Half Year 2019 Absa Group Ltd Earnings Call
Johannesburg Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Absa Group Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 6:30:00am GMT
TEXT version of Transcript
* Jason Paul Quinn
Absa Group Limited - Group Finance Director & Executive Director
* René van Wyk
Absa Group Limited - Interim CEO & Executive Director
René van Wyk, Absa Group Limited - Interim CEO & Executive Director 
Good morning and thank you for joining us for Absa's interim results presentation. I will give you feedback on my first 5 months as acting Chief Executive, then Jason will cover our numbers for the half, and we'll answer your questions at the end.
What did I find when I looked under the hood of Absa as Chief Executive? To start with, we have the right strategy, which I fundamentally believe in. And as a standalone group, our new strategy was built bottom-up. We included 600 staff members in the process, who gave a clear message that bureaucracy was hurting us. They also asked for greater ambition and more focus on growth, which resonated with us all. Bureaucracy forced us to become internally focused and to operate in silos, and hence, we lost our focus on the customer. I, however, look at it not as a new strategy but reengineering the group. We have to remove the silos and reduce bureaucracy, we decentralized as a group and give management end-to-end accountability for their businesses, including for operations and connections. This was the right thing to do and the right structure.
My job this year is to ensure that we don't lose momentum, that we maintain our energy and focus, essentially, supporting the team to make it happen. We have a strong executive team, and I rarely back them. I spent a lot of time at the goal phase, ensuring that this energy and focus. I've traveled the country including all the regions and visited about 40 branches to date, often unannounced. I sat in call centers and met with many of our customers so I have a good sense of the issues and the pulse. My feedback is our staff are really excited and their energy is incredible. Investors often ask us how our separation from Barclays is progressing. Some say there's a big risk. Yes, it is a large complicated program, but I'm confident we'll get it done on time and within budget.
We are currently almost 3/4 complete, and successfully migrating our regional operations core banking and digital platforms to South Africa from the U.K. in the second quarter was a major achievement. We have also increased visibility of the Absa brand in our regional operations and plan to start rebranding 2 of our operations before the end of this year. However, the separation is far more fundamental than what people see. It is not just about systems and rebranding. It's been an enabler for a new strategy, a complete reset, allowing us to restructure the group and to change our culture. Culture is critical as we remove the bureaucracy and empower our people and get the focus back on our customers.
Looking at our franchise, Retail and Business Banking South Africa is our biggest business, and we have to turn it around. Generally putting customers first is key. Getting closer to customers is the biggest opportunity in banking. We simply can't take our structures to the clients. We looked at how to get closer to customers to allow us to compete and regain our market share. Arrie is just completing RBB's restructuring taking out a layer of management and removing the silos. The next layer that has come through, they are young, talented and energetic. While the last part of this process has been tough, staff say, "We will stay", and I knew we had to do it. Importantly, we're not reducing cost to hit some cost/income target. It's not cost-cutting but reengineering to resize and make RBB fit for purpose. Experienced bankers will know: if you just take out costs, it usually comes back in another form.
We are bringing back the old concept of a branch manager, who is the chief executive of their business. Thus, a branch is no longer a delivery platform for products. As we have regained some market share in retail loan production, we often get asked whether we are relaxing our credit principles or playing a pricing game. We aren't. In fact, our new business pricing has improved in many products. We are not targeting outsized market shares. We just want to regain our fair market share.
Customer primacy is our top focus. We want to grow transactional revenue and deposits. All banks talk about cross-selling. In our case, it's particularly acute as we're well below the market average. It is a big opportunity without going open market by just being close to our customers and data mining our existing base. You will see we've integrated most of our bancassurance business into RBB to give it the right impetus and focus by removing the silos. Investors ask us about digital in retail banking. It is crucial for us to digitize our business, which reduces costs and also improves customer experience. While digital does put some existing revenue streams at risk, it also enables customers to access products online far more easily and to transact and apply for products. A lot of our Personal Loans growth is to existing customers applying for preapproved credit online. Some investors ask us how we will turn Absa around while facing new competitors. Our response in respect of the new entrants is by putting our customer first, improving the experience and playing to our strength of offering multiple products.
