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

Good afternoon. Thank you very much for joining the Standard Bank Group Pre-Close Call this afternoon. My name is Sarah Rivett-Carnac, and I'll be managing the call. The purpose of this call is to provide a little bit more color to the voluntary trading update we issued on SENS this morning. On the call today in the room, I have Arno Daehnke, the Group Chief Financial Officer; and we've also got the 4 CFOs from the 4 different business units online as well. Arno, I'll now hand over to you. Thank you.

Thank you, Sarah, and good afternoon, everyone, and thank you for joining us. I will assume that most of you have read the announcement we issued this morning. So I can be brief on the call this afternoon. In the comments that follow, where I will refer to the current period I am referring to the 5 months to 31st of May 2026. And where I refer to the prior period, it is the 5 months to 31st of May 2025. Year-to-date, the global and regional operating environments have been mired by uncertainty. Despite this, the group recorded a resilient performance underpinned by its scale, reach and diversification. In the current period, earnings growth was underpinned by ongoing franchise momentum, which drove balance sheet and revenue growth, alongside a disciplined approach to costs and credit risk. Moving to the operating environment in the 5 months to 31st of May 2026. The operating environment has become more complex, geopolitical tensions, higher energy prices and ongoing trade policy uncertainty weighed on global growth and inflation expectations. In April 2026, the International Monetary Fund increased its global inflation expectations for 2026 from 3.8% to 4.4% and lowered its real GDP growth expectation from 3.3% to 3.1%. Year-to-date in Sub-Saharan Africa, while inflation has remained relatively contained across several markets, the outlook has become less benign. The IMF also lowered its 2026 real GDP growth expectations or Sub-Saharan Africa slightly from 4.6% to 4.3% growth. The impact of global developments will filter through to different countries in different ways. For example, while oil importing countries will be negatively impacted by the higher fuel and related prices, oil exporting countries will benefit. It is also worth noting that we expect the macroeconomic stabilization and reform efforts seen in certain key economies to provide continued positive momentum, most notably in Nigeria, [ Kona ] and Angola. In South Africa, the domestic backdrop continued to be supported by the ongoing structural reform momentum and improved fiscal trajectory and resilient terms of trade. The constructive backdrop was duly noted by credit rating agencies, resulting in positive adjustments to their ratings and/or their outlooks. In May 2026, Moody's upgraded the outlook of the South African sovereign and South African banks to positive from stable and S&P Global affirmed South Africa's credit rating at BB with a positive outlook. And earlier this month, Fitch upgraded South Africa's rating to BB from BB minus with a stable outlook. The upgrades were primarily driven by a combination of improving macro fiscal credibility and a sustained commitment to structural economic reforms. Consumer confidence showed signs of improvement in the first quarter of the year compared to the last quarter of 2025. However, we expect a deterioration in the second quarter of the year in response to the increase in fuel costs and higher interest rates. In addition, business confidence for the second quarter of the year moderated compared to the first quarter. Standard Bank Research currently expect South Africa's real GDP to grow by 1.3% in 2026, slightly lower than what was expected in March 2026. In May 2026, inflation increased to 4.5%, up from 4% in April and 3.1% in March. Standard Bank Research expects inflation to average 4.1% in 2026, up from 3.6% expected in March 2026. In May 2026 on the back of inflation risks, the South African Reserve Bank increased the repo rate by 25 basis points to 7%. At this stage, our base case is no further hikes in 2026 and a possible 25 basis point cut in the fourth quarter of 2026. This is quite different from our expectation in March of 325 basis point rate cuts in 2026 with one further cut in early 2027. Turning to currencies. Period-on-period, the South African rand strengthened against the U.S. dollar and all the African currencies where we operate, except for the Nigerian naira and Zambian kwacha. Moving on to the key business performance drivers, starting with income from the banking business. Net interest income growth was supported by continued good balance sheet growth driven by a strong origination in investment banking and increased disbursements in business and commercial banking, particularly in South Africa. The sectors driving the strong origination in investment banking are energy and infrastructure, diversified industries, telecoms and media and real estate. The Personal & Private Banking portfolio recorded moderate