Overview

In 2005, financial activity in emerging markets continued to increase. Higher commodity prices, improved macroeconomics and strengthening local currencies, which reduced foreign currency debt burdens and dampened inflation, served to boost investment ratings in key developing countries. This, coupled with a growing appetite for diversified country risk among large global investors in search of yield, resulted in intensified interest – and competition – in emerging markets.

South Africa benefited from this trend. Underpinned by consistently prudent monetary and fiscal policy, the economy continued its structural move to lower inflation and interest rate levels. South Africa’s improved investment ratings and some high profile foreign direct investment inflows enhanced its global standing.

For financial services, conditions have been buoyant in South Africa, the group’s largest market. Sustained growth in consumer spending drove credit demand and strong growth was posted across the full spectrum of retail banking. After a slow start, corporate lending increased momentum towards the end of 2005. Equity markets performed strongly with the local bourse, the JSE Limited, recording a 43% increase in the All Share Index in 2005.

Performance

The Standard Bank Group was well positioned to capitalise on these favourable macroeconomic conditions and exceeded its principal financial objectives for 2005 – growing normalised headline earnings per share by 19% and achieving a normalised return on equity (ROE) of 25,2%.

In 2005, the re-alignment of executive focus areas and reporting lines has been implemented to support the group’s growth objectives and to provide more flexibility for the deployment of capital, particularly against the background of the recent dispensation announced by the Minister of Finance. This dispensation allows a portion of a bank’s assets to comprise exposures in the rest of Africa and, to a lesser extent, internationally without Exchange Control approval.

The re-alignment involves the de-emphasis of geographical segmentation of businesses in favour of focusing on the three key business segments of the group: Personal & Business Banking, Corporate & Investment Banking and Investment Management & Life Insurance. This refocusing enables the leveraging of skills, economies of scale and synergies, regardless of geography, and facilitates enhanced customer focus. It is anticipated that the financial results of the group will be presented on this basis from 2006 onwards. For 2005, however, the geographical segmentation has been maintained.

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%.

In South Africa, Personal & Business Banking enjoyed another good year, with the benefits of strong asset growth more than offsetting the effects of tighter margins and higher credit provisioning. Overall, the division maintained a strong focus on service levels and operational efficiencies, notwithstanding increased business volumes and compliance requirements.

In the rest of Africa, earnings growth was somewhat lower than that of recent years as management attention was somewhat deflected by the need to focus on the alignment of products, policies, procedures and systems with those of the South African operations.

Corporate & Investment Banking in South Africa generated a better than expected 15% earnings growth, off a high base, while internationally, earnings contribution was 28% lower through the combination of lower proprietary trading profits and significantly increased competition in emerging markets.

Liberty Life, the group’s life insurance arm, reported a substantial increase in earnings despite a significant provision for potential costs arising from the Statement of Intent relating to the Pension Fund Adjudicator (PFA) rulings. Highlights of Liberty Life’s results included improved investment returns and strong growth in new business.

Strategy

Over the last number of years, the Standard Bank Group has consolidated its position as a diversified business with a strong capital position and proven track record in South Africa. We believe we have a significant talent base and have structured the group to deploy key skills across its operations. The functional overlaps and redundancies that previously existed have been steadily eliminated to achieve efficient operating structures. We have also focused on implementing a customer-centric and service-driven model in all our businesses.

As part of the recent structural re-alignment of our businesses, we have identified opportunities to leverage off our existing infrastructure and specific country knowledge across emerging markets.

Driving organic growth

A key growth challenge for Personal & Business Banking in South Africa is to find ways to extend appropriate and affordable financial services to the un-banked and under-banked market segments. The division continued to attract customers through various targeted products. Since it introduced the Standard Bank Mzansi Blue Account in October 2004, over 300 000 Mzansi clients have been acquired.

A related challenge is the increasing complexity of regulatory frameworks to protect the consumer and the associated costs of compliance, which had to be balanced against the need to simplify products and pricing structures for mass market customers.

As a bank committed to providing access to financial services for all South Africans, our guiding principles when structuring our prices are to ensure affordable banking products across a broad customer base, balanced against the sustainable profitability of our business. This balance is reflected in the average increase in our bank charges for personal transactional accounts for 2006 falling below the inflation rate.

Standard Bank has continued to invest in initiatives to broaden its distribution reach and deal with the threat of disintermediation. It has entered into partnerships and alliances that allow it to grow market share through new distribution mechanisms, such as banking by mobile phone, or to acquire access to the established customer bases of retailers to grow product categories such as credit cards and consumer finance. Specific examples of these initiatives are provided in the operational reviews.

