Sim Tshabalala and Ben Kruger. Picture: BUSINESS DAY

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With hindsight, it’s clear that last December was a perfect time to buy bank shares.

Their prices had been pushed down by the prospect of a sovereign ratings downgrade, as well as a stagnant economy and a potential ballooning of bad debts. But banks have ingenious ways of squeezing revenue out of clients, and the latest round of bank results shows that operations remain robust.

Barclays Africa has risen from R106 to R165, Nedbank from R155 to R226 and Standard Bank from R95 to R150, FirstRand reports only in mid-September, but it is still expected to show by far the highest return on equity among the full-service banks, and it leapt from R34 to R50.

Standard Bank joint CE Sim Tshabalala says there is no doubt that it is a tough environment for banks: commodity prices are well below previous levels — and many of the investment banking activities of the group and its SA peers have historically revolved around commodities. Also, growth is sharply down in SA and elsewhere in sub-Saharan Africa, though in the latter it is still expected to average 4% up to 2020.

But Tshabalala is an optimist who sees early signs of recovery in mining and manufacturing, and thinks a stronger rand should permit slower monetary tightening and expects fewer and shorter strikes.

Standard Bank’s headline earnings in the six months to June increased 5% to R10,8bn. However, there was a higher base in the previous interims. This was due to a R515m gain from the release of cash flows and hedges from the disposal of the Brazilian operations to Mexican bank Inbursa and from the sale of 60% of the often troubled Standard Bank Plc in London to the group’s major shareholder, ICBC of China.

In the six months to June there was a R300m incidence of fraud originating from Japan when a syndicate hacked into one of the bank’s proprietary accounts. At least it wasn’t a client account.

But at divisional level the picture was better. Personal & business banking headline earnings were up 14% to R5.49bn, and corporate and investment banking (CIB) was up 13% to R4.98bn.

Retail profits in the rest of Africa almost tripled to R158m. It’s a drop in the ocean, but the bank was losing money in its African branch network two years ago.

The only product with sub inflation growth was vehicle and asset finance, where it is well behind both FirstRand’s WesBank and Nedbank’s MFC (see graphic) and about equal with Absa. Earnings in the motor book were up 1% to R165m. The best performer was mortgage loans, where earnings were up 17% to R1.22bn. On current trends, this could become a bigger contributor to headline earnings than the suite of transactional products such as savings and current accounts, and fixed deposits within two or three years.

Standard Bank is now the market leader in mortgages, which is impressive considering that, unlike Absa and Nedbank, it never bought one of the old building societies and growth has been entirely organic.

Credit impairments were reduced from 0.8% to 0.67% in mortgages — though this is still above the 0.44% impairment by Barclays Africa and the 0.19% at Nedbank.

Coronation fund manager Neville Chester says that while other banks cut back, Standard Bank remained very active in the home-loan market. It has increased lending rates, usually to above prime, but this has not led to a spike in bad debts. Chester’s Coronation Top 20 fund is a shareholder in Standard Bank and Nedbank.

The bank also reduced the huge 9.9% provision for Access (mass market) Loans to 9.75%. Not surprisingly, provisions were increased in vehicle finance (from 1.41% to 1.5%), card debtors (4.63% to 4.95%) and personal loans (4.74% to 5.09%).

Banks, to be fair, have been more conservative in their provisioning than they were just before the 2008 financial crisis. The group has raised a further R1.24bn in general provisions on top of the R5.03bn in specific provisions.

Sanlam head of equities Patrice Rassou says there is more rational behaviour from the banks, which used to lend in the good times and not worry about the business cycle.

Standard Bank’s loans to customers increased just 5% to R564bn and personal unsecured loans fell by 13% to R9.4bn.

Standard Bank joint CE Ben Kruger says provisions might have to increase considerably if the current economic drivers lead to large job losses, so it is critical that a responsible macroeconomic policy be followed.

Standard Bank’s return on equity of 14.4% still lags that of FirstRand, which is expected to report about 22%, as well as Barclays Africa’s on 16.1% and Nedbank’s on 15.7%. Barclays Africa deputy CE David Hodnett argues that his is the only bank that has had a return on equity ahead of its cost of capital through the cycle. He says few people understood the extent to which Absa’s purchase of Barclays’ African businesses transformed the group. Its African retail earnings of R439m were up 63% and almost three times Standard Bank’s.

It is a different story on the corporate banking side, however, as the rest of Africa contributes about R1bn to Barclays Africa’s CIB and about R2.5bn to Standard Bank’s CIB bottom line. Barclays Africa’s credit loss ratio increased from 1.27% to 1.48%. The biggest contributor was a single corporate client (unnamed but believed by analysts to be Edcon).

Hodnett says he believes that Barclays Africa will not need a shareholder of reference after Barclays Plc sells down, as it is already well capitalised, though he concedes it could have an impact on the multinational clients of CIB. Barclays Africa pleased the market with a 7% increase in headline earnings.

Nedbank’s separation from Old Mutual should be less painful. Finance director Raisibe Morathi says the bank has always been run independently, though it has been happy to sell Old Mutual products through an arm’s-length arrangement, which will continue.

Nedbank has increased its home loan book by just 2% over the first half of the year, and its R109bn book is barely a third of the size of Standard Bank’s. But Morathi says it is high quality, as the lending margin has increased from 1.2% in 2008/2009 vintage loans to 2% for loans written since then.

Nedbank was badly let down by the R603m loss from its associate Ecobank, particularly in Nigeria. Without this, it would have shown a 20% increase in headline earnings, with CIB chipping in 21% growth, retail and business banking 11%, wealth 18% and the rest of Africa, excluding Ecobank, 33%.