SA’s major banks perform well despite a difficult and challenging operating environment

Combined headline earnings up 13.1%; average ROE of 17.1%; bad debt expenses down 9.6%; total operating income up 9.5%; operating expenses up 9.8%.

The financial results of South Africa’s four major banking groups (Barclays Africa Group, FirstRand, Nedbank and Standard Bank) for the six months ended 30 June 2014 have remained positive despite a challenging and uncertain operating environment.

Johannes Grosskopf, PwC Banking & Capital Markets Leader for Africa, says: “Although the operating environment for the major banks for the first half of 2014 remained difficult and considerably volatile on the back of macroeconomic uncertainty, the combined results for the current period continue to reflect the strength of the South African banking sector and the resilience of our banks’ ability to generate earnings.”

Although there are differences in the financial performance of the individual banks, the four major banking groups posted combined headline earnings of R27.8bn, up 13.1% from the comparable period last year. The banks’ total operating income increased by 9.5%, compared to the first half of 2013.

These are some of the findings from PwC’s ‘South Africa Major Banks Analysis: Stability amid uncertainty’ report. The report analyses the results of South Africa’s major banking groups for the six months ended 30 June 2014. It also identifies common trends and issues currently shaping the financial services industry, as it builds on previous PwC analyses over the last four years.

Grosskopf says: “Expansion into the rest of Africa continues to be a key trend, with all of the major banks continuing to increase their intensity on expanding their presence across the continent. Offshore expansion into Africa plays an important part in the growth strategies of the banks, with each bank taking a different approach.”

“Channel and product innovation remains high on the agenda of the major banks, with all of them highlighting the importance of driving more customers and delivering more mobile-based banking services, and online channels. Banks are increasingly focusing their efforts on customer-centric analytical tools to better understand clients and channel usage patterns, which can assist in building and improving customer relationships,” adds Grosskopf.

Growth in net fee and commission income grew by 7.2% when compared to the first half of 2013. “This is a significant achievement, given the low-to-zero inflationary increases on bank charges, and highlights the considerable effort made by the banks to increase their customer bases,” comments Grosskopf.

Growth in earnings was further enhanced by an increase in net interest income of 13% and non-interest revenue of 5.6% and reduced impairment charges which declined by 9.6%, largely as a result of focused efforts in previous periods to streamline provisioning policies and strengthen collection efforts. However, impairment charges increased by 16.2% when compared to the second half of 2013.

Banks’ operating expenses increased by 9.8%, while total operating income increased by 9.5% to R124bn. Consequently, their combined cost-to-income ratio deteriorated marginally to 54.9% for the first half of 2014 (54.2%:1H13).

Cost-containment remains a core focus area for banks as they continue to invest in talent and undergo enhancement of their IT capabilities to respond to customer demands, rising concern over cyber-crime and regulatory requirements that call for enhanced data capabilities.

Interestingly, combined non-performing loans (NPLs) have begun to show a reversal of the downward trend seen consistently since 2011, and grew by 1.2% for the first half of 2014. This reversal in trend is reflective of both the consumer and business impacts of a turning interest-rate cycle.

As the South African banking sector continues to move along the Basel III implementation timeline, minimum regulatory capital ratios are expected to rise through to 2019, with additional buffers being phased in from 2016. Against this context, the combined capital adequacy ratio of the major banks of 15.4% reflects solid capital buffers, and the prudent approach to capital management taken by them over prior years in anticipation of changing regulation.

Despite a difficult trading environment, the aggregated ROE of the major banks is relatively strong at 17.1% (compared to 16.2% for the first half of 2013). However, when compared to the combined ROE of 17.5% observed for the second half of 2013, the impact of a difficult operating environment prevalent throughout the current review period is noted.

Grosskopf concludes: “Most banks are cautiously optimistic about their prospects in the short term. Investing for growth, while focusing on operating costs, also remains a common theme for most banks. Those banks that continue to focus strategically on building their core capabilities, while continuously optimising all elements of human and economic capital, will emerge as key differentiators in a dynamic and evolving operating environment.”