Group chief executive’s review
Group headline earnings for 2018 was R27.9 billion, 6% up on 2017. Group return on equity (ROE) was 18.0% up from 17.1% in 2017. Headline earnings per share was 1 748 cents, 7% ahead of the prior year. These results reflect continued, strong franchise growth across Africa, as evidenced by growing client numbers, and growing deposits and loans to customers.
Along with many other South Africans, I was over-optimistic about the pace at which our economy would recover during 2018. In the event, after two quarters of recession, the economy grew at only 0.7%, well below the 1.5% that had been widely forecast. Now, however, institutional reforms are well underway, which is likely to improve business and investor confidence. If – as we expect – these institutional reforms are followed by structural reforms after the general election, we are hopeful that the growth rate of the South African economy could accelerate to around 1.3% in 2019. If the new administration is able to pursue a bold and comprehensive programme of structural reform, South Africa could see growth of 3% a year by 2020.
Sub-Saharan Africa’s GDP growth rate was 2.9% in 2018, and is expected to strengthen to 3.5% in 2019. The continent’s growth may be somewhat weaker if interest rates rise sharply or if global trade tensions worsen. On the other hand, growth may be faster than expected if these tensions are resolved quickly and if good progress continues to be made in ratifying and implementing the African Continental Free Trade Area.
I echo our chairman’s view that economic growth must be inclusive if it is not to be derailed by populist policies and institutional decay. This is a universal truth, but it is a particularly pressing one in Africa. Africa’s ‘demographic dividend’ is likely to be a great blessing for the continent – but it also poses serious risks. Africa’s growth must be inclusive because Africa’s young people deserve productive and meaningful lives. It would be foolish and dangerous to allow their talents and energies to be wasted.
Some people worry that Africa has ‘missed its chance’ and that the increasing adoption of artificial intelligence (AI) and robotics in production, coupled with global trade, will permanently destroy jobs, reduce incomes and prevent Africa from developing. I think this is unlikely. Even at this early stage, it is clear that the new technology is in fact creating new demands for uniquely human skills and, therefore, large categories of new jobs. Perhaps equally important, the additional income created by higher productivity is stimulating an expansion of trade and of labour-intensive service industries. As I argued last year, these developments mean that it is extremely important that we radically improve education and training Africa-wide.
The group strongly supports the increasing focus of many African central banks on promoting financial inclusion. During the year, regulators in Ethiopia, Malawi, Nigeria and South Africa all emphasised the importance of deeper financial inclusion for economic development.
There is no question that South Africa needs much more investment in public infrastructure, and that the financial sector must be central to mobilising this investment. But proposals to require that financial institutions invest a proportion of their depositors’ and shareholders’ funds in projects unilaterally chosen by the state – ‘prescribed assets’ - are, in my firm view, not a good idea. In the light of abundant recent evidence from South Africa and abroad, it is clear that funds gathered in this way are at considerable risk of being used inefficiently. Even if used precisely as intended, the imposition of prescribed assets would damage the interests of workers saving for their retirements, and those of current retirees, by shifting savings away from their optimal allocation. In any case, a prescribed assets policy is unnecessary. As we have seen from South Africa’s renewable energy programme, more than enough private investment can be voluntarily attracted into public infrastructure projects when these take the form of transparent public-private partnerships.
I also think that the proposal to nationalise the South African Reserve Bank (SARB) is more concerning than prescribed assets. The private shareholders have no influence over monetary policy nor over any aspect of the SARB’s operations. Therefore, nationalising the SARB by buying out the private shareholders would cost a lot of money and serve no useful purpose.
Proposals to change the monetary policy mandate of the SARB are worse. Certainly – as is clearly recognised in the Constitution of South Africa – monetary policy can support growth. It does precisely this by maintaining price stability, which supports investment and keeps up real incomes, particularly the incomes of poor people. It is also possible that monetary policy can support growth by mitigating cyclical contractions. If politicians try to use monetary policy to expand spending in the hope that this will boost the economy onto a permanently higher growth path, the inevitable outcome is slower growth, more inflation, more unemployment and more poverty. The integrity and independence of monetary policy formation must therefore be defended.
