The first six months of 2021 were another exceptionally difficult period for many of our clients, staff and stakeholders but we are now hopeful that the worst phase of the pandemic is behind us. Notwithstanding these continuing strains, some early signs of recovery are evident in the Standard Bank Group’s (SBG or the group) financial results for the first half of 2021 (1H21). Our underlying business has strong momentum and, relative to this time last year, we have seen a recovery in client activity, an improved outlook and lower impairment charges. The group’s South African business recorded a strong recovery, particularly in the Consumer and High Net Worth (CHNW) client segment. The Wholesale client segment reported strong earnings growth on the back of net credit recoveries and tight cost control.
Our Standard Bank Activities’ (group excluding ICBC Standard Bank plc (ICBCS) and Liberty Holdings Limited (Liberty)) earnings were supported by growth in the client franchise, a recovery in client transactional activity, and fees and significantly lower credit charges. Underlying revenue growth was supportive although negatively impacted by lower interest rates period on period and an outsized performance in trading revenue in the prior period. Despite tight cost management, the decline in revenues drove negative jaws. Credit impairment charges halved but remained above 1H19 levels. Consequently, Standard Bank Activities’ reported headline earnings of R10.9 billion, up 41% on 1H20, and a return on equity (ROE) of 13.3% (1H20: 9.5%). Liberty returned to profitability and ICBCS continued to perform well.
Group headline earnings were R11.5 billion, an increase of 52% on 1H20, and ROE was 12.9% (1H20: 8.5%). The group’s capital position remained robust, with a common equity tier 1 capital adequacy (CET1) ratio as at 30 June 2021 of 13.5%. Taking into account the momentum in the underlying business and the group’s strong capital position, the SBG Board has declared an interim dividend of 360 cents per share, representing a 50% dividend payout ratio.
The group’s regional performance reflects the underlying recovery trends in our countries of operation. The group’s South African business rebounded strongly, recording earnings of almost three times that of 1H20. Client demand and activity improved, disbursements and fees recovered, and credit charges declined from very elevated levels in 1H20. Africa Regions’ performance was significantly impacted by currency movements, particularly the stronger Rand. By way of example, revenue declined 11% but grew 10% in constant currency (CCY). Underlying growth was underpinned by ongoing balance sheet and client franchise growth. Africa Regions’ contribution to 1H21 group headline earnings was 35%. The top six contributors to Africa Regions’ headline earnings remained Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.
Overall, the global environment was favourable. Continued low interest rates and fiscal stimulus supported global equity markets. Inflationary fears waxed and waned. Vaccination rates improved as the rollout beyond developed markets gained momentum. Lockdown restrictions were reintroduced in many places to deal with the Delta variant outbreaks, however in most cases they were less restrictive than the initial lockdowns. Travel and trade resumed; however supply disruptions remained an issue.
Sub-Saharan Africa benefited from the global tailwinds, particularly in those countries with links to commodities. Interest rates remained low, with only Mozambique and Zambia recording interest rate increases of 300 basis points and 50 basis points respectively in the period. Inflation upticks were limited to specific markets, namely Malawi, Nigeria and Zambia. The vaccine roll-out has been slow – constrained by access and logistics. Many countries experienced further waves of infection in the period. Recovery rates differ and are expected to continue to be bumpy.
In South Africa, as lockdowns eased, activity and confidence improved. High commodity prices supported the fiscus (tax collection) and enabled the state to continue to support those impacted by the pandemic. The vaccination programme got off to a slow start but has gained momentum. Reform progress, particularly in energy, was positive. The social unrest, experienced in July 2021 in KwaZulu Natal and Gauteng, exposed the urgent need to tackle rising inequality through accelerated growth, investment-related reforms and job creation. While we experienced damage to our infrastructure, we were most concerned about the safety of our colleagues and clients. We have offered various forms of support to our clients, our colleagues and to the communities impacted. We are working hard to get back up and running and have put contingency plans in place where necessary. The unrest occurred post the reporting date and therefore any financial impact will be recorded in 2H21. The impact is however, expected to be limited due to insurance.
Overview of performance
Standard Bank Activities by client segment
Client segments is our primary axis of reporting. The client segments are responsible for designing and executing the client value proposition strategy.
