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The big news is not in the earnings

07 March 2008 Gareth Stokes

Another of South Africa’s ‘big four’ banks released their full year results this week. Standard Bank performed in line with expectations, posting a 22% improvement in headline earnings. But there is more in the annual report than the group’s continued hea

Tshabalala will take the reins as the domestic banking environment enters difficult trading conditions. It will be difficult to extract maximum value for shareholders against the backdrop of high inflation and high interest rates.

Consumer woes cost R4.6bn

And Standard Bank is fully aware of the struggle facing local consumers. Like most other financial services companies reporting in the last two weeks, Standard Bank announced a massive increase in impairment charges. The group recorded a 68% increase in impairment charges over 2006, announcing that the total charge reached R4.6bn in the latest year. It pays to investigate this number a bit further.

Standard Bank says that the increase in impairments for non-performing loans grew to 86%. And it’s the consumer that’s causing the problem. Personal and business banking impairments were up 82% while that for commercial lines was slightly lower than the previous year. These statistics prove that the string of interest rate hikes and generally higher prices of basic good is taking a huge toll on domestic consumers. Homeowners are struggling to keep pace with mortgage payments that are 30% higher than 20 months ago.

The result is a 129% increase in non-performing mortgage loans, with the “credit loss ratio for mortgages” now at 0.54% against a 0.27% last year. “In instalment sale and finance leases, the weaker economic conditions and growth in higher risk dealer-originated business increased non-performing loans by 116%.” The credit loss ratio in the passenger vehicle department has stretched to 1.49% from 1.09% a year ago and the bank is concerned that recovery values in the used passenger car market have deteriorated. Credit impairment changes in this area are up 90%. And it seems wherever the word credit appears, the impairment charge is higher. Non-performing loans to credit card users were up 46% with impairment charges 48% higher.

Operating expenses on the rise

One of the difficulties with maintaining service levels at a large organisation in a rising inflation environment is that expenses tend to increase exponentially. Standard Bank is no exception and reported a 29% rise in operating expenses for the year. These included a 32% increase in staff costs and 26% in other expenses. Standard bank attributed the increase in staff costs to a 17% rise in the total staff compliment. They also noted that incentive-based remuneration had increased from 31% to 34% of total costs, indicating the group’s focus on reward for superior performance – and of course creating flexibility in one of the group’s major overhead categories.

The annual report noted the importance of technology: “The group’s largest cost component besides staff costs was information technology, which grew by 24% largely as a result of investments in systems development for compliance and risk related projects, increased maintenance costs, higher ATM network and data line expenses.”

Despite these increases the group reported a slight improvement in the cost to income ratio from 52.7% to 52%! Good news for shareholders who don’t see a reduction in earnings; but bad news for consumers who no doubt dipped deeper into their pockets to assist Standard Bank in covering the higher costs.

Tough economic conditions will slow earning growth

Briefing shareholders on prospects for the coming year, Maree noted that “The outlook for global economic growth has deteriorated significantly in the past six months.” He said it would be difficult to repeat the current year’s performance in these conditions. One of the main challenges in the medium term would be to find suitable outlets for the capital raised through Industrial & Commercial Bank of China’s purchase of 20% of the group. Maree was confident that these funds would help the group achieve its long term objectives…

The group is unlikely to repeat its performance to 31 December 2007 in the 2008 year. Maree notes that expectations have been lowered slightly to “21% for normalised return on equity and to average South African inflation (CPIX) plus 5 percentage points for growth in normalised headline earnings per share.” With CPIX currently near the 10% mark the group is thus aiming slightly lower than the 22% increase in earnings achieved in 2007.

Editors’ thoughts:
We love the term used by today’s big banks to define what used to be referred to as ‘bad debt’. Today a failure to repay a bank loan is categorised as an impairment charge. Standard Bank has raised its impairment charge some 68% to R4.6bn. By how much will that number grow in 12 months time? Add your comments below, or send them to

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