Overview of financial interim results 2023
Standard Bank Group’s strong 1H23 performance can be attributed to our differentiated franchise and Africa-focused strategy. We have continued to support our clients and our teams have managed the business well through an uncertain geopolitical environment and volatile market conditions.
GROUP RESULTS
Standard Bank Group Limited’s (SBG or group) prior year numbers have been restated following the introduction of IFRS 17 Insurance Contracts (IFRS 17). The new standard was effective from 1 January 2023 and applied retrospectively, from 1 January 2022. Details of the adjustments are included in the IFRS 17 Transition Report available on the Investor Relations website. All commentary that follows is relative to the restated numbers.
In the six months to 30 June 2023 (1H23), the group recorded headline earnings of R21.2 billion, up 35% relative to the six months to 30 June 2022 (1H22) and delivered a return on equity of 18.9% (1H22: 15.7%). This performance is underpinned by robust earnings growth across our three banking businesses and improved earnings and returns in our insurance and asset management businesses. Our Africa Regions franchise performed particularly well, contributing 44% to group headline earnings.
Net asset value grew by 10% and the group ended the current period with a common equity tier 1 ratio of 13.4% (31 December 2022: 13.4%). The SBG board approved an interim dividend of 690 cents per share which equates to an interim dividend payout ratio of 54%.
Our banking businesses benefitted from continued client franchise growth, larger balance sheets and increased transaction volumes, as well as certain market and interest rate tailwinds. Revenue growth was well ahead of cost growth which supported strong positive operating leverage and a decline in the cost-to-income ratio to 50.5%. Credit impairment charges increased across all portfolios, reflective of the difficult macroeconomic environment and the deteriorating outlook, as well as client-specific strain. The credit loss ratio increased to 97 basis points, at the upper end of the group’s through-the-cycle range of 70 to 100 basis points. Banking operations recorded headline earnings growth of 42% to R18.7 billion and ROE improved to 19.0% (1H22: 15.3%).
Our insurance and asset management business unit (which now combines the businesses previously housed in Liberty Holdings with the other insurance and asset management businesses in the group) recorded improved operational performance and headline earnings of R1.4 billion (1H22: R1.1 billion). The life insurance operations recorded increases in indexed new premiums and the short-term insurance business recorded increased gross written premiums. Group assets under management increased by 6% to R1.4 trillion.
The South African banking franchise headline earnings grew by 17% to R8.4 billion and ROE improved to 15.2% (1H22: 13.7%). The Africa Regions franchise headline earnings grew by 65% and ROE improved to 28.4% (1H22: 20.4%). The top six contributors to Africa Regions headline earnings were Ghana, Kenya, Mozambique, Nigeria, Uganda and Zimbabwe.
During the period, the group proactively assisted over 20 000 South African clients through various client assistance initiatives. The group also continued to assist clients with their sustainability journeys and structured several innovative market firsts in the period. In 1H23, the group mobilised R28 billion in sustainable finance for clients, of which 40% was for clients in Africa Regions. The business is well on its way to delivering on the R50 billion sustainable finance commitment for FY23. We also raised R6.6 billion in green and sustainability-linked treasury finance to support the group’s sustainable finance initiatives.
OPERATING ENVIRONMENT
In the first six months of the year, inflation remained elevated, central bank policy rates continued to trend up and global growth slowed. Markets remained volatile. China’s recovery has been slower than previously expected, and the financial sector experienced some turbulence.
In sub-Saharan Africa, higher interest payment obligations have placed pressure on sovereigns with high debt levels. Inflation rates remained at elevated levels. During 2023, we have welcomed positive actions in Ghana, Kenya, Nigeria and Zambia which have reduced sovereign credit risks in these markets. The most notable change was the liberalisation of the Naira which, although negative for inflation in Nigeria in the short term, is promising for growth and investment in the medium to long term. Sovereign credit risk remains high, however, in Malawi and has increased in Angola and Mozambique. In February 2023, South Africa and Nigeria were grey listed by the Financial Action Task Force.