HEADLINE EARNINGS BY CLIENT SEGMENT
Client segments is our primary axis of reporting. The client segments are responsible for designing and executing the client value proposition strategy.
CHNW delivered a solid set of results in a difficult environment. Headline earnings improved 132% to R2 371 million and ROE increased to 9.7% (1H20: 4.3%). An improving trend in client experience scores, growth in active clients, increase in digital capabilities, and robust balance sheet growth reflect the underlying franchise momentum.
BCC’s headline earnings increased 1% to R2 156 million and ROE improved to 20.8% (1H20: 19.5%). Lower net interest income (NII), due to a sizeable negative endowment impact, was offset by lower credit impairment charges. Increased client demand for lending to support business growth, alongside growth in client transactional activity and turnover was evident. Improvements in global trade supported the trading environment across many markets.
Wholesale delivered headline earnings of R6 646 million, an increase of 27% on 1H20, and an ROE of 20.0% (1H20: 15.3%). Revenue pressures were more than offset by tailwinds from impairment releases, the partial reversal of the equity fair value write downs suffered in 1H20, and good cost containment.
Standard Bank Activities by solution
For the purposes of our secondary reporting axis, we group products and services into banking, insurance and investments.
HEADLINE EARNINGS BY SOLUTION
Banking solutions headline earnings improved considerably, up 39% period on period. The franchise grew clients and balances, and transactional and account activity improved relative to the low levels seen during the lockdowns in 1H20.
Loans and advances
Gross loans and advances to customers were flat period on period, as strong growth in CHNW loans was offset by repayments of liquidity and facilities drawn down by Wholesale clients in 1H20. CHNW client demand experienced in 2H20, continued into 1H21. Personal unsecured lending growth continued to be driven through our digital channels. Wholesale origination momentum improved towards the end of the period.
Total provisions were up marginally from 31 December 2020. As at 30 June 2021, stage 3 loans represented 5.5% of the portfolio and provisions held against these loans remained sufficient at 47% and largely unchanged from year end (30 December 2020, 5.5% and 46% respectively).
In South Africa, gross loans to customers grew 2%. We continued to support our clients as they sought to buy homes and cars. Applying consistent risk appetite and more stringent affordability criteria (to take into account future increases in interest rate), we found many attractive opportunities to lend to the clients we know well. New mortgage loan-to-value was unchanged from 2020. As at 30 June 2021, the active payment holiday portfolio amounted to R5 billion (30 June 2020: R107 billion), of which the vast majority is home loans. Payment rates remained at 90% on the expired portfolio and additional provisions were raised for accounts deemed to be high risk. Strain in the expired card population resulted in an increase in coverage from 4% in December 2020 to 5.4% as at 30 June 2021. In addition, loans disbursed under the South African Covid-19 loan guarantee scheme totalled approximately R7 billion as at the end of the period. These loans are included in the business lending portfolio, with total coverage ratio of over 5.0%.
Within Africa Regions, the accelerated rollout of our digital lending capabilities drove continued strong growth in our gross loans to customers (CCY: 14%). Countries supporting this growth included Botswana, Eswatini, Ghana, Kenya, Malawi, Nigeria, and Uganda.
Deposits and funding
Total deposits were largely flat period on period. Muted net credit demand and higher business transactional balances reduced the need for wholesale funding (i.e. NCDs). South African deposits from customers were flat period on period at R1.2 trillion. Balances accumulated in the prior period were largely retained. Africa Regions deposits from customers grew 20% (CCY) and current and savings account (CASA) balances grew 19% (CCY), underpinned by new active customers. CASA balances grew across the portfolio, but particularly in Angola, Ghana, Kenya, Mozambique Nigeria, Uganda, and Zambia. Deposits placed with our offshore operations in the Isle of Man and Jersey totalled GBP5.9 billion as at 30 June 2021 (30 June 2020: GBP5.2 billion).
Banking solution revenue declined 2%. NII declined 5% driven by margin compression. Lower average interest rates continued to be a drag – negative endowment equated to R2.2 billion in the period (1H20: R 1.8 billion, 2H20: R5.7 billion). Net interest margin (NIM) declined 26 basis points to 361 basis points.
