Standard Bank has a presence in 20 Sub-Saharan African countries. It has four global centres and two offshore hubs. The bank has a strategic partnership with the Industrial & Commercial Bank of China.
Clearly, this is more than just a South African bank. Whether that is a good thing relative to its more South Africa-focused peers depends entirely on the performance of Africa vs South Africa.
The geographical split is fascinating. South Africa contributed 42% of headline earnings in the financial year ended December 2024. Africa Regions contributed 40%, so that’s an even split. About 9% came from offshore markets and a further 9% sits in the “other” bucket. If we drill down into Africa, we find that both East and West Africa are meaningful contributors. Time has taught us that East Africa has been a better place to play than West Africa, though anything can change.
It’s also worth touching on the margin mix. Traditional retail banking operations aren’t as lucrative when it comes to margins, evidenced by Personal & Private Banking contributing 32% of revenue and only 25% of headline earnings. In contrast, Corporate & Investment Banking contributed 35% of revenue and a substantial 46% of headline earnings. If you’ve ever wondered why investment bankers get paid proper money, now you know why.
With that out of the way, we can now consider its recent performance. 2024 certainly had some highlights, but the overall performance wasn’t inspiring. Currency depreciation in Africa blunted growth, with headline earnings up by 4% and the dividend up by 6%. Cost control was solid, with the cost-to-income ratio improving to 50.5%. Return on equity (ROE), the key metric for any bank, was a respectable 18.5% and within the target range of 17%-20%. Notably, it was down from 18.8% in 2023.
The group has released new targets that cover 2026 to 2028. The targeted headline earnings per share growth is a compound annual growth rate of 8%-12%, with ROE of 18%-22%. If Standard Bank can achieve these numbers, it will be rewarding shareholders with growth ahead of inflation while achieving economic profits. If you aren’t familiar with that term, it describes a situation in which ROE is above the cost of equity. Economic profits cause a bank to trade at a premium to NAV (or book value) per share.
A key lever in getting ROE higher is the Africa Regions
A key lever in getting ROE higher is the Africa Regions. Though they had a disappointing overall outcome in 2024, because of currency depreciation that ultimately ruined a local currency growth rate of 22% in earnings, they still managed ROE of more than 28%. This is clearly ROE-accretive to the group, so any improvement in the African currency story is going to be of assistance.
Something to remember is that one of the requirements for currencies to stop depreciating is for inflation to be brought under control, reducing the local currency growth rate. On the flipside, economic stability does tend to encourage more activity and dealmaking, so that would support above-inflation growth in those countries.
We can debate what the real growth might be in better times, but what we know for sure doesn’t work is when strong local currency growth becomes meaningless once translated into rand. An improvement in African currencies is a part of the bull case here.
As for the bear case, one would have to point to the trade war and the potential impact it would have on frontier and emerging markets. Standard Bank’s long-term positioning is arguably helpful in this regard, as the operations are built around the China-Africa opportunity. This doesn’t mean that there won’t be short-term pain, though, as a global recession (if triggered) would inevitably drive a risk-off environment, and Standard Bank’s key markets would take a knock. Credit impairments would likely also spike.
The NAV is R152.81 a share, having increased 7% year on year. The share price is R218.50 at the time of writing, which means a price:book of 1.43 times. Based on ROE of 18.5%, that’s an effective ROE of 12.9%. This is arguably fully valued, which means that the return will primarily be driven by earnings growth rather than multiple expansion.
Of course, if Standard Bank can get a further uptick in ROE, then the multiple might show you some love as well. But above all, a long position in Standard Bank is a long position on Africa and, by implication, China. That’s going to come down to personal views on where the world is going.
Volatility aside, there are far worse choices for a portfolio than Standard Bank.
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