Deputy Chief Executive Officer and Financial Director
Overview of 2015
We delivered another satisfactory performance in 2015, meeting our guidance for a third consecutive year, despite the deteriorating macro backdrop and increasing regulatory pressures. Diluted headline earnings per share again grew 10%, driven by improving revenue momentum and 8% higher pre-provision profits.
Responsibly growing our top line remains a priority and our revenue grew 6% to R67.2bn, as our net interest income rose 8% due to wider margins and better than expected loan growth. Importantly, our non-interest income growth improved to 5%, given solid momentum in several target areas. Costs remain well managed, increasing 5% as we continue to optimise in the right areas while investing in growth initiatives. Although non-performing loans declined to 3.9% of the total loan book, our credit loss ratio increased slightly to 1.05%, as we built up our portfolio provisions further.
RBB’s headline earnings grew 14% to R9.7bn, while WIMI’s rose 11% to R1.5bn, both due to improved revenue growth and strong cost management. CIB’s headline earnings increased 6% to R3.9bn, despite significantly higher credit impairments. Our Rest of Africa operations continue to enhance our Group earnings and revenue trajectory, growing 17% and 14% respectively, largely due to RBB Rest of Africa’s improved performance.
Our return on equity increased to 17.0%, its highest level since 2008, reflecting an improved 1.37% return on assets and slightly lower leverage. Strong internal capital generation offset 13% risk-weighted asset growth to maintain our Common Equity Tier 1 ratio at 11.9%, enabling us to declare an 8% higher dividend per share.
Deteriorating macro backdrop
South Africa’s economic growth disappointed again last year, impacted by electricity shortages, drought, lower commodity prices and reduced consumer spending. GDP increased 1.3%, well below the 2.9% we forecast in our budgets.
The commodity cycle downturn, drought, electricity shortages and weaker fiscal balances in several countries also slowed economic growth across our Rest of Africa portfolio materially. There were substantial interest rate increases across five of our markets, although Botswana and Tanzania reduced theirs. Nonetheless, we have limited exposure to oil exporting countries and GDP growth across our portfolio remained well above South Africa’s. The rand depreciated against most currencies in our portfolio, particularly in December, which increased our Rest of Africa balance sheet by 20%.
Regulatory changes continue to impact our operations, earnings and balance sheet. The introduction of a new interchange regime in South Africa from 17 March 2015 reduced our card revenue by R300m, while new National Credit Act affordability rules slowed new sales and impacted our strategy of limit increases in Card. We also dealt with numerous regulatory changes across the Rest of Africa, ranging from moratoriums on fee increases, reducing lending margins, higher reserve requirements and increased capital adequacy hurdles.
During the year, the South African National Credit Regulator introduced lower lending caps effective from May 2016, which will impact our margins, particularly in personal loans and credit cards. Given our already low fees, the recently proposed rules on lower pricing caps on credit life products is expected to have a limited impact on us.
Regulatory changes have also impacted our balance sheet, including new liquidity hurdles that I will discuss below. Other future developments include establishing the Bank Recovery and Resolution Framework, getting clarity on total loss-absorbing capital requirements and capital for interest rate risk in banking books, a fundamental review of capital held for trading, the potential introduction of deposit insurance and a number of evolutionary changes outside South Africa.
Improving revenue growth in target areas
Despite these challenges, we continue to gain revenue momentum in several target businesses. Continued progress in Retail Banking South Africa, which constitutes 47% of our revenue, saw its non-interest revenue grow 5% to R12.3bn, from just 2% in 2014. Absa Card, the largest acquirer in Africa, grew volumes 14%, while our debit card turnover increased 13%. Importantly, our retail transactional revenue rose 5%, as 2% customer growth, increasing client activity and sub-inflation price increases outweighed continued customer migration to digital channels and lower-cost bundled products.
