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17 August 2005 Angelo Coppola

The bank reports at its interim results presentation that there were several market and performance drivers.

Market drivers were low interest rates, consumer spending was up, strong equity markets, some regulatory pressures did affect spending, to a limited extent, with some cost and compliance issues, and increased competition in the emerging markets.

On the other hand the performance drivers were retail loans were up although there was some margin and competitive pressure, while credit experience was positive and better than budgeted for, while transaction growth increased, although there were higher costs that supported some sensible growth initiatives.

* headline earnings per ordinary share up 22% (normalized)

* Normalised RoE increased 23.7%

* NAV per share up

* Dividend cover normalized at 2.5

* Capital adequacy drops from 11% to 10.8%

The top performer was the local retail banking operation, and while the African growth is up, Standard Bank CE Jacko Maree, calls it pedestrian.

Of the R4bn profit, some R3bn (or 75%) still comes from South Africa, with retail and whole banking neck and neck in terms of contribution.

On loans on advances, growth was up 26%, while the big driver was the mortgage and home loans business – with the actual book up 40%, year on year. They are focusing on the stronger originators with more revenue coming from internal sources.

The retail growth on loans and advances is slowing down however. One of the issues that affects the margin – the strong retail asset growth meant funding – got R7bn form the retail market. Have to fund their growth through the wholesale market. This has compressed margins.

Vehicle asset finance is also looking stronger. They are getting the basics right was Maree. We feel we are making progress and there is a long way to go. Some incentivisation models have been reviewed. The re-engineering and rebuilding business has been a long term drive.

In terms of credit cards – the scoring system also looks at credit and an automatic offer of a credit card is also made to new clients. There is also a new processing system which has just been implemented. The early arrears numbers are a little higher than expected, although the bank says that they are provisioning and pricing correctly for it, according to financial director Simon Ridley.

e-plan and mnsanzi has seen strong volume growth, wit ha compounded effect of 10% growth, and also evidenced in the 22% growth in personal loans. They are looking at JVs to get closer to the unbanked market sector – also seen in the MTN banking initiative announced, and the Edgards retail card book deal.

Maree also confirmed that there was another major announcement due in the short term.

A lot of that funding is term funding – based on FSA guidelines – and this is costing the bank money.

Turning to Africa, Maree was expecting bigger things, despite an improved margin income, there was pressure because of the low loan to deposit ratio. On the international front the results were somewhat disappointing.

Credit spreads have tightened. Commodities and the high prices have meant that there is revenue pressure as the miners generally don’t look for hedging opportunities and there is less business for the bank.

Maree says that what was traditionally their backyard (emerging markets) and the place where they made money has seen more international competitors coming in and some margin pressure, which Maree says will lead to some strategic challenges.

On the Liberty Life front, and the FPA issues, says Maree, are being dealt with. No real basis to provision, and there are issues for the industry to evaluate. This won’t emerge in the short term, as clearly investors have broken legal contracts and there are issues here.

On the regulatory front cost of communicating with clients around Fica, was up 15%. Costing was also affected by the employment of more expensive compliance and regulatory staff, while cost to income ratios were also affected by international developments.

Looking forward Maree says that the next 12 months will see increased foreign competition – on the corporate and investment banking space as the job market gets more competitive. Competition is alive and well, and seen.

Maree says he is aware that there would be some investigation by the competition commission into banking charges, while the regulatory environment has seen the employment of 100s of people within the group, and this raises the barriers to entry for potential entrants.

On the people front Maree wanted to allay some of the fears of staff, saying that the current evaluation that senior staff were going through is a means to ensure that the group is operating efficiently, in good times. He anticipated that there would be an announcement to the market in September.

In terms of credit charges – the earning in the next half will change. There were some right-backs – and the credit charge will be higher than R600m, significantly higher than 2004 results, nowhere near the R200m for the second half of last year…

In closing Maree was cautious, and said that normalised headline earnings will not be at the 22% level. It will be lower than that.

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