BEN Kruger is deputy CEO of Standard Bank.
SUMMIT TV: Standard Bank is reaping the benefits of its decision to focus on Africa — but it has seen a major surge in bad debts in the first half and its corporate and investment banking division is finding the going tough. Overall headline earnings were up 11%. What was the reason for the growth?
BEN KRUGER: We’ve had some interesting pockets of growth. Our personal and business bank in South Africa performed particularly well, increasing 33%. The personal and business bank in Africa did similarly well, growing about 32%, and our businesses in Africa had a strong performance, increasing headline earnings by more than 80% for the year.
The difficult part for our business clearly has been in our corporate and investment bank, which, after a very strong start in the first quarter, had a more demanding second quarter, particularly in the businesses outside Africa.
STV: Were there any corporate calamities? I ask that because there seemed to be an overall spike in credit impairments, up 35%, but quite significant increases in corporate and investment banking.
BK: Quite right. In South Africa, corporate and investment banking had a pretty clean portfolio with losses below 10 points, which was actually almost too low, but in the international business we’ve had a much higher impairment charge for the first six months. About half of that related to legacy positions we’ve had in the Middle East where you would have seen us involved in some legal action in the past six months, so we have provided properly for that.
We had a commodity customer that got into trouble as well in the international business that we provided for in full. In Africa we’ve had a few similar exposures, energy having had a tougher time — but not completely out of the range of what we’ve expected. If we normalised the corporate and investment bank over the year we would be closer to where we ended for last year.
STV: Personal and business banking –— are you happy with credit impairments there or would you like that to tick down? I think that’s come off by about R1bn in your mortgage book.
BK: In South Africa we’ve seen a continuing downtrend in credit costs — the subtle nuance in South Africa is that we have grown the bottom part, being unsecured lending, so we have a slightly higher provision there. We also have bigger growth in Africa in personal and business banking, and while the margins are much higher in this business, the credit costs have gone up as well — but on a net basis it’s still very positive.
STV: Talking about unsecured lending, that’s about 19% of the book for private banking. Is that the level where you would like it to be? Is the contribution from unsecured lending going to drop? You seem to be applying stricter criteria at the moment.
BK: To put that into context, in the definition of unsecured lending we would include our card business, our overdrafts business and revolving plans. Those are established businesses that the bank has been involved in for many decades.
The business that people refer to when they get concerned about credit quality is what we would call "inclusive lending" at the bottom end of the market. Our book there is much smaller — we have about R3.5bn of exposure there, mostly to our own customers, being 85% to existing customers. The term structure of that book is quite short. We focus on that and we are not overly concerned. It still is an opportunity in the market, but it is a market everyone is focusing on extensively. In doing that you will find better balancing of risk and return — clearly people are paying too much for loans, so that will adjust downwards and find equilibrium.
STV: What is the full-year picture looking like for the mortgage book? It’s been quite strong and it seems Standard Bank has overtaken Absa as the biggest home loans provider at the moment. With interest rates being so low, could we see a further boost or are these rates hurting you with the endowment effect?
BK: Clearly low interest rates are tougher on the banks with the endowment effect. On the mortgage book, we didn’t have a strategy to grow that per se — we look at customers more broadly. If a customer needs a mortgage and we can’t provide at that point, that’s difficult for them to deal with, so for our own customers we try very hard to be there for them. So the growth in our mortgage book has been more a reflection of us trying to remain close to our customers in difficult and in good times.
Many good young customers are finding buying their first houses very difficult, given what’s been happening over the past few years, so our growth in mortgages has really been a derivative of what we’ve done in our customer relationships broadly, where clearly the market has been very competitive.
STV: So you’re not chasing aggressive mortgage growth?
BK: No, in fact we’ve been very fortunate to grow market share in all categories of lending — but it’s been more a holistic focus on customers.
STV: Looking at Africa transactional products and services, which is part of corporate and investment banking — that business is the same size now as the South African business. What about profitability, and at what point is this going to eclipse the South African business?
BK: That’s a very good question. If you tie that together with the investments we’ve made in IT and the branch networks in Africa, we have a slight migration to becoming more of a commercial bank rather than a pure investment bank in many of the African businesses.
If one gets that right, clearly that’s a more stable revenue but that requires greater investment in infrastructure and technology. We’ve now seen strong 60% growth in our African business on the transactional business side and it’s a reflection of the maturity of that franchise providing us with an opportunity to deal with customers across a broad base.
STV: If we were looking at Standard Bank over a longer term of three to five years, is this African presence where growth for Standard Bank will come from?
BK: This positions us really well. In fact, we are very focused on our South African business as well. We don’t want to fall behind in South Africa, and if you watch the business you will see we are trying very hard to be relevant here for our customers but we have invested significantly in Africa over the past few years and we do expect higher growth in Africa.
STV: That’s obviously behind a big increase in costs, up 17%, with staff costs up 16% and professional fees up about 30%. Are you letting costs get out of control?
BK: No, to put that in context, 4% of the cost growth was really just the currency effect in Africa. If you look at our African businesses, our cost growth there has been 28% and revenue growth has been 40%, so we have a net positive there of 12%.
We are trying to match our level of investment now with the revenues we are generating, and obviously the much higher levels of cost there have an impact but we are comfortable because we can see the revenues flowing from that. In South Africa, if we look at personal and business banking, you will see the costs have only increased 7% for the year, so it’s a very tight regime.
The area of difficulty for us has really been the dollar cost base where we saw lower dollar revenues and a very resistant dollar cost base with much of that driven by regulatory interventions, where as you scale businesses down internationally you make less revenue but you still need people to manage the positions down and comply with all the regulatory issues.
STV: So you are saying the costs will reduce in the future as the dollar cost base works its way out of the system?
BK: We will be retaining some element of a dollar-based business but we are well down the track of right-sizing that business.
STV: For the second half of the year, much of the same, better or worse?
BK: We think the revenue environment could be tough for the second half given what’s happening in Europe and around the world, but we remain very focused to extract as much revenue as we possibly can. Given that we think it’s going to be fragile, we are focusing on costs, trying to get that number down for the second half.
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