Business Banking South Africa’s moderate 3% core revenue growth to R9.0bn masks solid growth in target areas, as continued client migration to digital channels and 10% increase in electronic banking fee income offset a 21% and 3% drop in cheque payments and cash-related income respectively. Term loans also increased 15%, after we created a dedicated sales force in 2014 to grow these in targeted segments. However, customer numbers declined 2%, and reversing this trend is a priority.
Commercial property finance payouts increased 28%, so the net book declined 2% despite higher run-off. CIB’s commercial property finance book more than doubled off a low base, predominantly to large listed clients.
Following substantial investment, RBB Rest of Africa rebounded from a disappointing 2014, as the positive underlying metrics I highlighted last year translated into stronger topline growth. Constant currency revenue rose 11%, including 20% higher non-interest income on strong transaction volumes, particularly in card acquiring and foreign exchange.
Corporate South Africa maintained its double-digit revenue growth rate, rising 12% to R4.0bn, due to strong growth in trade finance and cheque account deposits. Our Corporate revenue in the Rest of Africa increased 10% to R3.3bn, reflecting strong balance sheet growth. We expect both to grow their transactional revenue as we roll out Barclays.Net in South Africa this year and in other countries from 2017.
Our Markets revenue in the Rest of Africa continued its strong growth, with revenue up 23% to R1.4bn, 35% of CIB’s total trading revenue. Markets Rest of Africa is largely foreign exchange trading that benefited from currency volatility and increased client flows. With our foreign exchange platform and risk systems in place, we expect continued growth here, as more countries contribute and our corporate flows increase.
WIMI Rest of Africa remains a strong growth story with 22% higher revenue, in part due to the depreciation of the rand. Acquiring 63% of First Assurance, a Kenyan short-term insurer, will help its revenue growth. In South Africa, WIMI’s revenue growth improved to 6%, including 12% higher net premiums from Life Insurance. WIMI’s assets under management grew by R15bn, or 6%, due to a substantial R19bn positive swing in our net inflows, particularly of institutional funds.
Rest of Africa strategy delivering
While the commodity downturn and reduced GDP growth weakened general sentiment towards the continent, our operations in the Rest of Africa performed well and enhanced Group growth. Revenue increased 14% and headline earnings 17%, well ahead of the 5% and 8% respectively in South Africa. Consequently, the contribution from Rest of Africa increased to 21% of our revenue and 16% of headline earnings, and our acquisition of Barclays Africa Limited in 2013 remains earnings-enhancing.
The momentum was broad-based, with all three segments producing double-digit revenue growth and banking earnings increasing 22%. Although WIMI’s earnings were flat, this stemmed from non-tax deductible pre-incorporation costs in Kenya, as its pre-tax profits grew 18%.
We continue to benefit from the contractual Barclays PLC funding of £30m a year for IT spend, which still has two years to run. With cost growth contained to 9%, Rest of Africa achieved 5% positive Jaws, resulting in 23% higher pre-provision profits. Reflecting the commodity cycle and deteriorating macro backdrop, credit impairments grew 67%, as RBB’s credit loss ratio normalised to 2.07%, while CIB’s charge increased significantly for mining and commodity exposures off a low base.
We continue to see attractive growth prospects for our portfolio outside South Africa. Within RBB, low retail credit penetration and access to banking provide a structural longer-term growth story, and we remain underweight in Business Banking, particularly SMEs, agriculture and the public sector, which are all areas of strength in South Africa. While Rest of Africa’s contribution increased to 37% of CIB’s earnings, there is scope to grow this, initially in Markets and through targeted lending, followed by corporate transactional revenue when systems are in place. As noted, WIMI should maintain its strong growth and it continues to look at opportunities in Ghana.
The shape of our income statement was consistent with our guidance, with a wider net interest margin and revenue growth exceeding cost growth and our credit loss ratio similar to 2014’s.
Net interest income continues to underpin revenue growth
Net interest income grew 8% to R38 407m, benefiting from 16 basis points of margin expansion to 4.81% and 4% higher average interest-bearing assets. It has consistently improved since 2012, rising by 53 basis points, despite a declining contribution from our hedge programme.
