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 will be managing the call this afternoon. As you will be aware, we issued a voluntary trading update this morning. The purpose of this call is to cover the highlights of that announcement, and then we will open up for questions. The purpose of this call is to cover the highlights of that announcement, and then we will open up for questions. On the call today, we have Arno Daehnke, the Standard Bank Group Financial Director. Brooks Mparutsa, Barbara Bell and Lihle Ngema, the business unit's CFOs in the room, and Willa van den Berg online.

Thank you, Sarah, and thank you, everyone, for attending our update and our pre-close call. We much appreciate that. I will start with the macroeconomic trends in the markets in which we operate and operational trends we have seen in our business in the 5 months ending 31st of May 2024, and we will compare that to the 5 months ending 31st of May 2023. Thereafter, I will provide some comments on the macroeconomic outlook and our guidance for the full year. Starting with the macroeconomic trends across our Africa regions portfolio of countries, on average, period-over-period, many African currencies have devalued relative to the rand. Inflation is higher in West Africa, but has moderated in East Africa, policy rates are higher on average. The most notable currency devaluations have taken place in Angola, Malawi, Nigeria and Zambia. In addition, Zimbabwe adopted a new local currency, the [ ZiG ] or ZiG, effective from early April. In relation to Zimbabwe, it is worth noting that the group changed its reporting and functional currency from ZWL to USD, prior to the introduction of the ZiG. The change in functional currency to the USD is premised on the economic environment in which the group operates. On a USD reporting basis, Zimbabwe is no longer hyperinflationary. This change was effective from 1 January 2024, and has been applied prospectively. In terms of interest rates from the end of May 2023 to the end of May 2024, we have seen interest rates increase in 9 countries, mainly Angola, Cote d' Ivoire, DRC, Kenya, Lesotho, Malawi Namibia, Nigeria, Tanzania and Zambia. And we have seen interest rate cuts in 4 countries, namely, Botswana, Ghana, Mozambique and Zimbabwe. Turning now to South Africa. Inflation has moderated period-on-period, and is well anchored within the South African Reserve Bank's 3% to 6% target range. Average policy rate is higher, following the interest rate increases in the 5 months to May 2023. In summary, on the overall macroeconomic trends across our portfolio, inflation has moderated, but remains high, policy rates are marginally higher and African currencies are weaker relative to the rand in May 2024 compared to December 2023. Turning to the business and starting with the overall headline earnings trends. In summary, banking activities headline earnings grew by mid-single digits. The increase in Insurance and Asset Management headline earnings was more than offset by the decrease in earnings attributable from ICBCS off a high base in the prior period. Combined, the group's headline earnings grew by low to mid-single-digit in rand. On a constant currency basis, group headline earnings grew by mid-teens. From a regional perspective, SBSA delivered a respectable performance, growing earnings period-on-period. Africa regions delivered strong organic growth in constant currency, but earnings declined marginally in rands period on period. Despite the decline in Africa Regions earnings, Africa region still contributed 43% to group headline earnings for the 5-month period. Moving on to the operational trends and starting with our banking activities. As noted previously, the group amended the methodology for recognizing interest on Stage 3 loans, and applied the change retrospectively. This change resulted an increase in net interest income and an equal and opposite increase include impairment charges as well as an increase in the group's net interest margin and credit loss ratio. I refer you to the detailed restatement reconciliation available on the Group Investor Relations website. Accordingly, the commentary that follows reflects the trends relative to the restated 5 months of last year. Income growth was supported