Standard Bank delivered a predictably shocking set of results for the six months to June 30 2020, when it opened the reporting season for the big four banks on Thursday. But within the results were a number of silver linings, notably its positive operating growth ahead of provisions and a sterling performance from the bank’s ex-South Africa operations. 

The bad news first. Group headline earnings declined by 44% in 1H19 to R7.5-billion, as consumers and businesses stopped spending (and earning) during the lockdown and bad debts ratcheted up.

Within the group, South Africa bore the brunt of the pandemic and ensuing lockdown and headline earnings declined by 72% as the pandemic exacerbated the recession that began towards the end of 2019. Hopes for modest economic growth were dashed and impairment charges increased to R11.3-billion, 2.7 times those reported in the prior period (1H19).

As a result, return on equity fell to 8.5% from 18%.

Standard Bank CEO Sim Tshabalala warned that while customer activity and business turnover levels are showing signs of recovery, South Africa’s economic future remains uncertain, constraining trading levels and balance sheet growth in the short to medium term.

“We have had many conversations as to what needs to be done to put us on a growth trajectory. I think, as regards the structural reforms that we need to make to unlock growth, not enough has been done. We talk about investing in infrastructure, public-private partnerships, the release of spectrum, allowing private generation of power, but this is just not happening fast enough,” he said during a call with the media.

On the positive side, the bank is well managed with revenue growing faster than costs, which supported under-pressure margins. As a result, operating profit grew 4% period on period to R24.3-billion ahead of provisions. 

The standout result of the day came from the group’s Africa Regions business, which delivered headline earnings growth of 11%, and 7% in constant currency. As a result, Africa Region’s contribution to 1H20 banking headline earnings grew to 62%, proving the value of diversification.

The top six contributors to Africa Region’s headline earnings remained Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.

Standard Bank demonstrated that South Africans have no need to worry about the stability of local banks as their capital position remains robust. In Standard’s case, its tier 1 capital adequacy ratio (core capital divided by its risk-weighted assets) of 12.6% is well above the regulatory minimum of 7%. Maintaining these reserves is a prudential requirement that is designed to ensure that they are protected against unexpected losses, such as those that occurred during the financial crisis.

Unsurprisingly given the extraordinary circumstances, the six months saw some behaviour change from customers.

For one, they started to stash their cash – deposits from anxious retail and business customers grew 19% period on period to R1.5-trillion. This is good for bank liquidity, but not necessarily for profits as banks make money by lending it out.

However, despite the lockdown – which saw deeds and vehicle registration offices closed, stalling mortgage and vehicle and asset finance portfolio growth – loans and advances to customers grew 11%. In particular, Corporate and Investment Banking (CIB) grew its book by 17% to R487-billion and Personal and Business Banking (PBB) grew 6%. 

Of the PBB loans granted, Covid-19 client relief totalled R107-billion, representing 18% of the PBB SA portfolio.

It is an indication of the economic climate that bank provisions jumped by 26% compared to the equivalent 2019 reporting period.

This is money set aside by the bank and is a function of the IFRS-9 accounting standard which requires it to take a view on what might happen over the life of the loan and set aside provisions against anticipated future bad debts. 

“This could make things look worse than they actually are,” says Jean Pierre Verster, CEO of Protea Capital Management.

The share price, which like all banking stocks has been on a declining trend for the last two years, initially reacted positively to the results but ended the day up just 0.25% at R109.97.

“Investors are likely to care less about what’s happened and will be more focused on trying to understand how well banks are positioned to recover,” says Kokkie Kooyman, portfolio manager at Denker Capital.

The way forward will be determined by how much of those provisions will be required by the banks in the future. And how much will be reversed back into profits?

The same is being seen across the world, including England, Japan, US and Russia, he says. The difference is that while international bank share prices have jumped by 30% since March, South African bank share prices have stagnated.

The reason for that, he says, is that the probability of those provisions becoming bad debts is higher in South Africa with high government debt and business confidence in the doldrums. The expectation abroad is that most of the provisions will be reversed.

Banks are a mirror to an economy, says Neelash Hansjee, senior investment professional at Old Mutual. 

“We knew the results would be bad, but despite the significant earnings headwinds, capital remains strong and the book value is growing, demonstrating the resilience of the bank.”

Although both local and foreign bank shares look cheap, analysts think that despite the pressure on interest margins, the benefits of cost-cutting across the global banking sector at the branch level will start filtering through next year. Cuts of between 15-30% have already been realised.

This is essential in an environment of limited growth, adds Shamier Khan, portfolio manager at Element Investment Managers. 

“South Africa faces potential structural impediments to growth. Debt to GDP is expected to breach 80% which puts a constraint on government’s ability to stimulate the economy from a fiscal viewpoint. If the government is constrained, the private sector will have to be the engine of growth, which is difficult to see in the current environment. 

“While earnings growth over the next 12 months might benefit from a declining credit loss ratio, it is difficult to see the source of top-line growth from the SA-facing businesses.”

However, for those with a long-term view, Denker Capital Research shows that at this point of the cycle, when bad debts are at their peak, banks start recovering, and at the current prices it is the ideal opportunity to participate in that recovery. BM/DM