Overview of financial annual results 2023

In 2023, Standard Bank Group delivered earnings growth of 27% and a return on equity of 18.8%. This strong performance is underpinned by our robust and growing franchise and is reflective of the positive momentum in all our businesses.

GROUP RESULTS

In the twelve months to 31 December 2023 (FY23), the group recorded headline earnings of R42.9 billion, up 27% relative to the twelve months to 31 December 2022 (FY22) and delivered a return on equity (ROE) of 18.8% (FY22: 16.3%). This strong performance is underpinned by our robust and growing franchise and reflective of the good momentum in our business. Our Africa Regions franchise contributed 42% to group headline earnings. The top eight contributors to Africa Regions’ headline earnings were Ghana, Kenya, Mauritius, Mozambique, Nigeria, Uganda, Zambia and Zimbabwe.

In FY23, the group effectively defended and grew its banking franchise and improved banking earnings and returns. Client franchise health showed improvements across a number of metrics. Active customers grew by 6% to 18.8 million, with growth recorded in both South Africa and Africa Regions. In addition, digital retail clients in South Africa increased by 8% as more clients transitioned to our convenient digital channels. In the year, the group recorded over 2.8 billion digital transactions for retail clients, up 30% year on year, and distributed over R41.1 billion on behalf of our South African clients via our digital wallet platform. Client satisfaction scores improved across various channels, particularly digital in South Africa.

The Insurance & Asset Management franchise recorded an improved insurance performance and growth in its assets under management year on year. Since the announcement of the Liberty minority buyout, the group has received over R5.7 billion in distributions related primarily to capital optimisation. In FY23, the group successfully bought out the minorities of Liberty2Degrees (L2D). L2D holds an attractive portfolio of commercial properties.

The group ended the year with a common equity tier 1 ratio of 13.7% (31 December 2022: 13.4%). This positions the group well to reward shareholders and continue to grow. The SBG board approved a final dividend of 733 cents per share which, when combined with the interim dividend, equates to a dividend payout ratio of 55% for FY23.

In 2023, the group mobilised over R50 billion of sustainable finance for corporate clients and provided over R2 billion in loans to SMEs to help business owners access affordable and reliable alternative energy products. In addition, the group disbursed over R145 million to homeowners and over R840 million to businesses for solar installations in South Africa.

OPERATING ENVIRONMENT

In 2023, uncertainty remained elevated globally. The year was one of two halves. In the six months to 30 June 2023 (1H23), inflation remained elevated and interest rates continued to rise. In the second six months to 31 December 2023 (2H23), central banks paused whilst monitoring inflation trends and developing geopolitical risks. Across most markets, inflation was stickier than forecast and interest rate cuts were delayed. The International Monetary Fund (IMF) forecast global real gross domestic product (GDP) growth of 3.1% in 2023.

Sub-Saharan Africa also experienced inflationary pressures and monetary policy tightening. Higher debt costs increased fiscal pressures and sovereign risks in certain countries, which in turn, drove currency weakness. There was progress on Ghana’s debt restructure, Kenya’s funding outlook improved, and Nigeria took steps to liberalise the Naira. While currency movements were mixed across the group’s portfolio of countries, they were weaker on average by the end of the year.

In South Africa, inflation peaked in March 2023 at 7.1%, and then declined to end the year at 5.1% in December 2023. The South African Reserve Bank increased interest rates by a cumulative 125 basis points by the end of May 2023 and then paused. The repo rate closed the year at 8.25%. While electricity disruptions and logistics constraints placed pressure on businesses and corporates, and in turn on the economy, progress was made during the year, particularly in the last quarter, towards delivering sustained improvements on both fronts. South Africa’s real GDP grew at 0.6% in 2023.

OVERVIEW OF PERFORMANCE

The group’s products and services are grouped into i) Banking and ii) Insurance & Asset Management.

HEADLINE EARNINGS BY BUSINESS

BANKING

Banking headline earnings reflected a strong performance, up 31% period on period. Banking ROE increased from 16.4% to 19.5%.

LOANS AND ADVANCES

Gross loans and advances grew by 7% year on year to R1.7 trillion. Subdued growth across the retail portfolios together with a decline in business lending was more than offset by strong growth in the Corporate and Sovereign lending portfolio. Higher interest rates negatively impacted demand and affordability and resulted in a slowdown across mortgages, card and personal unsecured lending in 2H23. In South Africa, personal unsecured loan applications increased but approvals declined. The business lending portfolio declined by 5% due to lower client demand linked to elevated rates, reduced appetite to invest, and higher early repayments. Renewable-energy deals and higher demand for trade facilities supported the corporate portfolio. The Africa Regions’ loans and advances to customers grew by 20% in constant currency but was broadly flat in ZAR.

Total provisions increased by 15% to R64.0 billion. Total coverage increased from 3.6% at 31 December 2022 to 3.8% at 31 December 2023 driven by an increase in Stage 3 loans and related provisions. Stage 3 coverage decreased marginally from 50% at 31 December 2022 to 47% at 31 December 2023 driven by the increase in the proportion of early stage non-performing (Stage 3) loans which attract lower coverage.