Advancing our strategic priorities
Our purpose does not change: Africa is our home, we drive her growth. Equally, we will continue to pursue our vision until we have achieved it: to be the leading financial services organisation in, for and across Africa, delivering exceptional client experiences and superior value.
Working closely with our strategic partners and 20% shareholder, the Industrial and Commercial Bank of China (ICBC), we continue to support and deepen the economic links between Africa and China. We achieved notable progress this year in areas, including joint funding of major infrastructure projects and renminbi internationalisation.
For the next few years, the group executive team is focused on delivering three immediate priorities within our longer-term strategy: client centricity, digitisation and becoming a truly integrated group. We believe that it is the combination of these that will create a large and sustainable competitive advantage for the group, and each of the three remains an equally important priority. We have made pleasing progress on client centricity and in becoming more integrated during the year, as you will see elsewhere in this report.
This year, however, I will emphasise digitisation and use this space to describe some of the progress we have made in becoming a truly digital financial services group. This is for two reasons: first, and quite simply, as group head of digital – a role that I take just as seriously as group chief executive – I am proud of what we have achieved and want to bring it to your attention. Second, accelerating our progress towards becoming a truly digital organisation is a precondition for achieving client centricity and integration, and is key to permanently lowering our costs.
As mentioned, digitisation requires new kinds of human skill and organisation. Digital technology holds immense promise to improve service, to reduce risks and to reduce costs. But to make this promise real, it is necessary to create much simpler and more agile internal structures, and to redesign our jobs.
Many of the largest gains from digitisation are to be found by combining the data-crunching abilities of AI with human skills and qualities. Banking, insurance and asset management are, and should remain, people-centred services. Our work will increasingly be about using AI to assist us to develop and deliver solutions based on our clients’ individual needs and circumstances, drawing on the uniquely human attributes of contextual insight and empathy.
The comprehensive modernisation of our core banking systems was completed in the first quarter of 2018. Building on this foundation, here are some of our achievements:
- Updating our mobile application (app) in 12 countries simultaneously, for both phone and tablet, every six weeks or less.
- Being world first to deliver a machine learning solution for credit spreading.
- Using hundreds of bots throughout the business. For example, our VAF verification bot has reduced client waiting times from a day to 40 minutes.
- Provide more peace of mind to our clients when they shop online, by launching virtual cards, where clients can create virtual cards using our app in a matter of seconds.
- Reducing the average time for a large corporation to open a CIB account with us from ten days to two minutes.
- Providing merchants with a rich set of predictive analytics, through our CustomerView service.
- Building our first Chinese-language internet banking site, now live in Angola.
- In Ghana, our SlydePay digital payments wallet now has over 150 000 registered users.
- Our losses to digital fraud fell by 47% over the year and the number of material system stability incidents reduced by 68% in South Africa and by 72% in Africa Regions.
Delivering on our strategic value drivers
We measure our progress against our five strategic value drivers, which are discussed in the chapters that follow. Work continues to improve the coverage, accuracy, depth and consistency of the metrics used to measure our non-financial strategic value drivers.
CIB’s client satisfaction score remained at a high level during 2018. PBB South Africa’s net promoter score (NPS) rose slightly over the year while PBB Africa Regions score improved sharply. PBB achieved 11% growth in client numbers in Africa Regions and 1% client growth in our target segments in South Africa. Wealth’s NPS ended the year ahead of target and Wealth won awards, including Top Stockbroker of the Year at the Intellidex SA Stockbroker of the Year Awards 2018 and Best Private Bank for Customer Service and Best Private Bank in Nigeria at the 2018 Private Wealth Manager/The Banker Global Private Banking Awards. The group was also awarded Bank of the Year in Africa, South Africa and Namibia by The Banker.
