our countries of operation was 11.8% for the period. I do wish to note that we still achieved strong positive [jaws] in the current period. Turning to credit. [indiscernible] charges were almost 50% higher for the 5 months of 2023 compared to the charges in the first 5 months of 2022. This was as a result of larger lending books, consumer strain in South Africa, and increased sovereign debt risk in Africa Regions. The credit loss ratio for the current period was elevated but still within the through-the-cycle target range of 70 to 100 basis points. If I unpack credit by our business units, hidden payments related to consumer banking customers are currently elevated primarily in South Africa and particularly in home loans. On the back of rapid interest rate hikes, it sustained high inflation levels, which has resulted in some customers being unable to meet their drift obligations in full. Overall, the credit loss ratio for consumer banking clients is currently outside of the target range of 100 to 150 basis points. Coverage levels remain strong for this business. Present payments have also increased within our business in commercial banking segment due to a buildup of new nonperforming loans, particularly in single lanes in Africa Regions and across the small enterprise segments in South Africa. The credit loss ratio for this business is currently also upsides the target range of 100 to 120 basis points. Within Corporate & Investment Banking, corporate credit losses are currently below the 40 to 60 basis points through-the-cycle range for customer in payments. We note the weak trading results of several closely monitored clients across our metrics. The knock-on impact of the deterioration in the South African consumer sector into our corporate client base are being carefully analyzed. Sovereign defaults continues to be a risk and current levels of credit provisions for financial investments are elevated. For the 5 months of last year, we had no impairments for financial investments. Our provisions currently reflect adequately in our assessment of these risk factors across our network as of May 2023. Turning to Liberty and ICBCS. Liberty Holdings Limited continue to record improved claims experience and strong earnings growth despite losses experienced on the shareholder investment portfolio due to market movements. ICBC Standard Bank Plc recorded operational profits in the first month -- 5 months of 2023. And I wish to remind you that we had a sizable insurance recovery in January 2022, which is not repeated in this period, which has meant that ICBC Standard Bank Plc contribution to group overall profits has declined period-on-period. Turning to capital and returns. Our capital and liquidity levels remain strong. The group's common equity Tier 1 ratio as of the 30th of April 2023 was 12.9%. I'm pleased to announce that the group's return on equity for the period comfortably exceeded group cost of equity. Now turning to the outlook and our guidance for the 12 months to 31st of December 2023. While the economic outlook has deteriorated and uncertainty persists, opportunities to help our clients and in turn grow our business exist. Our group guidance for the 12 months to 31st of December 2023 has changed. Our latest estimates indicate higher net interest income growth compared to the low-teen guidance given in March and higher noninterest revenue growth compared to the earlier mid-single digits guidance [provided]. In turn, cost growth is anticipated to be slightly higher than our weighted average inflation rates for the year. Our expectation for strong positive jaws remains. The group's credit loss ratio is expected to increase towards the upper end of the group's through-the-cycle target range of 70 to 100 basis points. The group's 2023 return on equity is expected to show continued progress into the group's ROE target range of 17% to 20%. And we remain committed to serving our clients and achieving the 2025 targets and strategy we laid out in August 2021. Finally, as noted in the announcement this morning, we expect the group's headline earnings per share and earnings per share to be more than 20% higher in the first half of 2023 compared to the first half of 2022. And we will provide a more specific guidance range once there is reasonable certainty regarding the extent of the increase in earnings. We will report the group's first half results of 2023 on the 17th of August this year.

Arno, thank you. Please can we move on to questions? Chorus Call, over to you.

[Operator Instructions] Our first question is from Pinuna Pushkareva of Goldman Sachs.