South Africa experienced similar inflation and interest rate pressures, exacerbated by continued slow reforms, poor service delivery, and increased electricity and logistics disruptions. Inflation remained outside the South African Reserve Bank’s (SARB) target range of 3% to 6% for most of the period, resulting in a further increase in the repo rate of 125 basis points to end the period at 8.25%. Interest rates have increased by 450 basis points since the start of 2022, placing considerable pressure on consumers and businesses. Consumer and business confidence remained low, and demand declined.
OVERVIEW OF PERFORMANCE
The group’s products and services are grouped into i) Banking and ii) Insurance and Asset Management.
HEADLINE EARNINGS BY BUSINESS
Note 1: 1H22 and FY22 numbers restated
BANKING
Banking headline earnings reflected a strong performance, up 42% period on period.
LOANS AND ADVANCES
Gross loans and advances to customers grew by 9% to R1.4 trillion period on period, boosted by strong growth in the corporate and sovereign portfolio up 17% period on period. All other portfolios recorded muted growth as client demand declined, approvals declined due to client affordability constraints linked to higher interest rates, and disbursements slowed.
Higher interest rates drove instalments up and affordability down. This was particularly noticeable in the South African home loan portfolio, where instalments have increased significantly since 2021. We maintained focus on accelerating collections efforts and implementing relevant debt affordability solutions for clients. From 31 December 2022 to 30 June 2023, total coverage increased from 3.6% to 3.8%, driven by increases across all portfolios except the corporate and sovereign portfolio which remained flat at 1.8%, Stage 3 coverage decreased from 50% to 46%, due to a higher early stage 3 book which attracts a lower coverage. Total credit provisions increased by 15% to R61.5 billion as at 30 June 2023.
DEPOSITS AND FUNDING
Deposits from customers increased by 8% period on period, driven by ongoing underlying client franchise growth. Retail-priced deposits grew by 6% and wholesale-priced deposits from customers grew by 9% reducing the need for deposits from banks and driving a 4% decline period on period. Term deposits grew by 15%, matching longer duration disbursements on the lending book.
REVENUE
Revenue grew by 27%, driven by net interest income growth of 34% and non-interest revenue growth of 18%. Net interest income growth was driven by strong average balance sheet growth (average gross loans to customers grew by 13%) and wider margins linked to higher average interest rates across South Africa, Africa Regions and International. The negative impact of tighter asset pricing, due to increased competition in home loans, vehicle and asset finance, and corporate lending in South Africa, was more than offset by mix benefits, from stronger loan growth in Africa
Regions, and endowment tailwinds. Net interest margin increased by 87 basis points to 477 basis points, of which 66 basis points related to positive endowment (equivalent to an R6.5 billion net interest income uplift in 1H23 compared to 1H22).
Net fee and commission revenue increased by 6% supported by a growing client base, higher client trade and transactional activity, and annual price increases. Fewer advisory deal opportunities in 1H23 resulted in a decline in knowledge-based fees period on period. Some deals were delayed and there is a strong deal pipeline for 2H23. This was largely offset by the increase in structuring fees from renewable energy deals in South Africa and higher trade-related activity. Ongoing investment in our digital capabilities drove higher adoption rates, growth in activity and in turn revenues from digital platforms. Card-based commissions revenue grew by 12%, linked to higher card turnover. Our South Africa rewards programme, Ucount, continues to deliver much needed value to clients and drive client behaviour and entrenchment, particularly in private banking. In the 10 years since its launch, the programme has returned over R7.0 billion of value to customers, and over R620 million in the last six months alone.
Trading revenue grew by 36% to R11.7 billion. Fixed income and currencies recorded an exceptional performance driven by increased and widespread foreign exchange related client activity and client-related flows. Growth in structured deals boosted equity trading revenues. Commodities was down period on period linked to the decline in commodity prices and related client activity.
Growth in other gains on financial instruments was driven by higher asset valuations and mark-to-market gains.