by higher average interest rates and higher client transactional volumes, but dampened by lower trading revenues. Balance sheet growth has been -- has slowed year-to-date in rands, driven by heightened competition, particularly in mortgages as well as customer affordability constraints and limited demand in South Africa. The Africa Regions portfolio reported continued underlying organic growth. It is worth noting that during the second half of 2023, we instituted alterations to the accounting classification of instruments within the financial investment portfolio to reduce earnings volatility arising from accounting mismatches. This has resulted in a movement of income reported as noninterest revenue in the prior period to net interest income in the current period. Operating expenses and their growth was well contained, supported by cost containment initiatives. For example, on discretionary spend as well as lower performance-linked incentives. Banking income growth and operating expenses growth were both [ dampened ] by currency movements and translation effects period-on-period. Total income growth exceeded operating expenses growth, and this resulted in positive draws. As expected, credit impairment charges were marginally higher period-on-period. Higher charges in Business and Commercial Banking and Personal and Private Banking were partially offset by lower charges in Corporate & Investment Bank. In the current period, growth in Personal and Private Banking earlier years and nonperforming loans have slowed. Sovereign debt provisions in Africa regions, specifically Ghana and Malawi, were the key driver of [ high ] CIB credit charges in the prior period of last year. The elevated credit charges resulted in a credit loss ratio for banking for the period being above the top of the group's through-the-cycle credit loss target ratio range of 100 basis points. This is not unexpected, considering the stage of the cycle and the fact that the CLO, the credit loss ratio, is traditionally higher in the first 6 months of the year relative to the second. Turning to Insurance and Asset Management. Insurance and Asset Management operating earnings increased, driven by an improved insurance result in South Africa, more specifically from improved risk claims experience in the corporate and short-term insurance businesses. This was partially offset by a reduction in the Africa Regions Asset management earnings, following the devaluation of the Nigerian naira. The shareholder assets and exposure portfolio is impacted by market movements, principally interest rates. Recent trends have positively impacted the valuation thereof. Moving on to capital and returns. The group remains well capitalized and liquid. The group's return on equity, while lower than the prior period, remained within the group's target range of 17% to 20%. Turning to the 2024 outlook. Group headline earnings in the 6 months to 30th of June 2023 was ZAR 21.2 billion, boosted by a strong June in 2023. This sets a high base of which to grow in the 6 months to 30th of June 2024. Looking forward, we still expect some interest rate cuts across our portfolio of countries in the second half of the year. However, they are likely to be delayed. In South Africa, post the election outcome, we expect a continued commitment to the fiscal consolidation plan and ongoing traction with the growth support of reforms underway. This should support moderating inflation and monetary policy easing. Our latest [indiscernible] view based on Standard Bank Research remains 100 basis points of cumulative interest rate cuts, but we expect them to be split with 2 cuts of 25 basis points in the second half of 2024 starting in September this year, and 2 cuts of 25 basis points in the first half of 2025. Previously, we expected 75 basis points in the second half of 2024 and 25 basis points in the first half of 2025. In line with previous guidance for the 12 months to 31st of December 2024, we remain committed to delivering positive [ jaws ] and a return on equity well anchored inside the group's target range of 17% to 20% for the full year. We will release our financial results for the 6 months to 30th of June 2024 on the 15th of August 2024. Thank you, Sarah. I will now hand back to you for questions.