It's Waleed Mohsin from Goldman Sachs. Arno, a few questions all on asset quality, please. Firstly, you mentioned the increase in the credit losses on the mortgage portfolio. If you could kindly let us know which vintages are these? Are these some of the more recently written mortgages? Or is it the back book where you're actually seeing the stress? So that's the first one. Secondly, if you could also talk about some of the other retail products if you're seeing any stress, any material stress on the rest of the retail product space? And my third and final question on the asset quality side. When we look at the commentary that you have for retail, commercial and corporate, it seems there's more stress. But when we look at the revised guidance, it's only moved from above the midpoint of the range to the top end of the range. So just wanted to get your thoughts on the minor adjustment over there. I mean just the commentary seems to suggest it's a high adjustment. And then maybe you could also comment on what's keeping the corporate cost of risk well below through-cycle levels, although you're not stressed in certain sectors?

Great. Thanks, Waleed. Thanks very much. For the retail questions, questions 1 and 2, I'm going to hand over to Lee [indiscernible] to declare mortgage vintages and the retail other asset classes performance. Over to you. Thank you.

Thanks, Arno, and thanks for the question. So what we've experienced from a mortgage portfolio is a couple of things. You're absolutely right. We've grown the book quite significantly in the last 3 years. What we have though seen is that's actually been our best vintages is the book that we actually booked in 2020 when all the competitors are not in the market. We're able to capture quite a lot of low-risk clients. So we're actually quite comfortable with those vintages. What we do see and where we see pressure currently within the home portfolio is those clients that have income installment -- the installment-to-income ratio is about 30%. That's what we see. We also see clients that have home loans below -- pocket of home loans below 1.5 million. We do see some of those to be under pressure. I think what's quite important in terms of just context is that what we've done in the last couple of years is that we've actually been very targeted in terms of the clients that we've actually grown this book. It has been largely within the affluent segment. So the average income in terms of our lending has been over ZAR 60,000 on a monthly basis. So that's actually quite an important context in terms of where we actually pay. So that's where we see. I think the other pockets of pressure we see in the home loans portfolio has been on first property. So clients that have bought their first property and are below, which is a very small pocket and have salary between ZAR 15,000 and ZAR 40,000, we do see some of those clients to be under pressure. So that's the population. I think overall, more broadly, what we've also seen is really an increased flow into debt tribute, which you would expect in this sort of market. So debt review overall across the portfolio has been -- is up 22% from this time last year. So those are the two big, I would say, big drivers and population where we see pressure. I think we're quite important in the context of all of this, and Arno touched on it at the beginning of the call, is all of this is in the context of a very strong coverage. So our coverage sits at [ 5.9% ], which is way ahead of where we were pre-COVID. We really held that coverage quite tight through this period. So the bulk of the pressure you see is in the home loans book. The other important piece is that in the base effect of in the first half of last year, what we did -- we obviously still have the payment holidays from the COVID period. So we had a lot of releases in the base. So that's also added to the elevation that you see from a year-on-year perspective within home loans. So the big pressure point has been on the home loans book. We haven't seen a significant deterioration in terms of our unsecured portfolios, and a lot of that is because we've been quite targeted in terms of how we play there. We have never played in low income within unsecured. Therefore, our portfolio from an unsecured perspective is largely affluent. And so we've had some deterioration, but it really is not significant. And that's why we really just -- the big focus has been on their home loans -- on that home loans book. Thanks. Arno?

Cost of risk, we expect it for the full year to be at the upper level of 700 to 800 basis points fee loss ratio, as I mentioned. And we actually expect a slightly better performance in the second half of this year than the first half. And why is that? We've got multiple derisk initiatives underway, particularly in the retail bank, which is going to support us in the second half. And as [indiscernible] really has intimated, we are well provided and have opportunity to think about our provision level strength into the second half of this year. All of this [indiscernible] premised on our base case interest rate scenario, which is another 25 basis points rate hike in July. Of course, if we have a base case scenario playing out with many more interest rate hikes to that, that might get additional pressure onto the portfolio. But it's another base case currently, we remain confident that we'll be within the range still.

Perfect, Arno. Just the point on corporate cost of risk as well?

Yes. Yes. On CRB, Brooks, do you want to maybe deal with that question? Thank you.