There were several moving parts within our net interest margin, although a wider lending margin was the main reason for the increase.
Loan mix and pricing improved our margin by 8 basis points, largely due to better pricing within Home Loans, Personal Loans and our Investment Bank. These outweighed competitive pressure in vehicle finance pricing. Within deposits, compression in Business Banking offset improved retail spreads, while the endowment impact of higher rates added 2 basis points.
Rest of Africa’s margin rose 10 basis points to 8.23%, and given its increased weighting after 28% loan growth, it had a positive Group impact, as its margin remains considerably higher than South Africa’s. Our South African margin improved 13 basis points to 4.26%, in part due to improved pricing. Structural hedging contributed 14 basis points of our net interest margin, with R1.1bn released to our income statement, or 6 basis points less than in 2014. Our cash flow hedging reserve decreased to a debit of R2.1bn after tax from a R400m credit. Changing our funding model for foreign currency loans added 8 basis points to our margin, with an equal reduction in non-interest income, while higher liquid assets reduced it by 3 basis points.
Our non-interest income growth improved to 5%, including 6% growth year-on-year in the second half. Net fee and commission income, which accounted for 70% of the total, increased 8% for the year and 5% in the second half. Growth came in annuity areas, including 7% higher cheque account fees, while electronic banking grew 12% and credit cards 37%. Despite strong volume growth, merchant income fell 7%, due to lower prescribed interchange rates.
Although CIB’s net trading dropped 18%, this was largely due to reduced hedging from changing the way we fund foreign currency loans. Total Markets revenue fell 3%, which is a fairer reflection of our trading performance. While Rest of Africa continued its strong growth, South Africa’s Markets revenue dropped 13%, with fixed income and foreign exchange down notably, while Prime Services and Equities grew 21%.
Our Group revenue remains well diversified, although non-interest income declined slightly to 43% of the total. At 45%, South Africa’s level of non-interest income remains well above Rest of Africa’s 35%, which we expect to increase as WIMI and CIB grow across the continent.
|1||Percent of average interest-bearing assets.|
|2||Interest rate risk management.|
Costs remain well contained as we save to invest
Our operating expenses increased 5% to improve our cost-to-income ratio to 56%. Our structural cost programmes continue to produce efficiency gains that allow us to invest in strategic initiatives. Our property-related costs fell 1%, as we continue to optimise this portfolio, given above-inflation growth in rates and utility costs. We see further savings opportunities in our operations area, IT and our Rest of Africa branch network. South Africa’s 4% cost growth was well below inflation, while Rest of Africa’s costs rose 9%, reflecting continued investment spend.
Our staff costs increased by 8% and accounted for 56% of total expenses. Salaries grew 8% due to higher wage increases for entry level employees and additional headcount in specialist areas such as IT.
We restricted non-staff cost growth to 1%, despite 18% higher professional fees, which largely relates to strategic projects and increased Financial Intelligence Centre Act (FICA) remediation costs. Amortisation fell 6% due to impairments recognised in 2014 and our intangibles remain low at R2.8bn. Our overall IT spend also increased 7% and accounted for 18% of the total. Marketing costs grew 8%, reflecting increased product advertising, and volume growth increased cash transportation costs 7%.
Credit loss ratio ticks up
The credit cycle has started to turn, and our credit impairments grew 10% to R6 920m, increasing our credit loss ratio 3 basis points to 1.05%, its first rise since 2012. We calculate our credit loss ratio differently from our peers. On a like-for-like basis, including loans to banks and excluding collection costs of R295m, our charge was 0.9%.
We continued to build our balance sheet portfolio provisions, which grew 15% to R5bn, or 73 basis points of performing loans from 70 basis points. This increase included R418m of additional macroeconomic overlays, which have trebled since 2013 to R1.1bn. Higher portfolio provisions were particularly noticeable in CIB, given its growing watchlists.
South Africa’s credit loss ratio improved 3 basis points to 0.97%, reflecting our focus on originating quality loans and substantially improving our collections in recent years. Rest of Africa increased 53 basis points to 1.70%, reflecting a more normalised RBB charge and significantly higher CIB provisions.