Thank you very much, Arno. [Operator Instructions] The question is from Jacques Conradie.

Arno and team, thanks for the update. I think I'd be interested in your view on how the SA outlook challenges with this very positive election outcome that we received. I mean, it's obviously hard to know at this stage, but I guess there could be some immediate confidence boost and then maybe post rate cuts it could add on to that, but I'd be interested in what your internal view is and what the team thinks softer abate in the last few days? What effect this could happen over the next year or 2?

Thank you, Jacques. Obviously, it's still early days, and we're still processing everything, but no doubt this will boost confidence. As I'm sure, you will agree. I think it will also possibly move interest rate cuts further forward, and again, that improves our affordability constraints and should overall bolster some credit disbursements and further loans and balances growth. So it clearly goes without saying a very positive development and it certainly puts us in a good position to monetize the opportunities we see in South Africa in this instance.

The next question is from Harry Botha.

I just wanted to ask about the balance sheet growth in the first half. You noted that it's slowed down. You did guide to slow growth. So is the first half in line with your expectations? And are you still on track to see improved growth in the second half, obviously, noting the comments you just made for improved outlook with positive South Africa developments? And then I'd like to get a sense also of the CIB deal pipeline, what it looks like if it's changed in the last 3 months since you reported?

Right. Thank you, Harry. I will hand over to my [ Mercia ] to be specific on their portfolios, Lihle on your side in the Personal and Private banking side, are you seeing loans of balances growth?

Thanks, Harry, for the question. On our side, slower than what we originally anticipated a few months ago, and really, it is a more delayed rate reductions that had an impact on us, particularly on the home loan on the home loan book. We do anticipate that we'll start seeing more traction in that in the second half as well as into next year.

Thanks. Harry, so from an investment banking and CIB point of view, our investment banking franchise has actually done very well. In South Africa, we have shown high single-digit growth in loans and advances. So that's done very well. And when we look at the outlook, our deal pipeline is quite strong, both on the lending side in investment banking as well as sort of the advisers. And with the election outcome, we certainly see that coming stronger with more confidence. If you look at transactional banking in South Africa, also single-digit growth, mid-single-digit growth for transaction banking on the asset side. What has been disappointing and part of that is the currency impact is the growth in Africa region. So for both investment banking and transaction banking, it's quite -- it's quite positive in the mid-single-digit range. In terms of deal pipeline, I've already talked about investment banking. On the global market side, we are certainly forecasting to see improved performance in the second half of the year, particularly when it comes to structured products in global markets. So we're looking for a much more positive second half of the year in global markets than what we had in the first half of the year.

From a B2B perspective, similar to PBB, I think you see a lot of what happens in the PBB environment translates into the B2B. So it has been softer growth in the first half than we had anticipated. We are optimistic that the second half is going to see a lot better growth in South Africa, where we sort of into very low growth. In Africa region saw a very strong growth in constant currency terms, but really the currency weaknesses has softened that growth translating into slightly lower growth rates in Africa.

Great. The next question is from Ross Krige. I don't know if you can hear us?

Sorry, Sarah, apologies. I had mute on. Sorry about that. Just 3 questions from me on currencies. I'm just wondering if the impact on the -- for the 5 months to May, if it's been worse or better than expected. So has ZAR been stronger or weaker than you had forecast previously? And related to that, for the full year, is there any change on your current forecast versus the net 5.8% stronger ZAR? And the second question is on your FY '24 guidance, has there been any changes by P&L line item? Or is that something you're not disclosing at this point? And then finally, just with regard to Ghana and the currency depreciation that seems to be intensifying there. If you have any commentary on developments, economic developments on the ground in Ghana and how you guys see it?

Yes, thank you. Currency is slightly weaker than we had expected. So the impact is a bit bigger. The rand is largely tracking where we had expected that all the currencies I mentioned to are slightly weaker than we had anticipated. On the changing guidance, there are a few line item changes, so we expect NII to be slightly stronger and NRR to be slightly weaker. And actually, the principal driver on there is not so much the underlying operating driver, it's the classification of the investment portfolio typically hold for liquid asset requirements and quality liquid asset requirements, where I mentioned earlier in my call that we have a different accounting treatment and recognize that NII as opposed to gains and losses, favored against losses. So on the back of that NII, a bit stronger NRR what we have at overall sort of flattish on that. On Ghana, we continue to remain optimistic on the developments there. We see inflation coming down, and we expect inflation to be further lower at the end of the year. You would know that we are not treating it as hyperinflation economy. And I think by the end of the year, we'll be quite certain that that's not hyperinflation. And over the outlook is looking somewhat positive for us on Ghana overall. In the portfolio overall, when we did an assessment on sovereign risk, we see a sovereign risk having improved key parameters on some of our larger economies have improved. One example, for example, is the Kenyan Eurobond refi, which is successful. And so oversold risk is somewhat lower than we probably had a year or 2 years ago.

Sorry, if I may just follow up on the second question, just on the FY '24 guidance. So in substance, NII, NRR comments, everything is in line with the March guidance? Is that right?

