Income statement analysis

1 2016 financial results booklet available for download here.


Pre-provision profit drove earnings growth

The shape of our income statement was largely as we guided. Revenue growth improved to 8%, exceeding a well contained cost increase of 6% to grow pre-provision profits by 10%. A 26% rise in credit impairments, including a large single client exposure in CIB, dampened our earnings growth.


Maintaining revenue momentum in targeted areas

Despite the tough operating environment and regulatory pressures, we continue to grow revenue in several targeted areas. For example, we remain the largest card acquirer in Africa, with volumes up 13%, as we added new merchants. Debit card volumes also grew 13%. In Business Banking South Africa, commercial property finance grew for the first time in several years, rising 14%. Our total Corporate revenue grew 18% to R8.7bn. Within this, Corporate SA achieved double digit growth for the fourth consecutive year, with revenue increasing 13% to R4.5bn, with strong increases in term debt and working capital. Corporate in the Rest of Africa grew 24%, given strong balance sheet growth and improved margins. In Markets, our Africa desk has almost doubled its revenue since 2013 to R1.8bn, or 35% of CIB’s total trading revenue. It continues to benefit from increased client activity, our expanded product offering and improved cross selling. In WIMI, Life Insurance’s embedded value of new business grew 23%, in part due to improved sales of standalone products via our bank branches.

We did not sustain RBB’s positive revenue momentum in South Africa. This was partly due to the weak macro backdrop and regulatory pressures, but also slow growth in primary customers. We did, however, continue to grow our affluent, private bank and youth customer base. Addressing overall rental customer growth remains a priority.


Solid net interest income growth

Net interest income grew 9% to R42.0bn, benefiting from 11 basis points of margin expansion to 4.92% and 7% higher average interest-bearing assets. Our Group net interest margin has consistently improved from 4.46% in 2013. This was largely due to a better deposit spread and an increasing contribution from the Rest of Africa, where our 8.46% margin is almost double South Africa’s 4.29%.

As usual, there were several moving parts to our net interest margin. Unlike last year, our lending margins narrowed, due to regulatory changes, higher interest suspended and pricing pressure in Vehicle and Asset Finance, plus the mix impact of strong CIB loan growth at a lower margin than Retail. These outweighed improved Home Loans and Personal Loans margins.

Our deposit margin continued to widen, despite higher wholesale liquidity premiums. Our structural hedge released R268m, 11 basis points less than the R1.1bn in 2015, offsetting the 10 basis points endowment uplift on capital and deposits.

Rest of Africa’s net interest margin improved by 23 basis points, which added 10 basis points to our Group margin. However, the impact of lower rates, rand strength and regulatory changes were evident in the second half. Lastly, the ‘other’ component of the change in net interest margin reflects the benefit of 75 basis points of prime rate increases in the first half and a substantial reduction in loans to banks offsetting higher borrowed funds and increased liquidity assets.

Our revenue remains well-diversified, with non-interest income at 42% of the total, after growing 6% to R30.4bn. Net fee and commission income, which is 68% of this, increased 3% to R20.7bn. Cheque account fees grew 4% and electronic banking 3%, while Card’s non-interest income grew 11%. CIB’s non-interest income rose 13%, largely due to 30% higher trading revenue.

1 Percentage of average interest-bearing assets.
2 Interest rate risk management.


Continue saving to invest for growth

Our operating expenses grew 6% to R40bn, improving our cost-to-income ratio to 55.2% from 56.0%. The largest component, staff costs, increased 6% and accounted for 55% of the total. It rose less than inflation on a constant currency basis, in part due to headcount declining by 1%. Our structural cost programmes continue to produce efficiency gains that enable us to invest in strategic initiatives. Real estate footprint consolidation contained the increase in property costs and operating leases to 5%, while a reduction in sponsorships decreased marketing by 9%. Professional fees fell 8%, given less reliance on external service providers for IT development. We continue to invest in technology, with our total IT spend up 17%, to account for 19% of our costs. Amortisation of intangibles grew 35%, but remains relatively low.


Rising credit impairments

As we noted last year, the credit cycle has turned, and our credit impairments grew 26% to R8.8bn, increasing our credit loss ratio from 92 basis points to 108 basis points, which is in line with our through-the-cycle expectation of 110 basis points. When compared on a like-for-like basis to peers, excluding R300m of collection costs, our credit loss ratio was 104 basis points.

The main reasons for the increase in our credit loss ratio was a single name corporate exposure in CIB, which we booked in the first half and a further build in our macroeconomic overlays. Excluding these, our credit loss ratio increased slightly. We continue to increase our portfolio provisions, which grew 19% to R6bn or 79 basis points of our total performing loans, from 65 basis points. The increase included an additional R300m of macroeconomic overlays to R1.4bn, which have now more than doubled since 2014.

Our credit loss ratio in South Africa increased to 100 basis points from 86 basis points, given the single-name exposure in CIB and credit costs normalising across most of our retail portfolios, besides Card. The Rest of Africa charge rose to 160 basis points from 131 basis points due to higher RBB impairments, while CIB’s declined given the non-recurrence of a large exposure in the base. RBB Rest of Africa’s credit loss ratio rose noticeably to 296 basis points, principally in scheme personal loans in Kenya and Botswana, and its portfolio provisions to performing loans almost doubled to 214 basis points.

Our non-performing loans grew 11% to R31.1bn, or 3.9% of our total gross loans, from 3.5%. Most of the increase came in CIB during the first half of the year. Our specific impairment coverage of non-performing loans rose to 44.2%, increasing in most categories.


Effective tax rate remains relatively high

Our taxation expense declined 1% to R5.8bn, slightly below the 2% growth in pre-tax profit, resulting in a 26.9% effective tax rate. The decline was due to the recognition of deferred tax assets in our Life Insurance business, following changes to the Tax Act. Our Group tax rate remains relatively high, in part due to an effective rate of 33.9% in the Rest of Africa.


Resilient returns

Given 5% higher headline earnings, our return on equity only declined slightly to 16.6% from 17.0%. This is a satisfactory outcome considering the operating environment and the substantial single name credit impairment in the first half. Excluding the latter, our return on equity would have increased year-on-year. Our return on assets decreased slightly to 1.34%, which is still similar to 2008’s high of 1.38%, when our return on equity was 23.4% in an environment of far higher leverage. South Africa’s return on equity was 17.1%, while our Rest of Africa banking return was 15.8% and WIMI’s was 23.9%.