The group’s employee net promoter score (eNPS) rose to +23 from +14 in 2017 and our emotional promoter score rose from +47 to +58. These are exceptionally strong results by global industry standards. In this anonymous survey, 96% of our people reported that they are ‘willing to go the extra mile to make the Standard Bank Group successful’ and 94% reported that they ‘understand their contribution to the broader Standard Bank Group purpose’.
It is in the nature of our industry that our people face many stressful situations in the workplace. We continue to offer comprehensive health and wellness services to our employees. Our employees’ physical and emotional wellbeing appears to be in line with industry norms in South Africa and Africa Regions.
I am delighted that we were able to attract Peggy-Sue Khumalo as chief executive of Wealth in South Africa. We now have a very accomplished senior executive team who are focused exclusively on our South African operations, comprising:
- Lungisa Fuzile, chief executive of Standard Bank South Africa
- Disebo Moephuli, chief executive CIB South Africa
- Funeka Montjane, chief executive PBB South Africa
- Peggy-Sue Khumalo, chief executive Wealth South Africa.
Risk and conduct
The group’s capital and liquidity positions remained sound and within or above board-approved ranges throughout 2018. As always, they were conservatively managed, taking into account both likely and remotely possible needs for capital and liquidity.
The group remains constantly vigilant against cybercrime and continues to place the highest priority on maintaining IT security and stability. We are pleased by the decline in digital fraud over the year, and by the marked improvement in IT stability seen in 2018. There were, however, two incidents of system instability in South Africa, and one in Namibia, which took an unacceptably long time to restore, causing significant inconvenience to our clients and reputational damage to the group. We have placed increasing focus on this to ensure that systems are restored more quickly.
In August, the Central Bank of Nigeria (CBN) wrote to our Nigerian subsidiary, Stanbic IBTC, to advise that it had imposed a penalty of NGN1.9 billion (approximately R75 million) on Stanbic IBTC and directing that USD2.6 billion transferred by Stanbic IBTC on behalf of MTN Nigeria be ‘refunded’ to the CBN. However, in September, the CBN advised that Stanbic IBTC would not be required to refund the USD2.6 billion and that it would examine new submissions and documentation and, where justified, would reverse the NGN1.9 billion penalty imposed.
The group also welcomes the finalisation of the Basel III regulatory framework, which has undoubtedly made the global financial system more stable and more resilient. I believe that international regulators’ top priorities should now be to assess the costs and benefits of the finalised framework, to seek to dissuade national authorities from diverging from international standards, and – most important – to ensure that new digital entrants to the financial markets are held to the same standards of soundness and conduct as incumbent institutions.
As noted above, our results reflect strong franchise growth, evidenced by growing client numbers, and growing deposits and loans to clients.
Despite a tough year, the group’s credit loss ratio (which measures the extent to which we lend money that does not get repaid) improved substantially to 0.56%, from 0.87% in 2017.
Banking activities’ headline earnings grew 7% to R25.8 billion, and generated an ROE of 18.8%, up from 18.0% in 2017.
The cost-to-income ratio was 57.0%, 150 basis points (bps) worse than in 2017. At negative 2.8%, the group’s ‘jaws’ were particularly disappointing. This outcome is partly the result of accounting adjustments, and without these, jaws would have been negative 1%. This is still too large, but it is encouraging that cost growth was contained at 5% for the year.
CIB’s headline earnings fell by 2% to R11.2 billion, with negative jaws of 4.1 % and generating an ROE of 19.3%. CIB’s results reflect the poor performance of the South African economy, partly offset by strong client revenue growth in Africa Regions.
PBB achieved headline earnings of R15.5 billion, up 10%, with negative jaws of 2.6% and an ROE of 21.9%. PBB’s result reflects a resilient South African franchise, with excellent earnings growth in Africa Regions and Wealth International.