On a weak economy, you can't sail against the wind. We don't want to be in that picture. If the economy is poor, then you have to sit it out. But there are still customers out there, and we're pushing transactional banking much harder than asset growth. And good times often mask bad structures. If the market is pumping, I don't know if we would have made the changes we have.
While South Africa's economy has disappointed for several years, we benefit from having a sizable franchise across the continent. There's a lot of runway in our existing markets. We're usually in the top 3 or 4 of each market, but we're not #1. So there's a lot of scope to grow. I visited Ghana, Kenya, Mauritius, Botswana, Zambia and Uganda so far. They have good Boards and management in place and must go for it. The economy is also struggling in other countries at the moment, but that's a benefit of a broader footprint. Although CIB is 3/4 of our earnings outside South Africa, we see scope to grow out more, particularly on transactional side. We want to give this more impetus. Banking corporates are seamlessly across the continent. RBB regional operations is different as it is driven in country because they know the market base.
So that gives you my perspective on our business. We are doing all the right things to succeed. There's still a lot of to do, and ultimately, our numbers need to do the talking, but we're doing the right things, and we're on the right road.
Jason will take you through our financial performance, and you will see that we're building some momentum across the group.
Jason Paul Quinn, Absa Group Limited - Group Finance Director & Executive Director 
Well, thanks, René, and good morning, everybody. As usual, my presentation will focus on our first half performance, and then I'll briefly update you on our separation from Barclays before providing our guidance for the rest of 2019. And finally, we'll answer your questions.
Before getting into the details, I wanted to comment on key aspects of our first half performance. Firstly, the macroeconomic backdrop in our main markets has been tougher than expected, and it's not just in South Africa where growth has disappointed. We've revised down our GDP growth expectations this year for 8 out of our 10 markets. And global trade tensions have escalated lately, which is negative for emerging markets as a whole. Secondly, as our investor update in June showed, with only a year to go, our separation from Barclays remains on track from a budget and timing perspective. We landed some very important projects during the half, including migrating our core ARO banking system to South Africa. Nonetheless, there's still a lot to complete in the next year. The separation process has been a positive catalyst for us to reset our organization. The extent of operational restructuring is evident in our results with ZAR 500 million worth of restructuring charges in this half and with benefits already starting to flow from the restructuring charges we took in second half of last year. We've changed our segmentation within RBB South Africa, our largest franchise, to reflect how we run the business. And we have also included WIMI's Insurance and Wealth businesses in RBB, while Investment Management is now in the group center.
Thirdly, you'll see further evidence of this reset in the improving momentum in our loans, deposits and annuity transactional revenues. Despite the tough operating environment, we've been able to sustain better revenue momentum in our key target areas with total revenue growth improving to 6%. This is in line with the medium-term guidance we gave last December to grow revenue in line with the market this year and then faster than it in 2020 and 2021.
Fourth, in response to pressures on revenue growth, we've been executing our cost initiatives at pace. This allowed us to achieve flat Jaws for the half, which was better than we guided.
Lastly, we achieved most of the remainder of our guidance despite the macro backdrop and while executing substantial separation projects.
Starting with our salient features. We continue to give a normalized view of our financial results while we separate from Barclays as it better reflects our underlying performance. I'll refer to our normalized financials throughout the presentation, and we provided a reconciliation of our normalized and reported IFRS results in our booklet. Our diluted HEPS rose 3%, and we increased our first half dividend per share in line with this HEPS growth. Our NAV per share grew 7%, driven by retained earnings and an increase in our foreign currency translation reserve, while the impact of IFRS 16 on equity was negligible. Given the solid growth in our NAV and a relatively strong base in the first half of 2018, our return on equity declined slightly to 16.4%. This reduced our PARC, or profit after regulatory capital charge, for the period of 16% to ZAR 1.3 billion. Flat operating Jaws increased our preprovision profits 7% to ZAR 17, billion which outweighed the slight increase in our credit loss ratio.
