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JIMMY MOYAHA: One of our big banks in South Africa reported its results for the financial year ended December 2023. I’m referring to Standard Bank, of course, and I’m joined on the line by the company’s group CEO to take a look at these results and just reflect on the performance.
Good evening, Mr Tshabalala. Thanks so much for taking the time. Let’s start with the overall sense of the numbers and how the company performed in a year of two halves, so to speak.
SIM TSHABALALA: Yes, indeed, Jimmy. The second half was tougher than the first half, but for the full year we managed to generate headline earnings of R42.9 billion – that’s 27% up with a return on equity of 18.8%. It’s a tale of two cities, but also, if you like, a tale of a portfolio. We had South Africa at R16.8 billion. And then you had our Africa regions business generating R18.2 billion.
So South Africa R16.8 billion, Africa regions sort of R18.2 billion, with Africa regions now bigger than South Africa in terms of earnings, and in total making up over 40% of our group.
It’s quite a remarkable outcome.
JIMMY MOYAHA: Sim, looking at that, let’s stick with Africa for a second. [There are] concerns around regions like Nigeria and what’s happened with the Nigerian naira. Obviously other operators, other South African firms the likes of MTN that have exposure to the Nigerian market, have really been struggling to contend with all the developments in Nigeria. And obviously your business, being starkly different from a telecoms provider, means you have different sets of challenges. How are you finding the Nigerian environment? But also the rest of Africa – how is that looking for you as a business, given that it does account for so much of the earnings?
SIM TSHABALALA: Jimmy, let’s start again with the portfolio and start at a high level. Our East Africa region made R3.5 billion and they were up 45%. The South Central region – that’s everything in the south but excluding South Africa – made R8.4 [billion]. They were 36% up. West Africa, which includes Nigeria, Ghana, DRC and Angola, made R6.3 billion and they were 74% up.
In that period, you had massive market dislocations, which I think is what you’re alluding to. You had the authorities in Nigeria effecting a currency devaluation, trying to normalise the FX market – a process which is not complete yet. You had them removing fuel subsidies, which has caused social challenges; it appears as if [that’s] partly been reinstated.
But importantly, in the last couple of weeks you’ve seen the maturation of the monetary policy approach in the country, with interest rates being increased by 400 basis points.
And then you’ve seen a devaluation. I think the naira is roughly N1 602/ dollar at the moment. You can see the authorities biting the bullet on monetary policy. They’ve also changed cash-reserving requirements. They’ve increased them, and interestingly they’ve released the excess cash-reserving that we were forced to hold in the country. What does that tell you? It tells you that there’s a path towards orthodoxy. Is it complete yet? No. Is there likely to be continued devaluation? Possibly, but with this type of policy management, you could see a strengthening of the currency. Goldman Sachs reckons it could go to N1 200/dollar if they continue with the disciplined monetary policy execution.
JIMMY MOYAHA: To have a look at the rest of the operation, let’s zoom out of Africa for a little and just look at your global exposure, the business as a whole. You’ve modelled out a couple of scenarios in the financials around the bear scenarios, the bull scenarios, taking into account things like inflation, interest rates or a whole bunch of other variables, and just where your expectations are sitting there. As a business and as a leading bank in South Africa and on the continent, where are you flagging some serious concerns? Obviously the underlying things that we’ve had to contend with, with interest rates and all of that coming around, you are also looking at and expecting rate cuts at some point. You forecast three for South Africa, but where are you seeing concern from a banking perspective or from a client perspective, despite having grown your client base?
SIM TSHABALALA: Jimmy, maybe just to start by what one is seeing in the scenario planning for the group. You are right. In the financial results we set out for investors how we thought about the modelling that we do for providing for bad debts, essentially. And for that purpose we think about a base scenario, a bear scenario and a bull scenario.
And for South Africa, for the purposes of the base scenario for the period end of December last year to end of December this year, we’ve sort of assumed real GDP growth. At the time we did the analysis, we assumed GDP growth of 1.43% for the base scenario.