Although our non-performing loans grew 2% to R27.9bn, they decreased from 4.2% to 3.9% of gross customer loans, the lowest level since 2005. Substantially higher CIB non-performing loans offset the continued decline in Home Loans and Commercial Property Finance. Our stock of repossessed vehicles has dropped 44% since 2011 to 1 191, while our 126 properties in possession are 94% below 2011’s peak.
|2||Interest rate risk management.|
Effective tax rate remains relatively high
Our taxation expense increased 6% to R5 899m, less than the 8% growth in pre-tax profit, resulting in an effective tax rate of 27.7% from 28.3%. The decline was largely due to reducing expenses that were not deductible for tax purposes. Our tax levels remain relatively high, in part due to a rate of 31.6% in our Rest of Africa operations.
Our total assets increased 15% to R1 145bn. Solid 12% or R86bn growth in customer deposits and debt securities were our principal source of new funding. Equity added another R8bn and borrowed funds R2bn. We used these funds to increase customer loans by R67bn. Trading portfolio assets and liabilities grew 52% and 82% respectively, in part due to the weaker rand. Rand depreciation, particularly in the second half, increased our balance sheet by 3% and added R3.8bn to our foreign currency translation reserve in the second half, increasing our total equity by 5%.
Improved loan momentum in target areas
Net loans and advances to customers rose 11% to R703bn. Our constant currency growth was closer to 9% and excluding the substantial increase in reverse repurchase agreements, about 7%. Our gross property-related book grew 2%, its first increase in several years, to account for 38% of Group loans from 41%. Home Loans were flat, despite 13% higher registrations, while Business Banking’s book increased 2% as payouts rose 28% and CIB’s commercial property loans grew significantly to low-risk customers.
The rest of our loans increased 17%, largely due to CIB growing 29% after a strong fourth quarter. CIB’s reverse repurchase agreements more than trebled to R20bn, leaving its underlying growth at 21%. Most of CIB’s loan growth was to leading South African corporates and large international groups involved in renewable energy. Much of the growth came in the fourth quarter, which will provide momentum into 2016. Although CIB’s Rest of Africa loans grew 31%, rand depreciation accounts for two thirds of this growth.
Our CIB portfolio remains well diversified across industries and our exposure to the mining sector remains low at 1% of loans. Our agricultural book of R31bn is about 4% of loans. Approximately R22bn is in Business Bank and R9.6bn in CIB, which is to large well diversified cooperatives. Despite South Africa experiencing our worst drought since records began, we do not currently expect this area to increase our Group charge significantly in 2016, given resilient farm values, farmers with reasonable harvests benefiting from higher prices and our prudent credit granting over the past four years.
RBB Rest of Africa’s loans increased 26% or 14% in constant currency, with strong growth in credit cards as we entered additional countries, mortgages on opening mortgage centres and personal loans through improved risk segmentation. Commercial loans grew 22% off a low base.
In South Africa, Vehicle and Asset Finance grew 6% despite industry new vehicle sales falling 4%, although retail slowed notably in the second half. Our Ford Financial Services joint venture grew new business 30%, as Ford gained market share. Card grew 2%, with Edcon falling 10% to offset solid growth from Woolworths Financial Services and Absa Card. Personal Loans grew 8%, with improved sales to existing low-risk customers. Our retail lending remains prudent and we lost market share in most categories.
Solid deposit growth
RBB South Africa maintained its strong deposit growth, with Retail Banking growing 10%, including 7% higher cheque account deposits, fixed deposits rising 14% and investment products up 17%. Business Banking grew 9%, with investment products rising 16%, to remain a large net provider of funds to the Group. RBB Rest of Africa’s deposits grew 20%, largely due to rand depreciation. CIB’s deposits rose 6%, with call deposits up 16% and cheque account deposits 10%. Our Group loan-to-deposit ratio fell to 86% from 87%. Debt securities in issue grew 21% to R128bn to account for 15% of our funding.