Moving on to the income statements. Its overall shape was again largely as we guided. Revenue growth improved to 6% or 5% in constant currency due to 9% higher net interest income and 3% growth in non-interest income. This was despite prior year WIMI disposals reducing revenue by ZAR 600 million and ZAR 120 million revenue-drag from implementing IFRS 16.
Operating expenses remained very well controlled, increasing by 6% or 5% in constant currency with low single-digit underlying growth. Credit impairments grew 19% off a low base, ahead of our loan growth. Our effective tax rate decreased to 27% from almost 28%. The 29% rise in noncontrolling interest was largely due to issuing additional Tier 1 capital in support of our growth ambitions. Our normalized headline earnings grew 3% to ZAR 8.3 billion.
We show normalization items on the right. Separation-related operating expenses of ZAR 900 million was the most material item, although this was 37% less than last year's as transitional services agreement costs fell after localizing more of the services. At a headline earnings level, we added back ZAR 600 million in the half, slightly less than last year's ZAR 700 million, with our IFRS headline earnings up 4%.
As expected, our net interest margin declined mostly due to funding margins. Our average weighted interest-bearing assets grew 13% to just over ZAR 1 trillion, and our net interest income grew by 9%. Our loan margins declined mostly due to Investment Bank South Africa's strong growth in preferences as well as higher suspended interest. Pricing was lower in relation to Banking, while front book margins continue to improve in Home Loans and Personal Loans. Slower growth in Home Loans and our overall book was positive for our loan mix, although this was partially offset by strong CIB growth.
Our deposit margin narrowed due to competitive pricing in Everyday and Relationship Banking. Increased reliance on wholesale funding and stronger growth in lower-margin Everyday Banking deposits had an adverse mix impact. The combined 5 basis points negative impact from our capital and deposit in diamond income was due to slower growth in these balances than in our overall interest-bearing assets rather than from lower rates.
We continue to hedge structural balances of about 13% of our South African capital and liabilities. Our structural hedge released ZAR 240 million or 5 basis points to the income statements, which was in line with the previous period.
In ARO, lower rates in many of our markets and competitive pricing of foreign currency loans and deposits further reduced our group margin slightly. The negative impact of implementing IFRS 16 was the main item in Other, although there was an offset in costs. Our net interest margin declined only slightly from the 4.59% recorded in the second half of 2018.
We maintained last year's momentum in lending. Our gross loans increased 12% to over ZAR 900 billion as we added ZAR 100 billion year-on-year and ZAR 40 billion year-to-date. Growth was evident across most of our businesses. RBB South Africa, our largest book, grew 7%, an improvement from last year's figure of 5%. CIB South Africa's gross loans rose 23%, although most of this was already booked in the second half of 2018 and low-margin reverse repos increased 80% to ZAR 45 billion. Commercial Property Finance grew 35% on average off a relatively low base, while term loans declined slightly this year. ARO's gross loans increased by 15% with consistent growth from RBB and CIB.
Looking at RBB's loan growth in South Africa on the right. Our key products all achieved solid growth besides Home Loans. Excluding Home Loans, RBB South Africa grew 11%. Importantly, Home Loans has gained 2% market share of new business this year. Vehicle and Asset Finance grew 8% as an increased share to offset declining industry sales. Personal Loans grew 12% due to strong production via branches and digital channels and targeted marketing campaigns. Credit cards increased 9%, largely due to limit increases. Lastly, Relationship Banking grew 13% with double-digit growth in Commercial Property Finance, agri, term loans and Commercial Asset Finance. We're pleased with the momentum that's building RBB South Africa lending as well as the quality of new production, which bodes well for improved annuity revenues.
