This review provides context to the financial performance of the group’s banking and insurance operations as detailed in the financial statements. The group’s performance over the past seven years is detailed under 7 year review and the financial ratios generally quoted are defined under Financial definitions.

Overview of financial results

Standard Bank Group headline earnings per share for the year to December 2005 increased by 23% to 702,3 cents per share and a return on equity of 27,8% was achieved. These results are based on International Financial Reporting Standards (IFRS). Certain of the accounting conventions under IFRS distort the results from an economic perspective. As discussed under the normalised results section of this review, the effect of these distortions has been adjusted for in calculating normalised results. On a normalised basis, headline earnings per share grew 19% and the return on equity was 25,2% (2004: 24,2%).

Broadly, 2005 was positive for emerging market economies as macroeconomic fundamentals and demand for exports from these markets improved. Investment inflows to these markets, aided by global liquidity and increased investor risk appetite, lifted economic activity but reduced profit margins of our corporate and investment banking activities.

South Africa’s strong economic growth stemmed substantially from strong local demand. High consumer spending was underpinned by relatively low inflation and interest rates. Net job creation, the positive effect of rising equity and house prices, increased household disposable income and the growing middle class resulted in improved consumer confidence and provided a strong platform for consumer and business banking in South Africa.

Headline earnings (Rm)

Financial highlights

Key factors impacting the results

• Increased consumer activity in South Africa

  
  2005 saw continued strong growth in the residential property market and record new vehicle sales. A further 50 basis points reduction in the prime interest rate together with a strengthening economy was conducive to sustained growth in lending and transaction volumes.
  

• Rehabilitation of previously impaired loans

  
  Corporate & Investment Banking in South Africa and internationally experienced credit recoveries during the year as improved economic conditions in emerging markets led to the recovery of previously distressed counterparties. This helped reduce the group’s credit loss ratio to a historic low, despite an increase in the credit loss ratio in Personal & Business Banking SA.
  

• Increased funding requirements

  
  Customer deposits continue to grow at a slower pace than consumer lending, resulting in an increased reliance on more expensive wholesale funding. In addition, the proportion of term deposits has been increased to lengthen the structure of the funding book in line with internal prudential liquidity guidelines. Consequently, average long-term funding as a percentage of total funding has increased from 15% to 18%. During the year, the group successfully concluded its first asset-backed securitisation transactions: R4,5 billion of mortgage loans and R3,0 billion of vehicle and asset finance receivables.
  

• Strong equity markets

  
  Investment Management & Life Insurance benefited from a strong run in equity markets. Higher listed property fund prices assisted Corporate & Investment Banking SA to achieve sizeable gains on its property investment portfolio.
  

• Intensified competition in emerging markets

  
  Emerging markets became increasingly popular with global investors as developing countries’ credit ratings continued to improve. In this environment, traditional emerging market players like ourselves are encountering increased competition from the large established global banks in our chosen markets. Consequently, trading margins have contracted. In addition, these more stable environments have reduced trading opportunities for the group’s international operations. These trends have led to the international operations’ 2005 results being below expectation.
  

• Higher compliance costs

  
  Increased regulations are becoming a feature in most of the jurisdictions in which the group operates. Staff costs in South Africa were significantly impacted by additional staff requirements to comply with the Financial Intelligence Centre Act (FICA) and other regulations. FICA requirements were also the main driver behind increased communication costs.
  

• Adjustments for deemed treasury shares

  
  The group’s results have been affected by required accounting conventions that do not reflect the underlying economic substance of transactions. Group shares purchased by empowerment partners and group shares held for the benefit of policyholders of Liberty Life are deemed to be treasury shares in terms of IFRS. Consequently the number of shares used for per share calculation purposes is materially lower than the shares enjoying an economic interest in the group, resulting in inflated per share ratios. In addition, fair value adjustments relating to group shares held for the benefit of policyholders and dividends received are eliminated from the group’s income statement without a corresponding elimination in policyholders’ liabilities, resulting in a mismatch in the income statement.
  

