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Standard Bank results for the six months ended 30 June 2008 reflect the resilience of its businesses amidst continued global financial market turmoil. The bank's strong capital position and healthy liquidity profile has positioned it to take advantage of business opportunities in the group's chosen growth markets.
Normalised headline earnings grew by 15% to R7,1 billion and normalised headline earnings per share by 7% to 482 cents per share. Net asset value per share increased by 40% and a return on equity of 19,8% was achieved. Standard Bank has declared an interim dividend of 193 cents per share, an increase of 7% on the 2007 interim distribution of 181 cents per share.
In South Africa, consumers continued to come under pressure from rising inflation, falling asset values and tighter borrowing conditions. The South African Reserve Bank has raised interest rates on 10 occasions since June 2006, taking the prime lending rate 500 basis points higher to 15,5% at June 2008. Household spending lost momentum and activity in the residential property and passenger car markets slowed significantly. However, strong investment spending continued to buoy growth in the corporate sector.
Jacko Maree, Standard Bank Chief Executive says: "Our strategy to grow businesses in other emerging markets continued to deliver value in the period. Including Liberty Life, headline earnings from South Africa grew 1%. Our businesses outside South Africa grew 30%, allowing the group to achieve growth in headline earnings of 15% in very difficult trading conditions."
Excellent top line revenue growth
Net interest income grew 40% on the back of strong balance growth assisted by higher net interest margins. Non-interest revenue was up 25%, with net fee and commission revenue up 21%, trading revenue up 42% offset somewhat by other non-interest revenue down 7%. All revenue items have benefited from acquisitions.
Increased credit impairment charges dampen earnings growth
Credit impairment charges more than doubled and the credit loss ratio increased from 0,78% to 1,27%. Within Personal & Business Banking, impaired loans increased 122% from June 2007 and 75% since December 2007, increasing the charge for impaired loans by 137% and resulting in a total credit loss ratio for Personal & Business Banking of 2,18% (June 2007: 1,31%). The credit loss ratio for mortgages rose from 0,61% to 1.30%, while instalment sales and finance leases experienced a credit loss ratio of 2,00% (June 2007: 1,38%) . The credit loss ratio in card debtors increased from 6,34% to 9,44%.
In Corporate & Investment Banking the credit loss ratio increased from 0,16% to 0,29%, with the increase mostly arising in the rest of Africa.
Costs increase yet cost-to-income ratio continued to improve
Despite costs growing 24%, the group improved the cost-to-income ratio to 48,7% from 51,8% at June 2007, as a result of strong income growth. Excluding the impact of recent acquisitions, operating expenses grew by 17%.
Resulting in 15% group headline earnings growth
Analysing the results by product line, Personal & Business Banking's contribution to headline earnings declined 3% for the period, Corporate & Investment Banking grew their contribution by 20% and Liberty Life declined by 46%; resulting in 15% growth for the group. The 15% growth translates into 7% headline earnings per share growth largely as a result of the dilutive impact of new ICBC shares in issue.
ICBC
On 3 March 2008, ICBC subscribed for 152,5 million newly issued ordinary shares for an aggregate consideration of R15,9 billion. This new equity capital resulted in additional income that boosted earnings growth. R4,3 billion of this capital has been used in the acquisition of minority interests in Liberty Holdings in July 2008. Some capital has been used to fund organic business growth and the remainder is earmarked for acquisition activity in emerging markets. The business co-operation with ICBC, though still gaining traction, is progressing well, with numerous business opportunities having been identified.
Liberty Holdings minorities
The group's offer to acquire the issued ordinary shares of Liberty Holdings Limited that the group did not already own closed on 18 July 2008, at which time 97,08% of minority shareholders had accepted the offer. Standard Bank is pleased to have achieved its objective of increasing its effective economic interest in Liberty as part of a rebalancing of its portfolio of financial services subsidiaries and to align its economic exposure with its strategic and commercial contribution to Liberty.
Prospects
Macro outlook remains uncertain
The global economy has experienced a period of rapid deterioration and the outlook remains uncertain. South Africa's growth potential for 2008 is being restrained by the potential slowdown in global economic activity. However, strong investment spending, particularly by the South African government and public sector entities, is expected to support economic growth and should ease the impact of the slowdown. Reduced disposable income following sharply increased food, transport and borrowing costs, a weaker residential property market and low recovery values of vehicles are compounding the strain on households' ability to service debt, which is likely to increase default experience in South Africa.
Earnings tracking below targets due to higher than expected credit losses
The group publishes its financial objectives annually in March. The principal financial objectives for 2008 published at that stage were normalised headline earnings per share growth of CPIX plus 5% and a return on equity of 21,0%. Following the significant increase in early arrears and non-performing loans, which exceeded the group's expectations, it moderated its outlook at its May annual general meeting and advised that growth in normalised headline earnings per share was only expected to exceed CPIX. The default experience in its Personal & Business Banking loan book has worsened further since May and growth in normalised earnings per share, while positive, was below CPIX for the period under review.
Difficult to provide reliable guidance on earnings for the remainder of the year
Given Standard Bank's recent experience of South African consumer credit performance and the potential effects of volatility in international markets, the group is currently not in a position to provide reliable guidance on results for the financial year. In the circumstances, it intends issuing a voluntary trading update and results guidance in late October, following the next trading quarter.
Despite the challenges the group's strategy is working: it remains profitable and well capitalised with good long-term growth prospects.
While the current environment presents challenging trading conditions, the group's capital position and growing franchise remain healthy and it will maintain its focus on risk mitigation and cost-saving strategies to protect and grow shareholder wealth. The group continually identifies and pursues growth opportunities in its chosen markets to enhance the group's long-term growth prospects.
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