As you know, growing core deposits is one of our priorities, and it's also an indicator of improving franchise health. Total deposits grew 12% year-on-year with strong growth of over ZAR 60 billion year-to-date, well ahead of loans. Customer deposits account for 74% of our total funding mix. RBB South Africa grew 13% to ZAR 349 billion or 44% of our total deposits, in part, due to a strong second half of 2018. Everyday Banking deposits increased 12% ahead of the market's 9%. Relationship Banking rose 14% with growth in transactional and savings due to new products and growth in the public sector. Deposits is a focus area for CIB South Africa, and its deposits grew 13% with corporate transactional deposits up 12%. We successfully launched an on-balance sheet money market product in the first quarter. ARO's deposits increased 10% or 11% in constant currency. Although below its loan growth, its loan-to-deposit ratio remains low at only 82%. Our proportion of long-term funding was comparatively high at over 27%.
Balance sheet growth and a focus on improving customer primacy is starting to translate into improving noninterest income growth. Our noninterest income increased 3% or 2% in constant currency to over ZAR 16 billion or 42% of total revenue. It grew 6% excluding the full and net trading income. Annuity income is a large component as net fee and commission income accounted for 71% of the total, after growing 5%. Net trading declined 10% and is a relatively small part of our overall noninterest income, while net premium income from the Insurance Cluster is a big part of Other.
Looking at our divisions. RBB South Africa grew its noninterest income 8% with solid 11% growth in merchant income, 6% higher net fees and commissions and the Insurance Cluster, up 5%. CIB South Africa's noninterest income fell 20% with the Investment Bank down 1/3 due to our Markets business, which I will cover later. This was partially offset by Corporate's solid 12% growth. Our regional operations grew 19% or 12% in constant currency. RBB ARO rose 15% or 8% in constant currency due to higher card volumes and 16% growth in bancassurance sales. CIB ARO increased 23% or 15% in constant currency with strong growth in the ARO Markets business and solid growth in ARO Corporate customers and transactional accounts.
Our operating expenses increased 6% or 5% in constant currency to ZAR 22 billion. However, this includes ZAR 400 million of incremental run costs due to separating from Barclays, plus restructuring costs of ZAR 500 million. Excluding these items, our underlying cost growth was closer to 2%. Implementing IFRS 16 and prior year WIMI disposals reduced our cost by 1%, which is similar to the impact of the weaker rand.
Staff costs grew 8% or 6% in constant currency and remained the biggest component at 57% of the total. Salaries grew 12% or 10% in constant currency with restructuring costs about half this growth. Incentives decreased 13% with bonuses and share-based payments down a similar amount. Our headcount in South Africa declined by 1,700 colleagues year-on-year or 5%, largely due to RBB South Africa's restructurings. Non-staff costs increased 4%, including 21% lower marketing, 2% higher professional fees and 5% growth in cash transportation costs.
IT costs grew 17%, due largely to ZAR 200 million of post-separation run costs and annual contract increases. Our total IT spend, including staff and depreciation, grew 13% to ZAR 4.5 billion, which is 20% of group expenses.
The 54% growth in depreciation and 43% lower property-related costs were due to adopting IFRS 16, which added ZAR 500 million in depreciation for right-of-use assets with a corresponding decrease in property operating lease expenses. Our total property costs continue to benefit from optimizing our corporate and retail branch portfolios and was flat year-on-year.
Amortization of intangible assets grew 29% due to a ZAR 1.1 billion increase in software development costs to ZAR 5 billion. The 21% growth in communication costs reflects higher market data costs in CIB after separating from Barclays. We see further savings opportunities in operations and technology, ARO's cost base and WIMI while also reducing discretionary costs. Given management actions, the incremental run costs I mentioned in March are coming through much lower than we expected. It's important to highlight that the benefits from our restructuring over the past year should become more evident in 2020.
As expected, our credit impairments increased off a relatively low base, rising 19% to ZAR 3.7 billion and increasing our credit loss ratios slightly to 79 basis points. Our year-on-year credit impairment comparison is now like for like after adopting IFRS 9 last January. You may notice that we reduced our comparative first half 2018 net interest income and credit costs by a ZAR 300 million after the International Financial Reporting Interpretations Committee announced its conclusion on how to treat interest and expense recovered on cured Stage 3 assets. This change had no impact on our bottom line and is consistent with our treatment at year-end in 2018.