growth as the home loans portfolio continued to grow at low single digits. Pleasingly, current accounts and term deposits recorded strong growth, in line with the group's transactional cloud franchise focus. The growth in NII was partly offset by the negative endowment impact of lower average interest rates period-on-period and the ongoing competitive pricing pressures in the home loans portfolio in South Africa. Noninterest income growth was driven by increased client activity and an increased client base, which drove higher transactional activity period-on-period. Net fee and commission income growth was underpinned by a strong performance in Personal & Private Banking in South Africa supported by strong growth in value-added services revenue and higher fee income generated in transactional banking from increased trade activity in Africa regions. Trading revenue growth was supported by periods of elevated market volatility and market-making opportunities, particularly in the first quarter of the year. Turning to costs. The group continues to maintain rigorous cost discipline while absorbing increased business activity related costs. We continue to invest in growing the client franchise while improving operational efficiency and optimizing our physical infrastructure. Cost growth was broadly in line with revenue growth period-on-period. Moving to credit trends. Credit impairment charges were lower period-on-period. This is, however, still expected to revert to year-on-year growth as the year progresses as a result of new business strain linked to loan growth and higher charges in the second half of the year relative to the low base in the second half of 2025. Corporate and Investment Banking credit impairment charges were lower period-on-period, driven by post-write-off recoveries in the nonperforming loans portfolio. Business and Commercial Banking credit impairment charges were also lower period-on-period due to the nonrecurrence of Stage 3 provisions raised in the prior period. Personal and Private Banking credit impairment charges were higher period-on-period due to an increase in forward-looking provisions in response to the deteriorating macroeconomic outlook particularly in South Africa and South and Central Africa. This was partly offset by ongoing and successful early-stage collections and restructuring efforts, which reduced inflows into nonperforming loans. Lower credit impairment charges, combined with a growing balance sheet resulted in a lower credit loss ratio period-on-period. The credit loss ratio for the period was around the midpoint of the group's through-the-cycle range of 70 to 100 basis points. Turning to the insurance and asset management business. The strong earnings growth momentum, IAM reported in 2025 has continued into 2026. This was supported by improved life risk experience, continued good persistency levels and good growth in assets under management in South Africa and Nigeria, period-on-period. And on ICBCS, ICBCS continued to contribute positively to the group's earnings growth. Earnings growth in ICBCS was supported by improved trading profits from precious metals. Considering earnings and capital, as expected, the group's earnings growth for the 5 months moderated relative to the strong 12% recorded in the first quarter of this year. Africa regions portfolio continued to benefit from its diversity. The softer performance in the South and Central region was more than offset by growth in the West and East Africa portfolios. The ongoing growth in the South African franchise was underpinned by continued positive momentum in the business and competitive client offerings. The group remains well capitalized and liquid with a common equity Tier 1 ratio of 13.2% as at 31st of March 2026. Turning to the outlook for 2026. There is no doubt that the uncertainty brought about by the Middle East contract and the subsequent inflation and related monetary policy actions have temporarily weighed on our clients' confidence to transact, invest and borrow. More recently, the U.S. Iran agreement to extend the ceasefire and open the Strait of Hormuz and the subsequent decline in oil prices are positive developments. Assuming this holds, we would expect confidence and momentum to return in the second half of the year. At this stage, the group's guidance for the year ended 31st of December 2026, as provided in March this year remains unchanged. As a reminder, for the full year to 31st December 2026, the group expects the following: banking revenue growth of mid- to high single digits in rands, banking cost-to-income ratio to decline slightly, credit loss ratio to increase but remain in the bottom half of the through-the-cycle target range of 70 to 100 basis points and group return on equity to increase relative to the 19.3% reported in 2025. This guidance will be reviewed as part of the interim results process. The group will report its financial results for the 6 months to 30th June 2026 on Thursday, the 13th of August 2026. Thank you. Sarah, I will now hand back to you for questions.