The group’s other banking interests (the 40% share in ICBC Standard Bank Plc (ICBCS) and the 20% holding in ICBC Argentina) generated headline earnings of R418 million, 26% down on the prior year. Within this, ICBCS returned to loss, offsetting a pleasing performance from ICBC Argentina. While the poor performance of ICBCS should be seen in the context of the poor performance of global markets in general and the longerterm benefits brought to the group by our partnership with ICBC, it remains a serious concern. During 2019, we will continue to work with our strategic partners at ICBC to develop a lasting solution for these legacy businesses.
Liberty’s earnings attributable to the group is R1.6 billion, 11% up on 2017. It is pleasing that Liberty’s operating earnings were up 42% on the prior year, driven by strong performances in Individual Arrangements and STANLIB. The negative trend in asset prices during the year drove the poor performance of Liberty’s shareholder investment portfolio, with earnings down 81% on 2017. We will continue to support Liberty as it executes its remedial and recovery plan, by continuing to deepen the collaboration between our businesses, for instance by offering Liberty products to our banking clients, and encouraging the sale of banking and wealth products to Liberty’s clients.
From a geographic and legal entity view, when considering the very weak performance of the South African economy over the year, increasingly intense competition, and our high market shares, we believe that SBSA performed acceptably to maintain headline earnings flat on the prior year at R16 billion and to generate an ROE of 16.7%, up from 16.6% in 2017.
The group’s Africa Regions businesses generated headline earnings of R8 billion, 19% up on 2017 (26% up in constant currency terms). Africa Regions produced an ROE of 24%, 20 bps ahead of the prior year, and contributed 31% of the group’s banking activities’ headline earnings.
As always, by far the most significant way in which the group creates social, economic and environmental value is in the ordinary course of our business as we help our clients to invest in their skills, acquire valuable and life-enhancing assets, grow their savings and wealth, manage their risks, expand their businesses, create economic and social infrastructure, and trade in Africa and throughout the world.
We have maintained our level 1 broad-based black economic empowerment (B-BBEE) status in South Africa, when scored against the amended 2018 Financial Sector Code scorecard. On employment equity in South Africa, we achieved our 2018 targets for black and black female representation in senior, middle and junior management. Black people constituted the majority of promotions into all grades. However, African people are still under-represented in promotions into the most senior positions and progress in achieving equitable African representation at top and senior management levels has been slower than we would like.
Corporate social investment spending amounted to R141 million in South Africa, mostly on improving access to better quality education. Across Africa Regions, corporate social investment spending was largely in support of the Global Fund’s HIV Epidemic Response campaign.
In September, on behalf of the group, I was honoured to become one of the global Thematic Champions of the HeForShe movement for gender equity, an international partnership led by UN Women, publicly committing to increasing the representation of women in leadership positions throughout the group. This partnership also provides an opportunity to reinforce the group’s commitment to gender equity and our opposition to all forms of harassment and discrimination.
It is likely that economic conditions will remain challenging and volatile in 2019, and it is certain that the group will face increasingly intense competition. The group executive team’s primary focus will be on meeting the group’s commitments to delivering sustainable earnings growth and an ROE within our target band of 18% to 20% over the medium term.
To achieve this, we will continue to:
- Improve client experience.
- Eliminate unnecessary costs and reduce cost growth – ‘saving to invest’.
- Accelerate the digitisation of the group to ensure and enhance our competitiveness.
- Make further changes to the group’s architecture in order to become a more agile and integrated Standard Bank Group.
- Support faster, more inclusive and more sustainable economic growth and human development in South Africa and throughout the continent we are proud to call home.
Our former joint chief executive, Ben Kruger, retired from the group at the end of 2018. Ben is a great corporate leader and an extraordinarily accomplished banker. It has been an honour to work with him.
I am very grateful to the board, my colleagues, our shareholders and stakeholders and, above all, our clients for your support.