|  |  | Corporate and Investment Banking |  | | |
Standard Bank became a shareholder and active settlement member of CLS Bank during the last quarter of 2004 when the South African rand joined the global currency settlement utility.
Financial highlights
- Headline earnings increased by 24%.
- All major business units contributed positively.
- Financial performance was boosted by strong growth in non-interest revenue, as well as a lower net charge for credit losses.
- Net interest income was negatively impacted by lower interest rates, resulting in a 1% reduction in net interest income overall.
- Credit losses were maintained at very low levels resulting in a second year of net recoveries.
- Fee and commission revenue grew mainly due to strong growth in advisory and transactional revenue.
- Trading revenue ended the year 36% up primarily due to good performances in debt securities and foreign exchange.
- Investment revenue increased as a result of property and private equity investment gains.
- Staff costs increased in line with performance.
|
How we did
| |
2004 |
2003 |
| Headline earnings (Rm) |
2 656 |
2 140 |
| ROE (%) |
35,8 |
29,4 |
| Cost-to-income ratio (%) |
43,0 |
44,8 |
| Credit loss ratio (%) |
0,05 |
0,31 |
| Net advances (Rm) |
63 785 |
57 178 |
| Headline earnings contribution (%) |
35 |
34 |
|
What we achieved in 2004
All areas of Corporate and Investment Banking performed well in 2004, with a well-balanced mix of income arising from net interest income, trading revenue, and fee and other income. Strong focus on capital and operating costs saw return on equity increasing to 35,8% and the cost-to-income ratio decreasing to below 44%.
Income contribution
|
2004
% |
2003
% |
2002
% |
2001
% |
2000
% |
| Net interest |
35 |
41 |
38 |
35 |
35 |
| Trading |
26 |
22 |
29 |
33 |
32 |
| Fee and other |
39 |
37 |
33 |
32 |
33 |
|
Global markets
Global markets houses the division's customer driven financial markets and treasury activities.
Foreign exchange trading profit was higher due to volatility in the currency market, which created greater opportunities in 2004. Standard Bank is the pre-eminent market maker in rand products and enjoys a large market share. Proprietary risk is balanced with significant sales flows from domestic clients, as well as international and regional banks. The business maintains a 24-hour trading and client service capability through London, New York and Hong Kong.
Commodity trading performance was subdued in the absence of major gold hedging opportunities. The desk continues to focus on growth opportunities in the base metals, agriculture and energy sectors.
The money market, bond and associated interest rate derivative trading businesses performed well under difficult market conditions. This resulted from increased competition and subdued client activity, given a stable interest rate environment. Profits from equity derivative trading were also well up on 2003 in a market characterised by a marked increase in competition and diminishing margins.
There was record issuance of corporate and securitised debt in 2004 with some R28 billion being raised in the capital market. In this environment, the debt origination and securitisation desks both performed well by executing a record number of transactions.
Corporate and Investment Banking enjoys a substantial market share in capital markets and continually seeks to enhance its vanilla and structured product delivery to its clients.
The Corporate and Investment Banking business featured prominently in both the 2004 Risk magazine and the PricewaterhouseCoopers (PwC) banking surveys.
Risk magazine rand survey:
- no. 1 – rand interest rate swaps 2-10 years
- no. 1 – rand interest rate long dated swaps 10+ years
- no. 1 – USD/ZAR currency options
- no. 2 – rand interest rate swaps 0-2 years
PwC banking survey:
- no. 1 – capital markets (foreign exchange, bonds and derivatives)
- no. 1 – warrants issuance
- no. 1 – primary dealer in government bonds for 2004 fiscal year
- no. 1 – primary markets issuance
Banking and trade finance
Margin revenue was negatively impacted by an environment of low interest rates, subdued corporate credit demand, narrowing credit spreads and a competitive market. Continued focus on the quality of assets, however, resulted in an excellent year for credit recoveries. The lower interest rate cycle assisted clients previously in default, resulting in high levels of recoveries and further improvement in the credit loss ratio, which declined from 0,31% in 2003 to 0,05% in 2004.
