Category Banking

Promising banking results for first half of 2011 – revenue growth and cost containment remain priorities

16 September 2011 PwC

For the six months to June 2011, combined headline earnings for South Africa’s four major banks were up 8.8% to R18,3 billion, compared to the June 2010 period and up 7.3% compared to the 6 months ended 31 December 2010. Combined core earnings remained resilient and were up 14% on the comparative period to R42,8 billion and up 17.1% on the second half on 2010.

“These six months’ results of our major banks are certainly commendable, especially when compared against their global peers, and demonstrate their intrinsic resilience and profitability” says Tom Winterboer, Financial Services leader: PwC Southern Africa and Africa. The banks achieved an average ROE of 14.5% during the reporting period whilst maintaining their relatively high capital adequacy levels which is another measure of their credible performance, notes Winterboer.

This PwC report analyses the results of South Africa’s major banks (being Absa, FirstRand, Nedbank and Standard Bank) for the six months to 30June 2011 and highlights the following features (1H10 is first six months of 2010; 2H10 is second six months of 2010):

· combined net interest income up 4.2% on 1H10 to R43,7 billion ( up 0.9% on 2H10)

· non-interest income up 14.2% on 1H10 to R57,7 billion (up 5.3% on 2H10)

· an improvement/reduction in bad debt expenses of 21.5% on 1H10, with a R10,4 billion impairment charge for the period (reduction of 6.4% on 2H10)

· total operating expenses increasing by 6.7% on 1H10 to R58,6 billion (although they were down by 4.8% on 2H10)

· average return on equity of 14.5% (down from 14.8% in 2H10, up from 14.3% in 1H10).

Commenting on the 4.2% increase in net interest income, Johannes Grosskopf, PwC SA Banking & Capital Markets Leader, says this is very positive considering that funding costs increased. “This upward trend reflects the major banks’ ability to re-price loans and still grow market share in their selected growth areas at better margins than before.” Into the near term, he expects such price discretion will help the banks to manage their margins. “But in the longer term, much depends on the extent of the funding challenge and whether we will see an increase or drop in the South African Reserve Bank’s repurchase rate (Repo rate).”

Looking at credit growth, gross loans and advances increased marginally by 2.3% on 1H10 and 1.7% on 2H10 with risk-weighted assets growing slightly faster at 4.8% on 1H10 and 1.5% on 2H10. “This low growth was largely because of ongoing risk aversion and de-leveraging by businesses and households” says Grosskopf.

Impairment charges reached their highs in 2009 and have continued their downward trend as consumers get relief from the low interest rate environment – although banks are predicting that this trend will not continue for long.

Non-interest income for this period now represents 56.9% of total income (up from a 55.8% proportion in 2H10), demonstrating the increased focus and reliance by banks on non-interest income to boost earnings. There was strong growth from electronic banking fees, despite these fees being cheaper than other forms of transactional banking. But investment banking revenue, recovering as merger and acquisition activities pick up, remains subdued.

The reduction of operating costs has been a focus area for the major banks. The average cost-to-income ratio improved and moved down from 60.6% for 2H10 to 55.5% for 1H11. However, total operating expenses increased by 6.7% compared to 1H10 which is primarily due to salary cost increases. The payroll expenses now represents 49.6% of total costs, and salaries increased by 8.2% (with staff numbers remaining stable) on 1H10.

“Achieving cost savings is one of the biggest opportunities to boost the bottom line and return on equity in the short to medium term” says Grosskopf. “In the first six months of 2011, banks delivered some good efficiency gains and have reported that cost containment will remain a priority.”

In order to further drive productivity efficiencies, banks are making significant investments in replacing or enhancing their core banking IT. “But these initiatives won’t positively impact earnings in the immediate future” says Grosskopf. “Furthermore, such large and complex projects carry the risks of taking longer and/or being more expensive to deliver than originally estimated. Consequently, it seems that any near-term cost savings will have to come from further streamlining bank processes and reducing complexity.”

Tom Winterboer, raises the issue of future earnings growth. “Certainly there is a feeling that superior top-line revenue growth will be hard-won. Recent falls in business confidence and factory output levels do not bode well for banks and their push to grow the top line, particularly in a relatively mature market.”

There are further challenges for the sector from new entrants. “New entrants, particularly those from Asia, are looking to use South Africa as the gateway into Africa to follow their clients and explore the African market” says Winterboer. “There is also further competition from the new digital players. In defending themselves against these non-traditional new entrants, our banks are embracing new electronic channels such as mobile banking and internet.”

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