Good afternoon, and thank you very much for joining the Standard Bank Group Pre-Close Call this afternoon. My name is Sarah Rivett-Carnac, and I will be managing the call, this afternoon. As you will be aware, we issued a voluntary trading update this morning. The purpose of this call is to cover the highlights of that announcement, and then we will open up for questions. On the call today, we have Arno Daehnke, the Standard Bank Group Financial Director, Brooks Mparutsa, Barbara Bell, and Thembelihle Ngema, the business unit CFOs in the room, and Willem van den Berg online. I'll now hand over to Arno. Thank you very much, Arno.
Thank you, Sarah, and thank you everyone for attending our update and our pre-close call. We much appreciate that. I will start with the macroeconomic trends in the markets in which we operate, and the operational trends we have seen in our business in the five months ending 31st of May, 2024, and we will compare that to the five months ending 31st of May, 2023. Thereafter, I will provide some comments on the macroeconomic outlook and our guidance for the full year.
Starting with the macroeconomic trends across our Africa Regions portfolio of countries, on average, period-on-period, many African currencies have devalued relative to the rand. Inflation is higher in West Africa, but has moderated in East Africa. Policy rates are higher on average. The most notable currency devaluations have taken place in Angola, Malawi, Nigeria, and Zambia. In addition, Zimbabwe adopted a new local currency, the ZiG, or ZiG, effective from early April. In relation to Zimbabwe, it is worth noting that the group changed its reporting and functional currency from ZWL to USD prior to the introduction of the ZiG.
The change in functional currency to USD is premised on the economic environment in which the group operates. On a USD reporting basis, Zimbabwe is no longer hyperinflationary. This change was effective from 1 January 2024 and has been applied prospectively. In terms of interest rates from the end of May 2023 to the end of May 2024, we have seen interest rates increase in nine countries, namely Angola, Côte d’Ivoire, DRC, Kenya, Lesotho, Malawi, Namibia, Nigeria, Tanzania, and Zambia. We have seen interest rate cuts in four countries, namely Botswana, Ghana, Mozambique and Zimbabwe.
Turning now to South Africa. Inflation has moderated period-on-period and is well anchored within the South African Reserve Bank's 3%-6% target range. Average policy rate is higher, following the interest rate increases in the 5 months to May 2023. In summary, on the overall macroeconomic trends across our portfolio, inflation has moderated but remains high . Policy rates are marginally higher, and African currencies are weaker relative to the rand in May 2024 compared to December 2023. Turning to the business and starting with the overall headline earnings trends. In summary, banking activities headline earnings grew by mid-single digits.
The increase in Insurance and Asset Management headline earnings was more than offset by the decrease in earnings attributable from ICBCS off a high base in the prior period. Combined, the group's headline earnings grew by low to mid-single digit in rands. On a constant currency basis, group headline earnings grew by mid-teens. From a regional perspective, SBSA delivered a respectable performance, growing earnings period-on-period. Africa Regions delivered strong organic growth in constant currency, but earnings declined marginally in rands, period-on-period.
Despite the decline in Africa Regions' earnings, Africa Regions still contributed 43% to group headline earnings for the five-month period. Moving on to the operational trends and starting with our banking activities. As noted previously, the group amended the methodology for recognizing interest on Stage 3 loans and applied the change retrospectively. This change resulted in an increase in net interest income and an equal and opposite increase in credit impairment charges, as well as an increase in the group's net interest margin and credit loss ratio.
I refer you to the detailed release statement reconciliation available on the group investor relations website. Accordingly, the commentary that follows reflects the trends relative to the restated five months of last year. Income growth was supported by higher average interest rates and higher client transactional volumes, but dampened by lower trading revenues. Balance sheet growth has slowed year to date in Rands, driven by heightened competition, particularly in mortgages, as well as customer affordability constraints and limited demand in South Africa. The Africa Regions portfolio reported continued underlying organic growth.
It is worth noting that during the second half of 2023, we instituted alterations to the accounting classification of instruments within the financial investment portfolio to reduce earnings volatility arising from accounting mismatches. This has resulted in a movement of income reported as non-interest revenue in the prior period to net interest income in the current period. Operating expenses and their growth was well contained, supported by our cost containment initiatives. For example, on discretionary spend as well as lower performance-linked incentives.