Non-interest revenue (NIR) grew 1% to R21.2 billion. Net fee and commission income increased 3% as consumer activity levels and transactional volumes improved relative to levels recorded in the 1H20 lockdowns. In South Africa, NIR was negatively impacted by pricing adjustments, on account and ATM fees, as well as lower cash-related fees as customers switched from branch to ATM and electronic channels. While the latter had a negative impact on fees, it is in line with our strategy to drive our clients to our digital channels and de-cash our branches, where possible. Reducing branch sizes and removing cash are key to our ongoing drive to lower distribution costs. Regulatory restrictions on fees remained in place in some of the markets in which we operate. These include fee moratoriums in Eswatini, Lesotho and Malawi and restrictions on card-based fees and commissions in Nigeria, Angola, Lesotho and Eswatini. In Africa Regions, card-based and trade finance revenues improved as travel and trade restrictions eased. Digital transaction fees recorded exceptional growth as clients increasingly embraced our innovative, convenient digital solutions.
Trading revenue declined from record levels in 1H20. 1H20 volatility-related gains were replaced with revenue from strong client flows and client revenue growth in Angola, Ghana, Mozambique, and Zambia. Other income and gains and losses benefited from the non-recurrence of prior year equity revaluation losses.
Credit impairment charges
Credit impairment charges declined 49% to R5.8 billion, from elevated levels in 1H20. The improvement was driven by improved collections (aided by less restrictive lockdowns), improved customer risk profiles and forward-looking assumptions, lower charges associated with the client relief portfolio in CHNW, and a net release in the Wholesale client portfolio. Wholesale client provisions were released as client exposures matured and were paid down. The credit loss ratio decreased to 88 basis points (1H20: 169 basis points).
Costs were well contained, increasing only 2% after absorbing annual salary increases, ongoing work-from-home costs, higher digital capability development costs and the normalising of performance-related incentive costs. Inflation in certain Africa Regions countries drove up costs in CCY. Softer revenue resulted in negative jaws and a banking cost-to-income ratio of 60.9%.
The insurance business recorded growth in policies, gross written premiums (GWP) and revenues (up 6% to R2.3 billion). Revenue growth more than offset higher claims leading to headline earnings growth of 4% to R987 million. Long-term insurance GWP increased by 13%, with Funeral GWP growing by more than 20%, supported by strong growth in the underlying policy base (driven principally by our well-positioned Flexi Funeral solution in South Africa). Our long-term insurance products are mainly underwritten by Liberty. Short-term insurance recorded a 2% increase in GWP.
Claims increased across almost all products due to the Covid 19 pandemic as well as the difficult economic environment, resulting in higher loss ratios in both short-term and long-term insurance results.
The investment business continued to grow assets under management (AUM) and headline earnings. Total AUM as at 30 June 2021 amounted to R462 billion (10% up in CCY, negatively impacted by a stronger ZAR), split approximately 50/40/10 across South Africa, Africa Regions and International. Africa Regions AUM relates primarily to Nigeria and International, to Isle of Man and Jersey. Our operation in Ghana, while still small, is showing strong momentum. Due to the sizable non-Rand-denominated AUM and revenue contribution, the stronger Rand impacted period-on- period performance. Investment revenue declined 2% in ZAR to R1.7 billion, but grew 14% in CCY. Headline earnings grew 6% to R427 million (+39% in CCY).
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. The segment costs amounted to R279 million (1H20: R633 million).
Other banking interests
ICBCS recorded a profit of USD72 million in 1H21 (1H20: USD70 million). The business continues to make good operational progress and is becoming more integrated with ICBC. The group’s 40% share of earnings equated to USD29 million or R420 million post translation (1H20: R508 million). SBG’s attributable profit declined 17% due to the stronger Rand period on period.
The financial results reported are the consolidated results of the group’s 57% investment in Liberty, adjusted for Standard Bank Group shares held by Liberty for the benefit of Liberty policyholders which are deemed to be treasury shares in the group’s consolidated accounts.
Liberty’s performance in 1H21 was much improved from 1H20. It did, however, continue to be impacted by the pandemic. In the period, additional prospective pandemic reserves raised, together with excess risk claims, amounted to R1.1 billion (post tax and non-controlling interests). Improved global and South African financial market conditions positively impacted the Shareholder Investment Portfolio performance. Liberty reported headline earnings of R222 million (1H20: loss of R2.3 billion). After adjusting for treasury shares, the group’s share of the earnings amounted to R163 million (1H20: loss of R0.7 billion). Liberty remains well capitalised, with a Solvency Capital Requirement cover ratio of 1.73 times as at 30 June 2021.
