Standard Bank CEO Sim Tshabalala says the bank will not allow upstart lenders to gain a foothold in the small- and medium-sized enterprises (SME) lending market as this will allow them to eventually “move up the value chain” much like Capitec has done in the retail banking segment.
Likening the rapid inroads being made into business banking by the likes of TymeBank and African Bank to the emergence of Capitec two decades ago, Tshabalala says incumbent banks will not make the same mistake twice. Capitec, which was only registered as a bank in 2001, has since racked up 18.1-million clients to emerge as SA’s biggest retail bank by customer numbers with a market value that threatens to surpass that of 160-year old Standard Bank.
“What happened a couple of decades ago with Capitec entering the banking market, and the banks not responding, resulted in the outcome you have today with their dominance in retail banking,” Tshabalala said in an interview on Friday. That was after Standard Bank’s interim results showed record headline earnings of R15.3bn, the highest yet for a half-year.
“I don’t believe that will happen again in business banking because the environment is so much more competitive. We’re going to respond, we’re going to compete.”
Tshabalala’s comments come after TymeBank, which is backed by Patrice Motsepe’s African Rainbow Capital, announced earlier this month that it was buying out SME funder Retail Capital to make a move into business banking. African Bank also announced in May that it was buying Grindrod Bank to make a similar move into business banking while Capitec’s purchase of Mercantile Bank in October 2019 further underscored the allure of the segment.
Performed admirably
“Business banking is an environment where people are noticing the large ROEs [return on equities] being generated by the incumbents and they are looking for opportunities to eat into those ROEs,” said Tshabalala. “They’re seeing an opportunity in the mid-sized to smaller enterprises with digital solutions. We believe we’ve got those digital solutions and we’ll be responding appropriately.”
Despite Tshabalala’s acknowledgment of the potential threat posed by new entrants into SA’s increasingly competitive banking market, Standard Bank performed admirably in its financial first half with a 32% rise in profit and by raising its interim dividend by almost half.
Africa’s biggest lender by assets said on Friday that profit for the six months to end-June rose 32% from the previous interim period to R17.59bn. Headline earnings rose 33% from the previous half-year to R15.3bn enabling the bank’s board to approve an interim dividend of 515c per share, a 43% increase on the 360c a share paid out in the prior half-year period.
Headline earnings per share (Heps), a profit measure that strips out one-off items, rose 37% to 936c.
SA banks have benefited from the economy’s recovery from Covid-19 as consumers took advantage of easing lockdown restrictions and record low interest rates to accelerate spending in the past year. However, with inflation and interest rates rising worldwide, their longer-term prospects are more uncertain as mounting global headwinds ranging from supply chain constraints to rising geopolitical tensions threaten to upend the postpandemic recovery.
Muted growth
Standard Bank’s consumer and high net worth unit — its retail and private banking arm — saw headline earnings growth of 28% to R3.42bn driven by a continued economic recovery across all its markets. Business and commercial clients — the business-facing part of the business — delivered a 59% increase in headline earnings to R3.29bn.
The group’s money-spinning corporate and investment banking unit saw more muted growth in headline earnings of 16% to R7.35bn. However, the unit still accounted for more than 48% of the bank’s total group headline earnings during the period.
The performance of Liberty continued to improve after the successful buyout of the insurer from minority shareholders, which was concluded in March. Liberty’s contribution to group headline earnings rose 55% in the half-year to R253m as the unit’s SA insurance operations improved thanks to waning mortalities on the back of a more benign fifth wave of Covid-19 infections.
While the unit’s investment portfolio was negatively affected by market volatility it remains the third-largest investment services business on the continent with combined assets under administration of R1.4-trillion. Liberty remains well capitalised, with a solvency capital requirement cover ratio of 1.79 times as at June 30, giving Standard Bank the scope to focus on driving sales from the unit as it becomes more integrated into its operations.
The group’s Africa regions grew headline earnings by 41% to R5.63bn underpinned by an expanding balance sheet, higher transactional volumes and trading revenue, rising interest rates and a recovery in international trade. The top six contributors to the Africa region’s headline earnings were Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.
Standard Bank said rising borrowing costs are expected to negatively affect consumer and business confidence, particularly in its key market of SA where GDP is expected to grow only 2.3% in 2022. Higher interest rates act as a double-edged sword for banks in that they boost revenue from loans yet erode clients’ personal income.
Standard Bank said it expects inflation to peak in the second half of 2022, though price growth will average 6.5% in 2022 that is likely to result in another 75 basis points of monetary tightening.
Update: August 19 2022
This story has been updated throughout with comments from Standard Bank’s CEO as well as new information.
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