Banking income growth and operating expenses growth were both dampened by currency movements and translation effects period-on-period. Total income growth exceeded operating expenses growth, and this resulted in positive jaws. As expected, credit impairment charges were marginally higher period-on-period. Higher charges in Business and Commercial Banking, and Personal and Private Banking were partially offset by lower charges in Corporate and Investment Banking. In the current period, growth in Personal and Private Banking, early arrears, and non-performing loans have slowed.
Sovereign debt provisions in Africa Regions, specifically Ghana and Malawi, were the key driver of higher CIB credit charges in the prior period of last year. The elevated credit charges resulted in a credit loss ratio for banking for the period being above the top of the Group's through the cycle credit loss target ratio range of 100 basis points. This is not unexpected, considering the stage of the cycle and the fact that the CLR, the credit loss ratio, is traditionally higher in the first six months of the year relative to the second.
Turning to Insurance and Asset Management. Insurance and Asset Management operating earnings increased, driven by an improved insurance result in South Africa, more specifically from improved risk claims experience in the corporate and short-term insurance businesses. This was partially offset by a reduction in the Africa Regions asset management earnings following the devaluation of the Nigerian naira. The shareholder assets and exposure portfolio is impacted by market movements, principally interest rates. Recent trends have positively impacted the valuation thereof.
Moving on to capital and returns. The group remains well capitalized and liquid. The group's return on equity, while lower than the prior period, remained within the group's target range of 17%-20%. Turning to the 2024 outlook. Group headline earnings in the six months to thirtieth of June 2023 was ZAR 21.2 billion, boosted by a strong June in 2023. This sets a high base of which to grow in the six months to thirtieth of June 2024. Looking forward, we still expect some interest rate cuts across our portfolio of countries in the second half of the year. However, they are likely to be delayed.
In South Africa, post the election outcome, we expect a continued commitment to the fiscal consolidation plan and ongoing traction with the growth supportive reforms underway. This should support moderating inflation and monetary policy easing. Our latest house view, based on Standard Bank Research, remains 100 basis points of cumulative interest rate cuts, but we expect them to be spread with two cuts of 25 basis points in the second half of 2024, starting in September this year, and two cuts of 25 basis points in the first half of 2025.
Previously, we expected 75 basis points in the second half of 2024 and 25 basis points in the first half of 2025. In line with previous guidance for the twelve months to 31st of December 2024, we remain committed to delivering positive jaws and our return on equity well anchored inside the group's target range of 17%-20% for the full year. We will release our financial results for the six months to 30th of June 2024, on the 15th of August 2024. Thank you. Sarah, I will now hand back to you for questions.
Thank you very much, Arno. Please, may I ask that you use the Raise Your Hand function, and I will unmute your mic and to enable you to ask a question. Thank you. Next question is from Jacques Conradie. Please go ahead, Jacques.
Hi there, Arno and team. Thanks for the update. I think I'd be interested in your view on how the SA outlook changes with this very positive election outcome that we received. I mean, it's obviously hard to know at this stage, but I guess there could be some immediate confidence boost, then maybe post-rate cuts, it could add on to that, but I'd be interested in what your internal view is and what the team thinks after debating the last few days, what impact this could have on over the next year or two?
Yeah, thank you, Jacques. Obviously, it's still early days, and then we're still processing everything, but no doubt this will boost confidence, as I'm sure you will agree. I think it will also possibly move interest rate cuts further forward, and again, that improves our affordability constraints then, and should overall bolster some credit disbursements, and further loans advances growth. So it clearly goes without saying, a very positive development, and certainly puts us in a good position to monetize the opportunities we see in South Africa in this instance.
Great. Thank you.
The next question is from Harry Botha. Harry, please go ahead.
Thank you. Good afternoon, everyone. Thanks for the opportunity. I just wanted to ask about the balance sheet growth in the first half. You noted that it's slowed down. You did guide to slow growth. So is the first half in line with your expectations, and are you still on track to see improved growth in the second half? Obviously, noting the comments you just made for an improved outlook with the positive South Africa developments. And then, I'd like to get a sense also of the CIB deal pipeline, what it looks like, if it's changed in the last three months since you reported. Thanks.
