Banking industry is adrift, Telecoms becomes core

Partnerships between banks and non-financial institutions, such as retailers and telecom companies are expected to become more prevalent as banks aim to broaden distribution and reach unbanked populations across the African continent, says PwC executive Johannes Grosskopf.

The Banking & Capital Markets Leader for PwC Africa, Grosskopf, was commenting about the latest finding of the PwC South African banking survey.

The venture of banks into the telecom space is closely watched as representing a new frontier in the banking sector. In South Africa FNB is closely watched as a leader in these trends with some observers noting that FNB is on the verge of becoming an Internet Service Provider in its own right. Recently there were rumours that FNB may link up with South Africa’s third largest mobile operator Cell C.

The PwC report noted that South Africa’s big four banks, Standard Bank, Absa, FNB and Nedbank are evaluating their current branch networks alongside technological developments. The big four operate 2 877 traditional branches. This number is forecast to reduce by 21% to 2 285 by 2016, PwC report. “This is consistent with their stated intention to transition more customers to electronic distribution channels. This does not necessarily mean that their distribution networks will be negatively affected. Instead, banks are reaching out to customers through new self-service touch points and smaller lower-cost branches which have been increasing”.

The report added that “As the speed of technological innovation increases, banks are facing immense challenges as to where to focus their investment and what technology to use. The majority of banks say they will invest significantly to upgrade IT platforms over the next three to five years. The Big Four banks are forecast to each invest R3-R5 billion in the next three years”.

Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa, said “The results of PwC’s  13th edition of  the ‘South African banking survey, 2013’ show that  executives acknowledge that the industry is evolving fast, with a number of trends and developments currently shaping the global landscape for financial services and in particular the banking industry.

“These trends could either contribute to or detract from banks’ ability to achieve sustainable revenue growth.”

Grosskopf added that “innovation is critical in this rapidly changing landscape with the Big Four banks all ranking it of maximum importance.”

The PwC survey established that South African banks were not overly concerned about the potential threat of new entrants into the market. However, bank executives acknowledge the threat posed by non-traditional competitors, such as retailers and mobile service providers as they adapt to changing customer behavior.

The report added that regulatory reform is regarded as the most significant and pressing issue as well as the most significant weakness in the banking industry. The sheer scope of current and planned reforms that will impact the industry are clearly top of the mind for executives who said their organisations have already prepared for the changes ahead.

The survey found that executives recognise the growth potential in sub-Saharan Africa. “Almost half of participants expect 10-15% of their after-tax profits to come from the sub-Saharan region (excluding South Africa) in the medium term, with Nigeria, Ghana and Kenya regarded as key growth territories”.

The report also noted that “Although banks are positive about forecast ROE levels, they do not expect these returns to recover to pre-crisis levels. However, we believe that given lower gearing levels, the cost of equity may also reduce. In this scenario, the investor is therefore not worse off”.

The reported also noted that banks have been successful in implementing cost containment strategies as a means to maintain profitability. “This is expected to continue over the medium term as cost containment is now regarded as the most important driver facilitating improvements in ROE and ROA, up from third place in the 2011 survey”.

“Internal efficiency drives, automation and optimisation of staff levels are key mechanisms for containing costs. Overall staff numbers are predicted to grow marginally from 150 768 to 154 354 by 2016, which equates to growth of 2%. Based on these modest increases, rapid adoption and implementation of automation will be critical if banks are to achieve their growth aspirations”.

Grosskopf said “The evolving competitive environment, coupled with the external developments will require banks to continually rethink their strategies. Executives will need to adapt to new trends that may manifest over the medium to long term. This means constant evaluation of business and operating models.

“Ultimately, the winners will be those banks that can execute flawlessly to achieve alignment to these long-term trends.”

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