CREDIT IMPAIRMENT CHARGES
Credit impairment charges increased by 42% to R8.4 billion. The increase in charges was driven by the combination of macroeconomic pressures, higher interest rates, and negative sovereign credit risk migration in certain African markets. In South Africa, credit impairment charges increased across all portfolios, exacerbated by the non-recurrence of credit recoveries on the payment holiday portfolio in 1H22 (R470 million). In Africa Regions, balance sheet growth, client specific provisions, and risk migrations led to higher credit charges. The credit loss ratio increased from 82 basis points in 1H22 to 97 basis points in 1H23, remaining inside the group’s through-the-cycle credit loss ratio target range of 70 to 100 basis points.
OPERATING EXPENSES
Cost growth was elevated on the back of ongoing inflationary pressures, particularly in Africa Regions, higher performance related incentives, and continued investment in our franchise and client propositions to remain competitive. Operating expenses increased by 16%. Staff costs increased by 19% driven by a larger staff complement, annual increases, and higher incentives. We have purposefully invested in areas that are strategically important for the group’s growth, for example, to drive scale in BCB Africa Regions, to bolster our Investment Banking capability, to reinforce risk and compliance, and to enhance our digital capabilities. Across several areas the specialised skills required are increasingly scarce and increasingly costly.
Software, cloud, and technology-related costs (formerly referred to as Information Technology costs) increased by 18% due to higher spend on cloud migration and software licences. Amortisation was flat and depreciation increased by 7%. The increase in premises costs was well contained at 10% as increased municipal charges and higher fuel costs linked to electricity disruptions in South Africa were offset by savings from continued infrastructure optimisation. Most notably, in South Africa the branch square meterage declined by a further 8% period on period and our ATM estate optimisation programme resulted in a 4% decline in machines period on period. Operational costs declined as high communication and marketing spend in the prior period normalised. Discretionary spend increased by 34% driven by a large increase in business activity related travel and entertainment. Operating expense growth was well below total income growth, which resulted in very strong positive jaws of 11.3% and a decline in the cost-to-income ratio to 50.5%.
CENTRAL AND OTHER
This segment includes costs associated with corporate functions and the group’s treasury and capital requirements that have not been otherwise allocated to the business units. In 1H23, the central headline loss amounted to R1.2 billion (1H22: loss of R0.6 billion). The key drivers of the increase were higher withholding taxes on larger Africa Regions dividends received, foreign exchange losses on dividends between declaration and receipt, and the non-recurrence of the Covid-related central credit overlay release of R151 million in 1H22.
INSURANCE AND ASSET MANAGEMENT
Post the Liberty minority buyout in FY22, Liberty has been integrated into the group and is now included, with other related businesses, in the Insurance and Asset Management (IAM) business unit. Bringing all the insurance, investment, and asset management businesses together in one business unit allows for more efficient scaling of the businesses while also improving client value propositions and specialised risk management, all contributing to enhanced value for clients, advisers, and shareholders.
The Insurance business unit includes the group’s short- and long-term insurance businesses as well as the insurance broker business. The South Africa Life, Savings, and Investments business (formerly the Liberty SA Retail and the associated life business written through Standard Bank Insurance Brokers) delivered headline earnings of R1.4 billion, which is up 11% on 1H22. This is off the back of continued increased sales volumes and risk experience normalising post the pandemic. The South Africa short-term insurance business recorded a 6% growth in gross written premium to R1.7 billion together with improved earnings compared to the prior period. The Africa Regions insurance operations continued to focus on scaling the businesses and recorded a small headline loss in the period. New business value equated to R1.4 billion, which is a significant increase on the prior period (1H22: R1.1 billion).
The Asset Management business unit’s (including STANLIB, Melville Douglas, Stanbic IBTC Pension Fund Managers, and the group’s other asset management and pension fund businesses) combined assets under management grew by 6% to R1.4 trillion. The decline in earnings in the South African businesses, on the back of negative customer cash flows from the muted economic environment, was more than offset by growth in the Africa Regions’ businesses to deliver growth in headline earnings of 4% to R0.6 billion.
Overall, the group’s insurance and asset management business unit grew headline earnings by 23% to R1.4 billion in 1H23 and delivered an ROE of 13.1% The capital coverage of the key legal entities within IAM remain robust.
