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 this call. As you will be aware, we issued a voluntary trading update on SENS this morning, referencing our financial trends for the 10 months ending 31st of October 2024 relative to the 10 months ending 31st of October 2023 and reaffirming the guidance across our 3 core metrics, namely revenue growth, cost-to-income ratio and ROE. The purpose of this call is to cover the highlights of that announcement and provide some additional commentary, and then we will open the line for questions. On the call today, we have Arno Daehnke, the Standard Bank Group Financial Director and Brooks Mparutsa, Barbara Bell and Thembelihle Ngema, the banking business unit CFO. I will now hand over to Arno. Thank you very much, Arno. Please go ahead.

Hello, everyone, and thank you for joining us this afternoon. I'm sure most of you have read the announcements we issued this morning, so I will provide a bit more color on the macroeconomic and operational trends and the impact thereof on our key business performance drivers as well as on the supplementary metrics and then turn over to question and answers. First, I'd like to start with the macroeconomic developments. While there have been positive developments, uncertainty has remained high and certain headwinds are proved to be stickier than expected. In the period through to the end of October, we have seen positive developments in South Africa, driven by improved electricity supply, positive election outcome, moderating inflation and interest rate cuts or translating into improved confidence, improved activity and better growth, albeit off a low base. In Africa regions, we have seen currency devaluations in various countries, which the group operates on the African continent. Previously, we expected this impact to moderate in the second half of the year. However, this has not been the case to date. This has continued to dilute the Group's strong organic performance once translated into rands. This has been more than previously expected. Turning to our headline earnings trends to 31st of October 2024. As highlighted in our announcement, banking activities headline earnings grew by low to mid-single digits. Increase in insurance and asset management earnings was largely offset by the decrease in earnings attributable from ICBCS off a high base in the prior period. Combined, Group's headline earnings grew by low to mid-single digits in rands. And on a constant currency basis, Group headline earnings grew by mid-teens. From a regional perspective, SBSA delivered a good performance, growing earnings period-on-period. Africa regions delivered strong organic growth in constant currency, but earnings declined marginally in rand period-on-period. Africa regions still contributed 40% to group headline earnings for the 10-month period. Moving on to the operational trends and the key business performance drivers. Let's start with our banking activities. Our balance sheet growth was expected to moderate in the second half of 2024 due to the strong origination in the second half of 2023 and the high base set thereby, it has been slower than expected due to larger-than-expected currency movements in Africa regions relative to the rand. In South Africa, the retail and business lending portfolio growth period-on-period has remained slow. We do expect the recent interest rate cuts, moderating inflation and improved consumer confidence to support client affordability, and retail demand into 2025. More recently, business lending has seen an uptick in disbursements, albeit of a low base, aligned to the improvement in business confidence since elections in May 2024. Corporate loan origination has been strong again this year, supported by Africa's energy transition and infrastructure investments. In terms of net interest margin, while the group's weighted average interest rate remains higher period-on-period, this is largely offset by increasingly competitive pricing and a negative portfolio mix. Pricing is very competitive across all portfolios and is expected to remain so. A negative portfolio mix impact was driven by the tighter priced corporate portfolio growing faster than the business and retail portfolios, this impact was as expected. And by the wider priced Africa regions growing slower than South Africa. This impact was slightly more than we expected. The slower balance sheet growth, the margin pressures dampened net interest income growth, which slowed to low to mid-single digits