The group’s African operations are continually improving, having been integrated by business line into the group structure. A key objective of this process has been to align the African operations with our South African operating standards, and good progress has been made in this regard. The optimisation of both Personal & Business Banking and Corporate & Investment Banking in different countries, relative to their operational maturity and market opportunities, continues and areas of further improvement have been identified. The launch of personal lending products in seven African countries is planned in 2006.

In South Africa, infrastructure and empowerment financing are the main growth areas for Corporate & Investment Banking as the socioeconomic development of South Africa and the continent accelerates.

Escalating acquisitive growth

Whereas the group’s growth has been largely organic in recent years, we are confident that we are now well positioned to grow acquisitively outside South Africa. The experience and expertise in the group, together with its presence on the ground across a broad geographic footprint, enables us to adopt a bolder line in our African and international strategy.

Our growing experience brings with it a better ability to identify and pursue new growth opportunities. Having built a track record in both Personal & Business and Corporate & Investment Banking, we have a comprehensive range of competencies that are transportable and exportable. We believe we understand the complexities of operating in emerging markets, and the challenges in building an internationally competitive group while responding to the developmental needs in emerging economies and societies.

Based on this, we have allocated the necessary senior resources to evaluate countries, markets and companies to seek value accretive acquisitions.

In December 2005, Standard Bank, with a consortium of local investors, entered into an agreement to buy BankBoston Argentina from Bank of America. This transaction remains subject to fulfilling the provisions of the agreement and obtaining the necessary regulatory approvals in South Africa and Argentina. The acquisition is only expected to be concluded in the third quarter of 2006 and is not anticipated to materially affect the coming year’s results. Although we are well aware of the potential challenges, this acquisition provides us with a relatively low cost opportunity to demonstrate our ability to grow in emerging markets.

Given the importance of 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 continue to evaluate suitable acquisition opportunities in this important market.

The integration of Capital Alliance Holdings Limited (CAHL) into Liberty Life is on track and benefits are beginning to be extracted.

Capital and dividend cover

The group remains strongly capitalised despite healthy growth in risk-weighted assets and a reduced dividend cover. In light of the growth experienced and our plans to expand the group’s international footprint, the current dividend cover of 2,5 times calculated on normalised headline earnings per share is considered appropriate.

Corporate governance and directorate

The group continues to maintain high standards of corporate governance and complies with the requirements of the Code of Corporate Practices and Conduct (King Code). This includes our commitment to advancing the principles and practice of sustainable development. The corporate governance overview, starting on page 30 of this report, provides a concise update on our governance structures and undertakings. Further detail on corporate governance can be found in our 2005 Sustainability and Black Economic Empowerment Report (Sustainability Report).

It is worth commenting on the ownership structure of Liberty Holdings which has given rise to some criticism about its implications for corporate governance. The issue has been properly addressed with the Liberty Holdings and Liberty Life boards conducting their own assessments. As the parent entity, Standard Bank paid a premium for control of Liberty Life, which it wishes to maintain. All the relevant boards have agreed that it is in the best interests of all the shareholders concerned to maintain the current structure.

Conrad Strauss retires as director of the group at our forthcoming annual general meeting. He has been with the group for over 43 years in influential leadership positions, culminating in his appointment as chairman in 1992, a position he held for 10 years. We thank him for his valued service and counsel. Trevor Evans has resigned as a director of the group effective 8 March 2006 – we thank him for his contribution at both board and board committee level.

Sustainability

Fundamental to our ability to grow over the long term is our status as a corporate citizen. We acknowledge our responsibility as a major organisation to remain accountable to various stakeholders for our financial and non-financial impacts in all the markets in which we operate.

Moreover, we embrace our role as an active participant in socioeconomic development in South Africa – from business imperatives like implementing the Financial Sector Charter (charter), to broad-based corporate social investment.

Implementing the charter was a feature of the year for the sector. Standard Bank has made sound progress in meeting its charter commitments and looks forward to reporting against a finalised scorecard.

We continued to implement our Black Economic Empowerment Ownership (Tutuwa) initiative and completed the second allocation of shares to black managers in 2005. The third allocation will be made in 2006. Since we announced this initiative in July 2004, the Standard Bank share price has risen substantially, creating considerable value for black employees included in the initiative.

