Standard Bank management, by way of its CEO Sim Tshabalala, notes that recovery from the havoc of the last 18 months is well under way.
“The group’s regional performance reflects the underlying recovery trends in our countries of operation,” he told shareholders and fund managers in a presentation of the results on Thursday.
“The group’s SA business rebounded strongly, recording earnings of almost three times that of the first half of financial 2020. Client demand and activity improved, disbursements and fees recovered and credit charges declined from very elevated levels in 2020.”
While the global environment was favourable, it was specifically the improvement in business conditions in SA that benefitted Standard Bank.
Worldwide, interest rates remained subdued and fiscal stimulus supported consumer spending and global financial markets. Inflationary fears remained subdued except for temporary scares and confidence returned as vaccination rates improved. In short, the world is quickly returning to normal.
Things improved in SA too, despite uniquely SA problems. Tshabalala noted that recent lockdown restrictions have been less restrictive than the initial lockdowns. Travel and trade resumed, although supply disruptions remained an issue.
“Sub-Saharan Africa benefitted from the global tailwinds, particularly in those countries with links to commodities,” he said.
“In SA, as lockdowns eased, activity and confidence improved. High commodity prices supported the fiscus [with surprisingly high 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.”
However, Tshabalala voiced concern over the damaging social unrest of July 2021 in KwaZulu-Natal and Gauteng. “It exposed the urgent need to tackle rising inequality through accelerated growth, investment-related reforms and job creation,” he said.
Demand for debt
The increase in the demand for debt is a definite sign that things have improved. Signing for new debt indicates consumer confidence, while the resultant economic activity grows the economy.
Standard Bank reported that gross loans to customers increased by 2%. The growth is better than the low figure suggests as the growth in loans to retail clients was offset by corporate clients cutting back on debt.
“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,” management noted in its report to stakeholders.
Also noteworthy is that the total balance of the ‘payment holiday portfolio’ has decreased significantly, from R107 billion a year ago to only R5 billion.
This is of importance when read together with the big decline in provisions for bad debt.
The income statement shows that credit impairment charges declined 49% from nearly R11.3 billion in the first half of 2020 to R5.8 billion in the six months to end-June 2021. The credit loss ratio, defined as the total impairment charges on loans and advances as a percentage of average monthly gross loans and advances, more than halved from 169 basis points a year ago to 88 basis points.
Tshabalala notes that the improvement was driven by improved collections (aided by less restrictive lockdowns), improved customer risk profiles and better forward-looking assumptions, as well as lower impairment charges associated with the client relief portfolio. However, management warns that credit impairments are still higher than pre-pandemic levels.
A definite pointer that things are improving is that Standard Bank declared a “normal” dividend of 50% of headline earnings. Other listed companies that announced their results have continued to take the cautious approach and either skipped dividends or declared lower-than-expected distributions.
Standard Bank’s R3.60 dividend is the first since the pandemic hit.
This was partly due to an understanding with the South African Reserve Bank that commercial banks would not pay dividends in return for authorities relaxing some regulatory requirements.
When bank shares fell to the lowest prices seen in years, many commentators noted that good dividends could be expected once things improved, as Standard Bank has just proved.
Management made a firm commitment that shareholders can expect a dividend at year-end as well, also around 50% of earnings.
“The global backdrop is expected to remain favourable, supported by sustained low interest rates, continued fiscal stimulus and consumer demand,” said Tshabalala.
“Developed countries, with stronger balance sheets and higher vaccination rates, are expected to recover quicker than developing economies, but other countries are expected to show improvement too.
“In SA, 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,” he added.
“South Africa’s GDP is expected to grow 4% in 2021 and interest rates are expected to remain unchanged for the remainder of the year.”
Standard Bank’s optimism prompted it to publish a trading update for the full financial year to end- December 2021 a few hours after it announced its interim results, making its forecast official: “Financial year 2021 headline earnings per ordinary share and basic earnings per ordinary share are expected to increase by more than 20% when compared with those in the 12-month period ended 31 December 2020.”
The interim figures suggest it is rather obvious. Earnings would be close to 50% higher if Standard Bank (and Liberty) just repeat the performance of the first six months.
As a result, Standard Bank shares are currently just below their annual high.
Based on the latest results, the price-earnings (PE) ratio is just below 11 times. This is slightly higher than that of the other big banks. While not directly comparable due to different year-ends and timing of results, Absa is on a PE of 9.1, Investec on 10.3 and Nedbank on 9.9. FirstRand’s PE of nearly 23 times is still skewed by the full inclusion of the pandemic period and will normalise when it announces its results for the year to June 2021.
The full inclusion of Liberty, once Standard Bank completes the acquisition of 100% of the life office, will also give earnings a nice boost.
Click here for a pdf version of the results announcement.