OREANDA-NEWS. The Standard Bank Group Limited's (group) summary consolidated financial statements for the year ended 31 December 2015 (results) are prepared in accordance with the requirements of the JSE Limited (JSE) Listings Requirements for provisional reports, the requirements of International Financial Reporting Standards (IFRS) and its interpretations as adopted by the International Accounting Standards Board, the South African Institute of Chartered Accountants (SAICA) Financial Reporting Guides as issued by the Accounting Practices Committee, the presentation requirements of IAS 34 Interim Financial Reporting and the requirements of the South African Companies Act, 71 of 2008 applicable to summary financial statements.

The accounting policies applied in the preparation of these consolidated financial statements from which the results have been derived are in terms of IFRS and are consistent with the accounting policies applied in the preparation of the group's previous consolidated annual financial statements with the exception of changes referred to below.

While this report is itself not audited, the consolidated annual financial statements from which the summary consolidated annual financial statements  below were derived were audited by KPMG Inc. and PricewaterhouseCoopers Inc., who expressed an unmodified opinion thereon. That audit report does not necessarily report on all of the information contained in this report.

Shareholders are therefore advised  that, in order to obtain a full understanding of the nature of the auditor's engagement and, more specifically, the nature of the information that has been audited, they should obtain a copy of the auditors' report together with the accompanying audited consolidated annual financial statements, both of which are available for inspection at the company's registered office.

The directors of Standard Bank Group Limited take full responsibility for the preparation of this report and that the selected financial information has been correctly extracted from the underlying consolidated annual financial statements.

The results discussed in this announcement are presented on a normalised basis, unless indicated as being on an IFRS basis. For further explanation, refer below.

The preparation of the group's results was supervised by the group financial director, Simon Ridley, BCom (Natal), CA(SA), AMP (Oxford).

The results were made publicly available on 3 March 2016.

This report contains pro-forma financial information. For further details refer below.

In line with changes to the JSE's Listings Requirements during 2014, the group no longer posts a physical copy of this document to its shareholders. Investors are referred to www.standardbank.com/reporting where a detailed analysis of the group's financial results, including an income statement and a statement of financial position for The Standard Bank of South Africa Limited, can be found. Scan the image below to be taken there directly.

The group's reporting suite, including the Standard Bank Group integrated report and annual financial statements will be made available during April 2016. 

 

Group results

Group headline earnings and headline earnings per share (HEPS) increased by 27% to R22 002 million and 1 359 cents respectively. Net asset value per share increased by 9% and group return on equity (ROE) increased to 15.3% from 12.9% in FY14. A total dividend of 674 cents per share has been declared, a 13% increase on FY14.

During the period covered by the results, the group completed the disposal of its controlling interest in Standard Bank Plc (SB Plc) on 1 February 2015 (the disposal), which was classified as a discontinued operation up to the date of the transaction's completion. Subsequent to the transaction SB Plc was renamed ICBC Standard Bank Plc (ICBCS) and the group's remaining 40% interest has been included as an associate, with equity accounted results included in the group's continuing operations from the disposal date.  As a result of the disposal, earnings attributable to ordinary shareholders include R2,8 billion of net disposal gains which have been excluded from headline earnings, primarily consisting of releases to the income statement from the group's foreign currency translation reserve.

Headline earnings for the year reported within the group's discontinued operation include the effects of a write-down of the residual aluminium exposure in China; a partial recovery in respect of insurance claims relating to the external fraud in the Qingdao port in China; and cash flow hedge releases relating to the disposal. The loss from the discontinued operation within headline earnings amounts to R90 million. Headline earnings from operations excluding the discontinued operation (continuing operations) increased by 5% to R22 092 million. The commentary which follows refers to the group's continuing banking operations. Liberty Holding Limited's (Liberty) results are discussed separately.

Operating environment

In 2015 global economic growth remained moderate at 3.1% with growth in emerging market and developing economies expected by the International Monetary Fund (IMF) to have declined for the fifth consecutive year. A modest recovery has continued in advanced economies with a gradual monetary tightening in the United States (US) as several other major advanced economy central banks continue to ease monetary policy. Market concerns about the outlook for the Chinese economy have affected other economies through weaker commodity prices, diminishing confidence, and increasing volatility in financial markets. Manufacturing activity and trade remained weak globally, not only due to developments in China, but also because of subdued global demand and investment more broadly.