You’ll quickly point out to me that our economists are saying that they think that South Africa will grow at 1.2% in 2024. The reason they’re different is that [those] analyses were done at different times. For [our] Africa regions real GDP growth of roughly 4.9%. You’ll again quickly point out to me that the IMF says that sub-Saharan Africa will grow 3.8% in 2024. My answer to you will be that these countries, the countries that I’m referring to, are the ones where we operate as Standard Bank.
Quickly then, when you think about the bear scenario, South Africa goes to GDP of sort of -0.5%. The bull scenario, however, is GDP of 2%.
For Africa regions it’s the bear scenario; it’s roughly 3%. In the bull scenario it’s 5.7%.
Now there’s a lot obviously that goes into this. You could also think about what happens globally. You’ve got to think about what happens with geopolitics. Does the relationship between China and the US deteriorate and, if it does, what implications [does that have] for inflation and interest rates and asset prices? The blockage in the Red Sea – if that deteriorates, what happens to inflation, and so forth?
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So we’ve plotted all of those out. We’ve made assumptions, but we are still quite confident on the base scenario.
Let me quickly add, because I’m sure you’re going to ask me, do we change our base scenario given our thinking around elections in South Africa? The answer is no. We stay on the base scenario.
JIMMY MOYAHA: Alright. So the base scenario takes into account a lot of different permutations and factors that could affect that. Are you seeing any concerns from your credit impairment business? You touched on this a little earlier when we started looking at this, and I’ve seen competitors in your space and in the banking space flagging that credit impairments are a concern for them. They’re seeing an increase in that.
You guys have been very prudent in how you’ve managed that up to now. I imagine going forward that that won’t change anytime soon.
SIM TSHABALALA: Well they call [me] the ‘Big Blue conservative’ for good reason. And frankly, Jimmy, the one statistic that I think should stick in your mind is that we’ve got balance sheet provisions of R64 billion. Just think of how many listed companies would have R64 billion on their balance sheet. So I would think that we are well provided.
Our coverage ratios are very, very good and we’re pretty confident.
But, like our competitors, we are dealing with the same competitive environment. Our clients are suffering from high inflation – which is declining. We reckon that it’ll be 5% in 2024. But in the year 2023 people suffered high inflation and salary increases that in some instances were below the inflation rate. So high inflation, high interest rates as a consequence of the monetary tightening by the South African authorities, give rise to a tough environment and job losses in certain segments resulting in higher bad debts.
We think that bad debts are peaking as inflation goes to 5%.
As it declines – as interest rates improve, as jobs continue to improve in the country – the bad debts will follow [and come down]. Just let me point this out. The balance sheets of South African retail clients are stronger now than they were during previous cycles at similar times. Things like the debt-to-disposable-income ratio, or the instalment-to-disposable income ratio, are actually better during the cycle than they’ve been.
JIMMY MOYAHA: Sim, let’s stick with the provision conversation for a second and that’s quite a healthy provision you have there. Obviously a prudent approach is what keeps the balance sheet as strong as it is. To that point, Moody’s adjusted the deposit ratings that they had on seven of the banks in South Africa, Standard Bank being one of those banks. Your thoughts around just how Moody’s and the global landscape are shaping up, particularly relating to financial institutions like yours?
SIM TSHABALALA: At the end of the day one has to look at the actual statistics. Look at the level of capitalisation of Standard Bank. We’ve got R277 billion in equity, in capital. We are liquid. Our provisions are solid, as I described to you.
The quality of our client base is good. Our risk-management framework works. And I think shareholders and depositors are adequately rewarded for the risks that they take in us.
So I think we are fine.
JIMMY MOYAHA: We’ll leave it at that, Sim. Thanks so much for those insights. I look forward to catching up with you as we reflect on the interims of 2024. But for now, that was Sim Tshabalala, who is the group chief executive at Standard Bank, joining me to reflect on the financial performance of the 2023 financial year.
