Solid foundations, challenging conditions
SA’s major banks registered resilient growth against difficult operating conditions and a complex macroeconomic environment
Combined headline earnings growth of 13.8% against FY22 to R113.2bn, combined ROE of 17.6% (FY22: 17.1%), net interest margin of 458 bps (FY22: 430 bps), credit loss ratio of 102 bps (FY22: 82 bps), cost-to-income ratio of 52.2% (FY22: 53%), common equity tier ratio of 13.2% (FY22: 13.5%)
Despite difficult trading conditions and the challenging macroeconomic environment that prevailed globally, regionally and domestically in 2023, South Africa’s major banks exhibited solid operating foundations and continued the performance trajectory observed in the first half of the year.
Commenting on the major banks’ results for FY23, Rivaan Roopnarain, PwC South Africa Banking and Capital Markets Partner, says: “The formation of these results — which are enviable by global measures — coupled with solid growth momentum continues to demonstrate the underlying franchise strength of South Africa’s major banks. These results demonstrably reflect the positive portfolio effects of a diverse mix of businesses, together with the outcomes of considered strategic decisions taken and refined by management teams within a challenging operating context.”
Key themes observed from PwC’s Major Banks Analysis include:
- The combination of larger balance sheets, higher interest rates, strong levels of customer activity and transaction volumes underpinned robust revenue growth. In previous reports we highlighted that the favourable endowment effects on interest margins would continue, which materialised in the major banks’ FY23 results as market interest rates remained elevated in response to inflation levels.
- Financial market volatility increased on the back of elevated sovereign risks, significant movements in African currencies and severe geopolitical tensions. This combination of events sustained resilient demand for risk management products as corporate customers sought to hedge against turbulent foreign exchange, commodity and interest rate markets. Accordingly, the Global Markets’ business units of the major banks benefited from these events.
- Balance sheet growth — across both loans and deposits — continued on a purposeful path to record levels, reflecting the many strategic efforts and product decisions by management teams to offer customers convenience and competitive pricing. These include focused efforts to attract new customers, cross-sell and upsell across the full range of financial services products, while generating more opportunities for customer activity through increasingly frictionless digital channels.
- The major banks’ key balance sheet metrics remained resilient, as management teams steered their portfolio of businesses to respond to market and operating dynamics. Prudential measures across capital and liquidity were maintained comfortably in relation to regulatory requirements, while balance sheet provisions grew in response to elevated credit risks in specific sectors and loan portfolios.
- Risk costs in the form of credit impairment charges increased, driven by the current economic environment and informed by forward-looking risks in certain rate-sensitive loan portfolios such as home loans. In South Africa, credit impairments increased on a combined basis to the upper ends of “through-the-cycle” levels as credit models reacted to low growth, consumer pressure and the adverse effects of load shedding on South African households and businesses. Beyond South Africa, challenging fiscal positions and sovereign risks intensified in several other African territories in which the major banks operate, generating higher sovereign related risk costs.
- The benefits of geographic diversity continued to benefit the major banks through their operations on the continent. The theme observed at 1H23 of record contributions from their foreign operations continued, considerably uplifting group earnings relative to their South African operations. However, the nuances of doing business on the continent were also more acutely visible as political, fiscal, sovereign and currency risks were amplified in several African territories in 2023.
- In a year of elevated inflationary pressures, a disciplined approach to cost control translated into a new record for the combined cost-to-income ratio of 52.2% (FY22: 53%). Key investments continue in talent retention and technology related spend — consistent with the major banks’ strategic initiatives to enhance and digitise customer experiences. At the same time, volatile currencies in key African countries played out in translation effects while higher foreign-currency denominated costs in technology and other areas drove higher operating expenses.
- 2023 was the inaugural year of application of IFRS 17, the new accounting standard dealing with the measurement of insurance contracts which required the restatement of results. While the overall quantitative impact of the standard was largely insignificant on the net asset value of the major banks, the operational and technical effort to implement its requirements were demanding.
- Emerging and rapidly advancing topics such as generative AI, climate change and complex socio-economic and geopolitical trends all continue to exercise the minds of bank management teams. These areas present both opportunities and risks, with the major banks generally adopting a responsive posture in each of these areas, while maintaining a cautious eye on their varied risk management implications on overall bank strategy.
- The outlook for 2024 is uncertain and complex. With a majority of the global population in an election year, the range of outcomes and implications for the global economy, policy decisions and societal impacts are wide. Scenario planning and the need to quickly position their businesses for the effects of global change was highlighted as a key area of focus by management teams in a highly complex and uncertain macro environment.
Click here to read more...