Thanks, Arno. So we'll now go to questions. And if we could ask you to use the raise the hand functions and then we will go through the hands as they come up. The first hand is from Harry. Harry Botha, please go ahead.

Maybe 2 questions, please. Just like to get a sense whether we should expect any material seasonality between the first half of the year and the full year. And then in terms of the second quarter trends that you're seeing, do you have any insights to share on whether the uncertainty has impacted the earnings that you've reported up to the 5-month mark or whether you just I guess, being cautious about that impact that it might have in the second quarter of the year?

Thanks, Harry. On the seasonality point, you would be aware that in the first half, typically, we have a higher impairment charge compared to the second half, so we'll see that playing out. On the uncertainty impact, retail credit extension has been slightly lower than anticipated originally. CIB has continued a very strong origination, particularly in investment banking. Overall, our portfolio is tracking to plan. And as a consequence, we could then reaffirm our guidance. So I would say, at this stage, the impact has not been that marked.

The next hand, James Starke. James, please go ahead.

Two questions from me. The first, just regarding the revenue growth and cost growth that you commented that costs tracked revenue growth, suggesting flat cost to income for the period, yet you're reiterating an improvement in the cost to income in FY '26 guidance. If you could perhaps just highlight any sort of anomalies that may be distorting the trend in the 5 months and why we're not perhaps seeing an improvement yet? The second question just relates to your costs. Your credit loss ratio guidance, the midpoint of the 70 to 100 basis point range, is that just relative to your customer loans? And if you could just comment on I mean the sovereign related charges, I know in the past you've reported them separately, are there anything that we should be aware of there in either direction, increases or proceed reversals?

Yes. Thank you, James. At the moment, yes, we've got roughly around flat jaws. We expect slightly positive jaws for the full year. There's nothing extraordinary coming out of it. It's diligent cost management relative to a revenue base as we've done for the last 5 years. I'll remind you, we've had positive jaws for 5 years in a row now, and we certainly intend keeping the trend. And we do have certain cost levers, which we are actioning in light of the slightly worse-than-expected macro environment. So that will allow us to manage our costs actively to maintain those slightly positive jaws. On credit charges, yes, we expect it to be around the middle, if not slightly below the middle of the range. Last year, I do remind you, we've had a fairly low charges on loans in the second half of the year. We also had releases of forward-looking provisions in the second half of the year, particularly in our retail portfolio, whereas in the first half of 2026, we had an overlay to recognize the deteriorating global macroeconomic conditions, and that was a credit overlay, and that charge was taken in the first quarter of this year and is in our P&L. On sovereign, you're right, James, we did take provisions last year, specifically on Mozambique, which we disclosed to the markets. And we also had some concerns about Malawi. We do not expect a repeat of those provisions. And as we stand at the moment, we are well and comfortably provided for both of those markets. As things stand at the moment, I don't expect any further sovereign provision requirements for this particular year.

And potential for release?

I think a bit too early to recognize a release. We will update the market if we get to that point. But right now, that will be a bit early to promise anything to the market in that respect. .

Next hand is Ross Krige.

Two questions from me. Just on the comment on the temporary downturn and client confidence. Just wondering, are there specific business client or geographical segments that you're referring to there? Or was it more of a general comment? And then just on the -- from the NIM side, has the performance been in line with expectations? And I understand you're reassessing guidance. So can we take prior guidance that's still in place for the full year?

Yes. On the downturn, the consumer, as you would have seen from the beer information as well, Ross, the consumer loans advances growth has been somewhat subdued. I think the industry is tracking in the low single digits. We are tracking slightly below that on the back of the mortgage portfolio growing quite slowly at this point in time. And we commented on that already in March that the pricing we find is particularly aggressive. So we are tracking behind the markets in the mortgages, which I'm quite comfortable seeing we are still writing 25% of the mortgage market in South Africa. In the other products, we are comfortably tracking with or ahead of the market, and that includes, for example, the [ Vericon ] Asset Finance business. On NIM, we did guide the market a slight compression on NIM on the back of declining interest rates year-on-year, and that is tracking still as expectation, and we are expecting them to be slightly reduced compared to FY '25.

Next hand, Baron Nkomo, JPMorgan.

Two questions from me as well. Firstly, can you comment on the the loan growth split between SA and the Rest of Africa? And then secondly, just on home loans pricing. I mean how intense is pricing competition at the moment. And yes, what's the margin versus volume trade-off you're willing to accept through 2026 on this?

Thank you, Baron. On the home loans question, I will ask Sayuri to respond on that. On Africa regions, total credit extension in South Africa, as you would have seen for the industry is 8.8%. And for SBSA is 10.1%. I'm comparing April 2026 to April '25. So we are growing slightly faster than the industry in South Africa. And particularly, we've had very strong origination in investment banking. Our commercial loans advances are growing at 17.7%, industry is growing at 12.3%. Loan growth in Africa regions is in the low teens at present, in the low teens, so not too far off what we've seen in South Africa. I mentioned already on household loan extension in South Africa, slightly more subdued and faster in CIB. Sayuri, on the pricing pressures and concession rates on the mortgage portfolio over to you, please?