RBB South Africa's credit impairments grew 20% resulting in a 112 basis points credit loss ratio. Home Loans tripled off a very low base of just 5 basis points. Everyday Banking, the largest component, increased 19% to ZAR 2 billion, slightly ahead of its 10% loan growth, in part, due to a one-off recovery in a slow-car portfolio in the base. Vehicle and Asset Finance's charge increased 7%, in line with book growth, as improving early arrears offset some pressure in the late-cycle and legal portfolios. Relationship Banking's credit loss ratio increased slightly, reflecting normalizing credit losses in Commercial Asset Finance and macroeconomic pressure on SMEs, partially offset by recoveries in Wealth and Commercial Property Finance. CIB South Africa's credit impairments fell 25% and reduced its credit loss ratio to 18 basis points. This was largely due to the non-recurrence of a single name charge in the comparative base. ARO's credit charge rose 64% year-on-year off a low base, particularly in CIB.
Lastly, Stage 3 assets improved to 4.8% of total loans from 5.3%, and we consider our 44% cover on this appropriate. Our group credit loss ratio of 79 basis points is at the bottom end of the through-the-cycle annual charge we expect under IFRS 9. We expect our charge to rank between 75 and 100 basis points over time, although it can obviously beat or exceed this in trough or peak years. We constructed this range bottom-up based on the range of 110 to 155 basis points for RBB South Africa, its first half charges at the bottom end of this range. Home Loans is a key driver here given its size, and we expect it to range between 25 and 35 basis points. We expect CIB overall to range between 20 and 30 basis points. So it's 22 in the first half -- is at the bottom end having been at the upper end last year. ARO's charge will be between 100 to 140 basis points. So it was slightly below this in the first half.
Moving on to our capital base, which remains strong. Our common equity Tier 1 ratio was stable despite our improved loan growth. Group risk-weighted assets grew 10% to ZAR 844 billion, slightly less than our customer loan growth. We remain strongly capital-generative as profits added 2% to our CET1 ratio year-on-year, while dividends reduced it by 1.1%. Our resulting normalized CET1 ratio of 11.9% is at the top end of our Board target range. And of course, our capital levels are stronger on a statutory basis, which includes another 50 basis points for what remains of the separation contribution from Barclays. Our total normalized group capital ratio is healthy at 15.4%.
Our divisional returns remained broadly consistent except for CIB South Africa. RBB South Africa's return on regulatory capital was stable and remains attractive at 23%. CIB South Africa's lower return on regulatory capital was all due to its lower Markets revenue. ARO's ROE was stable at 19% and remains far higher than the 13% when we acquired it 6 years ago.
Our group earnings remained well-diversified by products, activity and geography. RBB South Africa, which now includes the Insurance Cluster, grew 4% to contribute 60% of our earnings. RBB South Africa itself is well diversified. ARO's earnings increased 8% to account for 21% of group earnings from 13% in 2013. These 2 outweighed the 10% fall in CIB South Africa's earnings due to its negative Jaws on the back of lower Markets revenues. On a total view, CIB's earnings declined 5% or 8% in constant currency and accounted for over 1/3 of group earnings.
Positively, the group's preprovision profits grew 7%, well ahead of last year's 1% growth. RBB South Africa's positive Jaws produced 8% higher preprovision profits given its improved top line growth. ARO's preprovision profits grew strongly, driven by its 18% revenue growth. CIB South Africa's preprovision profits fell 16%, again, due to the 28% lower Markets revenue. CIB's total preprovision profits were 3% lower.
This slide shows the earnings from RBB South Africa's new operating segments in the manner set out at our Investor Day last December. There have been several changes from our previous segments. For instance, Vehicle and Asset Finance is considerably smaller as it excludes Commercial Asset Finance that moved to Relationship Banking. Its earnings increased to ZAR 122 million, largely due to positive Jaws on 8% net interest income growth and 2% lower costs.
Everyday Banking incorporates Transactional and Deposits, Personal Loans and card issuing to create a large business that made ZAR 4 billion last year. Its earnings grew 11% to ZAR 2 billion due to 14% higher preprovision profits on solid balance sheet and noninterest income growth, which outweighed 19% higher credit impairments.
