South African banking giant Standard Bank said in an annual report on Friday that despite weathering an exceptionally challenging year, it expected extremely difficult operating conditions for 2009.
Earlier the group reported an 8% growth in headline earnings in 2008 to R14-billion rand.
Standard Bank chairperson Derek Cooper and chief executive Jacko Maree said in a review: “Our exposure to the turbulent conditions [economic recession] that swept through global financial markets was made more significant by the fact that 30% of our banking assets are located outside South Africa in 24 different international jurisdictions where we have banking licences, each with its own legal and regulatory requirements and market complexities.”
The group said it continued to drive organic growth and to integrate its recent acquisitions, without compromising its focus on risk management.
“This advanced our long-term strategy of positioning the group as an emerging markets financial services provider with a strong African base,” Cooper and Maree said.
The group said that operating conditions in personal and business banking in South Africa had deteriorated far more rapidly than anticipated in an environment of higher inflation and rising interest rates.
“The combination of higher levels of household debt, accumulated over the last five years in a more benevolent interest environment, and sharply higher interest rates, resulted in average debt servicing costs for consumers increasing by well over 50%.
“This was compounded by a surge in energy and food prices, significantly eroding the ability of South African consumers to repay debt and resulted in a substantial increase in the group’s credit loss impairments,” Maree and Cooper said.
“While we had anticipated a cyclical downturn in the domestic economy in 2008, we did not foresee the rapid pace of the deterioration. With hindsight, it is clear we could have moved faster to tighten credit scorecards and curtail loan growth, steps which were taken in the second half of 2008.
Stricter credit criteria
These included new loan-to-value criteria in home loans and generally stricter credit criteria across most retail products,” the two added Standard Bank said that following a rigorous review of all group portfolios, it was confident that impairments were at appropriate levels, as it anticipated that its corporate client base would come under pressure as a result of the deepening impact of the global economic downturn.
Despite the unprecedented conditions, the group said it achieved very strong revenue growth. Net interest income grew by 40% and non-interest revenue by 19%.
Net asset value grew by 47% in 2008 to R85,9-billion. In addition to the R15,9-billion of equity raised by the issue of shares to the Industrial and Commercial Bank of China and R14,1-billion of earnings, a further R5,2-billion of currency translation and associated hedging gains were accounted for directly in reserves. Dividends of R6,1-billion were paid to ordinary shareholders.
The group said its capital position is strong, reflected in a tier I capital adequacy ratio of 10,7% and a total capital adequacy ratio of 12,9% at year end. “Our liquidity profile remains healthy with a buffer of unencumbered and readily available marketable assets, in excess of prudential guidelines, of R97-billion at December 31 2008.
The banking operations have maintained relatively modest loan-to-deposit and gearing ratios throughout the year, ending the year on 93,6% and 18,3 times respectively,” Maree and Cooper said.
Looking ahead, the group said it expected extremely difficult operating conditions to continue, posing significant challenges for its customers and industry. “Global confidence in financial markets is unlikely to improve in the short term,” Maree and Cooper said.
“Operations outside of South Africa should continue to benefit from synergies with the South African operations and opportunities in local markets. In South Africa it is likely that consumers will remain under pressure as unemployment and lower economic growth exacerbate financial stresses despite the relief provided by the current downward trend in interest rates.
“Lower commodity prices and a slowdown in activity will pose challenges for South African corporate customers,” the two added.
In light of the prevailing volatility of financial markets, the group has not published financial objectives for 2009. It concluded that producing similar results in 2009 to those achieved in 2008 would be an acceptable outcome. — I-Net Bridge