Capital and liquidity remain strong
Our Group risk-weighted assets grew 13% to R703bn, largely in line with our asset growth. We remain capital generative, with earnings adding 2.1% to our Common Equity Tier 1 ratio. Paying R8.2bn of ordinary dividends reduced our ratio by 1.2%, while R3.0bn growth in our foreign currency reserve added another 0.5%. The resulting 11.9% Common Equity Tier 1 ratio was above the top end of our Board target range, which we increased by 50 basis points to 11.5% during the year. Our Group leverage ratio, including unappropriated profits, was 6.7%, well above the minimum requirement of 4.0%. Although we are still evaluating its likely quantum, introducing IFRS 9 in 2018 is likely to reduce our Common Equity Tier 1. For 2016, our Board has increased its total capital adequacy ratio target range by 50 basis points to between 13.0% and 15.0%. This is likely to increase further in the next few years. Given the growth in our business and the uncertain economic environment, we will maintain capital ratios at the top end of our Board targets and our dividend cover is likely to increase in the coming years.
Our liquidity also remains healthy, with 13% growth in liquid assets and other sources of liquidity to R199bn. Our liquidity coverage ratio averaged 70% in the fourth quarter, well above the current regulatory requirements of 60%. In 2016, we will start using the committed liquidity facility that the South African Reserve Bank is providing to enable banks to meet these liquidity coverage ratio requirements as they increase. While net stable funding ratios only become effective on 1 January 2018, recently proposed changes to the recognition of wholesale funding would see us complying already.
Our earnings remain well diversified by both division and individual product lines.
RBB’s earnings grew 14% to R9.7bn, or 64% of our earnings excluding the Group centre. Improved 7% non-interest income growth and containing cost growth to 4% produced 10% higher pre-provision profits. Credit impairments rose 1%, although its credit loss ratio improved slightly to 1.29%. RBB’s return on regulatory capital improved to 21.7% from 20.1%.
Retail Banking South Africa
Headline earnings grew 16% to R6 628m, driven by 10% higher pre-provision profits and 2% lower credit impairments. Transactional and Deposits earnings grew 9% to R2 672m, given increased customer numbers and 14% higher net interest income on 11% deposit growth. Despite moderate 3% revenue growth, Home Loans’ earnings rose 15% to R1 813m, as a result of 9% lower costs while credit impairments fell 20%. Card earnings increased 25% to R1 678m, as 6% revenue growth exceeded 1% lower costs and its credit loss ratio improved slightly to 6.07%. Our Edcon portfolio made R123m, from its 2014 loss of R9m, due to far lower credit impairments. Vehicle and Asset Finance earnings declined 3% to R999m, given negative operating Jaws and 6% higher credit impairments. Personal Loans earnings grew 211% to R361m, reflecting improved 10% revenue growth, while costs and credit impairments fell 10% and 6% respectively. Losses in the ‘Other’ segment grew 13% to R895m, due to increased spending on strategic initiatives and a higher cost of funding. Retail Banking South Africa accounted for 44% of total earnings, excluding the Group centre.
Business Banking South Africa
Headline earnings increased 5% to R2 175m, reflecting 4% growth in its core franchise and a 17% smaller loss in the non-core equity portfolio. Pre-provision profits grew 3% with moderate 3% revenue growth slightly below 4% higher costs, while its credit loss ratio remained flat at 0.87%. Business Banking has a high proportion of annuity revenue as fees account for 93% of its non-interest income and it produces a strong 26% return on regulatory capital. Business Banking South Africa generated 14% of overall earnings excluding the Group centre.
RBB Rest of Africa
Headline earnings grew 24% to R895m or 17% in constant currency. Improved 12% revenue growth exceeded 7% higher costs to grow pre-provision profits 28% and reduce its cost-to-income ratio to 69%. Credit impairments increased 21%, slightly more than growth in average advances. RBB Rest of Africa contributed 6% of total earnings excluding the Group centre.