Relationship Banking is another large segment that includes Business Banking, card acquiring, Commercial Asset Finance, Private Banking, Wealth and financial advisory. It grew 4% to ZAR 1.7 billion as preprovision profits increased 6%, largely due to cost containment. It also achieved 14% balance sheet growth. Relationship Banking produces a strong ROE of 24%.
RBB's Insurance Cluster includes Life and Short-term Insurance. Enhanced products and collaborating with RBB saw new business sales reach 100,000 demand in South Africa. Earnings increased 7% to almost ZAR 600 million with Life up 14%, while Short-term declined 11%. Life net premiums grew 10%, and its embedded value of new business rose 8%. In Short-term, weather-related claims increased materially and reduced the underwriting margin.
Home Loans earnings decreased 7% as credit impairments increased materially off a very low base. Its preprovision profits increase 2%. Home Loans gets a lot of attention because it accounts for 29% of group loans although it's only 15% of RBB South Africa's earnings. Maintaining momentum in our loan production is an important part of regaining leadership in RBB South Africa. As I mentioned, our loan production strategies saw us maintain above-market growth in retail lending in a tough economy and compared to our higher base because we started improving our loan production in the second half of 2017. Home Loans registrations grew 16%, well above the market's 7% growth in registrations, improving our flow market share to 22% from 20% as we focused on granting higher LTV loans to low-risk customers. Our average LTV on new mortgages increased to 87% from 84%.
In vehicle finance, production slowed to 2%. However, this growth came in a contracting market with new sales down 4% and new and used finance vehicles declining 9% and 7%, respectively. We strengthened our dealer relationships and improved our share in the used segment by 2%.
Personal loan production grew 20%, largely through improved operational processes and without changing our risk appetite. There is further scope to increase our low market share here of just 11%.
Credit card turnover grew 9%, largely due to increasing limits for existing customers. We get many questions about our retail loan pricing as we gain share of new business in the subdued market. Importantly, as you can see on the right, our new business pricing improved by 15 basis points in Home Loans and 67% in Personal Loans, while credit cards was flat. Pricing remains tight in Vehicle and Asset Finance with increased competition in a weak market.
Moving on to CIB. We show the components of CIB in total, in line with how we run it on a Pan-African basis. CIB's earnings decreased 5% or 8% in constant currency to ZAR 2.8 billion. In total, Corporate declined 4%, while Investment Bank decreased 5% as they both bagged ZAR 1.4 billion. Including ARO improves CIB's return on regulatory capital to 18%, although this is down from 22% last year. CIB's earnings in South Africa declined 10% to ZAR 1.5 billion as 5% lower revenue produced negative Jaws that outweighed 25% lower credit impairments off a high base. Within this, Corporate earnings declined 4% over ZAR 500 million due to significantly higher credit impairments. Nonetheless, Corporate extended its track record of double-digit revenue growth, which increased its preprovision profits 20% given flat costs. Its underlying revenue momentum was strong with significant growth in debt and trade finance and working capital, although a declined collections business dampened its transactional revenue. Its average loan growth was 14%, while deposits were flat.
Investment Banking includes Markets, Banking and Commercial Property Finance. Its South African earnings fell 13% to ZAR 1 billion with the opposite drivers to Corporate. Revenues fell 16% and costs rose 10%, outweighing a material decline in its credit impairments off a high base. As mentioned, Markets revenue declined 28% with fixed income and credit down 21%. FX and commodities fell 11%, and equities and prime services dropped 71%. Banking revenue declined 5% with Global Finance and Advisory down. This offsets a favorable performance in resource and project finance and strong growth in the preference share business.
Commercial Property Finance continued to perform well with revenue up 31%, although it remains small compared to peers. Our Commercial Property Finance book is well diversified with a rising proportion of investment-grade loans that source more net reversal and credit impairments. We do expect Commercial Property Finances growth to slow. We see growth potential in target areas and aim to win primary relationships to increase our transactional revenue and deposits. Doing so should improve CIB South Africa's low returns.
