Standard Bank expected to maintain position as SA’s largest bank

MAY 31, 2016

Global Credit Ratings (GCR) has affirmed the national scale ratings assigned to Standard Bank of South Africa Limited (SBSA) of AA+(ZA) and A1+(ZA) in the long term and short term respectively, according a Stable outlook.

Omega Collocott, ‎Head of Financial Institution Ratings at GCR, says SBSA’s ratings reflect the bank’s leading position in the domestic market and resilient financial performance in 2015, despite a challenging operating environment which was characterised by low economic growth and increased regulation.

“The Stable outlook reflects GCR’s expectation that the bank will maintain its position as South Africa’s largest bank, given its ability to leverage its size and scope to compete for opportunities, together with high barriers to entry which provide some protection from competition. Based on its sound track record, we also expect the bank’s asset quality, capitalisation, liquidity and profitability to remain relatively stable over the short to medium term,” Collocott says.

GCR noted that SBSA’s ratings, which are unsolicited and accorded based on publicly available information, also reflect its key status within Standard Bank Group Limited (SBG) – Africa’s largest banking group with approximately R2 trillion in assets and a presence in 20 countries across sub-Saharan Africa. SBG’s position is further strengthened by its strategic partnership with the Industrial and Commercial Bank of China (ICBC), the largest bank in the world by total assets.

Despite the difficult economic conditions in South Africa, SBSA’s earnings performance has remained consistent over the past three years, with its Return On average Equity and Assets at 14.4% and 1.1% respectively in F14 and F15. As a result of its investments in staff and IT infrastructure, the bank’s cost to income ratio has risen from 54.5% in F12 to 58.8% in F15.

As a consequence of high levels of indebtedness, poor employment prospects, increased interest rates and weak confidence levels in the South African market, the bank’s wholesale credit growth continued to outpace retail advances. Net loans and advances, including bank placements, increased by 14.2% to R897.3 billion at FYE15, with personal and business banking reporting growth of 4.4% compared to corporate and investment banking growth of 25.6%. The bank’s impaired loans ratio decreased to 3.5% at FYE15 from 3.7% at FYE14 and 3.9% at FYE13 respectively, on the back of enhanced collection strategies and the application of a prudent approach to credit origination.

GCR noted that the bank remains well capitalised, with a total capital adequacy ratio of 15.3% at FYE15), which was above the regulatory minimum of 10% and the industry average of 14.1%. “However, higher risk-weighted assets and slowing internal capital generation have resulted in capital adequacy ratios declining since F13, as the bank moves towards full Basel III implementation in 2019,” Collocott says.

“Furthermore, SBSA’s funding base grew by 9.3% in F15, and is considered stable and diversified, while an average liquidity coverage ratio of 82.1% (comfortably in excess of the minimum regulatory requirement of 60%) was maintained for 2015.”

She concludes: “Given the challenging operating conditions in South Africa, there is currently limited upside potential for SBSA’s ratings. Downward pressure on SBSA’s ratings could stem from further deterioration in macroeconomic conditions, which could adversely affect its credit quality, capital base and earnings power.”