Great. Thank you, Harry. I will hand over to my CFVOs to be specific on their portfolios. Lihle, on your side, in the Personal and Private Banking side, are you seeing loans advances growth?
Thanks, Harry, for the question. On our side, slower than what we originally anticipated a few months ago, and really it is the more delayed rate reductions that had an impact on us, particularly on the home loan book. We do anticipate that we'll start seeing more traction in that in the second half, as well as into next year.
Thanks. Good afternoon, Harry. So from an Investment Banking and CIB point of view, our Investment Banking franchise has actually done very well. In South Africa, we've shown high single digit growth in loans and advances, so that's done very well. And when we look at the outlook, our deal pipeline is quite strong, both on the lending side in in Investment Banking, as well as sort of the advisory side. And with the election outcome, we certainly see that coming stronger with more confidence. If you look at transactional banking in South Africa, also single digit growth, mid-single digit growth for Transaction Banking on the asset side.
What has been disappointing, and part of that is the currency impact, is the growth in in in Africa Regions. So for both Investment Banking and Transaction Banking, it's quite positive in the mid-single digit range. In terms of deal pipeline, I've already talked about Investment Banking. On the global market side, we are certainly forecasting to see improved performance in the second half of the year, particularly when it comes to structured products in global markets. So we're looking for a much more positive second half of the year in global markets than what we had in the first half of the year.
Thanks. From a BCB perspective, again, similar to PBB, I think you see a lot of what happens in the PBB environment translates into the BCB. So it has been softer growth in the first half than we had anticipated. We are optimistic that the second half is going to see a lot better growth in South Africa, where we're sort of in sort of very low growth. In Africa Regions, a very strong growth in constant currency terms, but really the currency weaknesses has softened that growth, translating into slightly lower growth rates in Africa. Thanks.
Great. The next question is from Ross Krige. Ross, please go ahead. So I don't know if you can hear us?
Sorry, Sarah. Apologies, I had mute on. Good evening, everyone. Sorry about that. Just three questions from me on currencies. Just wondering if the impact on the five for the five months to May, if it's been worse or better than expected. So has the ZAR been stronger or weaker than you had forecast previously?
And related to that, for the full year, is there any change on your current forecast versus the net 5.8% stronger ZAR? The second question is on your FY '24 guidance, has there been any changes by P&L, line item, or is that something you're not disclosing at this point? And then finally, just with regard to Ghana and the currency depreciation that seems to be intensifying there, if you have any commentary on economic developments on the ground in Ghana and how you guys see it. Thank you.
Yeah, thank you. On the currency, slightly weaker than we had expected, so the impact is a bit bigger. But the rand is largely tracking where we had expected. But some of the counter-currencies I mentioned earlier are slightly weaker than we had anticipated. On the changing guidance, there are a few line item changes. So we expect NII to be slightly stronger and NIR to be slightly weaker. And actually, the principal driver on there is not so much the underlying operating driver, as the classification of the investment portfolio, typically held for liquid asset requirements, high-quality liquid asset requirements, where I mentioned earlier in my call that we have a different accounting treatment and recognize that in NII, as opposed to gains and losses, fair value gains and losses.
So on the back of that, NII a bit stronger, NIR a little weaker, but overall, sort of flattish on that. On Ghana, we continue to remain optimistic on the developments there. We see inflation coming down, and we expect inflation to be further lower at the end of the year. You would know that we are not treating it as a hyperinflation economy, and I think by the end of the year, we'll be quite certain that that's not hyperinflation.
And overall, the outlook is looking somewhat positive for us on Ghana overall. In the portfolio overall, when we do an assessment on sovereign risk, we see a sovereign risk having improved. Key parameters on some of our larger economies have improved. You know, one example, for example, is the Kenyan Eurobond refile, which is successful. And so overall sovereign risk is somewhat more, somewhat lower than we probably had a year or two years ago.
Thanks, Arno. Sorry, if I may just follow up on the second question, just on the FY '24 guidance. So in substance, in our comments, everything's in line with the March guidance. Is that right?
Yeah. So the total revenue guidance is in line, but a bit more NII, a bit less NIR.
And OpEx, credit loss ratio?
