Standard Bank Group's normalised headline earnings of R5 989 million were up 11% on the comparable six-month period, while normalised headline earnings per share of 382 cents were 9% higher.
Under International Financial Reporting Standards (IFRS) headline earnings of R5 868 million were 16% higher than the same period in the prior year and headline earnings per share were up 12% at 396 cents per share (1H09: 353 cents per share).
"In a period characterised by continued low interest rates and increasing uncertainty about the global outlook, banking revenues were constrained. This was balanced by a steady improvement in customers' debt profiles, allowing impairment charges to almost halve. Liberty earnings alleviated some of the pressure felt in the banking operations, helping the group to achieve growth in headline earnings. Notwithstanding lingering uncertainties about the condition of world markets, we remain committed to the long-term growth of our emerging markets franchise," said Jacko Maree, Standard Bank Group Chief Executive.
The group remains well capitalised with a tier 1 ratio of 11.8%, well above the group's internal targets and at levels similar to those at December 2009. Given the uncertain outlook, the board has considered it prudent to hold the dividend at the same level as the prior interim period at 141 cents. The resultant interim cover ratio is 2.7 times, slightly higher than the existing policy of 2.5 times.
Financial markets are generally stabilising across the globe and investor appetite is gradually returning, while credit default swaps have declined to pre-September 2008 levels. Unprecedented government intervention in advanced economies and some key emerging markets has pulled the world economy out of crisis mode. Many developed nations are being forced to implement severe austerity measures to bring their fiscal balances to order. Liquidity concerns remain and corporate and consumer appetite for credit has generally remained subdued.
Led by the BRIC economies, emerging markets are continuing to move to the centre of global economic focus. Nearly half of the world's GDP growth in 2010 will come from the BRIC economies.
Africa is reaping the rewards of reform, better macroeconomic management, investments in infrastructure and more constructive trade partnerships. Africa's economic momentum in 2010 was nevertheless held back by falling commodity prices, export volumes and external financial flows in 2009. Africa's prospects remain contingent on the gradual recovery in the world economy.
Real GDP growth in South Africa of 4.6% in the first quarter of 2010, compared to a decline of 1.8% in 2009, has been driven primarily by external demand for commodities and manufactured products. The strong rand has led to low inflation, which in turn has led to the lowest interest rates in 28 years.
Asset prices, including house prices and equities, have shown an improvement from last year. A recovery in the asset base of households should also support consumer spending in due course. The ratio of household debt to disposable income declined to 78.4% in the first quarter of 2010 from 79.9% in the last quarter of 2009. However, the ratio is still historically high, explaining the reluctance of consumers to take on more debt and suggesting that consumers will continue to focus on paying off existing debt.
Income statement analysis
The average US dollar/rand exchange rate strengthened from 9.20 in the first half of 2009 to 7.53 in the period under review. This, together with the rand's strength against the basket of African currencies in which the group operates, meant foreign earnings were dampened when translated into rands.
Net interest income was 12% lower than for the first six months of 2009, due primarily to lower net interest margins and a flat loan book. Non-interest revenue declined 5% with net fee and commission revenue up 4%, trading revenue down 23% and other revenue up 21%. The group's partnership with the Industrial and Commercial Bank of China bolstered advisory fee and commission income through increased cross border transaction deal flow.
Credit impairment charges almost halved when compared to the first half of 2009 and were 24% down on the second half of 2009, reflecting the continued improvement in the credit environment. Non-performing loans (NPLs) remained high at 6.24% of the book (FY09: 6.15%). The credit loss ratio of 1.04% is an improvement over the ratio of 1.84% for the first half of 2009 and 1.31% for the second half of that year.
Banking activities cost growth was 7% for the period and, adjusted for a constant currency, cost growth was 15%. Staff costs increased 6% while other operating costs grew 8%. Given slower revenue growth, the cost-to-income ratio increased to 58.1%.
Within banking activities, income from associates and joint ventures more than doubled largely due to the first time inclusion of equity accounted earnings (USD24 million) from our investment in Troika Dialog in Russia.
Analysis by business unit
Personal & Business Banking
Headline earnings of R1 988 million in Personal & Business Banking were 2% up on the same period in 2009. Personal & Business Banking benefited from reduced credit impairments although this was offset by lower net interest income due to muted asset growth and low interest rates. An ROE of 16.1% was achieved.
