An introspective look at the domestic banking environment

If you ask the average consumer how many banks are active in the local marketplace, most would shrug and guess: "five or six?" Of course there are many more than that. When we include foreign owned banks operating on our shores, we find the number is actually 36!

There banks are made up of 20 registered banks (of which five are controlled by foreign companies), fourteen South African branches of foreign banks and two mutual banks.

Despite the variety, the five largest domestic banks account for 90% of all banking assets in South Africa. The share controlled by ABSA, Standard Bank, First National Bank (FNB), Nedbank and Investec is massive when compared to the measly 8% controlled by foreign banks.

Making sense of the domestic banking environment

This background information allows us to consider some of the interesting results from the annual PriceWaterhouseCoopers (PWC) domestic banking survey. Titled Strategic and Emerging Issues in South African Banking the report is based on responses provided by senior executives at 21 banks (8 domestic banks and 13 South African branches of foreign banks) operating locally.

Tom Winterboer, PWC Banking and Capital Markets Leader for Southern Africa emphasised a number of the objectives of the survey at a media briefing held in Johannesburg on 18 June 2007. These included to "raise the awareness of strategic and emerging issues in banking in South Africa" and to "provide perspectives on how banking could evolve in the next three years."

Survey results were compiled by Dr Brian Metcalfe, who was in attendance to present the findings. He was quick to point out that the 21 participating banks represented a significant section of the local banking industry, in that they employed 129,000 people, operated 2,900 branches and serviced 7, 000 automated teller machines across South Africa.

Looking for 2010 answers in the industry crystal ball

The survey generated a wealth of insight into conditions in the local banking market. There is too much information to cover to any level of detail in this short article but we will pick up on some of the items which might be of interest to banking product consumers.

To begin, the survey revealed that South Africa's 'big four' banks plus African Bank managed 32.5 million bank accounts at the start of 2007. Banks expected a 24.8% increase in this number by 2010. Government's claim of 3 million Mzansi account holders could not be confirmed, as Post Bank was not included in the survey.

Survey results also showed an industry-wide consensus on growth prospects to 2010. Respondents agreed that the market share of local and foreign banks would remain constant over that period. Local and domestic banks would share in the expected revenue increases in similar ratios to those prevailing today.

When asked, "Do you expect any further foreign bank investment in the 'big four' banks in the next three years?" respondents mostly answered yes. There has long been speculation that the Barclays investment into ABSA would not be the last seen on the South African market, and this response seems to confirm that possibility. Interestingly, respondents were in agreement that no more than two of South Africa's 'big four' banks should fall into foreign hands at any given time.

Plenty of profit in a healthy market

The report reflects an industry with an extremely positive profit and growth outlook. The PWC survey dedicated an entire section to bank performance and senior executives affirmed their positive outlook in this section.

Revenues were expected to show continued strong growth. Domestic banks estimated annual revenue growth in the 10% to 30% range in 2007, falling slightly to 10% to 25% by 2010. Many of the foreign banks expected revenue growth of 30% or more in the domestic market in 2007 with five expecting annual revenue growth of more than 30% by 2010.

All the banks surveyed expected significant growth in their credit books in the years to 2010. Estimates varied, ranging from lows of 10% per annum to highs of around 40%. This credit robustness is good for banks which make sound profit from credit lending, but less good for consumers who will suffer as the central bank hikes rates to counter credit spending.

We will end with one of the comments included in Metcalfe's comprehensive results presentation. "The market optimism over the next three years is supported in the robust growth projections." It looks like all systems go for the banking sector in the coming years.

Editor's thoughts:
The domestic banking environment looks incredibly rosy right now. How long before the consumer sees the impact of all this goodwill in the form of less expensive bank products? Send your comments to [email protected]