Sub-Saharan Africa economic growth is estimated to have reduced sharply to 3.5% in 2015 from 5.0% in 2014 as lower commodity prices impacted net exports and placed pressure on economic activity even as lower oil prices eased energy import costs. While economic activity remains more robust than in many other developing regions of the world, the strong growth momentum evident in the region in recent years has dissipated, particularly within oil-exporting countries.

2015 economic growth forecasts for South Africa were marked down progressively during the year as the full impact of commodity price deflation, and weakening business and consumer confidence limited demand. Although there was notable stabilisation of electricity supply in the second half of 2015, unfolding drought conditions, higher interest rates and policy uncertainty subdued investment and cyclical consumption; economic growth is expected to have been 1.3% in 2015 from 1.5% in 2014. A sharply weaker exchange rate in response to investment portfolio outflows and a continued current account deficit accompanied broad acceleration in market volatility towards the end of the year, exacerbated by market concerns related to the unexpected removal of South Africa's minister of finance in December.

Revenue

Total income increased by 8% in FY15, with net interest income (NII) growing by 9% primarily due to a 17% increase in average interest-earning assets, driven mainly by growth in higher quality but lower-yielding Corporate & Investment Banking (CIB) assets. Margin compression of 30 basis points resulted mainly from significantly higher growth in CIB assets relative to Personal & Business Banking (PBB) assets. Higher funding costs and the requirement to hold higher levels of high quality liquid assets (HQLA) were largely offset by higher average South African interest rates.

Non-interest revenue (NIR) grew 8% due to good growth in trading and other income. Fees and commissions were 3% higher than in FY14 as knowledge-based fees and commissions declined by 9% due to weaker corporate activity conditions in the rest of Africa and a high base in FY14. Trading revenue increased by 20% due mainly to good growth in fixed income and currency trading which was up 15%, as well as a good performance from equities trading, up 51%.

Other revenue growth of 10% benefited from fair value gains and profit on disposal of equity investments, partly offset by the non-recurrence of gains from property disposals and lower rentals received.

Credit impairments

Total credit impairments were 4% higher than in FY14 and the credit loss ratio declined to 0.87% from 1.00%. Credit impairments in CIB increased to R1 279 million from R804 million in the prior period with its credit loss ratio rising to 0.24% from 0.22%.

In PBB, credit impairments were 5% lower than in the prior year and its credit loss ratio improved to 1.27% from 1.41%. Impairments in mortgage lending declined by R327 million while those in the vehicle and asset finance business were largely unchanged as lower impairments in South Africa were offset by higher provisioning required in the rest of Africa portfolio. Personal lending impairments declined by R83 million due mainly to lower charges required for access loans, while card debtors' impairments were 23% higher reflecting a higher level of stress across the portfolio. Business lending impairments fell by R270 million due to the non-recurrence of a few larger account impairments in 2014, offset partially by higher charges required in the agriculture sector. Impairments in PBB's rest of Africa operations increased by 22% and the credit loss ratio increased to 2.02% from 1.83% in FY14.

Operating expenses

Operating expenses increased by 10% over the prior year and the group's cost-to-income ratio increased to 56.7% from 55.0%. Staff expenses increased by 12% while other operating expenses increased by 8%. Growth in staff expenses was affected by the conversion of approximately 4 400 people from temporary to permanent staff, mainly in South Africa. Other operating expenses were affected by higher IT expenses related to core banking systems taken into production, including increased amortisation of capitalised software assets.

Loans and advances

Gross loans and advances to customers increased by 15% in FY15. PBB balances with customers grew by 6%, and CIB balances grew by 29% including a higher level of loans granted under resale. Residential mortgages grew by 3%, and vehicle and asset finance reached   11% growth in a softer overall market. Card debtors grew by a moderate 4% with personal loans 3% higher than FY14 reflecting tighter monetary conditions in South Africa. Business and corporate loans showed higher levels of growth at 18% and 22% respectively.

Capital, funding and liquidity

The group maintains appropriate levels of capital with tier I and total capital levels at 13.3% (FY14: 12.9%) and 15.7% (FY14: 15.5%) respectively. The group remains well placed to meet the higher regulatory requirements across markets in which the group operates.