Yeah, probably in line with the guidance we gave you in March. OpEx is tracking as per expectation. Actually, you know, slightly better than expectation, even on an operating expenditure line item. So we see positive jaws currently and then have to push those through to the end of the year. Whereas the guidance we had was sort of flat to positive jaws, at the moment, we've seen positive jaws.
Okay. Thank you.
Okay, Charles Russell.
Thanks. The next question is from Charles Russell. Charles, please go ahead.
Good afternoon, Sarah, Arno, and team. Thanks very much for the opportunity to ask some questions. Maybe just following up on one of Ross's questions, just from a credit loss ratio perspective, would you still expect to be in the range by the end of the year, so weaker seasonally, first half versus second half? And would the election outcome have much of a difference on that? If I could maybe just go to the second question as well.
Your trading activity results, what would that have been in constant currency? It was down in ZAR, but what would that constant currency impact have been? And then finally, just on the Zimbabwean property losses that you mentioned at Q1, where are those stacking at the five months? Has there been an improvement in this? And maybe just sort of key drivers there. Was that as a result of changing the functional currency to USD? That's all for me.
Thank you, Charles. So first of all, on the credit loss ratio, so I mentioned we're about 100 basis points at the moment. We'll probably be around 100 basis points by year-end. Hoping for slightly below that, obviously, but somewhere at the upper end of our target range, somewhere around that. We previously guided 1H being worse than 2H. That remains. We're seeing positive developments in our retail banking portfolio. If you want to go into more detail there, Lihle, on my left, can give you some detail, where we're seeing, as I mentioned in the script, that some of the indicators are certainly turning favorable.
Still seeing pressure in the BCB book. Typically, that would be lagging in the cycle, so retail taking strain first, BCB taking strain second. So BCB, I guess, is currently the book which is in the eye of the storm, you could use that terminology, whereas PPB has sort of worked through the worst. Then CIB is actually tracking quite well in terms of payments, analysis and impairment provisioning. Brooks, do you want to reflect on trading, and then I'll come back to Zimbabwean property?
Sure. Thanks, Charles. In terms of trading income, as you're well aware, we've got trading income in both global markets as well as Investment Banking, but I'm sure that the focus is on the global markets piece. In constant currency, we are up, I would say, high single digits, in constant currency, but unfortunately, with the depreciation of currencies, down in ZAR. I hope that answers your question.
Thanks, Brooks. And then, Charles, on the property, there have been no material movements since those losses reported in the quarter one release. And remember, those losses, not really losses, they're revaluations rather, I would call them, as opposed to losses. They were based on the switch of the ZWL to the USD, so this was a once-off adjustment. We don't expect further adjustments there.
Thank you. Great, yeah. Appreciate it.
Awesome.
Thank you. The next questions are from James Starke. James, please go ahead.
Hi, good afternoon, everyone on our team. Thanks for the opportunity. Four questions from me, if I can. Your net interest margin, if you could just give us a bit more color on how that's trending. It, well, came out of last year pretty strong. We've had quite a few moving parts, FX rate cuts, et cetera. You know, perhaps just help us out on how you're seeing things trend at the moment. The second one is on deposit insurance. I know it's relatively new. Can you just give us some color on trends you're seeing early on, perhaps both on the retail side and perhaps if there are any surprises coming out on, on the corporate side?
Just on the OpEx, to further to Ross's question, you say it's trending a bit better than expectation. Now, what is the source of that positive surprise? And then lastly, given some of the FX moves we've seen on the continent, can you perhaps comment on trends around dividend repatriation? I know you've been quite firm in the past that it hasn't been a problem. Is that still the case? In the last few months, have you been able to get out what you were hoping from your subs? Thank you.
Thanks. Thanks, James. On NIM, with interest rates being higher, NIM is tracking better than expected. Endowment is more positive than we had thought. And when we'll have the half-year numbers for you in August on the 15th, we'll be able to unpack that in detail. But endowment is better than expected, NIM is doing better than expected. Obviously, taking the shine off that is the very competitive pricing we're seeing in South Africa, particularly in the mortgage portfolio, with some of the concession rates relative to prime are really quite sizable.
