Strong rand hammers Standard Bank profits – but why? Expert insights

Standard Bank, a South African headquartered multinational, said this week that a stronger rand drove its revenue down in the first four months of this year. Why is it blaming ‘currency effects’ for its four-month revenue hit? Andre Cilliers, currency strategist at TreasuryONE, joined Jackie Cameron for BizNews to discuss an important question that shareholders should be asking, factors influencing the value of the rand, and how big companies can safeguard their profits. – Jackie Cameron

Andre Cilliers, currency strategist at TreasuryONE, on factors affecting the rand over the past week: 

It [was] a bank holiday in the UK [on Monday] and it [was] also a holiday in the United States. So a fairly quiet day. Equity markets and everything on the quiet. So the rand relatively subdued. During the course of the week, we have a few figures coming out which could cause some interesting moves. We have unemployment and non-farm payroll productivity out of the United States. So that could prove to be a market mover. If we recall, the last figure on the non-farm payrolls was a very, very bad one and missed the targets dismally. And that caused quite a bit of chaos in the market. So everybody’s looking forward to more updates on non-farm payrolls.

But the rand [is] still performing extremely well. It’s still the best-performing emerging market currency. But if you look at commodity prices, then we have seen commodity prices doing relatively well over the week. Inflation figures creeping up throughout the world and that caused people to take a bit of a flight into gold, supporting the gold price, going above the 1900s where we currently are. And also platinum, palladium, and all the others followed suit. Us being a commodity currency, still benefiting from those lovely high prices in commodities.

On why the rand is doing better than the currencies of other commodity producers: 

Well, one of the other advantages that the rand has got is the fact that our interest rates are quite a bit higher than the First World and compared to the emerging markets, which, as we said before, we one of the better ones in the emerging markets basket. We’ve had the Covid-19 vaccination programme starting. We had a family meeting by Mr Ramaphosa where some new measures were imposed but nothing that really could dampen any growth in the economy. Really, it’s more requests that have been put to the people of South Africa to actually stay within the lines, you know, wear masks, etc. But the economy still looks as if it’s going to come out of the pandemic quite reasonably. Our figures released for growth seems to be on the positive side. So the emerging market space overall – we [are] one of the better ones and we’re benefiting from that. Our bond market is also attracting some investment at this point in time.

On the relationship between the value of the rand and the gold price: 

Well, we remain one of the biggest exporters of gold in the world. As long as the gold price is doing well the rand will be doing well. Historically, there’s been a relation between the rand price and the gold price. If the gold price goes up, then the rand strengthens. If the gold price comes down, then the rand weakens. That relationship between the two is still there. And as long as we are one of the major exporters in gold, that will always be the case. Also, remember that a fair amount of our reserves is held in gold. So once the gold price goes up, then the reserves of South Africa also go up. And hence there will always be a relationship between the two.

On why Standard Bank prefers a weaker rand: 

We must remember that if you earn foreign currency … so Standard Bank has got Standard Bank London; they are in Africa. Standard Bank has got branches and subsidiaries all over the world. So they would be earning money like Investec, like many, many other companies in South Africa who’s got earnings in foreign currency. Now, if you were to earn one dollar and you could convert that at a weak rand of R16, that simply means that you get R16 for every dollar that you earn. With the rand currently trading down at the R13.75 levels, that income is reduced significantly to R13.75 per million US dollars. So percentage-wise, your earnings that you had coming in from offshore profits is significantly lower and does impact on the overall profitability of the South African entity. So that’s where that relationship comes from.

How do we help customers? Well, in times of movement – adverse movement – there are products that you can use. There are hedges that you can take. You can buy options; you can sell options. You can take out FX forwards. Many, many products in the markets that you can do, and that’s what you look at – to take out some of those products and hedge yourself against adverse movements. So if you look at the last month and a half, then it would have been possible to take out some forward cover around R14.50. If you then added some forward points to the actual date where your money comes in, you could have ended up with a rate even higher than R14.50. And in what I’ve just said before that, if you then get R14.50 for every one dollar that you earn in offshore markets, it’s a lot better than the current R13.75. And that’s what you do. You know, you look at how to hedge yourself with various products in the market, and that’s where we assist our customers on a daily basis.

On whether Standard Bank has looked for these opportunities:

Well, I’m treading on very, very dangerous territory here by saying that they did not because I have no idea whether they did take forward cover or whether they did not take forward cover. But I would imagine that from a bank’s perspective – it would be just a general comment as well – in these times with the strong rand, their income is adversely and negatively affected by the strong currency. That does not say that it might even filter through to the actual bottom line of the company because they might have taken forward cover. Very difficult for me to say what they would have done because they are definitely not a client of ours. With a big treasury like this and one of the leading banks in the market, they are pretty much up to their own as to what they do and what they don’t do. So dangerous waters for me to say and speculate what they would have done. I can only comment as to what you can do.

On whether investors should ask how companies (like Standard Bank) manage their currency risk:

I think that’s questions that the shareholders of the company should be doing, yes. That’s certainly one of the questions that, as a shareholder of a company, should be asked because that could limit the risk that the company incurs and to the benefit of the shareholders if they actually do that. So certainly questions that must be asked.

On what smaller companies can do to limit their risk: 

It’s a specialist field. And you know, I can only recommend to smaller companies, especially [those] that do not have treasuries of their own, that does not have the expertise within their own companies, to engage with outsourcing companies like us that does have the expertise, that can explain the products to them, that can recommend products to them, and can assist them in steering through turbulent times in foreign exchange markets and turbulent exchange rates – to manage that and to limit the risk that the company incurs and come through these troubled waters on a better footing.

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