Deposits and current accounts from customers increased by 10% with 20% growth in retail priced deposits significantly higher than the  5% growth in wholesale priced deposits from customers. Good growth in retail priced deposits in the rest of Africa and outside Africa was aided by significant rand depreciation over the year.

The group maintained its liquidity positions within the approved risk appetite and tolerance limits. The average group Basel III liquidity coverage ratio (LCR) during the final quarter of 2015 was 93.7%. The group continues to evaluate the funding impact of the Basel III net stable funding ratio (NSFR). Areas of national discretion pertaining to the NSFR are expected to be finalised by the South African Reserve Bank during the course of 2016.

 

Overview of business unit performance

Headline earnings by business unit

          
 

Change

%

  

2015

2014 1

  
   

Rm

Rm

  

Personal & Business Banking

15

  

11 232

9 797

  

Corporate & Investment Banking

59

  

7 923

4 980

  

Central and other

54

  

596

388

  

Banking activities

30

  

19 751

15 165

  

Liberty

4

  

2 251

2 158

  

Standard Bank Group

27

  

22 002

17 323

  

1 Where responsibility for individual cost centres and divisions within business units change, the comparative figures are reclassified accordingly.

  

Personal & Business Banking

PBB's FY15 headline earnings of R11 232 million increased by 15% compared with FY14. NII grew by 11% and moderate growth of 7% in NIR resulted in total income growth of 9%. Credit impairment charges were 5% lower than in FY14 and operating expenses, which were affected by the conversion of temporary employees to permanent employees during the year, increased by 10%. PBB's ROE was maintained at 18.1%. PBB South Africa earnings increased by 13% while PBB rest of Africa earnings improved to R192 million from R104 million in FY14. Good growth of 51% in PBB outside Africa earnings, which amounted to R461 million, was achieved and assisted further by rand depreciation during the year.

Transactional products total income increased by 11% assisted by higher average domestic interest rates and balance sheet growth driven by higher cash management, savings and investment portfolio balances, offset partially by reduced interchange rates on debit cards in South Africa. Earnings of R3 204 million were 9% higher than in the prior period.

Mortgage lending headline earnings increased by 25% to R2 450 million. Total income growth of 8% reflected the effect of higher average balances and continued improved average pricing relative to funding costs. Credit impairments fell by 13% and the credit loss ratio declined to 66bps from 79bps due to improved collection capabilities. Non-performing loans increased by 6% mainly as a result of the required regulatory change in the treatment of restructured loans.

The improvement in vehicle and asset finance profitability continued during the year as headline earnings of R306 million were 79% higher than in FY14. Total income growth of 7% in a challenging market was supplemented by an improvement in the credit loss ratio to 1.50% from 1.55%. New business quality continued to improve, assisted by the positive impact of investment in online dealer origination capabilities.

Card products increased headline earnings by 9% to R1 535 million during the year. Higher domestic yields and increased activity in the rest of Africa largely offset lower average interchange fees to lift total income by 12%. Higher average interest rates and a slowing domestic economy have affected contractual repayments by customers and credit impairments grew by 23% with the credit loss ratio rising to 4.83% from 4.08% in the prior year.

Lending products improved headline earnings by 14% to R1 442 million. Total income growth of 3% benefited from good growth in business lending balances offset by lower growth in personal products lending. Credit impairments were 10% lower than in the previous year with the credit loss ratio declining to 1.68% from 2.05% in FY14.

Bancassurance and wealth increased headline earnings by 11% to R2 295 million. Total income improved by 12% due to an increase in the client asset base, good growth in assets under management in Nigeria and the Offshore group as well as a better short-term insurance underwriting performance.

Corporate & Investment Banking

CIB increased headline earnings by 59% to R7 923 million, resulting in a ROE of 14.3% from 10.2%. The business delivered respectable revenue growth of 7% in the context of significant market volatility. Continued investment in major online programmes resulted in costs growing by 10%. Impairments increased by 59%, reflective of increased strain experienced in the oil & gas and mining & metals sectors. Earnings were materially impacted by the 40% associate share in the loss incurred by ICBCS for the 11 months ended December 2015, amounting to R1 173 million, which also included 40% of the fine paid in respect of a Deferred Prosecution Agreement agreed with the Serious Fraud Office in the United Kingdom.