As a result of a strong focus on transactional business, volumes continued to grow, as well as new business being won, including Amalgamated Beverage Industries, Telkom and the KwaZulu-Natal Provincial Government. Online transactional volumes increased by 15%. The 7% increase in import and export banking service volumes enabled international trade services to increase fee and commission revenue.
Standard Bank became a shareholder and active settlement member of CLS Bank during the last quarter of 2004 when the South African rand joined the global currency settlement utility. This brings to 71 the number of commercial and investment banks that are shareholders of CLS Bank. CLS Bank links 15 of the world’s central banks and many of the world's leading financial institutions. There are now 15 settlement currencies in the CLS fold of which the South African rand, together with the New Zealand dollar, the Hong Kong dollar and the Korean won were approved by the CLS Bank board on 30 November 2004 and subsequently became eligible settlement currencies on 6 December 2004. On 15 December 2004 a peak value of US$3,68 trillion equivalent settled through the system.
Settling transactions through CLS effectively reduces settlement risk from our global interbank foreign exchange transactions. The aim is to benefit from additional exchange and related business and associated capital cost reductions. It is also expected that more transaction capacity will be available within current counterparty limits. This is due to reduced counterparty risk as settlement occurs continuously.
Assets under custody increased to more than R1 trillion with large market shares in equities, bonds, securities lending and trustee services. The custody business was top-rated in the Global Custodian fall edition placing Standard Bank amongst the best sub-custodians in developed markets around the world, and was the highest rated custodian in South Africa in the fall edition of GSCS (Global Securities Consulting Services) Benchmarks 2004.
Structured debt and property finance
This operation mandated and concluded several large asset-based financing transactions. Standard Bank acted as mandated lead arranger of the commercial debt tranche for the Sasol Natural Gas Project, one of the biggest gas and infrastructure deals in Africa, with a total project cost of US$1,2 billion. Standard Bank also acted as global advisor and arranger for Celtel Kenya Limited. The syndicated loan tranche of the facility (slightly more than KSH6 billion or about US$75 million) is the largest single debt fundraising ever conducted in the Kenyan market.
Standard Bank acted as joint lead advisor and arranger on Incwala Resources’ acquisition of an 18% shareholding in Lonmin Platinum – a transaction valued at about US$500 million – to create a new black economic empowerment company in the South African platinum mining industry. This transaction was voted ‘Deal of the Year’ in the annual survey of South Africa’s corporate finance activity conducted by the research publication, DealMakers.
With support from the Export Credit Insurance Corporation of South Africa, Standard Bank was responsible for 60% of the total investments made under the export credit scheme during 2003 and 2004.
Property finance enjoyed good growth in its commercial mortgage lending book and a number of profitable realisations. Listed property investments performed exceptionally well with growth in value exceeding 40%.
Corporate finance and investments
Major milestones for the corporate finance and investments operation included:
- implementing the Standard Bank Group and Liberty Life black empowerment transactions;
- the formation of Incwala;
- concluding the Konkola Copper Mines transaction; and
- the listing of Peermont Global.
The increased activity has led to higher advisory billings. A number of equity realisations were achieved during the course of the year and favourable equity market conditions prevailed for valuations of investment portfolios.
The acquisition finance group, comprising a highly specialised team providing tailor made acquisition funding structures, was established during the first quarter and concluded a number of large and complex deals.
Investment for growth
Significant further investments were made in information technology, processing capability, risk management systems and staff. These investments are critical to support future growth of the business.
Focus areas for 2005
In the year ahead, Corporate and Investment Banking will focus on:
- growing balance-sheet lending;
- maintaining an unrelenting customer focus;
- strengthening transactional capabilities and pursuing new investment banking opportunities;
- replacing realised private equity and property equity positions;
- arranging and financing infrastructure upgrades and refurbishments in South Africa and other parts of Africa; and
- capitalising on opportunities arising from implementation of the charter.
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