Standard Bank’s diversified business shows good growth despite global climate

Standard Bank’s diversified business shows good growth despite global climate

Standard Bank results for the year ended 31 December 2008 illustrate the resilience of the group’s diversified business model in the face of high levels of volatility, declining asset prices and reduced global liquidity.

Headline earnings grew by 8% to R14.1 billion (US$1.7 billion) and headline earnings per share declined by 2% to 942.6 cents per share. Net asset value per share grew by 32% and a return on equity of 18.2% was achieved. Growth in headline earnings per share has been diluted by the issue of new shares to ICBC in March 2008.

Net asset value grew by R27.5 billion or 47% in 2008 to R85.9 billion (US$9.2 billion). In addition to the R15.9 billion of equity raised by the issue of shares to ICBC, earnings of R14.1 billion were recorded plus a further R5.2 billion of currency translation and associated hedging gains accounted for directly in reserves. Dividends of R6.1 billion were paid to ordinary shareholders.

A final dividend of 193 cents per share has been declared, bringing the total dividend declared in respect of 2008 to 386 cents per share - the same level as the prior year. While Standard Bank’s capital position remains sound, the board has decided to offer the dividend as a scrip distribution with a cash alternative in order to incrementally raise capital given that asset growth within the group is continuing and alternate sources of capital are currently limited.

Key features of Standard Bank’s results includes strong organic revenue growth despite the difficult operating conditions and meaningful contributions from recent acquisitions in Nigeria and Argentina, both included in the group’s results for a full year for the first time. All business units and geographic regions were profitable in 2008.

Jacko Maree, Standard Bank Chief Executive, says: “In addition to maintaining an intense focus on South Africa, the group’s strategy of increasing earnings from other strategic emerging markets continues to gain momentum. Headline earnings contributions from our African operations excluding South Africa rose 13% to R1.9 billion, a marked improvement from the R1.3 billion contribution the year before. Supported by recent acquisitions, our operations in the rest of Africa benefited from an enhanced product offering, higher trading volumes and a focus on profitable cross-selling opportunities. Operations outside Africa, where the effects of the global financial crisis were most acutely felt, showed notable resilience in achieving earnings of US$168 million, marginally lower than the prior year, US$174 million. When translated into rand, earnings from this region were up 12%.”

Business units
Following many years of strong growth, the convergence of several negative macro-economic factors affected our Personal & Business Banking division and, although remaining profitable, headline earnings fell 16%. Despite this, a healthy ROE of 19.9% was achieved and the cost-to-income ratio was further improved to 51.3%.

Corporate & Investment Banking grew headline earnings 19% in a challenging environment. An ROE of 22.2% was achieved and the cost-to-income ratio was 50.5%, down from 53.1% in the prior year.

Liberty’s earnings are closely aligned to investment markets and have been significantly impacted by the JSE Limited All Share Index being down 26% for the year under review. Liberty’s published headline earnings of R1 619 million were 48% down on 2007 and Standard Bank’s share of these earnings decreased 34% from R973 million in 2007 to R641 million for 2008, taking into account the increased shareholding in the more difficult second half of the year. Maree says: “We are pleased with Liberty’s results - it’s a good performance in tough market conditions”

Income statement
Net interest income
Net interest income was up 40%. Excluding the impact of recent acquisitions, net interest income was up 34%. Strong income growth was achieved in Personal & Business Banking of 29% and in Corporate & Investment Banking of 55%.

Non-interest revenue
Non-interest revenue grew 19%, with a meaningful contribution from recent acquisitions. Growth excluding recent acquisitions was 11%.

Net fee and commission revenue grew by 21% in Personal & Business Banking while increases in account transaction fees in South Africa were restricted to 4.6%. Corporate & Investment Banking advisory fees were lifted by 49% on the back of strong growth in fee income in Africa and higher corporate and structured finance advisory deal volumes in the first half of the year.

Trading revenue increased 31% with operations in Africa doubling trading revenue. Our client franchise businesses in commodity and foreign exchange trading achieved revenue growth of 62% and 72% respectively.

Credit impairments
Credit impairment charges increased by 147% and the credit loss ratio worsened to 1.55% from 0.80%.

Maree says: “Within Personal & Business Banking, credit losses in the current interest rate cycle have worsened due to lower disposable income amongst consumers following sharp increases in food and energy inflation earlier in the year. Economic conditions for customers have worsened progressively during 2008, intensifying the difficulty experienced in meeting contractual repayments.”

The credit loss ratio in Personal & Business Banking worsened from 1.35% to 2.47% during the year.

The credit loss ratio in Corporate & Investment Banking increased to 0.46% in 2008 from a low base of 0.10% in 2007. This includes increased provisions for loans identified as non-performing in sectors where stresses are evident and newly-created portfolio provisions for performing loans to cater for the evidently worsening economic conditions.

“We continue to re-evaluate the depth and expected duration of the current downturn to ensure the appropriate strategies are in place. These include a heightened focus on early identification of problem accounts, collection capability and efficiencies, proactive rehabilitation policies and processes. We are nevertheless currently originating quality new business,” says Maree.

Operating expenses
The group’s cost-to-income ratio improved to 49.2% (2007: 51.6%). The consolidation of recently acquired entities drove banking activities’ cost growth to 23% (14% excluding acquisitions). Operating expenses in South Africa were well contained and grew at 7.5%, well below South African inflation.

Standard Bank well capitalised
The group implemented Basel II on 1 January 2008. The group’s capital adequacy ratio was bolstered by the ICBC capital injection of R15.9 billion in March 2008, internally generated capital and proactive management of the balance sheet. Total capital adequacy increased to 12.9% (2007: 11.6%) and tier 1 capital adequacy improved to 10.7% (2007: 8.7%).

ICBC
The group’s business co-operation with ICBC is still gaining traction and progressing well. Much of the first year of co-operation has involved relationship building, understanding our mutual structures, exploring client opportunities, and determining how best to co-ordinate our efforts in China and the emerging markets in which we operate.

Nigeria and Argentina
Standard Bank acquired controlling interests in BankBoston Argentina on 1 April 2007 and in IBTC Chartered Bank Plc in Nigeria on 24 September 2007. The results of both these operations are included for the full period for the first time, adding an incremental R393 million to group headline earnings in 2008.

Prospects
Standard Bank expects the difficult operating conditions to continue, posing significant challenges for our customers and our industry. Global confidence in financial markets is unlikely to improve in the short term. Operations outside of South Africa should continue to benefit from synergies with the South African operations and opportunities in local markets. In South Africa it is likely that consumers will remain under pressure as unemployment and lower economic growth exacerbate financial stresses despite the relief provided by the current downward trend in interest rates. Lower commodity prices and a slowdown in activity will pose challenges for South African corporates.

Maree says: “We are committed to continue deepening our client relationships and staying alert to opportunities as they arise. We do not underestimate the challenges of the external environment but we believe our businesses are resilient and we are pursuing our focused strategy with strength and confidence. We continue judiciously to seek growth opportunities in our chosen markets to enhance the group’s long-term prospects.”

In light of the prevailing volatility of financial markets, the group has not published financial objectives for 2009. In these tough global economic conditions the group will continue to exercise caution and to ensure that sound risk management practices are maintained and enhanced. In light of the above circumstances, the board considers that producing similar results in 2009 to those achieved in 2008 would be an acceptable outcome.

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