Considerable planning has gone into the last phase of the initiative – the regional business and community allocation – to be implemented in 2006. Half of this allocation is to be made to approximately 250 black small and medium enterprises, as defined by the charter, who employ 10 or more people. We believe that nurturing entrepreneurial activity is critical to address the national priorities of job creation and sustainable economic growth in South Africa. The other half will be allocated to social development programmes that are primarily directed at developing and empowering previously disadvantaged communities.

Standard Bank’s vision statement recognises that its people are its most important competitive advantage, and ongoing focus is given to building stronger and deeper teams of talented people. We recognise that continual improvement is required in our people management processes to ensure we attract and retain talent. Among other initiatives, new management review processes were implemented in 2005, which will provide a yardstick for ongoing improvements.

We direct stakeholders to our Sustainability Report, which incorporates a Financial Sector Charter Report, for comprehensive information on the group’s non-financial performance.

Brand development

The Standard Bank brand, rated the most valuable brand in South Africa's Most Valuable Brands survey conducted by Interbrand Sampson, is being repositioned to make it more relevant to the local and international markets in which we operate. As a unitary brand, it is important to ensure a single, unified positioning and consistent brand experience across our operations.

As part of the repositioning, we are replacing our advertising payoff line “Simpler. Better. Faster.” with the more relevant “Inspired. Motivated. Involved”. Although the previous payoff line served us well for many years, we operate in a highly competitive environment and must stay abreast of constantly evolving stakeholder needs. Following a comprehensive stakeholder feedback process, the new payoff line was chosen to encapsulate the essence of what we are trying to achieve – to make a real difference to the lives of our customers, shareholders, employees and other stakeholders in all the markets we operate in.

Prospects

The Personal & Business Banking division is set to continue benefiting from sustained positive economic fundamentals in South Africa, as well as the increased economic development and organic business growth anticipated across the African continent.

Corporate & Investment Banking should benefit from potential growth in South African infrastructural and empowerment financing, and increasing corporate credit demand. As we improve our regional infrastructure and trading teams across our emerging markets footprint, the division should be well placed to take advantage of opportunities in our chosen markets.

Investment Management & Life Insurance earnings may be lower in 2006 due to the potential impact of a lower assumed equity and bond market performance although real growth in embedded value and dividends should be achieved.

Taking the above factors into account, we believe that the group’s diversified business spread will underpin returns to shareholders in 2006 that are in line with our principal financial objectives of normalised ROE of 24,0% (revised upwards) and normalised headline earnings per share growth of South African inflation (CPIX) plus 10 percentage points.

Conclusion

In South Africa, Standard Bank is a strong competitor across the financial services spectrum. But we know we must anticipate and stay responsive to changing needs and expectations to maintain our position in increasingly competitive markets. In Africa, we are becoming a better and bigger contender as we leverage our abilities to provide solutions across the banking spectrum. In other emerging markets, we are positioned to pursue attractive organic and acquisitive growth opportunities.

We believe we have the ability to move beyond the longer-term constraints of being a major financial services group in a relatively small economy. We are well aware that a bolder approach is required outside South Africa to continue to deliver our financial and strategic objectives.

It is important to note our firm intention to remain based in and focused on South Africa. Standard Bank has played a central role in the development of the southern African economy for more than 140 years. It has done this by constantly aligning its presence in the marketplace to the evolving needs of the economy, and delivering relevant banking and financial services. Standard Bank will continue to play this role and will stay listed on the JSE Limited and headquartered in downtown Johannesburg.

The astute non-aligned positioning achieved by the Government since 1994 facilitates our acceptability as an investor and business partner in other developing countries. Furthermore, the products and services developed for the South African market tend to be suitable for developing countries both in Africa and beyond.

As we grow, through organic expansion or acquisition, we will stay true to our values. These values reflect the character of Standard Bank built up over many years of operation, and were updated in 2005 to ensure relevance to both our people and markets. They form the ethical backbone that makes Standard Bank what it is across all operations in all territories. Within this framework, we will continue to work hard to understand and internalise that which is culturally appropriate in different countries.

Acknowledgements

Our sincere thanks go to our customers, staff and other stakeholders for their continued support over the last year, which has enabled us to deliver an excellent set of financial results and substantive progress across our businesses. We look forward to another year of creating value for all stakeholders and assure you that we guard against the dangers of arrogance and complacency. The guidance and support of our board gives us added confidence in believing that we have the skills and resources to take Standard Bank to the next level.

Derek Cooper
Chairman

Jacko Maree
Chief executive officer