The management of Standard Bank, through its CEO, Sim Tshabalala, points out that the recovery from the ravages of the last 18 months is well under way.
“The group’s regional performance reflects underlying recovery trends in our countries of operation,” he told shareholders and fund managers in a results presentation Thursday.
“The group’s SA business recovered strongly, posting earnings almost three times those of the first financial half of 2020. Demand and client activity improved, disbursements and fees recovered, and credit charges declined from levels. very high in 2020. “
Although the global environment was favorable, it was specifically the improvement in commercial conditions at SA that benefited Standard Bank.
Globally, interest rates remained low 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 rapidly returning to normal.
Things also improved at SA, despite SA’s unique problems. Tshabalala noted that recent closure restrictions have been less restrictive than initial closures. Travel and trade resumed, although supply disruptions remained a problem.
“Sub-Saharan Africa benefited from global tailwinds, particularly in those countries with links to commodities,” he said.
“In South Africa, as lockdowns decreased, activity and confidence improved. High commodity prices supported the fiscus [with surprisingly high tax collection] and allowed the state to continue supporting those affected by the pandemic.
“The vaccination program got off to a slow start, but has gained momentum. The progress of the reform, particularly in energy, was positive ”.
However, Tshabalala expressed concern over the damaging social unrest of July 2021 in KwaZulu-Natal and Gauteng. “He laid out the urgent need to address growing inequality through accelerated growth, investment-related reforms and job creation,” he said.
Increased demand for debt is a clear sign that things have improved. Signing new debt indicates consumer confidence, while the resulting economic activity makes the economy grow.
Standard Bank reported that gross loans to clients increased by 2%. The growth is better than the low figure suggests, as the growth in loans to retail clients was offset by the reduction in debt from corporate clients.
“We continue to support our clients as they look to buy houses and cars. Apply a consistent risk appetite and stricter affordability criteria [to take into account future increases in interest rate], we found many attractive opportunities to make loans to clients we know well, ”management noted in its stakeholder report.
It is also noteworthy that the total balance of the ‘paid vacation portfolio’ has decreased significantly, from R107 billion a year ago to just R5 billion.
This is important when read in conjunction with the large decrease in bad debt provisions.
The income statement shows that credit impairment charges decreased by 49% from almost R11.3 billion in the first half of 2020 to R5.8 billion in the six months to the end of June 2021. The index of credit losses , defined as the total impairment charges on loans and advances as a percentage of the monthly average of gross loans and advances, more than half 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), better client risk profiles and better forward-looking assumptions, as well as lower impairment charges associated with the client’s relief portfolio. However, management warns that credit impairments are still higher than pre-pandemic levels.
A definite indicator that things are looking up is that Standard Bank declared a “normal” dividend of 50% of overall earnings. Other publicly traded companies that announced their results have continued to take a cautious approach, skipping dividends or reporting lower-than-expected distributions.
Standard Bank’s R3.60 dividend is the first since the pandemic hit.
This was partly due to an agreement with the Reserve Bank of South Africa that commercial banks would not pay dividends in exchange for the authorities relaxing some regulatory requirements.
When bank stocks fell to the lowest prices seen in years, many commentators pointed out that good dividends could be expected once things improved, as Standard Bank just demonstrated.
Management made a firm commitment that shareholders can also expect a dividend at the end of the year, also around 50% of profits.
“The global environment is expected to remain favorable, supported by sustained low interest rates, continued fiscal stimulus and consumer demand,” Tshabalala said.
“Developed countries, with stronger balance sheets and higher vaccination rates, are expected to recover faster than developing economies, but other countries are expected to show improvement as well.
“In South Africa, while the recent unrest has eroded consumer, business and investor confidence, we do not believe it will significantly derail the incipient economic recovery in the short term,” he added.
“South Africa’s GDP is expected to grow 4% in 2021 and interest rates are expected to remain unchanged for the rest of the year.”
Optimism from Standard Bank led it to release a trading update for the full financial year through the end of December 2021 a few hours after announcing its interim results, making its forecast official: “Overall 2021 Financial Year Earnings per Common Share and Earnings Basic per common share is expected to increase by more than 20% compared to the 12-month period ended December 31, 2020 ”.
The provisional figures suggest that it is quite obvious. Profits would be almost 50% higher if Standard Bank (and Liberty) simply repeated the performance of the first six months.
As a result, Standard Bank shares are currently just below their annual high.
According to the latest results, the price-earnings ratio (PE) is just under 11 times. This is slightly higher than that of the other big banks. While not directly comparable due to the different end of the year and calendar of results, Absa is at a PE of 9.1, Investec at 10.3 and Nedbank at 9.9. FirstRand’s PE of nearly 23 times is still skewed by the full inclusion of the pandemic period and will normalize when it announces its results for the year through June 2021.
The full inclusion of Liberty, once Standard Bank completes the acquisition of 100% of the lifetime office, will also give a good boost to earnings.
Click here for a pdf version of the results announcement.