SA banks are strong and well position for growth

South Africa’s four major banking groups; Absa, FirstRand, Nedbank and Standard Bank; remain stable and adequately funded despite rumblings about their exposure to the unsecured debt market and continued global volatility.

This can be taken out of the PwC statement on the state of South Africa’s big four banking groups. Released last week the statement was announcing the launch of a PwC report titled South Africa Major Banks Analysis: Finding Strength in Adversity.

The statement offshore expansion into the rest of the African continent remains very much in play, with each bank taking a different approach. “We have seen an increase in reporting on the banks’ rest of Africa operations and it will be interesting to see more information as strategies mature,” said Johannes Grosskopf, Banking and Capital Markets Leader for PwC Africa. Banks recognise the growth potential in sub-Saharan Africa, which forms part of the SAAAME region (South America, Asia, Africa and the Middle East)”.

Tom Winterboer, PwC Financial Services Leader for Africa, said “Notwithstanding some international headwinds the South African banking system has remained stable and the banks are adequately well capitalised, with solid returns on equity (ROE). We expect South Africa’s banks to continue on a cautious growth path.”

Although there were differences in the performances of the individual banks, the four major banking groups posted combined headline earnings of R23.7 billion, up 11.5% from the comparable period last year. Core earnings increased 12.4% to R47.6 billion on the first half of 2012 and 5% on the second half of the year.

Grosskopf said “Regulatory reform is regarded as the most significant and pressing issue in the banking industry, according to PwC’s recent 2013 South African Banking Survey.”

From 1 January 2013 all of South Africa’s banks reported that they successfully transitioned to Basel III, one of the biggest changes the banking industry has seen since the introduction of Basel II.

Notwithstanding these regulatory challenges, capital levels continue to be strong for the industry. The combined total adequacy ratio strengthened to 15.2%, compared to 15.04% at December 2012 in spite of the new Basel III capital requirements. When compared against June 2012, the current period’s combined ratio further highlights the strong capital positions of South Africa’s major banks, as the total combined capital adequacy ratio strengthened from 14.9% for the first half of 2012.

“We expect regulatory change will continue to play a significant role in banks’ strategies and results going forward, particularly as higher capital levels in terms of Basel III are phased in,” says Grosskopf.

Growth in earnings was further enhanced by an increase in net interest income of 11.7% and non-interest revenue of 6.4%. “The banks have managed to continue growing their net interest margin amidst the stagnating economy, the low interest rate environment and changes made to the composition of the balance sheet,” adds Grosskopf.

Growth in net fee and commission income was generally flat on the second half of 2012, but grew by 9.3% on the first half of the previous year. The growth in this area has been largely driven by an increase in transaction volumes with limited prices increases. The banks are also using electronic channels to drive transaction volumes.

From a lending perspective, the major banks’ reported combined gross loan growth of 7.2% came primarily from strong corporate lending, card lending, overdrafts, instalment credit and leases. Housing credit growth continues to be weak (up 1.4% from 1H12 and up 1.0% from 2H12) as consumers take advantage of low interest rates to repay debt.

Total non-performing loans (NPLs) for the major banks grew 0.3% for the first half of 2013 (compared to a -6.7% decline in combined NPLs for the second half of 2012).In contrast, mortgage NPLs declined 7.3% for the first half of 2013 (compared to a 13.2% decline in mortgage NPLs for the first half of 2012), reflecting a significant focus by banks in reducing their NPL portfolios and a slowly improving residential property market.

Banks’ operating expenses increased by 6.6% to R61 billion compared to the first half of 2012, while total operating income increased by 9.0% to R108.7 billion. Consequently, their combined cost-to-income ratio improved to 54.1% for the first half of 2013 (56.5%:2H12).

Cost control is an imperative for the banks as they seek to reduce their cost bases by 5% in each of the next two years, according to PwC’s Banking Survey launched in June 2013. Of particular interest is the continued significant investment by banks in information technology. The importance of technology to the banks’ operations has been on a long-term upward trend resulting in increased technological costs.

Grosskopf says: “Innovation remains a priority for the industry and the market has seen a number of new products launched in an attempt to attract new customers to banks and encourage them to use cheaper electronic channels, facilitating less spend or investment in new and expensive branch infrastructure.

“There has also been a renewed effort by the banks on customer centricity, with a keen focus on onboarding new clients and retaining existing ones. Loyalty plans continue to be an important driver to attract and retain customers.”

Salaries, which continue to represent roughly half of the total expense bill, grew at a rate of 7.5% on an annual basis. “Attracting and retaining the right talent remains a priority on the boardroom agenda. This is even more of a challenge as authorities continue to look for alternatives as to how to regulate rewards in the sector.”

Despite the challenging regulatory environment, the aggregated ROE of the major banks is still strong at 16.1%, compared to 15.9% in the prior six month-period and 15.6% in the comparable period last year. However, this does not reflect the different circumstances that exist at each of the different banks, in particular those that have significant capital tied up in African operations, where they are in the process of building businesses. The average ROE compares favourably to that of the other BRICS (Brazil, Russia, India and China) countries.

Grosskopf concludes: “Our view remains that execution of strategies in the areas of specific focus will continue to be the key differentiator. Those banks that have well-defined and executed strategies will ultimately be the winners.”

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