Yes. Thanks, Arno. In terms of CIB, I think there's a number of issues to mention. When we talk about our through-the-cycle range of 40 to 60 bps, that excludes some of the sovereign provisions that we would need to hold because that target range really refers to our customer exposure. So that is a contributor to that. We have seen some inpayments coming through in the first 5 months of this year with some exposures in Ghana and Malawi. But in as far as the remainder of our book in South Africa and [indiscernible] regions , we've seen some stress in the consumer sector. And we've taken the adequate provisions as far as that concerns. Some pressure in industrials, particularly in South Africa, and we've made the requisite provisions. But I think what is also important is in terms of our provisioning, taking a forward-looking view. It's also interstate that the adequacy of provisions that we held as at the end of December will impact sort of the additional provisions that we need to hold in 2023 coming through the income statement. So we're fairly confident that we will come in at probably the bottom end of the range of the 40 to 60 basis points, but that excludes the sovereign exposure. Thank you.

That's very helpful. Arno, just to confirm that then the 70 to 100 bps, the top end of that range that you guide for, for this year excludes sovereign provisions? Do I understand that correctly?

Yes, excludes sovereign provisions. The credit loss ratio is calculated on the loans of values and excludes financial investments, which sovereign are calculated.

The next question is from Gameiom of Citi.

It's Gameiom from Citi. A couple of questions from my side. Can you please provide more detail on the drivers for the impressive Africa Region's performance. Maybe also touching on regional over- or underperformance relative to expectations that you had in March? And secondly, can you also maybe comment further on current loan growth trends? So which products the segments have been driving growth and while you pull them back? And maybe also how has the worsening macro picture impacted the group's mid-single-digit loan growth guidance?

First of all, Africa Regions performance has exceeded our expectations really across most of the markets, South and Central Africa, East Africa and West Africa. So the portfolio is really performing across all of these regions. Obviously, the entire interest rates in dollars impact is supporting that. But it is also a franchise growth we've seen. We've seen very strong loans and value growth in these markets. And we've seen also exceptional trading performance in these markets in the CIB business. Credit impairments remain sort of broadly with some expectations in -- the underperformance has been in the consumer in South Africa. And as I mentioned in my call already, interest rates are higher than expected. And I think [Luvuyo] clearly painted the picture of where we are taking a constraint in the mortgage portfolio. So that underperformance in South Africa is slightly worse than expected in SA consumer. Loan growth trends. I remind you, we had a very strong performance in loan growth at the second half of last year. So we've got a strong installed base. Year-on-year, we've seen stronger loan growth than we've guided initially for the group. I think we guided mid-single digits in March. We're seeing higher numbers than that coming through at the moment both on a year-on-year as well as on an average balance sheet basis. Particularly in CIB, we've seen strong loans advances growth, more moderate in the consumer and in the business segments. I'll pause there, [Gameiom], for any follow-up questions or details you want from the recent [indiscernible] business unit heads.

Sure. And maybe the loans [indiscernible] guidance for the full year, does that still remain at mid-single digits?

Yes. Our current trend is probably going to indicate that will be higher than that.

Our next question is from Charles Russell of SBG Securities.

A few of my questions have been asked already, but if I could just add to Tiamo's question on Rest of Africa. How much of that performance was FX-related? And then if I could ask another one on Rest of Africa. Just maybe a high-level comment on the contagion risk of sovereign debt defaults and the inability to refinance across broader markets and what you already mentioned, Ghana and Malawi. I know the market has already been concerned about places like Kenya. If you could maybe just talk to the broader region on sovereign debt risks as well.

Well, the FX impact is not that material. However, though, the weaker rand has assisted our earnings growth and had been terrible for translation. But in constant currency, the performance has still been stellar and it's not that big an impact. Look, on sovereign exposures, obviously, we are very alert to sovereign risk -- heightened sovereign risk. I mentioned to really the [indiscernible] impetus of the country. In countries which [indiscernible] or Malawi, as you pointed out, really Kenya [indiscernible] or you see the traction being made or refinancing of some Eurobond exposures. But certainly Malawi and Zambia possibly as well, all countries which we are focused on and working quite closely. At this stage, I can affirm, though, we are not seeing a situation like Ghana unfolding, where there's been a sovereign local and foreign currency default to the name of loss. We cannot see that as founding at this stage in our best case scenario. But no doubt, there is heightened risk in these countries.

