Cutting back pays off for Standard Bank
Standard Bank has seen its profits increase thanks to a decline in credit impairment charges. This is as a result of its strategy to cut back lending to individual customers and instead focus on businesses and governments.
For the six months ending June 2024 (1H24) Standard Bank Group delivered earnings of R22.0 billion (up 4%) and a return on equity of 18.5%.
“This result is underpinned by strong organic growth driven by our growing client franchises, our increasingly digital clients, and our continued diligent allocation of capital,” said Standard Bank CEO Sim Tshabalala.
The group said ongoing uncertainty and geopolitical issues shaped global macroeconomic trends 1H24.
Over the past two years, the bank has tightened its lending criteria. Specifically, it focused on extending credit to businesses and governments rather than individuals, limiting its exposure to rising bad debt.
Gross loans and advances grew by only 3% in the period, and the bank noted that many of its clients remain part-paying, while others have entered debt review—but are still making required payments.
Global inflation dropped more slowly than anticipated, and interest rate cuts were delayed.
Several sub-Saharan African countries faced difficulties linked to political uncertainties and external imbalances, weakening their currencies.
However, inflation on the continent was not uniform. East Africa has seen the lowest inflation outcomes, while West Africa has seen inflation edge higher.
Central banks increased interest rates in Angola, Kenya, Malawi, Nigeria, Tanzania, Uganda, and Zambia.
“In 1H24, South Africa saw an improvement in both energy and logistics in the period, supported by strong backing from the private sector,” said the group.
“Several Eskom units returned to commercial operation, alleviating the electricity supply pressures experienced in 2023.”
“Improved supply, together with increased self-generation, supported economic activity. Uncertainty ahead of the election weighed on consumer and business confidence.”
It added that the formation of the Government of National Unity (GNU) has been viewed positively by the market.
The policy reform agenda by the GNU is expected to continue and possibly accelerate. Inflation in South Africa has also trended down slowly, and interest rates have remained flat.
Over the period, the group’s number of clients grew by 5% to 19.5 million, with growth recorded in both the South African and African regions.
Despite the weak local economic environment, the group’s South African franchise delivered double-digit earnings growth, which was supported by improving credit trends.
The group’s credit impairment charges decreased by 15% to R8.0 billion, with the decline partly driven by a slowdown in new early arrears and non-performing loans in the South Africa retail portfolios.
“The relatively slow loan growth combined with the decline in credit impairment charges resulted in a decline in the credit loss ratio to 92 basis points (1H23: 109 basis points), in the top half of the
group’s through-the-cycle credit loss ratio range of 70 to 100 basis points,” said the group.
Amidst the jump in headline earnings, the group declared an interim dividend per share of 744 cents – an increase of 8% from 1H23.
Looking ahead
In South Africa, inflation is expected to moderate in the second half of the year, which will provide scope for interest rate cuts.
Improved consumer confidence and interest rate cuts should support economic growth.
Like many other economists and analysts, Standard Bank sees 25 basis point cuts in the repo rates in September and November 2024, followed by another 50 basis point cuts in the first half of 2025.
The bank expects real GDP growth of 1.1% in 2024, 1.8% in 2025 and over 2.0% in 2026.
“Across Standard Bank’s portfolio of sub-Saharan African countries outside of South Africa, inflation is expected to moderate, interest rates to decline marginally, and real GDP to grow at above 4% in the short term and closer to 5% over the medium and longer term,” said Standard Bank.
The group’s underlying franchise momentum is also set to support robust organic growth for the 12 months to 31 December 2024, with the group expecting the following from its three core metrics.
- Banking revenue growth of low single digits in ZAR and low double digits in constant currency;
- Banking revenue growth at or above operating expenses growth, resulting in a flat to lower cost-to-income ratio year on year; and
- Group ROE to remain well anchored in the group’s target range of 17% to 20%.
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