The unaudited table below indicates the significant impact that the deemed treasury shares have on the results.

Further details of the accounting treatment and the calculation of normalised results are discussed under Normalised results (unaudited).

Business units

The refocusing of operations on key business lines, as described in the chairman and chief executive review, as opposed to geographic segmentation aims to encourage the leveraging of skills, economies of scale and synergies. This basis will be followed as the primary segmentation from 2006 onwards.

On this new basis, Personal & Business Banking comprises 44% of the group’s headline earnings, and grew these earnings in 2005 by 22%. Corporate & Investment Banking comprises 45% and grew by 7%, and Investment Management & Life Insurance comprises 7% and grew by 51%.

On a geographical basis, South African banking increased headline earnings by 21% with growth of 23% in Personal & Business Banking SA. The favourable economic conditions benefited the consumer market and underpinned transactional and lending growth. The division maintained a strong focus on service levels and operational efficiencies notwithstanding increased business volumes and compliance requirements. The home loans business concluded another successful year with a 25% growth in new loans registered and low credit losses. Specific focus on the card business resulted in substantial growth in both balances and turnover.

Corporate & Investment Banking SA increased headline earnings by 15%. The benefits of strong loan growth in commercial property lending was partly offset by lower interest margins resulting from more expensive and longer dated funding. Fees and commissions benefited from increased corporate transaction volumes and new electronic banking products. South African trading income increased by 8%, dampened by low volatility in foreign exchange markets. Other income increased following the revaluation and realisation of listed property investments. A net reversal of credit losses occurred for the third consecutive year supported by an exceptionally favourable credit environment. Operating cost growth was contained to 3% largely through lower IT costs, savings on depreciation and premises costs.

Corporate & Investment Banking International’s headline earnings were 28% lower following increased competition and tightening spreads against a background of increased global liquidity across most of its markets. Trading income was also adversely impacted by a continued shift from a reliance on proprietary trading, with lower value-at-risk utilisation, to becoming more client focused. A net reversal of credit losses resulted from previously impaired accounts now performing. Strategies to improve performance in this operation are being implemented including an increase in the talent pool, particularly in client facing areas, improved systems and a change in emphasis from product to client focus. In addition, the appointment of Ben Kruger as chief executive of Corporate & Investment Banking across the group should quicken the pace of implementing these strategies.

Following strong earnings growth in Rest of Africa over a number of years, headline earnings growth of 17% was slightly below expectation. Lower lending margins restricted income growth, off a higher cost base. Management’s attention in 2005 was mostly inwardly focused on the alignment of products, policies, procedures and systems across all African countries, and integrating these with the South African operations. The focus for 2006 will be to increase transaction flows through the stronger base that has now been established.

Liberty Life had a very good year and increased normalised headline earnings by 47%, notwithstanding a once-off R321 million after tax provision for the Statement of Intent relating to the Pension Funds Adjudicator (PFA) rulings. Significant gains on investments held in the shareholders’ portfolio, previously accounted for directly in equity, more than offset this provision. Highlights of Liberty Life’s results were improved investment returns and strong growth in new business. The Capital Alliance Holdings Limited (CAHL) integration is on track and benefits are beginning to be extracted.

The group will continue to invest in expanding its activities in emerging markets outside of South Africa. In December 2005, a consortium led by Standard Bank entered into an agreement to buy BankBoston Argentina from Bank of America. This transaction remains subject to fulfilment of provisions of the agreement and obtaining the necessary regulatory approvals in both South Africa and Argentina. The acquisition is only expected to be concluded in the third quarter and is not anticipated to materially affect the 2006 results. Given our interest in Nigeria, we have invested approximately USD185 million in our existing banking operation to meet the new minimum capital requirement set by the Central Bank of Nigeria. This enables us to comprehensively evaluate suitable acquisition opportunities.