On 15 July 2021, the group and Liberty jointly announced the group’s intention to buy out the Liberty minority shareholders and to integrate Liberty more closely into the greater group. The transaction is expected to close in 1Q22, subject to Liberty shareholder and regulatory approvals. Further details thereof are outlined in the aforementioned announcement.
There were no material headline adjustable items in 1H21 and profit attributable to ordinary shareholders amounted to R11.4 billion.
The group maintained strong capital adequacy ratios, with a CET1 ratio of 13.5% (1H20:12.5%) and a total capital adequacy ratio of 16.4% (1H20: 15.4%).
The group’s liquidity position remained strong. The group’s second quarter average Basel III liquidity coverage ratio amounted to 141%, well in excess of the temporarily reduced minimum phased-in regulatory requirement of 80%. The group maintained its net stable funding ratio in excess of the 100% regulatory requirement.
During 1H21, the group successfully raised over R14 billion of longer-term funding. The group also issued R1.7 billion Basel III compliant Tier 2 capital and R1.8 billion of Additional Tier 1 capital, the proceeds of which were invested in The Standard Bank of South Africa.
The global backdrop is expected to remain favourable, supported by sustained low interest rates, continued fiscal stimulus and consumer demand. Developed countries, with stronger balance sheets and higher vaccination rates, are expected to recover quicker than developing economies. The International Monetary Fund is forecasting global real GDP to grow 6.0% and sub-Saharan Africa to grow 3.4% in 2021. Recovery paths across our markets of operation are expected to be uneven.
In South Africa, while the recent unrest has dented consumer, business and investor confidence, we do not believe it will meaningfully derail the nascent economic recovery in the near term. South Africa’s GDP is expected to grow 4.0% in 2021 and interest rates are expected to remain unchanged for the remainder of the year. Unforeseen spending pressures are a risk to the fiscal outlook. Structural reform implementation remains key to sustainable growth and job creation.
The group’s performance trends in the second six months of the year (2H21), and for the twelve months to 31 December 2021 (FY21) overall, will continue to be impacted by the base effects of 2020. Most of the interest rate cuts occurred in 1H20 and therefore,FY21 NIM is expected to be similar to the 1H21 level. CHNW balance sheet growth is expected to moderate from recent elevated levels, but 1H21 balance sheet growth should support average balances and NII growth in 2H21. The Wholesale client pipeline is strong, but conversion remains subject to reform execution and improved confidence. Lockdown restrictions are not expected to return to previous levels, which should aid transactional activity and NIR year on year. We expect revenue growth to exceed cost growth in 2H21. Credit impairment charges are expected to increase from 1H21 levels, as Wholesale credit charges normalise. The FY21 credit loss ratio is expected to be within the group’s through-the-cycle credit loss ratio range of 70 to 100 basis points. FY21 ROE is expected to be well above the prior year, but remain below cost of equity and the final dividend payout ratio is expected to be similar to 1H21.
We will provide updated medium-term targets tomorrow at our Strategy Update.
Further infection waves are likely, particularly in sub-Saharan Africa where vaccination levels are still low. In July 2021, there were elevated infection levels in 16 of our 20 markets on the continent. In line with our continued focus on keeping our staff safe and well, we expect that many of our colleagues will continue to work from home for the rest of the year. In 2H21, the vaccine rollout is expected to gain momentum, particularly in South Africa. We look forward to returning to work on a hybrid basis in 2022. We thank all our colleagues for their continued commitment in what has been another mentally challenging six months. We look forward to building on the progress we have made in 1H21 and remain steadfast in delivering on our purpose, “Africa is our home, we drive her growth” in 2H21 and beyond.
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.
FY21 headline earnings per ordinary share (HEPS) and basic earnings per ordinary share (EPS) are expected to increase by more than 20% when compared with those in the 12-month period ended 31 December 2020 (HEPS: 1 002.6 cents, basic EPS: 777.0 cents). A further trading statement will be issued to provide more specific guidance when there is reasonable certainty about the extent of the increases and the relevant HEPS and basic EPS ranges.
Shareholders are advised that the information in this trading statement has not been reviewed or reported on by the group’s joint auditors.