period-on-period. Accordingly, for the 12 months to 31st of December 2024, the group has moderated its net interest income growth expectations from up mid- to high single digits to up low to mid-single digits. Noninterest revenue declined by low to mid-single digits period-on-period, driven by a decline in trading revenue off a high base in the prior period. Growth in net fee and commission revenue was supported by increased transactional volumes, annual price increases and good client activity. Insurance revenue grew on the back of continued growth in the policy base driven principally by sales by the retail distribution network. Noninterest revenue is tracking in line with expectations, i.e., down low to mid-single digits. Cost growth has been well contained, reflective of continued cost management discipline. Currency translation impacts dampened organic trends. Cost growth is tracking lower than expected. Management continues to target flat to positive jaws for the financial year 2024. The cost-to-income ratio is still expected to be flat or slightly down year-on-year. Credit impairment charges were lower period-on-period, driven by, one, lower charges in the current period linked to a slowdown in early arrears and lower inflows into nonperforming loans in Personal and Private Banking; and two, elevated charges in the prior period relating to one-off sovereign debt charges in that prior period. The group's credit loss ratio for the first 10 months of 2024, remained in the top half of the group's through-the-cycle range of 70 to 100 basis points. The group's credit loss ratio is tracking slightly better than expected. And therefore, we update our credit loss ratio expectation, slightly from -- at the top of the range; two, in the top half of the range. Commenting briefly on Insurance and Asset Management. Insurance and Asset Management business operational performance has been good. As mentioned previously, PPB and IAM continue to work well together to deliver improved sales. The shareholder portfolio remains exposed to movements in interest rate expectations and market movements. I remind you that capital optimization actions taken previously will support higher ROE going forward. Commenting briefly on ICBC Standard Bank Plc. ICBCS had a particularly strong half in 2023 on the back of heightened market volatility in that period. Relative to the high base, it remains down year-on-year. The growth in head on earnings from the insurance and asset management business was largely offset by the decline in the contribution from ICBCS, which came off a high base in the first 10 months to 2023 as explained. Moving on to capital and returns. The group remains well capitalized and liquid. With regards to capital, as disclosed in our Pillar 3 SENS announcement on Friday last week, the group's common equity Tier 1 capital adequacy ratio, including unappropriated profits was 13.6% at 30th of September 2024. On returns, the group's return on equity remained firmly within the group's target range, 17% to 20% for the 10 months to the end of October. Turning to our guidance for the 12 months to 31st of December 2024. When we set our guidance in March for the 2024 year, we did so taking into account both the strong base after 2 years of exceptional growth as well as the outlook based on what we knew at the time. On the former, I remind you that the group grew headline earnings by 37% in 2022 and 27% in 2023 or cumulatively over 70% since 2022. On the latter, relative to our expectations in March, and as previously mentioned, the currency headwinds experienced have been stronger than expected. Taking this all into account, we are pleased to confirm our previous guidance for our core metrics. For reference, they are as follows: Banking income growth of low single digits in rands and double digits in constant currency. Our cost-to-income ratio are flat to down year-on-year, and our return on equity well anchored in our 17% to 20% target range. In closing, despite the headwinds, the business has proved resilient and continued to deliver strong organic growth. This is a testament to the resilience of our client franchise and our people and the value of the diversity of our franchise across our 4 business units and 3 regions. We will release our financial results for the 12 months to 31st of December 2024 on the 13th of March 2025. We will provide guidance for 2025 financial year at that stage. Thank you, Sarah. I will now hand back to you to manage the questions.

