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Commentary on results |
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Overview of financial results
Against the backdrop of extended recessionary economic conditions worldwide, Standard Bank Group completed another successful year, growing headline earnings by 19% to R5 263 million.
The diversity of the group’s sources of income again provided a foundation for solid results, with the strongest performance in 2002 from banking businesses on the African continent. The group’s South African banking operations performed well on both retail and wholesale fronts, while strong growth occurred elsewhere in Africa assisted by good performance from recent acquisitions. Looking abroad, international credit markets deteriorated to levels not seen for many years. The group’s international operations are active in both credit origination and trading and were impacted by reduced new business opportunities and the need to substantially increase provision levels. The effect of weak equity markets, evidenced by key indices declining for a third consecutive year, was most noticeable in the group’s life assurance and asset management operations.
The domestic banking environment was characterised by a competitive banking sector, rapidly increasing interest rates and a volatile rand exchange rate. Domestic inflation peaked at 14,5% and the prime interest rate increased by four percentage points following a significant weakening in the rand in late 2001. The current financial year was further marked by a liquidity crisis in the smaller domestic banks in the first half of the year, that resulted in some systemic risk followed by consolidation within the banking sector. Amid these uncertain market conditions, Domestic Banking performed strongly and benefited from a slight improvement in margins and from trading opportunities created by the volatile markets. Improved credit quality in these operations led to a reduction in credit provisioning ratios and improved provision coverage, despite the rising interest rate environment.
The group’s key performance highlights were:
- ROE increased from 20,1% to 20,3%;
- headline earnings of R5 263 million increased by 19%;
- headline earnings per share grew by 18% from 335 cents to 396 cents per share;
- the cost-to-income ratio improved to 57,3% from 57,4%; and
- total dividends of 124 cents per share were declared, 22% higher.
Effect of currency movements on the results
The rand’s volatility in 2001 and 2002 has had a material effect on the group’s income statement and balance sheet. For income statement purposes, foreign earnings and expenses are included at the average exchange rate for the year and, for 2002, this average rate against sterling was 27% lower than in 2001. This decrease in the average exchange rate was in sharp contrast to the closing rate for the year used in the translation of balance sheet items, that for 2002 was 21% higher than at the previous year end. The overall effect of these differing rates on the translation of foreign amounts into rands has been to increase income statement items and reduce balance sheet items.
The higher closing exchange rate for the year also resulted in a decrease of R3,3 billion in the currency translation reserve. This has been charged directly to reserves in accordance with the group’s accounting policy.
Income statement
Net interest income
Net interest income grew by 29%, whilst average assets increased by 31%. The margin decreased by 5 basis points to 3,26% mainly due to a change in the mix of average assets. A higher proportion of total average assets consisted of International Operations’ assets at lower margins.
Provision for credit losses
Despite a 400 basis point increase in the domestic prime rate during 2002, the group managed to contain the charge for credit losses to 1,18% of loans and advances, slightly higher than the 1,11% reported in 2001, with this increase attributable to increased provisions in International Operations. The specific provisions raised as a percentage of loans and advances reduced in Domestic Banking and Stanbic Africa from 1,02% and 0,82% in 2001, to 0,94% and 0,44% respectively following improvements in credit quality and collections. The net coverage ratio improved from 174% to 184%. Gross non-performing loans reduced as a percentage of average loans and advances from 3,5% to 2,9%, or by R277 million in absolute terms, reflecting the improvement in credit quality.
Non-interest revenue
Non-interest revenue rose by 25% and continues to contribute more than half of the revenues of the group.
Fees and commission income grew by 24% due to a combination of an increase in transaction volumes, new fees introduced and repricing initiatives particularly in electronic banking and card based products.
Trading income reflected strong growth of 42%. Improved client volumes and increased spreads due to the volatility of the rand assisted good growth in foreign exchange trading income. Satisfactory growth was also achieved in domestic trading in precious metal commodities, interest rate and equity derivatives. Internationally, trading opportunities in capital and debt markets were successfully exploited.