DEPOSITS AND FUNDING

Deposits from customers increased by 7% year on year to R1.9 trillion, driven by ongoing underlying client franchise growth. Wholesale-priced deposits grew by 7% and retail-priced deposits grew by 4%. Deposits from banks decreased by 4% year on year. Current and savings balances growth slowed as clients increased spending and/or moved their funds to term products to take advantage of more attractive interest rates. Term deposits grew by 12%.

REVENUE

Revenue grew by 21%, driven by net interest income growth of 25% and non-interest revenue growth of 14%.

The group has amended the methodology for recognising interest on Stage 3 loans. This change resulted in an increase in net interest income and an equal and opposite increase in credit impairment charges. The change also resulted in a 7 basis point increase in the group’s FY22 net interest margin to 432 basis points and a 8 basis point increase in the group’s FY22 credit loss ratio to 83 basis points. Net interest income growth was driven by strong average balance sheet growth (average gross loans to customers grew by 11%) and higher margins. The net interest margin increased by 62 basis points to 494 basis points. Strong margin expansion, driven by higher average interest rates across South Africa, Africa Regions and International (i.e. positive endowment), was moderated by pricing pressure in South Africa linked to increased competition in home loans, vehicle and asset finance, and corporate lending. Positive endowment contributed the equivalent of R10.8 billion uplift in net interest income in FY23 compared to FY22 (55 basis points).

A larger, increasingly engaged client base and annual price increases, combined with higher client trade and transactional activity resulted in 10% growth in net fee and commissions. Increased client card spend and travel supported healthy growth in card and foreign exchange related fees.

Trading revenue increased by 20% to R20.5 billion, driven by increased client-backed trades as well as market-specific opportunities linked to market dislocations which occurred during the year.

Growth in other gains on financial instruments was driven by an increase in the fair value financial investment portfolio and higher mark-to-market gains.

CREDIT IMPAIRMENT CHARGES

Credit impairment charges increased by 22% to R16.3 billion. The increase in charges was driven by new loan origination, client strain driving partial payments, negative sovereign risk migration, and new defaults in the Industrial sector and legacy exposures in the Consumer sector. In South Africa, credit impairment charges increased across all portfolios, compounded by the non-recurrence of credit recoveries on the payment holiday portfolio in FY22 (R500 million). In Africa Regions, balance sheet growth, client-specific provisions, and risk migrations led to higher credit charges. The group's credit loss ratio increased from 83 basis points in FY22 to 98 basis points in FY23, at the top of the group's through-the-cycle credit loss ratio target range of 70 to 100 basis points.

OPERATING EXPENSES

In FY23, we invested in our franchise and our client propositions. We hired over 1 000 people, increased our points of representation in South Africa, launched several new products (including our solar loan) and expanded our digital offerings and functionality. Operating expenses increased by 15% to R79.7 billion, impacted by inflationary pressures, particularly in Africa Regions. Staff costs grew by 17% driven by a larger staff complement, annual increases, and higher performance-linked incentives. Other operating costs grew by 12% driven by higher business activity- related spend.

Software, cloud, and technology-related costs increased by 14% due to higher spend on cloud migration and software licenses as well as personalisation and other focused AI-driven projects. System stability and availability was excellent throughout the year. Amortisation declined by 4% as the group’s large historic IT programs started to roll off.

Growth in premises-related costs was well contained at 10%. Increased municipal charges and higher fuel costs linked to electricity disruptions in South Africa were offset by savings from continued infrastructure optimisation. In South Africa, continued rationalisation of our footprint led to a reduction in our branch square meterage (down 4% year on year) and our ATM network (down 6% year on year). Professional fees increased due to higher audit fees and higher legal fees related to collection initiatives. In addition, travel and entertainment costs increased as business- related activity continued to recover off a low base. Total income growth exceeded cost growth, resulting in strong positive jaws of 5.7% and a decline in the cost-to-income ratio to 51.4%

(FY22: 53.9%).

CENTRAL AND OTHER

This segment includes costs associated with corporate functions and the group’s treasury and capital requirements that have not been otherwise allocated to the business units. In FY23, the central headline loss amounted to R1.0 billion (FY22: loss of R1.4 billion). The loss decreased due to an increase in net interest income driven by higher average interest rates and a higher level of capital held at the Centre.

INSURANCE AND ASSET MANAGEMENT

Post the Liberty minority buyout in FY22, Liberty has been integrated into the group and is now included, with other related businesses, in the Insurance & Asset Management (IAM) business unit. The insurance operations new business value increased by 13% year on year to R3.0 billion mainly due to an improved claims experience and increased sales. Insurance operating earnings grew by 23% to R3.9 million supported by the South African insurance business which increased operating earnings by 27% to R3.9 million.