The next question is from Harry Botha of Anchor Stockbrokers.

Just a couple of questions from our side. You had fairly good noninterest revenue growth momentum in Consumer High Net Worth in the second half. Has that continued into '23? And then on the -- sorry, on the net interest income side, has there been any change to your interest rate sensitivity? And any change in funding costs as we've seen global pressure on?

Okay. For NRR on consumer, Lisa, you go the first and then I'll talk about NIR.

So thanks, Arno. Yes, we definitely see continued improvement. The first half has actually been better than the second half last year, and we actually expect that trend to continue. We continue to see client activity come through, and that's translating in terms of what we see from an NRR perspective. Thanks.

On the NIR sensitivity, Harry, I would still take the guidance we gave in March, which is published in our booklets, in terms of our interest rate sensitivity. We are looking, as I have communicated to the market as in March and more recently, adding some hedges, both technical and structural, to the portfolio to lock in the higher interest rates and protect some of the margins as the interest rate cycle [indiscernible] turn. And as we add to those positions, obviously, the interest rate sensitivity of the portfolio will decline somewhat. Funding costs. Yes, there has not been a material impact on funding costs. We continue to access funding in multiple markets and has not been a major driver if we have that as a split of a driver in the wholesale market, of course, if you measure it as such. I mean absolute rates, obviously, it's much higher, but the endowment impact is supporting the margin expansion.

The next question is from James Starke of Morgan Stanley.

Just turning to the credit impairments. Can you just unpack the commentary? You mentioned a more than 50% increase year-on-year. Square that with credit loss ratio guidance of below the top end of the range. I mean that up 50-odd percent. Is there any of the sovereign-related impairments included in that, which would not perhaps be included in the CLR guidance? That's the first one. The second one is, have there been any write-backs relating to the ZAR 900 million in credit charges taken on the Ghanaian local currency and U.S. dollar bonds from FY '22. And then lastly, if you could just add a bit more color around the balance sheet growth. You've really touched on loans, but if you can give us a sense around what's been going on with your financial investments and even total asset growth. And then the last one is on ICBC Standard. I mean, I know you flagged the insurance recovery. But how should we think about the operating performance there? Is it perhaps quite similar to what we saw in the second half of FY '22?

Yes. Thanks, James. On credit, the 50% increase -- just under 50%, that includes a relatively small portion of impairments on financial investments, which is not included in the CLR ratio, so to answer your question there. Bearing in mind with the growing balance sheet, of course, is both for numerator and the denominator effects. So based on our current calculations, obviously, the CLR is still that target range, as I've indicated. Sorry, the next question was -- you had something on credit?

Ghana write-backs. Have there been any write-backs on the Ghanaian charges from the end of last year on your sovereign exposure there?

Yes. We've had a very small write-back in the trading portfolio, a derivative flat position. It's been a small write-back on that, not material in context of the group overall. On the actual pickup take on the bonds and provisions taken on both local and foreign currency bonds, there's been no write-back on those. Okay? On total asset growth, yes, as I said, it's higher than expected. The lumpy CIB business, in particular, has resulted in this. And Brooks can give more detail on that. But although we are tracking in -- well above the mid-single guidance we gave earlier in March this year. I'm looking at May 2023 to May 2022, we sort of in low double-digit territory.

And then the last one, ICBCS Standard, yes.

Yes. They continue to do well is tracking ahead of expectations, and we can expect another good first half of the year. And the results have also been [flattered] by a release of a provision on a vision they had relative to Russian culture [pulp] some time ago. So that's also aided that's good trading performance. And we'll get forward to that when we speak to the market in August.