Yes. So the total revenue guidance is in line, but a bit more NII, a bit less NRR.

And OpEx credit loss ratio?

Yes, probably in line with the guidance we gave you in March. OpEx is tracking as per expectation, actually slightly better than expectation on the operating expenditure line item. So we see positive jaws currently and then have to push those through to the end of the year. Whereas the guidance we had was flat to positive jaws at the moment, we've seen positive jaws.

The next question is from Charles Russell.

Maybe just following up on one of Ross' questions. Just from a credit loss ratio perspective, would you still expect to be in the range by the end of the year? So weaker seasonal first half versus second half, and would the election outcome have much of a difference on that? If I could maybe just go to the second question as well. Your trading activity results, what would that have been in constant currency? It was down in ZAR, but what would that constant currency impact has been? And then finally, just on the Zimbabwe in property losses that you mentioned at Q1, where are those stacking at the 5 months? Has there been an improvement in this? And maybe just sort of key drivers there? Was that as a result of changing the functional currency to USD? That's all for me.

Thank you, Charles. So first of all, on the credit loss ratio. So I mentioned we're about 100 basis points at the moment, will probably be around 100 basis points by year-end, hoping to slightly below that, obviously, but somewhere at the upper end of our target range, somewhere around that. We previously guided 1H being worse than 2H, that remains. We're seeing positive developments in our retail banking portfolio. If you want to go into more detail there briefly on my left, and give you some detail where we're seeing, as I mentioned in the script that some of the indicators are certainly turning favorable, still seeing pressure in the BCB book. Typically, that would be lagging in the cycle. So retail taking strain first, BCB taking strain second. And so BCB, I guess, is currently the book, which is in the eye of the storm. You could use that terminology, where PBB has sort of worked through the worst. And in CRB is actually tracking quite well in terms of repayments analysis and impairment provisioning. Brooks, do you want to reflect on trading, and then I'll go back to Zimbabwe property.

Sure. Thanks, Charles. In terms of trading income, as you're well aware, we've got trading income in both global markets as well as investment banking, but I'm sure that the focus is on the global markets piece. In constant currency, we are up, I would say, high single digits in constant currency. But unfortunately, with the depreciation of currencies down in ZAR. I hope that answers your question.

Thanks, Brooks. And then Charles, on the property, there have been no material movements since those losses reported in the quarter 1 release. And remember, those losses, not really losses, they are revaluations rather, I would call them as opposed to losses. They were based on the switch of the ZWL to the USD. So this was a one-off adjustment. We don't expect further adjustments there.

The next questions are from James Starke.

Four questions from me, if I can. Your net interest margin, if you could just give us a bit more color on how that's trending at what came out of last year, pretty strong. We've had quite a few moving parts, FX rate cuts, et cetera. Perhaps just help us out on how you're seeing things trend at the moment? The second one is on deposit insurance. I know it's relatively new. Can you just give us some color on trends you're seeing early on, perhaps both on the retail side and perhaps if there are any surprises coming out on the corporate side? Just on the OpEx, further to Ross' question, you said it's trending a bit better than expectation. Now what is the source of that positive surprise? And then lastly, given some of the FX moves we've seen on the continent, can you perhaps comment on trends around dividend repatriation? I know if you've been quite firm in the past that it hasn't been a problem. Is that still the case in the last few months, have you been able to get out what you are hoping from your subs, thank you?