Thank you, Arno. Please may ask the participants who wish to ask a question to use the raise-hand function, and we will unmute your line. Thanks, Harry. Please go ahead.

Just to get a sense, I think at the 9-month update, you still guided where you're still mentioning mid-single-digit group earnings growth. Can you just give us a sense of what changed in what seems like a relatively short space of time of 10-month update. And then possibly, if you could elaborate on where you're seeing some of the improved activity and better growth in South Africa. And maybe linked to that, give us a sense of the growth that you're seeing in the [ commission ] income as opposed to noninterest revenue related to trading revenue?

Okay. Thanks, Harry for your question. On my side, your call was a bit intermittent. Apologies for that. Harry, in fact, I only heard bits of it, I think, to really answer you comprehensively, would you just mind going through those points again? If you could just...

So yes, I guess it's -- the first question is really what changed to the 9-month update. The 10-month update, I think you're still talking about mid-single-digit earnings growth [ 9-month ] update. Second one is if you can elaborate on where you're seeing some of the improved activity and EBITDA growth in South Africa. And lastly, just maybe a sense of the split between the fees and commission growth versus the guidance on [indiscernible] trade revenue.

Yes. Great. 9 months to 10 months, I wouldn't say there was a substantial change. The overall guidance we gave is very similar to the sense we released just a month ago. So there's no material changes in the business outlook since then. Elaborate on South Africa growth, I think that was the question. We did indicate some additional increased activity and interest and disbursements we are seeing in business banking. We also are seeing some trends in the mortgage portfolio, which points to increased activity in the home loans business. And of course, our CIB business continues to do well, particularly the investment banking business. Significant disbursements in the last 2 months significant appetite from our clients, and we continue to see a record year for investment banking in terms of disbursements as well as these overall earnings. Fees and commission in South Africa continue to track strongly, particularly in the retail business. Those were trends we already commented in the first half of the year when we had our August announcement. So we're seeing that trend improving all the time and continuing rather all the time. Trading continues to be relatively robust. Last year, we had quite a poor trading performance in December, particularly the December. And we expect continued moderate growth in trading, and that will obviously support the over year-on-year trading growth overall. But obviously, not as good as last year where we had an exceptional performance. So we must get about that pace.

The next question is from Charles Russell.

Just 2 questions from my side. The first one relates to the movements of the currency basket that the group is exposed to. It seems that November has been more favorable than the trend up until October. If you could maybe just make some comments on the additional months that we've seen since this 10-month period. And then secondly, if you could perhaps break down the trends on credit cost growth by segment, PPB, BCB and CIB?

Yes. Thanks, Charles. Just on the currency, must bear in mind the translator earnings at the average currency for the year. So we do this on a monthly basis, average exchange rates for the month, and then we translate to earnings at that exchange rate. So it's not just based on the year-end position. I think that's important. The main driver in November, as you would have expected Charles, and I think you did comment on that earlier today, [ in the note that you ] released was, the rand was a bit weaker in November. Obviously, that would prove some of the currency translation just on the back of the rand being a bit weaker. That's sort of the main trend. We'll have to see how we go into December now and currencies how they play out. On the credit side, yes, I've got some thoughts on that here. On the retail side, we're seeing an improvement in credit continued, as we had seen already in half year. We're seeing a slowdown in early arrears. We're also seeing a slowdown in inflows into NPLs. That's also on the back of improved collection strategies, which have grown fruits on that. Broadly in South Africa, in line with expectations, which was a better second half in credit than the first half. So SA brought in line, and we had telegraphed that we really in half year. And in Africa regions, slightly better than expectations. Credit performance continues to drive actually quite good outcomes in Africa regions with fairly benign credit charges coming through the retail business in Africa regions. On BCB, we have a more market improvement compared to prior year. So that is quite positive. Again, improved post off -- right-off recoveries, improved collection strategy and the outcome thereof, improved performance in East Africa, where we had seen some pressure in the half year. But then this was offset by some additional provisions we had to take in trade, specifically in the West Africa regions, and also some additional charges we had to take in our offshore business. And then in CIB, a very strong performance from a credit point of view. We are below much materially through the cycle range which is 40 to 60 basis points, so quite a bit below that. And also bear in mind, please, Charles, we did have in the prior period, a sovereign risk charges, you'll remember, in 2023, we had sovereign charges in Ghana, Malawi and Zambia, and those have not been repeated now. We've also had some successful restructures in the business in CIB. So overall tracking quite good in credit. And as I mentioned in the script, just slightly better than expectations.

Next person Ross Krige. Ross, please go ahead.

Just 3 from me. Firstly, on the inflation in Nigeria. What's the likelihood that you have to implement hyperinflationary accounting there? Secondly, just with regard to the weaker-than-expected FX movements that you flagged, could you maybe give a brief overview of the country's most affected in terms of challenges that you face there and the outlook? And then thirdly, just regarding the SA credit side. You talked about the better area and NPL performance. I'm just wondering if the two-pot system had any impact on that if you're seeing any flows into payments of arrears or any other transactional activity?

Yes. Thanks, Ross. On inflation in Nigeria, you may have noted or possibly not. I'll give you an update then an assessment done by the global auditing firms where for 2024, they said, Nigeria is not hyperinflationary. So that has been publicly announced. However, they have flagged that Nigeria remains at risk, right? But for 2024, we certainly don't expect to apply hyperinflation accounting in Nigeria. On weakening FX, [ Angolan kwanza ] is weak. Obviously, we all know that Nigeria naira is also much weaker compared to the prior period, and those are the main drivers. We've also seen weaknesses, obviously, in Malawi seeing the new Zimbabwean currency has introduced the [ zig ] some time ago, yes. And then obviously, the much stronger rand we saw in following our half year results, but slightly weaker now in November, as was pointed out earlier on. On the SA credit side, so just hoping [indiscernible]. On the 2 pot system. Yes, I mean, we're following this very closely. We saw some of the note this morning. I think it was again [indiscernible], around ZAR 35 billion of drawdowns across South Africa. Having spoken to our retail credit experts, we haven't seen a direct translation into material improvements in credit quality of some of our nonperforming counterparties in that respect. So it hasn't been material, but small changes have been noted and some improvement has been noted. But I wouldn't say it's material yet that we can see a substantial impact in our NPL portfolio. And what I suggest is that we give you a more comprehensive update and we release our March numbers and when we have a more comprehensive data to understand the broader impact. So to summarize again on two-pots, small improvements noted but not material in context of the group overall.