Headline earnings rose 6% off a relatively high base to R3 940m, due to 6% higher pre-provision profits and lower taxation. Revenues grew 8%, with Rest of Africa increasing 15% and South Africa 4%. Markets’ revenue declined 3%, with South Africa down 13% while Rest of Africa grew 23%. Costs rose 9%, reflecting continued investment in systems and technology. Credit impairments increased 220%, due to higher portfolio provisions and non-performing loans. Corporate earnings grew 16% to R1 965m, as 5% positive operating Jaws outweighed higher credit impairments. Corporate revenue grew 11% on strong balance sheet growth. Investment Bank’s earnings fell 3%, given negative operating Jaws and increased credit impairments. CIB’s return on regulatory capital declined to 17.1% from 19.5%, due to higher credit charges. It contributed 26% of total earnings excluding the Group centre.
Headline earnings grew 11% to R1 464m, its strongest growth in several years, while net operating income increased 16% to R1 924m. Life Insurance earnings rose 14% to R794m, due to 12% higher net premium income and 2% lower costs. Its return on embedded value declined to 22.7%. Although Life Insurance’s embedded value of new business increased 14% in the second half, it decreased 4% year-on-year due to lower volumes in advice products and aligning credit life products and pricing across the continent. Wealth and Investment Management’s earnings grew 5% to R438m given 11% revenue growth as assets under management increased 6% to R274bn. Short-term Insurance earnings grew 40% to R237m as its underwriting margin and loss ratio improved. Fiduciary Services earnings increased 17% to R137m, while Distribution returned to profitability. WIMI South Africa’s continuing business lines earnings grew 13% to R1 400m, while Rest of Africa was flat at R49m. WIMI’s return on equity improved to 24.9% from 23.2%. It generated 10% of earnings excluding the Group centre.
Our return on equity increased further to 17.0% from 16.7%, as our return on assets rose to 1.37% from 1.33%, largely due to our improved pre-provision profit growth. Our leverage fell slightly to 12.4 times from 12.6 times. Our return on assets is similar to 2008’s high of 1.38%, when our return on equity was 23.4% given considerably greater leverage. South Africa’s return on equity improved slightly to 17.9%, so it has already achieved our Group target.
While Rest of Africa’s return on equity improved to 13.7%, it remains a drag and well below its cost of equity. We see substantial scope to improve this in the medium term by reducing RBB’s high cost-to-income ratio, further decreasing our effective tax rate and turning around our Tanzanian operations as we did in Mozambique in 2015.
Our strategy remains intact and we continue to see opportunities for growth.
Entering a tough and volatile economic period, our arrears in RBB are rising and there is increasing tail risk in our Wholesale portfolio. However, we have grown our lending prudently and are gaining traction in annuity businesses. Our balance sheet is also well positioned for a deteriorating macro backdrop, given our highest level of portfolio provision since 2007, our lowest non-performing loans since 2005, and strong capital ratios and liquidity. We believe that our Group targets are still correct medium-term, although we are unlikely to achieve our return on equity and cost-to-income targets in 2016.
We forecast 0.9% GDP growth in South Africa in 2016, with downside risks from drought and electricity shortages and estimate interest rates will increase another 75 basis points this year. We expect 5.1% GDP growth in our other presence countries in Africa.
We expect low single digit loan growth, with CIB growing faster than RBB and Rest of Africa more than South Africa. Deposit growth should exceed our loan growth. Our net interest margin should decline slightly as liquidity costs, a higher proportion of CIB lending, a reduced contribution from our hedge programme and the introduction of National Credit Act caps in May are likely to offset the endowment benefit of higher rates. However, continued focus on revenue growth and cost management should produce positive Jaws, further reducing our cost‑to‑income ratio. Our credit loss ratio will increase as arrears are rising and we believe our non-performing loans have bottomed. Our effective tax rate will probably decline slightly and our return on equity is likely to be similar to 2015’s. Lastly, Rest of Africa’s earnings growth should continue to exceed South Africa’s.