Sim Tshabalala prefers to see Standard as a universal financial services organisation. Picture: Freddy Mavunda
Sim Tshabalala prefers to see Standard as a universal financial services organisation. Picture: Freddy Mavunda

Banks have certainly come back into favour, with share prices up more than 20% since the beginning of the year.

Both private and corporate investors are expected to borrow again in the "Cyril Spring". The banking sector is the most liquid in the SA Inc, or nonrand hedge, group of companies, with more reliable earnings streams than domestic industrial sectors such as construction and engineering.

The one challenge is the proliferation of new competitors such as Bank Zero, TymeDigital (whose parent, the Commonwealth Bank of Australia, has a higher market cap than all big four SA banks put together) and Discovery Bank. All the major banks grossly underestimated the impact of recent newcomer Capitec.

Standard Bank CEO Sim Tshabalala believes that the group will be well-placed to increase its digital business now that it is finishing off its core banking programme, a 10-year programme that involved updating administration systems, some of which dated back 50 years.

"We will be able to open accounts faster, and bring in machine learning and other forms of robotics." Nedbank is already introducing a way to open an account on a smartphone.

Tshabalala says the bank is not afraid to work with other corporates on its digital development, as it demonstrated two years ago with the introduction of the SnapScan swipe payment system. It is investigating the use of blockchain as an efficient payment backbone — though it steers clear of bitcoin.

Tshabalala prefers to see Standard as a universal financial services organisation rather than a bank. This explains why he allows Liberty, which accounts for barely 5% of group profit, to take up significant management time. "We rely on Liberty and Stanlib to deliver the life and wealth products we need to give to our clients. We have sent David Munro to Liberty in order to lift margins and sales and reduce costs."

Tshabalala’s maiden solo results were strong, and the bank is in good health. Group headline earnings were up 14% to R26.3bn, while the dividend is up 17% to 910c. The investment in Africa is paying off, with headline earnings up 19% to R6.75bn, or 35% in constant currency, as the stronger rand hit the translations.

And it’s almost entirely a corporate and investment banking story, as just R202m is generated from the retail operations. In contrast, Barclays makes about R700m from retail of its R3bn in the rest of Africa.

Standard Bank’s slow growth in advances indicates just how stagnant the SA economy has been: mortgage loans increased by 3%, vehicle finance by 1% and card debtors by 3%. But Tshabalala says the group has adopted a proactive deposit-led strategy so that it can rely more on cheap retail funding than expensive treasury funding. Deposits increased by 8% to R535bn.

When it comes to return on equity and the cost-to-income ratio, Standard Bank benchmarks itself against FirstRand rather than the start-ups. Standard Bank’s return on equity is increasing steadily and now stands at 17.1%. In the six months to December, FirstRand had a return on equity of 22.5%, though it is declining, while its cost-to-income ratio increased to 51.7%.

Outgoing FirstRand CEO Johan Burger says WesBank had a poor six months as demand for vehicle finance was low, but it still made R1.9bn in the half-year while Standard Bank made just R500m in the full year from the product line. Though WesBank’s local retail vehicle finance earnings fell 15%, it made some ground through its corporate and commercial book as well as from commercial loans.

FNB increased headline earnings by 12% to R7.2bn, and RMB by 11% to R3.2bn. Burger says the bank deliberately grew loans faster in the better-quality premium sector (5%) than in the mass consumer sector (3%). At RMB investment banking and advisory, where its arch-rival is Standard Bank, profit was up 18%.

FirstRand is the only one of the four banks to have a significant hard currency operation, in Aldermore, a challenger bank in the UK (similar to Bank Zero) into which it is integrating its MotoNovo business, which finances second-hand vehicles in the UK. Aldermore is strongest in the SME, mortgage (especially buy to let) and savings sectors, and a full transactional platform will be rolled out.

"If we stuff it up we won’t be forgiven," says incoming FirstRand CEO Alan Pullinger.

FirstRand’s FNB has been running rings around its competitors with its digital product.

It still sweats its assets and liabilities so efficiently that its own return on equity is an outlandish 40.6%.

But an awakened Standard Bank will be a formidable competitor, and Nedbank and Absa are catching up. Further, Pullinger will no longer have the luxury of the shrewd and experienced chairman, Laurie Dippenaar, sitting down the passage, as he is retiring.

While FirstRand trades on a premium to the sector at a p:e of about 15.2, some believe even Standard Bank is looking full at 13.7. But at least both offer a respectable 4% dividend yield.

There is renewed energy at the newly "liberated" Absa, and it is the value share in the sector, with a p:e of just 12. But it isn’t encouraging to see the group manipulated returns through "normalisation", which turned a 4% decline into a 4% improvement.

In all the excitement of CEO Maria Ramos’s presentation, investors might have ignored that return on equity is falling to 16.4% and below.

Nedbank’s results attracted the least attention in this cycle; CEO Mike Brown did not pull out many surprises. His return on equity would look good at 18.1% if not for the problems at its associate ETI, which controls the pan-African Ecobank. It took a R744m hit this financial year, mainly from its problems in Nigeria.

Nedbank’s operational results reflected the same slow SA economy as its peers, with retail bank earnings up 7% to R5.3bn and corporate up 5% to R6.3bn. After the unbundling of control from Old Mutual, however, the free float will increase and Nedbank will have a higher weighting in index funds.

But FirstRand will still be the bank to beat.