Standard Bank provides quarterly information to the Industrial and Commercial Bank of China Limited (ICBC), which means the broader market gets a quarterly update as well. In this case, it covers the three months ended March 2022.
Group earnings were 28% higher this period than in the comparable period in 2021. Higher interest rates across many countries were a significant contributor here, as banks love it when rates go up. Of course, there’s a point at which the increases drive credit losses that offset the income benefit, but we are a long way off those levels in my view. The incredibly low rates during the pandemic haven’t been helpful to banks.
To complement the higher average interest rates, the bank achieved a larger average balance sheet i.e. there was growth in interest-earning assets. This is equivalent to a volume and pricing benefit in the same period, a great combination for earnings.
Transactional activity was higher, which supported all-important fee growth. The banks chase fees (vs. net interest income) as it improves Return on Equity (ROE), the primary driver of the valuation of a bank. Another contributor to this was trading revenue, which benefitted from volatile markets and higher commodity prices.
Unsurprisingly, operating expenses increased vs. the comparable period in this inflationary environment. The bank doesn’t give guidance as to the extent of the increase.
The credit performance was in line with expectations. There were lower impairment charges in most segments except Corporate and Investment Banking, which saw a net charge in this period due to loan book growth. This makes sense as the bank raises provisions as the book grows.
It’s interesting to see corporates borrowing again, something I’ve highlighted in my recent writing as a likely outcome of inflation and working capital pressures. This is good news for banks, particularly as rates increase.
Liberty is being 100% consolidated by Standard Bank as of 1 February 2022. There have been various accounting adjustments linked to this, resulting in a negative contribution from Liberty. Investors will likely ignore the accounting and be far more interested in how successfully the businesses can work together now that the acquisition has been completed.
Standard Bank holds a 40% stake in ICBC Standard Bank Plc, an emerging markets and commodities business that had exposure to entities impacted by the war in Ukraine. The business did a great job of reducing counterparty positions and reducing risk, eventually recording a small operating profit for the quarter excluding the receipt of a USD200 million insurance recovery back in January.
In terms of outlook, Standard Bank remains committed to delivering positive JAWS and an improving ROE in 2022. JAWS is the difference between growth in income and growth in expenses, with positive JAWS implying improvement in margins as income growth is the faster of the two.
Standard Bank is up around 18% this year.