Operating expenses
Operating expenses increased by 27%, reflecting the impact of a weaker average exchange rate, acquisitions by Stanbic Africa and the expansion of International Operations. Operating expenses were 18% higher in Domestic Banking, driven mostly by staff cost growth that included a provision made for the resumption of retirement funding contributions and increases in frontline staff to improve service levels. Higher technology costs were incurred as the group continues to upgrade both IT applications and infrastructural capability across all businesses.
A cost-to-income ratio of 57,3% was achieved, compared with 57,4% in 2001. Though improved, the cost-to-income ratio came under pressure due to geographic expansion and low growth in non-interest revenue in International Operations. A notable improvement in this ratio, from 55,9% to 53,4%, was achieved in the domestic banking operations and resulted from strong revenue growth.
Income from associates
Income from associates grew by R47 million following an increase in the number of equity accounted investment banking interests.
Goodwill
The goodwill charge increased by R86 million as a result of a full year’s amortisation of acquisitions in Asia and Africa.
Taxation
The effective tax rate increased from 30,8% to 33,5% as a result of an increased level of provisions for general tax risks, together with adjustments relating to prior period items. Indirect taxes increased in absolute terms by 21%.
Balance sheet
Banking assets reflected a small reduction due to the impact of the stronger rand on assets consolidated from foreign operations. Loans and advances in rand terms in International Operations reduced by 15% and Stanbic Africa’s growth was restricted to 7%.
Growth in quality retail lending business generating sustainable annuity income was actively sought, particularly in the following key domestic market segments:
- Home loans up 21% (market share up from 18,6% to 20,3%);
- Card increased 17% (market share up from 20,9% to 24,9%);
- Instalment finance up 16% (market share up from 20,9% to 21,8%).
Given the high interest rate environment and a possible increase in corporate defaults, a cautious approach to wholesale lending was adopted together with a stricter application of minimum hurdle rates for acceptance of new business. Accordingly, growth rates in SCMB and Business Banking were generally subdued, apart from certain large project finance deals concluded in the second half of the year.
Shareholders’ funds
Ordinary shareholders’ funds reported a marginal increase to R26,1 billion as a result of strong growth in retained income, mainly offset by the decrease for the year in the currency translation reserve.
Liberty Group
Liberty experienced a challenging year with the extended weak investment market conditions reducing the amount of operating surplus in the life fund. This had a significant effect on the headline earnings included in Standard Bank Group’s results, which, at R298 million, were 31% lower than the previous year. Operationally, Liberty Group is performing well with all key indicators, apart from investment returns, showing positive growth.
Capital adequacy
The group capital adequacy ratio reflects a slight increase from 14,2% in the previous year to 14,3%. The change primarily resulted from the issue of R1 billion tier 3 capital during the year. Of the group ratio of 14,3%, 13,8% relates to banking operations and 0,5% to the group’s share of regulatory surplus capital in Liberty.
Final dividend
As the group is well capitalised and in some areas has surplus capital, it is planned that the dividend cover will gradually be reduced to a cover of 3,0 times, at which stage it will be reassessed. Consequently, dividend growth over the medium term will be higher than earnings growth. The current year’s cover has decreased to 3,2 times from 3,3 times in 2001. A final dividend of 90 cents per share (2001: 74 cents) has been declared to shareholders, bringing the total dividend for the year to 124 cents per share (2001: 102 cents), an increase of 21,6%.
Prospects
Sound economic fundamentals are in place in South Africa and the country is well positioned for sustained growth. It is expected that the group will continue to benefit from efficiencies extracted from its strong domestic base and from its extensive African banking operations. The global political and economic conditions are uncertain but international credit markets are showing signs of improvement. Given the breadth and the ongoing integration of the group’s activities, it is well placed to take advantage of any improvements in market conditions. The group has a stated medium-term objective for rand earnings growth of inflation (CPIX) plus 10 percentage points. Whilst the attainment of this target is likely to be difficult in 2003, it nevertheless remains the group’s earnings objective.
Derek Cooper, Chairman
Jacko Maree, Chief Executive
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