The next question is from Ross Krige of Investec.

Just three questions from me. On NIM expectations, I guess you've already addressed it, so like speaking to Harry. But you guided 20 to 30 bps, I think, previously when we spoke in March. Given what's happened with the rate and based on your current expectations, would you be willing to give us a sense of where that could land? Secondly, just on Nigeria, there's been quite a lot of news flow around some of the reforms there. It would be interesting to hear your views on how that's playing out on the ground? And thirdly, just on ROE performance and outlook. Just wondering what is your group cost of equity? And does the guidance apply for FY '23 within the range or not?

Ross, so on Bloomberg guide the 20 to 30 basis points, it was margin-related, right? Yes, we're probably going to have margins expanding wider than that on the back of high interest rates. So that guidance is probably too low at this stage. So you can expect a wider margin impact on that. On Nigeria, we obviously welcome the liberalization of the exchange regime. We're still quite impressed with the speed with which this was done. I look just now, as you would know, the naira is currently trading around NGN 700 to the dollar. For half year reporting, obviously, we'll have an FCTR impact translating on NIB the weak currencies. And obviously, for the month of June, we will be translating what we said the weaker currency billings contribution from the Nigerian entity. But overall, a positive development. And this will let out stand in good fit for the market overall. And actually, on the day this was announced, we actually noted that the financial sector in terms of listed companies and the Nigerian Stock Exchange was up 10% almost [indiscernible]. But clearly, the market has taken us quite favorably. On cost of equity, it's around 15%. The previously published number was 15.2%. So it's somewhere around 15%, 15.2%. We still got the final COGS for half year. I don't expect it to move materially on that. On return on equity, we're tracking ahead of our expectations in terms of our 2025 targets. So we're entering that range quicker than expected. And at this stage, I'm somewhat optimistic it will be within the range by 2023 financial year.

[Operator Instructions] The next question is from Baron Nkomo of JPMorgan.

Just a quick one for me. Any comments you can make around Liberty's life new business volumes and the related VNB margins?

Thanks very much. Andrew, over to you, please.

Thanks. Baron, in terms of new business volumes, there are certain lines of business that have been delivering really well. Those are largely the investment single premium products and the guaranteed annuities. In respect of the risk product, we -- in a continuation of the effect we saw during COVID, where especially on our flagship product, the Protector range, there was a reduction in churn. So we're seeing improved persistency but at the same time slower sales growth, and the recurring premium investment products are following a similar trend. In terms of [VRNB], I think you should know we've stopped using [VRNB] as a measure. We now use new business value. That also includes the value of earnings that emerge on short-duration business, for example, on the group life business. And as we've seen an improvement in mortality. That effect will come through in that new business value measure. But all else equals sort of tracking reasonably well and consistent with what was mentioned earlier in terms of the state of the economy.

We have a follow-up question from Harry Botha.

I just wanted to get a sense of if there's any kind of changes you're making to your asset holdings in Africa Region given the sovereign risks. Have you diversified your asset portfolio? Has there been any impact on yields because of that?

When you talk about asset portfolio, are you -- which asset portfolio are you referring to here?

Government bonds or low-risk liquid assets.

Yes. Of course, in countries where we are worried about the sovereign risk, we would be minimizing and reducing our surplus placements with governments. And that's part of our normal risk patient processes.

Okay. Has there been any meaningful impact on NIM or yields because of that?

No. No, no, there's no meaningful impact to -- at a group level on these adjustments. In the NIM -- yes, you strive [indiscernible].

Ladies and gentlemen, we have no further questions in the queue, and I would like to hand back to management for some closing remarks.

Thank you, everyone. Arno, would you like to make any closing comments before we end the call?

Thank you, everyone, for dialing in for this update. And obviously, we are looking forward to seeing you in August [indiscernible] what are the account there. I wish you a good Tuesday evening.

Thank you very much, sir. Ladies and gentlemen, that then concludes today's event, and you may disconnect.