Can we now go to Matthew Pouncett. Matthew, please go ahead.

I am sorry if you mentioned this in your opening remarks, but can you just elaborate on how much of the endowment effect you've managed to hedge out in rands and in dollars and what the tenure of those hedges?

Yes, the tenure of the hedges are around 3 to 5 years. We're probably around 65% to 70% done with our hedging strategy. This has reduced the interest rate sensitivity for SBSA to just under ZAR 1 billion per 100 basis point rate cut annualized over a period. So a 100 basis point rate reduction is now ZAR 1 billion. If we wouldn't have hedged, it would have been over ZAR 2 billion. So we're roughly we've halved the interest rate sensitivity. And yes, we continue to execute the hedging until we probably have around 75% of the book hedged. This is rand, South Africa. In dollars, we do have exposure in Standard Bank offshore. And I think we previously mentioned that we have got some constraints on how much we can hedge in offshore, considering we have got relatively little capital there and the hedging limit is limits to the amount of capital you have in those entities. And we reduced the sensitivity about 30% in offshore. As it turns out in dollars and in rands -- sorry, in dollars and in pounds, that sensitivity is also around ZAR 1 billion or 100 basis point rate. In Africa regions, hedging is much more difficult. The instruments are less accessible. We have hedged in small pockets, but not materially so. And again, to summarize, overall, an instantaneous decrease of all currencies in Africa regions by 100 basis points, which again, coincidentally, ZAR 1 billion of NII at risk. So overall, the group with all of the interest rates would go down instantaneous by 100 basis points, that would be ZAR 3 billion less NII on an annualized basis.

Next question is from Chris Steward.

Just a quick one for me, I guess. Can you give us a sense -- clearly, when you're operating in inflationary environments or environments where there's higher inflation, perhaps than the domestic rate of inflation, you would expect to see higher rates of nominal revenue costs and indeed, earnings growth. And in some periods, you might benefit in that the currency translation doesn't necessarily take that away commensurately with the inflation differential between your reporting currency and the currency in which you're operating. And then in other periods, I guess, such as now, there would be elements of currency catch-up where, in fact, what you are benefiting from in terms of operating in a higher nominal environment you, in fact, are more than punished for in terms of relative currency depreciation. And you've obviously pointed out some of the currencies that are having the bigger effect. And could you give us a sense of where you see real rates of growth are in revenue costs and indeed, headline earnings for the group. I mean you've indicated somewhere around low to mid-single digits headline earnings growth, but that will be largely due to currency translation effects, which probably are outweighing inflation differentials over the period. And do you have a sense of where you think the real underlying rate of growth for the bank is at the moment? Not an easy one to answer, I understand that.

Yes. First, maybe just a few data points. So I think your analysis is 100% right. We are being punished this year, particularly with the catch-up of currency weakness, specifically the Nigerian naira and Angolan kwanza. Over the last 10 years, I think about sustainable growth for the group occur. The group earnings CAGR over 10 years has been 10% per annum. Typically, the currency impact, if you look into our numbers would be between 2% and sort of 6% dilution because of currency weakness. So constant currency is always higher. But in rand terms, it has been 10% growth. This year, the currency impact is more than 10%. We translate constant currency in 2 rates. So we see sustainable growth continuing of the group of around 10%, if not even slightly better because certainly, South Africa, I think, has got a better outlook. And these last 10 years, we all know South Africa contributed very little towards the group's earnings growth. So South Africa outlook continues to be constructive. And as our base case suggests would be with GDP growth of 1.8% next year, over 2% the year thereafter, there's no reason why the group couldn't have sustainable growth over 10%. If you take that into then into what that real growth is why you can take off SA inflation, I guess, and then get some real growth number coming out of that.