Thanks, James. On with interest rates being higher, NIM is tracking better than expected. Endowment is more positive than we had thought. And we will -- the half year numbers for you in August on the 15th, we'll be able to unpack that in detail. But the endowment is better than expected, NIM is being better than expected. And obviously, taking the shine off that is the very competitive pricing we're seeing in South Africa particularly in the mortgage portfolio, with some of the concession rates relative to prime are really quite sizable. And obviously, that asset pricing is taking some shine off the NIM, but overall, the trend is right there. On deposit insurance, we haven't seen any trends. I'm looking at my colleagues here. You're looking at trends, in other words, other sort of banks growing because of deposit insurance because they sort of treated equally to [indiscernible] deposits. We haven't seen those trends. Yes, there's obviously a charge to the bank. I don't know if you're referring to that, that's just around the ZAR 250 million level, ZAR 230 million level per annum. But no trends expected actually going forward either. I don't think we will be seeing some trends too. On OpEx, we've been extremely focused on costs. We know we've had some big investments last year into people, into growing our teams and so on. So there's been a very serious agenda of going from the top of the house into the organization on managing OpEx very, very carefully. And there are many cost initiatives underway looking at each rand spent and where can we save money on that. And obviously, that's bearing some fruit. But I also need to allude to the fact that obviously, the bank is not performing as strongly -- growing as strongly as last year. So incentive charges, variable pay is being cut to some extent. And that's obviously also helping our OpEx line. Then on dividend repatriations, yes, we have got some constraints in Angola and in Mozambique, where is currently liquidity tied up on the back of FX constraints. The Angola number is relatively small and Mozambique slightly more -- slightly bigger. But apart from those 2 countries, we continue to extract dividends from all of our markets. You may realize that in Nigeria, for example, the FX backlog has been completely cleared with the new economic reform happening there. So the FX backlog, it's a amounted to $7 billion, and that's been cleared out. So we expect no constraints in Nigeria and then obviously working hard with the authorities on giving our dividends out from Mozambique and Angola.

The next question comes from [ Kim ] [indiscernible]. Can you hear us? Can you try and unmute?

Okay. I've unmuted myself. Can you hear me?

We can hear you, [ Kim ]. Please go ahead.

Arno and team, thanks for the presentation and the opportunity to discuss. Can you comment on the mortgage market, the effect, if any, at this stage of Discovery's entry into the market? And then further on your infrastructure project, where there was previous talk of a target of ZAR 500 billion. And if I remember correctly, the actual to last year was of the order of ZAR 250 billion. How is that progressing?

All right. For the mortgage markets, I'll hand over to Lihle. But before I do so, [ Kim ], just to clarify, the infrastructure market perhaps you are referring to the sustainable financing targets we have, which amounted ZAR 250 billion by 2026. Just to clarify, [ Kim ], if you...

Yes, that is. Yes.

Yes. Fantastic. Thank you, [ Kim, ], and glad to hear from you. Thank you for dialing in. I'll ask Lihle to run through the mortgage market or any discovery impact. That was the question. Brooks, you can talk about sustainable financing, how much we've done and where we are tracking relative to the target.

Thanks, [ Kim ]. From a mortgage market perspective, it is -- it continues to be a competitive environment, and I think it's wider than just Discovery. We haven't really seen a significant impact from Discovery at the moment. But what we are doing is really staying close to our clients and making sure that we defend our base, but no significant impact as yet.

[ Kim ], so in terms of sustainable finance, growth for 2024 is ZAR 55 billion for the year, and we're tracking well in terms of that commitment. We are seeing increased availability of projects, not just in South Africa, but as well as Africa region. So we're seeing our portfolio for sustainable finance in Africa regions continue to increase and become a significant contributor to our overall sustainable finance target.

And maybe, Brooks, just to add. [ Kim ], for your information, we've already financed in 2023, ZAR 105 billion cumulatively already. So now we're adding another ZAR 55 billion to it. So you can see that at the end of this year, we'll be around ZAR 160 billion level, possibly even more. So we are tracking quite well to our 2026 target of mobilizing ZAR 250 billion of sustainable financing.

Arno, those are all the questions we have. Would you like to make any closing comments.

Yes, just to thank everyone for dialing in for this update. And as noted, we will release our results on the 15th of August, and I certainly look forward to you at that point in time, either virtually or on a hybrid basis to deal with any remaining questions, which I'm sure will be many of them. So thank you and wishing you all the best for the coming weeks.