How misfortunes in ICBCS cost Standard Bank

Standard Bank [JSE:SBK] delivered "disappointing" results than what the market expected when it presented its results on Thursday. However, the bank, which is South Africa's largest by assets says its performance was marred by events outside of its control.

CEO, Sim Tshabalala said the group’s earnings for the year ended December 31 could have increased by 5% had it not been for the US$248 million (about R3.9 billion) loss the bank endured due to its London-based business venture with Industrial and Commercial Bank of China (ICBC).

Standard Bank is a 40% shareholder in ICBC Standard Bank Plc (ICBCS), a specialist bank that focused on emerging markets and commodities. An explosion at an oil refinery belonging to one of ICBCS' client and subsequent bankruptcy of the same client in July 2019, as well as restructuring costs of US$30 million, plunged ICBCS to a US$ 248 million loss for the 2019 financial year. 

Subsequently, Standard Bank was forced to impair the value of its stake in ICBCS by US$163 million (about R2.5 billion) to USD220 million. The local bank said an impairment of R2.4 billion was recognised in earnings attributable to its shareholders as a result of this.

These events saw Standard Bank post a megre 1% growth in earnings to R28.2 billion. But Tshabalala mantained that if it wasn't for the ICBCS, the bank's financials would have turned out better as its banking operations actually grew headline earnings up 5%.

He still conceded that what the bank presented on Thursday was "a disappointing outcome".

"This happened on our watch," said the CEO during the results presentation in Morningside, Johannesburg. "The losses were incurred within ICBCS’s board approved risk appetite. As a 40% shareholder we have limited influence on the ICBCS."

ICBCS's badly-timed US deal

In June last year, ICBCS  closed a refinery deal with Philadelphia Energy Solutions –  ICBCS’s first major US trade agreement in which the bank would bring in untouched crude oil to the refinery in order to buy it and resell it after it has been refined.

Days later, an explosion occured in the Philadelphia refinery, trapping hundreds of millions of dollars worth of oil. This was followed by the refinery declaring bankruptcy and later closing shop.

ICBCS in London also experienced troubles and sold oil at cheaper prices, causing greater loss to the company.

Although ICBCS’s mishaps weighed heavily on the group’s performance, Tshabalala said the bank will support the ICBCS until it becomes profitable again as there is no option to jump ship.

"In terms of that deal, we could not sell unless they exercised the call option. They’ve got a call option of 20% and once they exercise the call option we can exercise a put option of 20%. They are the only ones really who can buy this.

"The result of that [explosion] was that they had to take a huge provision. Our 40% of that provision is the R1 billion odd…If we hadn’t had that explosion and we hadn’t had that loss, the group would have been up about 5%,” said Tshabalala to Fin24.

What will Standard Bank do now?

The CEO says although the refinery business is facing headwinds, talks with ICBCS leadership will yield good results for both parties, also making it easier for the refinery to exercise its call option.

"The upshot of all of those discussions is that actually the best outcome for this business is greater integration with ICBCS. Importantly, integration with respect to having access to the customer base of ICBC.

"The closer it is to the salespeople, the risk managers, the human capital managers of ICBCS, the greater the chance of it generating higher revenues. We have identified customers, we have identified product opportunities and those should get the business to break even," said Tshabalala.

Thus far, ICBCS has implemented reductions in some of its businesses including staff headcount, an approach Tsabalala said the group is "satisfied" with.

"All indications are that we are working well together and there is no reason to believe that we will have a similar incident in the short-term and there is every hope that we can have a different conversation later," Tshabalala said. 

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