Thank you, Arno. Thank you, Baron, for the question. We continue to see pricing pressure in our home loans portfolio. So the concession rates have still been in the range that we landed at the end of last year and slightly worsened. What we have seen in the last few months is that it seems to have stabilized a bit. So we are seeing some stability in terms of that concession rate closer to the 70 basis points less [indiscernible]. So we're also seeing that pricing pressure. We continue to focus on profitability and ROE as Arno mentioned. And in terms of the trade-off, we are quite comfortable that some of the market share on the back of that may be reduced while we keep profitability levels and ROE at the higher end. So we are still seeing strong disbursement growth coming through in home services. But as you know, that repayment rate is high. And so that low single-digit balance growth continues to come through as Arno has alluded to as well.

Next hand, Charles Russell.

I am going to break rank and can just ask one question. Regarding the change in the rate trajectory pre-war versus now, how asymmetric is that impact on lower NIM compression versus higher credit costs? Or is that pretty much in parity at this stage? Does that make sense?

Yes, I understand. So clearly, we had expected a slightly bigger endowment impact than is now materializing, particularly because of South Africa's 25 basis point rate hike as opposed to 3x 25 basis point rate cut. Bearing in mind, Charles, that we have hedged a large portion of that risk in South Africa. We do see continued rate cuts in many of the other Africa regions. So that does continue to feed through as endowment headwinds. We prefer rates to be lower and client confidence to be higher and growth to be quicker and overall that would benefit the portfolio. So this is not a complete offset the rate hikes will not completely compensate for the reduction in confidence and credit extension, particularly in the regional space. So we prefer, as I said, for rates continue to be cut and the economies to be simulated by monetary policy.

Harry, I could see you've got your hand up, back to you?

Just in terms of the currency impact in the first half, how different is constant currency earnings growth versus reported? And then maybe in PPP, is there any evidence starting to emerge of the improved insurance cross-selling as yet?

Yes. On currency, when we guided in March, we said the currency impact would be quite low. But the currency impact has proven to be slightly larger than we had anticipated, particularly on the back of the very strong rand, and that seems to be persisting at the moment. So the currency impact is more pronounced as we see it. And particularly, Harry, we're seeing some of the East African currencies relative to the rand to put pressure on our currency translation impact East Africa where some of the other currencies have proven to be quite resilient, particularly in West Africa.

Sorry, Harry, did you have a second part of your question?

Yes, there was a question on retail, right?

Yes, just the insurance cross-selling.

Yes, we continue to make good progress, as we previously reported on that. Sayuri, I see you jumped on to the screen. Do you want to comment anything on the progress you're making there?

Yes. Thanks, Arno and thanks, Harry, for the question. We continue to see strong growth in our funeral products. So on FlexiFuneral and on FlexLife that GWP growth still coming through. So the collaboration efforts are in fact, giving us positive outcomes. Of course, we've got a long-term journey there as well, but we are looking at [indiscernible] outcomes from the collaboration efforts.

Going back to Ross.

Just on the trading revenue that you called out for Q1 having been supported from volatility. So is it fair to say then that, that volatility slowed, I guess, as the war persisted and so that's a question -- more part 1. And then part 2 is have -- since the announcement of the truce, I realized it's early days, but has there been any return in trading volumes?

Since the announcement between?

Of the ceasefire.

In the last few days, yes, that's probably a bit too early to comment on that, Ross. The trading revenue has performed well, particularly year-on-year in the first quarter, bearing in mind that in the second and the remaining quarters of the year, we had a high base of trading revenue. But at the moment, we've continued to grow well off even though higher. So trading performance has been pleasing across our different trading markets.

All right. Great. I can't see any more hands. So thank you very much, everyone, for taking the time for joining the call and for your questions. if you do have anything else that we haven't covered, please do reach out to myself or the Investor Relations team. There will be a copy or a recording of this call available on our website within a few hours. Again, if you're looking for that, please to reach out for us, and we can provide you with the lake. Thanks very much for your time.

Thank you all. I appreciate it. Thank you.