Finance

Insights on how Africa’s largest Bank weathered COVID, economic recovery is on the cards for 2021

Johannesburg Stock Exchange listed and Africa’s largest bank by asset size Standard Bank (ISIN:ZAE000109815) forecasts economic recovery in 2021 post COVID. According to stock exchange news on the South African bourse, for Financial information provided to the Industrial and Commercial Bank of China (ICBC) Limited, the blue bank reported improved economic activity in 3Q20 across Africa regions covering the Sub-Saharan Africa (SSA).

“Despite these positive developments, we remain on high alert. Our business continuity management programmes, including safety protocols, remain in place. Over 70% of our employees are still working from home and many will continue to do so for the rest of the year,” Standard Bank carried in the SENS.

Second quarter was a trough. From an economic perspective, Standard Bank remains of the view that 2Q20 was a low point but that it expects an improvement in subsequent quarters, particularly in South Africa. While SBG expects real GDP to contract on average across SSA (excluding South Africa), the contraction is expected to be much less severe than in South Africa. Kenya, Tanzania and Uganda are expected to report real GDP growth in 2020. The timing and shape of the recovery remains subject to disruptions caused by new waves of infection, both in Africa and in key trading partners. In addition, country-specific risks in Mozambique, Nigeria, South Africa, Zambia and Zimbabwe remain elevated.

Still dedicated to supporting the Africa business. Against this backdrop, the group continues to provide significant support to its retail, business and commercial, and wholesale clients via a variety of measures. Pleasingly, as economies have opened, it’s clients have required less support, and many have resumed their payments. All requests for additional relief and/or extensions have been subject to appropriate client-specific risk assessments.

By 30 September 2020, the Personal & Business Banking South Africa (PBB SA) client relief portfolio had declined from R107 billion as at 30 June 2020 to R61 billion. On the lapsed accounts (i.e. where the payment holiday period granted had expired and the relief had not been extended) the average monthly instalment payment rate was >95% for the secured portfolios (mortgages and VAF), >90% for the unsecured portfolios (card and personal unsecured) and 100% for business lending. Of the extended portfolio (i.e. where the payment holiday period granted had expired and the relief period had been extended), 83% thereof was secured.

Provision coverage on the remaining R61 billion client relief portfolio increased relative to 30 June 2020.

In PBB Africa Regions (PBB AR), the client relief portfolio declined from R11 billion as at 30 June 2020 to R6 billion as at 30 September 2020. Of the balance outstanding c.56% is to business customers, >75% is secured and >75% relates to exposures to clients in Kenya, Namibia, Nigeria and Uganda. The performance of the lapsed book is better than the rest of the portfolio – 99% in stage 1 and 2. Provision coverage on the remaining R6 billion client relief portfolio increased relative to 30 June 2020.

Corporate & Investment Banking (CIB) client exposures with restructured terms increased to R70 billion (from R48 billion as at 30 June 2020). CIB continues to monitor certain sector- and client-specific risks closely; namely Commercial Real Estate, Hospitality and Oil & Gas.

In 3Q20, PBB disbursements continued to recover from lows in April 2020. In South Africa, attractive house prices and lower interest rates supported sales activity and in turn, mortgage disbursements in the quarter. Period on period, growth in PBB’s unsecured portfolios continued to outpace that of the secured portfolios.

Growth of the PBB Africa Regions’ portfolio continued to outpace PBB South Africa. In CIB in 3Q20, lending to corporates in South Africa slowed relative to 1H20, however lending growth in Africa Regions remained robust. Customer deposit growth period on period remained robust.

benchmark rate cuts squeeze margins. The significant interest rate cuts year to date are an increasing drag on margins and net interest income (NII). In South Africa, we do not expect any further interest rate cuts this year (after cumulative cuts of 300 basis points to the end of July 2020). We expect a 25 basis point increase in 2021. In Africa Regions, inflation is broadly in check and rates are expected to remain at similar levels through to the end of the year. Trading activities slowed in 3Q20 but remained a key driver of non-interest revenue growth year to date. In South Africa, PBB account turnover levels recovered to at or around pre-COVID levels (personal accounts slightly above and business accounts slightly below). Larger businesses recovered faster than smaller businesses. Physical channel activity levels (branch and ATM) improved but remained below pre-COVID levels, negatively impacting fees. In PBB Africa Regions, ongoing customer acquisition supported fees.

Cost efficiency. Cost containment remains a focus. Information Technology (IT) costs remained elevated as we continued to invest, particularly in digital client capabilities. In light of the NII and activity-related fee pressures, we expect negative jaws for FY20. Pre-provision operating profit growth was marginally negative period on period.

Credit trajectory. Credit trends to date are in line with our expectations. While initial indications are that collections have improved in 3Q20 relative to 2Q20, retrenchment claims have also increased. The latter, combined with broader customer stress, resulted in an increase in non-performing loans and additional impairment charges as balances transferred from stage 1 or 2 to stage 3. There remains a risk that the environment deteriorates, and the portfolio performance is worse than currently expected; for example, due to new waves of infection, subsequent lockdowns and further job losses.

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