CIB's earnings in our regional operations grew 3% to ZAR 1.2 billion, largely due to the weaker average rand as it declined 4% in constant currency. Corporate's earnings declined 4% as credit impairments normalized off a low base, and its Jaws were negative. ARO's Investment Banking earnings rebounded, rising 22% or 13% in constant currency, given a solid 25% revenue growth as we continue to build out our client franchise and roll out more advanced infrastructure.
Given the negative variance, we thought it important to spend some time unpacking our Markets performance. The graph on the left gives a different view of our South African trading operations. It shows that our client franchise remains healthy as we maintained our share off a declining institutional market and grew our corporate trading revenue. Markets' client facilitation risk was the swing factor given its negative contribution in the first half of 2019.
On the right, we show ARO's market revenue, which grew 25% off a relatively low base, reducing our overall trading revenue decline to 11%. The key takeaway is that CIB's core plan franchise remains healthy and that ARO diversification remains intact. That's very evident from the graph on the left that Africa regions has enhanced our earnings growth, particularly given South Africa's low growth for the past 3 years. Africa regions' earnings grew 12% to almost ZAR 1.8 billion, although this was closer to 4% in constant currency, and accounted for 21% of earnings and 24% of group revenues. Its preprovision profits grew 21%, partially offset by normalizing credit impairments.
I covered CIB earlier, which accounts for 3/4 of its earnings. RBB's earnings grew 2% due to its positive operating leverage and the weaker rand. ARO's ROE has improved materially since we bought it in 2013 to around 19%. We believe this should increase further, medium term, as we grow our CIB franchise where returns are attractive and as we reduce RBB's high 70% cost-to-income ratio once we've completed the separation.
There's nothing material to add on our separation from Barclays since our market update in June. As the graph shows, we've delivered another 9 projects and terminated 3 services contracted with Barclays since then. To date, we've spent ZAR 9 billion on separation execution, almost half on platinum projects, and ZAR 1.8 billion on transitional services agreement costs. Year-to-date cost includes HR and compliance, rebranding, corporate channels and FX systems and program support costs. We continue to expect that separation will be capital and cash flow neutral over time.
I'll finish by updating our guidance for the rest of 2019. In South Africa, we expect 0.5% real GDP growth this year, well below the 1.7% we expected when I presented to you in March. We've also reduced our expectations for our regional operations, particularly Mozambique, although there should still average almost 5%.
Based on these assumptions and excluding any major or unforeseen political macroeconomic or regulatory developments, our guidance is as follows: We continue to expect stronger deposit growth this year, which should exceed our loan growth. We expect better loan growth from ARO in constant currency than from South Africa. RBB South Africa momentum should continue, although CIB is likely to slow to mid- to high single digits. We also previously expected flat rates in South Africa this year, and last month's cut will reduce our net interest income by ZAR 200 million in the second half. Our net interest margin is likely to decline this year given higher wholesale funding costs and our funding mix. Our margin will probably be similar to first half levels. Costs will remain well controlled, and we're targeting flat deposit of operating Jaws for the full year. Our credit loss ratio is likely to be similar to 2018. Given the usual seasonality, it should remain slightly below our target range, barring any large corporate defaults. Our ROE is likely to be marginally lower in 2019 given our weak Markets performance year-to-date. However, we remain committed to our target of 18% to 20% in 2021. Also, it's important to note that the second half of 2018 was a relatively weak base from an earnings perspective. Lastly, our CET1 ratio should remain at the top end of our Board target range, and we remain comfortable with our dividend cover at 2018 levels.
Thanks very much for your attention, and we'll answer any of your questions now on Slido.
Well, just looking at the Slido here, we haven't had any questions come through. Of course, we have got significant engagements with our investor sort of groupings over the next few days and weeks with both our group teams, René and myself and the divisional teams meeting with many of you one-on-one, but I'm sure we'll go through all of your questions then.
Thanks again for joining our webcast this morning.