SA’s major banks post solid results amidst a difficult and volatile economic climate: PwC Major Banks Analysis

The financial results of South Africa’s four major banking groups (Barclays Africa Group Limited, FirstRand, Nedbank and Standard Bank) for the year ended 31 December 2014 are an admirable reflection of the financial health of the industry in that they show that the banks have remained resilient through recent volatility in global financial markets.

Johannes Grosskopf, PwC Banking and Capital Markets Leader for Africa, says: “South Africa’s major banks have weathered difficult global and domestic operating conditions during 2014, to achieve admirable results.

“For the past several years South Africa’s banking system has remained adequately capitalised with good returns on equity (ROE).”

Although there were nuances in the performances of the individual banks, the four major banking groups posted combined headline earnings of R30 billion, up 8.5% from 2H2013. This comes off the back of strong net interest income growth of 13.2%, solid non-interest revenue growth of 6.6% and stable impairment charges that amounted to a relatively flat 0.4% increase against 2H2013.

These are some of the highlights from PwC’s South Africa Major Banks Analysis report entitled Navigating a volatile landscape. The report analyses the results of South Africa’s major banking groups for the year ended 31 December 2014 and identifies common trends and issues currently shaping the financial services industry.

Grosskopf says: “While macroeconomic factors matter more than ever, the banking industry, both locally and globally, now finds itself firmly in the grasp of a rapidly changing world.
“Customer expectations continue to evolve and intersect with new technologies. Banks are increasingly required to focus on decisions associated with their channels, cultures and operations to meet changing customer needs. At the same time, the global banking regulatory landscape has continued to see a raft of new proposals being issued for comment, while regulators further develop their supervisory approaches and place renewed focus on market conduct practices.”

From a lending perspective, the major banks reported combined gross loan growth of 3% for the six months to December 2014, which is the same as the 3% loan growth noted in the first six months of the year to June 2014. Growth in gross loans and advances continues to be stronger in the corporate and investment banking sector than the retail sector.

Impairments increased by only 0.4% when compared to 2H2013 reflecting continued focus on risk management, workout and collection efforts across the banks.

Combined operating expenses increased 6.8% when compared to 2H2013, while total operating income increased 10% for the same period. Consequently their combined cost-to-income ratio improved to 54.5% (2H2013: 56.6%).

Cost containment continues to be an important focus for the banks, while they continue to invest in human capital and enhance their IT capabilities to respond to customer demands, heightened concern over cybercrime and regulatory requirements. Salary costs remain the most significant contributor to the cost line at 54% of total costs. Maintaining cost-to-income ratios at current levels is expected to become increasingly challenging in the short to medium term, as the headwinds faced in the form of currency weakness and the need to transform branch networks and IT platforms are expected to continue.

While maintaining or improving ROE levels remains a priority for all of the major banks, the combined ROE of 17.5% remained flat compared to December 2013. The impact of higher capital requirements being phased-in under Basel III continues to influence regulatory capital levels in line with expectations. Consequently, the combined total capital adequacy ratio of the major banks of 15.3% (15.9% at 2H2013 and 15.4% at 1H2014) reflect solid capital buffers and the prudent approach to capital management which continues to be taken by them.

Non-interest revenue (NIR) grew 8.5% in the second half of 2014 when compared to 1H2014, and it is interesting to note that there has been a significant increase in the contribution from the major banks’ operations in the rest of Africa to the NIR line.

Grosskopf concludes: “Despite the difficult macroeconomic climate, South Africa’s major banks continue to produce resilient financial results. Looking ahead, the outlook remains cautiously optimistic given the degree of uncertainty and persistent challenges facing the domestic economy. Diversifying and growing the earnings contributions from the banks’ operations outside South Africa will continue to be a strategic focus area for all of the banks, though each will look to execute on these ambitions in different ways.”