ICBC STANDARD BANK PLC
ICBC Standard Bank Plc (ICBCS) took advantage of client activity within the continued market volatility and recorded a strong operational performance. ICBCS (via the group’s 40% stake) contributed R1.1 billion to group earnings (1H22: R1.4 billion, R1.2 billion thereof related to the insurance settlement and R0.2 billion thereof related to ICBCS’ operational performance).
CAPITAL AND LIQUIDITY
The group’s common equity tier 1 ratio (including unappropriated profits) was 13.4% as at 30 June 2023 (31 December 2022, 13.4%). The group’s Basel III liquidity coverage ratio and net stable funding ratio both remained well above the 100% regulatory requirements.
PROSPECTS
Downside risks to global growth remain. Inflation is still expected to decline but the rate thereof may slow into 2024. Interest rates are therefore expected to remain higher for longer. The International Monetary Fund (IMF) forecasts global real GDP growth of 3.0% for 2023 and 2024. The IMF expects sub-Saharan Africa to grow at 3.5% and 4.1% in 2023 and 2024 respectively. Significant currency devaluations, for example in Angola and Nigeria, are likely to drive elevated inflation in the short-term.
In South Africa, inflation has recently returned to within the SARB’s target range and expectations are that it will move closer to the midpoint in the medium term. Accordingly, in July 2023, the SARB kept interest rates flat, which we believe to be the end of the tightening cycle. Standard Bank Research expects interest rates to remain flat at 8.25% for the rest of the year and real GDP growth to be 0.8% for 2023. Moderating inflation, interest rate cuts (expect cumulative cuts of 125 basis points in 2024) and increased electricity supply should drive an improvement in confidence, demand, and investment in 2024. Real GDP growth is expected to be 1.4% in 2024 and closer to 2.0% in the medium term.
Against this constrained background, for the six months to 31 December 2023 (2H23), we expect high interest rates to constrict demand and balance sheet growth. Interest rates are likely to have peaked and net interest margin tailwinds are expected to fade. Market volatility is unlikely to continue at levels seen in 2022 and 1H23, which will result in lower client trading activity. In 2H23 (versus 2H22), net interest income growth is expected to moderate to low teens, banking fees are expected to grow mid-single digits, while trading revenue is expected to decline by mid-teens if market volatility and increased client activity is not repeated. Cost growth is expected to moderate. In terms of credit impairment charges, while BCB’s credit impairment charges are expected to remain elevated, PPB’s charges are expected to decline as the book growth slows and specific de-risking initiatives gain traction. CIB’s credit impairment charges could match the 1H23 charge given continued sovereign and corporate stress.
For the twelve months to 31 December 2023 (FY23), banking revenue growth is expected to be stronger than previously guided in March 2023 but moderate relative to the strong 1H23 on 1H22 performance. Despite continued management focus, banking cost growth is likely to remain elevated on the back of ongoing inflationary pressures, particularly in Africa Regions, higher performance-related incentives, continued investment in our franchise and to ensure our client propositions remain competitive. Banking revenue growth is expected to remain ahead of cost growth resulting in positive jaws. The credit loss ratio is expected to remain in the upper half of the group’s through-the-cycle target range of 70 to 100 basis points driven by year-on-year increases in credit impairment charges across all three banking business units. The group’s FY23 ROE is expected to be inside the group’s 2025 ROE target range of 17% to 20%.
As in previous cycles, we will continue to support our clients through these difficult times. We remain committed to our purpose of driving Africa’s growth. This includes supporting Africa’s just energy transition and, particularly, South Africa’s renewable energy projects. In South Africa, we continue to work with the authorities to improve the legal and compliance environment in the context of the FATF grey listing recommendations and with the public and private sector to accelerate growth-enhancing initiatives.
In line with our 2025 commitments, we remain focused on delivering earnings growth, attractive returns and continued positive impact in the economies and societies in which we operate.
The forecast financial information above is the sole responsibility of the board and has not been reviewed and reported on by the group’s auditors.
Sim Tshabalala
Group Chief Executive Officer
Nonkululeko Nyembezi
Chairman
17 August 2023