And obviously, that's that asset pricing is taking some of the shine off the NIM. But overall, the trend is right there. On deposit insurance, we haven't seen any trends. I'm looking at my colleagues here. If you're looking at trends, in other words, are the sort of banks growing because of deposit insurance? Because everyone's sort of treated equally now up to ZAR 100,000 deposits. We haven't seen those trends. Yeah, there's obviously a charge to the bank. I don't know if you're referring to that.
That's just around the ZAR 250 million level, ZAR 230 million level per annum. But no trends expected actually going forward either. I don't think we will be seeing some trends there. On OpEx, we, we've been extremely focused on costs. We know we've had some big investments last year into people, into growing our teams and so on. So there's been a very serious agenda of going from the top of the house into the organization on managing OpEx very, very carefully. There are many cost initiatives underway, looking at each rand spent and where can we save money on that. And obviously, that's bearing some fruit.
But I also need to allude to the fact that obviously the bank is not performing as strongly, growing as strongly as last year. So incentive charges, variable pay, is being cut to some extent, and then that's obviously also helping our OpEx line. Then on dividend repatriations, yeah, we have got some constraints in Angola and in Mozambique, where there's currently liquidity tied up on the back of FX constraints. The Angolan number is relatively small, in Mozambique, slightly more, slightly bigger.
But apart from those two countries, we continue to extract dividends from all of our markets. You may realize that in Nigeria, for example, the FX backlog has been completely cleared with the new economic reform happening there. So that FX backlog, at one stage, amounted to $7 billion, and then that's been cleared out. So we expect no constraints in Nigeria. And then obviously working hard with the authorities on getting our dividends out from Mozambique and Angola.
Yeah. The next question comes from Clem Goemans. Clem, please go ahead. Clem, can you hear us? Can you try and unmute?
Okay, I've unmuted myself. Can you hear me?
We can hear you, Clem. Please go ahead.
Thank you. Good afternoon, Arno and team. Thanks for the presentation and the opportunity to discuss. Can you comment on the mortgage market, the effect, if any, at this stage of Discovery's entry into the market? And then further, on your infrastructure project, where there was previous talk of a target of ZAR 500 billion, and if I remember correctly, the actual to last year was of the order of ZAR 250 billion. How is that progressing? Thank you.
All right. For the mortgage markets, I'll hand over to Thembelihle. But before I do so, Clem, just to clarify, the infrastructure market, perhaps you're referring to the sustainable financing targets we have, which amount to ZAR 250 billion by 2026. Just to clarify, Clem, if you're referring to that-
Yeah. Yes, yes, that is. Yeah.
Yeah. Fantastic. Thank you, Clem, and great to hear from you. Thank you for dialing in. I'll ask Lihle to run through the mortgage market on any Discovery impact. That was the question.
Sure, yeah.
Brooks, you can talk about sustainable financing, please, how much we've done and where we are tracking relative to the target.
Thanks, Clem. From a mortgage market perspective, it is, it continues to be a competitive environment, and I think it's wider than just Discovery. We haven't really seen a significant impact from Discovery at the moment, but what we are doing is really staying close to our clients and making sure that we defend our base. But no significant impact, as yet.
Good afternoon, Clem.
Thank you.
So in terms of sustainable finance, our goal for 2024 is ZAR 55 billion for the year, and we're tracking well in terms of that commitment. We are seeing increased availability of projects, not just in South Africa, but as well as our Africa region. So we're seeing our portfolio for sustainable finance in Africa Regions continue to increase and become a significant contributor to our overall sustainable finance target.
And maybe, Brooks, just to add, Clem, for your information, we've already financed, in 2023, ZAR 105 billion, cumulatively already. So now we're adding another ZAR 55 billion to that. So you can see, at the end of this year, we'll be around a ZAR 160 billion level, possibly even more. So we are tracking quite well to our 2026 target of mobilizing ZAR 250 billion of sustainable financing.
Well done. Thank you.
Super. Thanks.
Thank you, Clem. But, Arno, those are all the questions we have. Would you like to make any closing comments?
Yeah, just to thank everyone for dialing in, for this update. As noted, we will release our results on the fifteenth of August, and I certainly look forward to reaching you at that point in time, either virtually or on a hybrid basis, to deal any remaining questions, which I'm sure will be many of them. So thank you, and wishing you all the best for the coming weeks. Till then.