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7 March 2007
Standard Bank Group achieved another year of strong financial performance, a year in which all targets were met. Headline earnings per share grew 19% to 837,4 cents per share and return on equity was 27.1%. On a normalised basis, headline earnings per share grew 20% and a return on equity of 25.2% was achieved.
The group's diverse spread of businesses were buoyed by a widely favourable operating environment and measured against a high base the group's earnings growth target of 10% above CPIX inflation was substantially exceeded.
A final dividend of 176 cents per share (2005: 145 cents) was declared, an increase of 21% bringing total dividends in respect of the 2006 year to 320 cents per share, an increase of 20%. The dividend cover ratio of 2,5 times normalised headline earnings per share has been maintained.
Key factors impacting the results
Healthy asset growth from both Corporate & Investment and Personal & Business Banking was experienced with both divisions reporting a 32% increase in advances. This robust asset growth in both current and prior periods and buoyant transactional activity from both consumers and corporates contributed to a rise of 25% in total banking income for the year. Rising prices and volatility in commodity, foreign exchange and interest rate markets resulted in increased trading volumes. Investment Management and Life Insurance benefited from a strong South African equity market and achieved a 33% weighted average investment return.
As expected, the low level of credit losses experienced in 2005 was not sustained in 2006. The return to a net credit charge in Corporate & Investment Banking contrasts with the substantial credit recoveries made in the prior year. Personal & Business Banking's credit loss ratio increased significantly in card debtors following the group's focus on higher risk and higher yielding segments.
The increasing need to utilise wholesale-priced funding to support asset growth caused some pressure on the group's overall margin, but this was compensated to a large extent by the benefits of higher interest rates on capital and transactional balances.
The group continues to scale up its operations outside of South Africa, investing heavily in talent and infrastructure both in existing and new operations thereby increasing cost growth in 2006 with associated revenue growth only expected from 2007 onwards.
Income statement analysis
The group achieved net interest income growth of 27%, with Personal & Business Banking up 25% and Corporate and Investment Banking up 29%, boosted by good growth in operations outside Africa.
Non-interest revenue comprised 53.7% (2005: 54.4%) of total banking income and rose 23%. Fee and commission revenue grew by 18%, primarily driven by higher transaction volumes and values off a larger current account base while price increases were generally sub-inflation. Growth in trading revenue of 30% and other revenue of 39% was achieved.
Credit impairment charges rose 126% off a low base. Credit impairment charges in Personal & Business Banking comprise 85% of the group's charge and this unit's credit loss ratio increased from 0.71% to 1.00%. Corporate & Investment Banking's credit loss ratio increase to 0.19% following net recoveries in 2005.
Operating expenses in the group's banking operations grew by 20% against income growth of 25%. The resultant "jaws" gap of 5% improved the group's normalised cost-to-income ratio from 56.1% to 53.5%. Staff costs were 17% higher, mainly driven by the investment in skills in Corporate & Investment Banking outside Africa. IT costs grew by 22%, mainly as a result of spending on systems to achieve regulatory compliance (including the National Credit Act and Basel II), analysis relating to the implementation of SAP core banking systems in Personal & Business Banking in South Africa and continued standardisation of systems in the rest of Africa.
Business units
Personal and Business Banking contributed 45% to group headline earnings (2005 43%); Corporate and Investment Banking 46% (2005 46%); and Investment Management & Life Insurance 8% (2005 7%). Personal & Business Banking grew headline earnings by 24%, Corporate & Investment Banking by 20%, and Investment Management & Life Insurance by 36%.
Personal & Business Banking's mortgage book grew 37%, the instalment finance book increased by 23% and the card debtors book was up 42%. The group's South African market share in mortgage lending and instalment finance remained stable during 2006, at 25% and 21% respectively. Market share in credit card debtors increased marginally to 36% from 35%.
Corporate & Investment Banking experienced 50% loan growth in rand terms in operations outside South Africa and 20% in South Africa.
During the year the joint venture with ABIL in microlending was terminated, which will allow Standard Bank to drive its lending strategy more independently in the mass market, where it is believed substantial growth potential exists.
Acquisition of BankBoston Argentina
The South African and Argentine regulators have approved the proposed acquisition by Standard Bank of BankBoston Argentina and the three-month formal process for the transfer of the agreed assets and liabilities has commenced. The effective date of the transaction is expected to be 1 April 2007 and the prospects for this operation continue to improve. Due to acquisition and initial rebranding costs, the impact on the group's financial performance is not expected to be significant in 2007.
Potential acquisitions
There is agreement in principle to merge IBTC Chartered and Standard Bank Nigeria. Total capital to be invested will be US$525 million with Standard Bank holding 50.1% in the merged entity.
Standard Bank has agreed in principle to acquire a majority shareholding in Turkish investment banking and brokerage house Dundas ?nl?. Total capital to be invested will be about US$40 million and Standard Bank will hold 67%. Standard Bank has also signed a memorandum of understanding to merge its Kenya bank with CFC Bank. All these acquisitions are subject to regulatory approval.
Capital management
The group has made considerable progress in preparing for the implementation of Basel II and ensuring capital management processes meet global standards. During the year the group issued preference share capital in two tranches to the value of R2,5 billion and subordinated debt qualifying as Tier II banking capital to the value of R4,7 billion.
Financial Sector Charter Progress
Standard Bank's overall Financial Sector Charter score has improved from 52,94 points (out of a maximum available 100 points) as at 31 December 2004, to 91,28 points as at 31 December 2006. Notably, given the importance to sustainable economic development of developing black small and medium enterprises (BSMEs), 10 million ordinary shares were allocated to 250 qualifying BSMEs. This formed part of the group's Tutuwa Community Trust initiative and the shares were worth a total of R445 million on allocation in November 2006. The bank has made progress in employment equity and black managers now represent 44% of the bank's management compared with 37% the previous year.
Prospects
Global growth is expected to slow in 2007 due to an easing US economy, the correction of current global imbalances and softer commodity prices. While growth in developing economies is expected to moderate, it should remain relatively strong.
In South Africa, the increasing interest rate cycle appears to be approaching its peak. The higher interest rates, combined with a record-high household debt-to-income ratio, are expected to curb durable consumer spending. The impact of this on retail activity should be felt towards the end of 2007. However, as the momentum in consumer spending decreases, a shift from consumer-led to corporate-led economic growth is occurring.
On the prospects for the year, Jacko Maree, Standard Bank Group Chief Executive says: "In the year ahead economic conditions in the markets in which the group operates are likely to be less favourable than in the last few years. We are nevertheless confident that with the high calibre of our staff and our portfolio of growing businesses, we will be able to deliver on our financial objectives. The group's principal financial objectives for 2007 remain unchanged: a normalised return on equity of 24%, and normalised headline earnings per share growth of South African inflation (CPIX) plus 10 percentage points."
Full details of the results are available here.
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