Mortgage lending book growth of 4% was achieved largely attributable to the reintroduction of the mortgage origination channel in the third quarter of 2009 and the purchase of a further R2.8 billion of mortgages from SA Home Loans in 2010. The lag effect of the high inflation and interest rate environment during 2008 and the impact of bottlenecks in the debt review process introduced by the National Credit Act, remain evident in the home loans portfolio with NPLs increasing to R27 billion. Standard Bank Group has remained steadfast in its risk-based strategy of assisting clients to remain in their houses which has resulted in low levels of foreclosures and evictions and hence low levels of write-offs in the period. Recently announced improvements to the debt review process should help alleviate the accumulation of NPLs in this portfolio.
The instalment finance book continued to shrink as some sectors of the business market struggle to recover from the impact of the economic recession, although a recent pick-up in new business volumes has been observed. NPLs are reducing in this portfolio and the credit loss ratio improved to 2.37% (1H09: 3.60%) with further improvement expected.
Card showed healthy earnings growth for the period despite lower revenues. Pressures on revenues continued with lower cardholder activity and reduced outstanding average balances as consumers reduce debt obligations.
Transactional and lending product deposit margins remained under pressure due to the negative endowment impact of lower interest rates on transactional accounts. Deposits continue to grow across the African network, particularly in Nigeria.
Bancassurance income grew 21% as complex product sales increased off a low base in 2009 and the simple products benefited from improved claims ratios.
Corporate & Investment Banking
Corporate & Investment Banking generated headline earnings of R3 237 million, down 6% on the same period in 2009. Excluding the impact of a stronger average rand exchange rate, headline earnings for Corporate & Investment Banking were flat compared to the same period the year before, with lower credit impairment charges mitigating reduced income following lower levels of client activity. An ROE of 15.1% was recorded.
The global markets business saw a 23% decline in income, off a high base established in 2009. General nervousness in financial markets in the second quarter resulted in much lower client activity than anticipated. Global markets' revenues earned outside South Africa were particularly impacted by the strong rand. The global markets business in the rest of Africa showed strong results from interest rate trading due to increased client activity.
Investment banking income was down 4% on the same period in the prior year with advisory businesses performing well across all regions. Investment banking recorded a turnaround in impairments for credit losses with some reversals of provisions previously raised in South Africa, as clients restructured their debt during the period.
Transactional products and services income was down 17% on the prior period. Margins were compressed by the negative endowment effect on transactional balances across Africa. Underlying transactional volumes and cash management deposits increased in South Africa with the electronic banking business performing well.
The financial results reported for the wealth business unit represent the consolidated results of the group's 53.7% investment in Liberty Holdings Limited. Normalised headline earnings were R1 007 million for the period compared to a R1 207 million loss reported for the same period in 2009, a significant improvement indicating a return to more normal levels of earnings from core insurance operations. Of these headline earnings, R540 million was attributable to Standard Bank (1H09: loss of R647 million).
Analysis by geography
Banking operations in South Africa showed some resilience, not being impacted by currency translations and requiring a lower increase in operating expenditure. Operations across the rest of the African continent experienced tighter interest margins but good investment banking revenues and continued the investment in staff, systems and branch presence to build the franchise. Operations outside Africa experienced a sharp decline in customer activity compared with a buoyant first half in 2009. Volatility and general customer apathy to transact in an uncertain environment dampened revenues while costs continued to be incurred in anticipation of increased economic activity, particularly in emerging markets
Further commentary on the performance of the South African banking activities is provided at the end of this release.
Uncertainty regarding a sustained improvement in market conditions remains and in the near term Standard Bank Group expects revenue growth to remain challenging.
It is expected that the credit environment across most regions will continue to gradually improve. Personal & Business Banking should benefit from reductions in NPLs in the second half of the year and into 2011. The risk of corporate defaults is not expected to increase and, although client watch-lists are shortening, a much subdued economic environment could raise this risk.
Notwithstanding lingering uncertainties about the condition of world markets, Standard Bank Group remains committed to the long-term growth of its emerging markets franchise. Standard Bank Group continues to invest in its infrastructure and people to enable it to deliver the quality products and services that its customers demand, and to provide good long-term results for its shareholders.
Standard Bank Group is in the process of improving the effectiveness of its organisational structures to support the sustainable building of the franchise, but at the same time achieving better cost efficiency. This enterprise-wide initiative is expected to take some time to bear fruit and is not expected to have an impact in the current year.
"While the results for the group in 2010 are under some pressure, we firmly believe we have the right strategy in place and remain confident about the future," said Mr Maree.
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