Standard Bank’s Strategy Blighted by Chinese Venture in U.K.

(Bloomberg) --

Standard Bank Group Ltd. is having a hard time convincing investors why it should hold onto a venture with China's biggest bank that continues to cause it pain.

ICBC Standard Bank was a headache for the Johannesburg-based company even before it sold 60% of the business to Industrial and Commercial Bank of China Ltd. in 2015, when just a year earlier it was ensnared in legal woes. The firm, known as ICBCS, has cost Standard Bank a cumulative 3.25 billion rand ($212 million) in losses since the deal was completed, only turning a profit in 2017.

“It will continuously be a drag on earnings until they can get rid of it,” Nolwandle Mthombeni, an analyst at Mergence Investment Managers in Cape Town, said by phone. “The only problem for shareholders is we're not seeing the benefit, especially from a financial perspective, of this strategic relationship. If anything it's detracting from returns.”

That criticism is not lost on Standard Bank Chief Executive Officer Sim Tshabalala, who said at a briefing on Thursday that the lender's capital will be better deployed in Africa. ICBCS -- which specializes in global commodities, fixed-income, currencies and equities -- is “off-strategy” for Standard Bank and outside of its stated purpose of growing on the continent.

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“A lot of commentators say why don't you just cut your losses and leave? We are saying we can't,” Tshabalala said by phone. Until ICBC exercises an option to buy the rest of the business, “we're stuck.”

It's better to help nurse ICBCS back to health by integrating it into ICBC's network, he said. “We then are in the realm of possibilities of either being 40% of something much bigger or being bought out.”

ICBCS might starting making money again in the next year or two, and Standard Bank “understands” there are no further downside risks for the unit, Chief Financial Officer Arno Daehnke said on the conference call.

Profit Miss

Full-year earnings missed analysts expectations as ICBCS slid to a $248 million loss, of which $198 million was attributed to a lone customer, bankrupt Philadelphia Energy Solutions, which suffered an explosion at a Pennsylvania oil refinery. Adjusted earnings per share before one-time items increased to 17.67 rand in the 12 months through December, short of the 17.90 rand average estimate of 11 analysts.

ICBCS -- which has since significantly reduced headcount and cut business lines and locations to restore profitability -- weighed on what was an otherwise good performance from Standard Bank's core operations, despite tough economic conditions in South Africa, according to Mthombeni.

South Africa's economy expanded at the slowest pace in a decade in 2019, forcing Standard Bank to cut 5% of its workforce, especially at branches, while encouraging customers to make more use of cheaper digital channels.

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Adjusted earnings rose 6% at its personal and business banking unit and by 5% at its corporate and investment banking business. Profit from its operations in the rest of Africa rose 5%, with the contributions coming from Angola, Ghana, Kenya, Mozambique, Nigeria and Uganda.

A 23% increase in credit impairments also weighed on profit, although “in other areas, the performance was better than expected given the economic environment,” said Casparus Treurnicht, a money manager at Gryphon Asset Management. “I remain concerned about our economic growth. There are no shortcuts to restoring a flourishing environment.”

Shares of Standard Bank swung between gains and losses for most of Thursday and were trading little changed by 4:22 p.m in Johannesburg. The stock has dropped 9% this year, compared with a decline of 11% in the six-member FTSE/JSE Africa Banks Index.

To contact the reporter on this story: Roxanne Henderson in Johannesburg at rhenderson56@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Vernon Wessels, Ross Larsen

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