I've got 2 questions on the Q&A. So I'll read those out. Firstly, thank you for the update. This is from Donata Sibanda. Please, can you provide further comments on Liberty and any specific metrics for the 10-month period.

Yes, Liberty continues to do well. I must say the integration with the group is proceeding well, and we are very comfortable with how the bankers and insurers are working together on incentivized to manufacture and distribution insurance products. And we are tracking carefully the metrics such as new business value, where we have got still some way to go for the complex products in terms of growing our new business value up to ZAR 1 billion and more, and we put various initiatives in place to do that. We've continued to invest heavily into Liberty in terms of technology such that our sales force is as competitive as they can be, and that will support our increase in new business value over the coming years. Other key dimensions, we've spoken about previously was the capital optimization. We've been able to extract more than ZAR 11 billion of capital out of Liberty as a consequence of the transaction. And that has resulted in quite a material increase in return on equity. Up to now, we've been for some years below the group's cost of equity. And we're progressing that above the group's cost of equity and higher beyond that into the group's target range. So overall, we think we've done well in Liberty. We are also rationalizing certain business, as you may know, and the Liberty Health business, which has been loss-making for some time now. We are busy closing that and incurring the costs of that as well. There are quite substantial costs, we'll update you on those in March. But that sets a good base for next year, expensing all of those costs. Most of those costs now, so for next year, again, we should have a stronger performance there. Yes. And SA Retail improved earnings, improved persistency, good margins and corporate benefits portfolio is having a particularly good year, higher earnings on the back of -- also favorable risk experience of that business. And then you already mentioned the shareholder portfolio. Following the U.S. election outcomes, we did see bond yields fell off, we saw that globally. That obviously, they will have an impact on the share investment portfolio, but that is normal market volatility we take through that portfolio.

The next question is from Gerald van Roy. Please, can you comment on the factors driving trading revenue? Also, post the 10 months, please, can you shed light on the book growth, especially in home loans as the data point you referred to in terms of increased volumes -- sorry -- let me repeat it. In the past 10 months, please can you shed light on the book growth, especially in home loans, as data points to an increase in volumes of property transactions?

Okay. I'm going to pull Lihle to do the second question and then Brooks to do the first question. Let's start with a Brooks, if you don't mind, please, on the trading color.

Good afternoon, everybody, and thank you for the question. I think our trading revenue, as Arno mentioned, had a high base in 2023. We've obviously not seen the same level of trading volumes across, in particular Africa regions. And thereby, we are sort of high single digits down in Africa regions for the 2024 financial year. Obviously, there was a significant space that was built in, as I mentioned, in 2023. But we've certainly seen in the second half of the year, a significant recovery. And we're looking at the first half or the second half of the year is probably likely to match the first half of 2024. In South Africa, we've actually seen very good trading revenue growth across our global markets business. I think with sentiment around the [ GMU ] and around sort of the overall economic outlook in South Africa, we've seen very good trading revenue in South Africa. So the headwinds are likely been in Africa regions. But in the second half of the year, we've certainly seen those ranges, whereby we will probably match the first half results. That's all I'll hand over back to you, Sarah.

Thanks, Brooks. Lihle, thank you.

Thank you for the question. Our asset growth, particularly in home loans, remains within expectation. We had guided that it will remain muted in the second half, and that's what we've seen. Even if you compare quarter-on-quarter in terms of those disbursements, they remain quite flat. We do anticipate that we'll see the pickup in 2025 as we get more rate cut. So no changes in terms of expectation. Thanks.

Thank you.

Thank you. Thank you, Arno. We have no more hands and no more questions on the Q&A. Would you like to make any closing comments before we close.

Yes. Thank you, Sarah, and thank you for everyone on the call. As I mentioned earlier, we'll release our results on the 13th of March next year. Of course, we're looking forward to engaging with you at that time. And then I wish you all the best for the rest of season or the holidays. If you can take a break and a rest or break and looking forward to meeting up with you next year. Thank you again for joining us today. And thank you also to my team for arranging all of the preparation of the materials. Thank you, and goodbye.