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Standard Bank steps up client and digital focus in competitive market

Stronger second-half revenues expected.

Standard Bank is focusing on clients, digitisation and integration in response to changing client expectations and new forms of competition, says CEO Sim Tshabalala.

At the presentation of Standard Bank Group results for the six months to June, where headline earnings increased 5% to R12.7 billion, he said the group welcomed increased competition, which, although uncomfortable at times and although it puts pressure on fees and commissions, was good for the business and its clients.

But, he added, it is essential that new digital entrants fall within financial services rules and regulations. 

The bank reported an improved return on equity of 16.8% (16.1%), creeping up to its target of 18% to 20%.

Banking headline earnings grew 6% to R11.7 billion, offset to some extent by a decline in other banking interests and Liberty’s contribution, although Liberty’s turnaround is on track.

Corporate and investment banking headline earnings were up 8% at R5.7 billion, and Africa headline earnings were up 20% to R3.8 billion, or by 32% in constant currencies, with a return on investment of 25.4%. 

At Standard Bank SA net interest income grew just 1% while headline earning were down 3%.

There was pressure on costs, with group operating expenses up 6% and the cost-to-income ratio at 60.8% from 59.8% in the previous year. Tshabalala made it clear that cost containment would be a major focus over the next six months, although IT spend would continue to escalate.

Tshabalala said the results reflected disciplined strategy execution against a difficult macroeconomic background.

The focus on improved customer experience is paying off, with client complaint volumes falling by 13% and a 31% year-on-year decline in banking ombudsman complaints.

The group continues to gain clients in Africa outside South Africa, with active client numbers growing 4% to five million customers.

Tshabalala told Moneyweb Radio that the banking industry is “going through a seismic change”, where there is an accelerating trend towards use of electronic channels and less physical channels. He said the bank had suffered market share loss, but this had stabilised and it was now regaining market share. 

Mobile transactions are growing at a high rate, resulting in reduced fees and commissions for banks.

Banks’ physical distribution networks will be smaller in future, and while Standard Bank hasn’t reduced its number of branches, they are operating on less square meterage.

With investor’s minds focused on banks’ exposure to state-owned entities (SOEs) and the potential risk they face from land expropriation without compensation, Tshabablala said Eskom and SAA are now appropriately governed and that professional management is being put in place. The group is closely monitoring and actively managing its exposure to SOEs.

He called for faster and more decisive action to restore SOEs to sustainability though, warning that Eskom continues to be a fiscal risk.

Achieving significantly faster growth in South Africa will require faster reforms, he said, with attention to broadband and finalisation and clarity on regulations, including the Mining Charter and the Minerals and Petroleum Amendment Bill, and resolution of the land expropriation without compensation issue.

Tshabalala said Constitutional amendment to Section 25 for land expropriation isn’t necessary. Improving land reform and housing policy outcomes so that people have decent places to live is a matter of strengthening public sector capacity and public-private partnerships, he said. Government needs to clarify a constitutional position that supports economic growth and doesn’t dampen investment confidence and weaken property rights.

He told Moneyweb Radio that Standard Bank has a sizeable property portfolio and a sizeable agricultural property portfolio – and the sector is continuing to grow and is investing in plant, machinery and livestock.

Section 25 is clear and sets out circumstances under which land can be appropriated, he said.

His reading is that what the ruling party and President Cyril Ramaphosa have said is that the changes [to the Constitution] will make it more explicit and much clearer on the circumstances in which expropriation can happen.

Land expropriation is aimed at promoting redress, advancing economic development and increasing agricultural development. When Ramaphosa’s announcement was made, credit default swap spreads hardly moved, Tshabalala said, indicating that sophisticated investors understood that clarity may actually improve economic activity.

“Surely improving land reform and housing policy is a good thing,” he said, but that requires capacity in the state and action in the state to strengthen the public sector and to draw on public private partnerships. 

Tshabalala said that if the Constitution clarifies how sustainable land reform and economic development are going to happen, “we will be in a better place”, especially if there is justice for land owners and those hungry for land.

Standard Bank is “sanguine, we are engaging and not concerned,” and believes there will be a disciplined execution of land policy.

Tshabalala doesn’t expect land appropriation without compensation to cause widespread risks to property rights or to financial institutions lending to property owners.

Asked by Moneyweb Radio about the 2016 fraud scam in Japan, where the bank lost R300 million, Tshabalala said the bank was “fortunate” that it happened, as it forced it to improve its safety and soundness. While the investigation is still not complete, the bank was aware of what had happened and has improved systems to make sure it is impossible for the same thing to happen again. It has since invested significantly in people, software and systems to prevent cybercrime.

“We are much safer and sounder today as a consequence of the incident.”  

Tshabalala said the group has shown resilience and steady progress under challenging circumstances.

African businesses continue to flourish but the business environment in many countries remains challenging.

He believes the South African economy will remain sluggish, but expects a moderate recovery in the medium term.

“We expect revenues to be somewhat stronger in the second half,” he said, adding that the investment banking pipeline is encouraging and that he expects faster loan growth.

“There is no doubt competitive pressures will continue to increase, however, we will fiercely protect our existing customer franchise and grow by partnering with third parties to build new, innovative offerings and revenue streams.”

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Solid CAGR in earnings and dividends but I fear corporate slowdown bad debts and no real retail growth. After inflation. ..flat. better value offshore in banking but certainly a well managed group

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