Assets under Management (AUM) in the South African asset management businesses increased by 8% to R1.0 trillion. This growth was attributed to the STANLIB South Africa business given positive local and offshore investment market movements during 2023. Asset management operating earnings decreased by 20% to R928 million, largely as a result of higher planned operating expenditure in STANLIB.

Overall, IAM headline earnings grew by 22% to R2.8 billion in FY23 and delivered an ROE of 13.1% (FY22: 10.5%). The capital coverage of the key legal entities within IAM remain robust.

ICBC STANDARD BANK PLC

ICBC Standard Bank Plc (ICBCS) recorded a strong operational performance in FY23 driven by increased client activity linked to market volatility. ICBCS (via the group’s 40% stake) contributed R1.3 billion to group earnings (FY22: R1.9 billion, R1.2 billion thereof related to the insurance settlement and R0.7 billion thereof related to ICBCS’ operational performance).

Profit attributable

The group’s profit attributable to ordinary shareholders increased by 29% to R44.2 billion. The primary driver of the difference between the group’s headline earnings and profit attributable was fair value gains on investment property in Zimbabwe.

CAPITAL AND LIQUIDITY

The group’s common equity tier 1 ratio (including unappropriated profits) was 13.7% as at 31 December 2023 (31 December 2022, 13.4%). The group’s Basel III liquidity coverage ratio and net stable funding ratio both remained well above the 100% regulatory requirements.

PROSPECTS

In 2024, while global risks are expected to persist, the IMF is forecasting a soft landing. Inflation is expected to continue to fall providing scope for interest rate cuts. The IMF expects global real GDP growth to be 3.1% in 2024, in line with 2023.

Real GDP growth in sub-Saharan Africa is expected to accelerate from 3.3% to 3.8% as higher levels of growth in East Africa more than offsets lower growth in South Africa and Nigeria. The interest rate outlook is mixed. While some markets may still see interest rate increases in 1H24 (Angola, Kenya, Nigeria and Zambia), most markets are expected to start cutting interest rates in 2H24.

Overall, the outlook is positive, but the region remains at risk of global shocks and climate events. In addition, 13 countries in sub-Saharan Africa will hold elections in 2024, including six where the group operates, namely Botswana, Ghana, Mauritius, Mozambique, Namibia, and South Africa.

In South Africa, inflation is expected to decline to 5.0% on average in 2024, supported by a lack of demand-driven inflation, a lack of wage pressure and favourable base effects. The repo rate is expected to decline to 7.50% by year end (Standard Bank Research: 3 cuts of 25 basis points each starting in July 2024 and one 25 basis point cut in 2025). The electricity shortfall is expected to ease notably, relative to that experienced in 2023, driven by an increase in Eskom supply and the ongoing expansion of private sector generation capacity. Actions to ease the logistics constraints are also expected to gather pace. Together, this should support an improvement in real GDP growth to 1.2% in 2024. The South African election outcome is not expected to drive a change in policy direction. Accordingly, the continued gradual policy reform should be growth-supportive over time. Any acceleration in resolving the electricity, road, rail, and port constraints would aid this further. While organic growth (in constant currency) is expected to remain relatively robust, the group’s year-on-year trends in reported currency (ZAR) will be dampened by the currency devaluations experienced in certain of our Africa Regions’ countries in 2023 and forecast for 2024. The guidance that follows is based on year-on- year movements in reported currency (ZAR).

For the twelve months to 31 December 2024 (FY24), we expect average interest rates to be marginally down and pricing to remain competitive. Balance sheet growth to remain slow in 1H24, but improve in 2H24. Accordingly, net interest income is expected to be up low-to-mid single digits year on year. Fee and commissions are expected to grow at mid-single digits supported by a larger client base, increased client activity and higher client spend. Trading revenue is likely to decline off a high base in FY23, but will be subject to market developments and client flow. While there is a heightened focus on costs, we need to continue to invest in our business to remain competitive and grow. Banking revenue growth is expected to be similar to banking cost growth and Jaws flat to positive.

Our clients are likely to remain constrained until interest rates start to decline. Credit impairment charges are expected to peak in the first six months of 2024, driven primarily by ongoing strain in Personal & Private Banking. For FY24, the credit loss ratio is expected to remain within but near the top of the group’s through- the-cycle credit loss ratio range of 70 to 100 basis points. A continued improvement in IAM earnings is expected to be partially offset by a decline in ICBCS earnings (off a high base). The group’s FY24 ROE is expected to remain well anchored inside the group’s target range of 17% to 20%.

While uncertainty is expected to remain elevated, our business is well diversified, growing, and resilient. We are focused on delivering against our strategic priorities and remain on track to deliver on our 2025 targets. The group is also on track to deliver against its ambitious sustainable finance and renewable energy targets.

In 2024, we will continue to support our clients, develop our employees, and deliver sustainable growth and value to our shareholders and other stakeholders. In addition, as a leading financial institution on the continent, we recognise our responsibility to deliver positive impact. We do so by delivering against our purpose of driving Africa’s growth.

The forecast financial information above is the sole responsibility of the board and has not been reviewed and reported on by the group’s.