The headline earnings loss within the discontinued operation, being the outside Africa global markets business, amounted to R104 million from a loss of R3 745 million in FY14, mainly due to the non-recurrence of the fair value adjustment on repo positions relating to aluminium financing in China. A partial recovery in respect of insurance claims relating to this matter received during the year was largely offset by final balance sheet adjustments relating to the disposal of the discontinued operation and SB Plc's January 2015 operating loss.

Transactional products and services grew headline earnings by 4% to R2 662 million.  Total income increased by 8% on good cash management deposit growth, offset by reduced investor services demand in Nigeria as its investment environment deteriorated. Expenses were adversely affected by higher staff costs in the rest of Africa to support increased systems investment and franchise growth.

Global markets recorded headline earnings growth of 19% to R3 889 million in FY15. Income growth of 12% benefited from higher client volumes in fixed income trading, good risk positioning on the back of client facilitation in equity derivatives as well as improved commodities trading. Expenses were well controlled during the year resulting in positive operational leverage.

Investment banking headline earnings increased by 1% to R2 598 million as total income increased by 6% following a good debt origination performance in 2H15. Depressed commodity prices and deteriorating economic conditions in resource-focused countries in the rest of Africa required higher impairment charges particularly related to exposures in the oil & gas and power & infrastructure sectors.

Real estate and principal investment management (PIM) recorded headline earnings of R51 million from R312 million in FY14 as property disposals and fair value gains within the property investment portfolio income did not recur. The PIM portfolio continues to be gradually wound down.

Liberty

The financial results reported are the consolidated results of the group's 54% investment in Liberty. Bancassurance results are included in PBB. Liberty BEE normalised headline earnings of R4 128 million were 4% higher, representing 7% growth in operating earnings and a 2% decrease in earnings from the LibFin Investments - Shareholder Investment Portfolio (SIP). The growth in operating earnings was supported by strong performances from Individual Arrangements, Liberty Corporate, a division of Group Arrangements, and LibFin Markets. The SIP gross performance of 9.6% (2014: 10.3%) was substantially ahead of benchmark, supported by overweight exposure to foreign assets. The BEE normalised return on equity at 19.5% (2014: 20.4%) reflects ongoing efficient capital management.

The life operations benefited from continued positive operating variances against modelled expectations which supported good cash generation in 2015. Net customer cash inflows were substantially higher at R15,2 billion (2014: R4,2 billion) due to significantly improved Stanlib asset management cash flows. This included external inflows of R8,4 billion (2014: outflows of R7,3 billion) into the asset management operations. Total assets under management increased to R668 billion (2014: R633 billion), reflecting net external customer inflows and relatively low incremental growth from investment market returns.

Prospects

Global growth is projected by the IMF to accelerate to 3.4% in 2016 and 3.6% in 2017 although the pickup in global activity is projected to be more gradual than previously anticipated, especially in developing economies. In advanced economies, a modest and uneven recovery is expected to continue. Risks to the global outlook remain tilted to the downside influenced strongly by a broad-based slowdown in emerging market economies, China's rebalancing, lower commodity prices, and the gradual exit from accommodative monetary conditions in the United States.

Most countries in sub-Saharan Africa are expected to experience a gradual pickup in economic growth, but at rates that are lower than those seen over the past decade. This mainly reflects the continued adjustment to lower commodity prices and higher borrowing costs, which are affecting some of the region's largest economies, as well as a number of smaller commodity exporters. In South Africa, the growth outlook for 2016 has slipped to below 1% due mainly to the effect of the drought and tighter financial conditions and  the risk of further economic growth disappointment remains elevated.

The year ahead is likely to provide a demanding operating environment in which consumers and businesses will have to adapt to higher interest rates and the full effect of currency weakness. The group's strategic market positioning, well-capitalised and liquid balance sheet, and committed employees are able to withstand uncertain macro developments and volatile markets for the sustained benefit of our customers. Our medium-term ROE target of between 15% and 18% remains intact. The group's ROE performance will however be affected by factors such as economic growth in South Africa and the rest of Africa, and the retention of a South African investment grade sovereign credit rating. As such, we are working closely with the authorities to promote a stable, growth-friendly domestic environment.