Category Banking

Thriving through turbulence

15 September 2023 PwC

SA’s major banks continued to demonstrate resilience against challenging operating conditions and a turbulent macroeconomic environment

Combined headline earnings growth of 16.8% against 1H22 to R55.8bn, combined ROE of 17.6% (1H22: 16.9%), net interest margin of 453 bps (1H22: 418 bps), credit loss ratio of 107 bps (1H22: 76 bps), cost-to-income ratio of 51.5% (1H22: 53.9%), common equity tier ratio of 13.2% (1H22: 13.6%)

South Africa’s major banks traversed familiar themes of uncertainty and market turbulence over the first half of 2023. Elevated inflation levels and interest rates, complex geopolitics, slow growth and volatile financial markets combined to create an operating backdrop more challenging than was anticipated at the start of the year. Globally, the banking industry faced acute scrutiny in the first quarter of the year driven by idiosyncratic events in the regional US banking sector, triggering resolution and other supervisory or market actions. While the South African banking sector was shielded from direct spillovers of these events, the interconnected nature of financial markets and banking in particular resulted in reflection and learnings for the industry as a whole.

Despite these challenging operating conditions, South Africa’s major banks drew on their experiences of navigating recent periods, their refined strategies and diversified strengths to deliver a robust financial performance. Commenting on the major banks’ results for 1H23, Rivaan Roopnarain, PwC Africa Banking and Capital Markets Partner, says: “What we see in this set of results reflects the outcomes of well crafted overall bank strategies that responded to challenging operating dynamics and economic conditions. Earnings growth was underpinned by the diversification of the major banks’ strong franchises, and the unrelenting focus on driving customer loyalty through better experiences and continued support.”

Key themes observed from PwC’s Major Banks Analysis include:

- Revenue growth benefited from higher interest rates through positive endowment effects. At the same time, balance sheet growth and the focus of recent years on superior and increasingly digital customer experiences was leveraged, translating into higher transaction volumes.
- Volatility in financial markets favoured trading revenues as customer demand for hedging and risk management products was strong, particularly in relation to foreign exchange, commodity and interest rate markets.
- Driven by challenging macros, the cost of risk in the form of credit impairments increased across most lending portfolios. Heightened sovereign and currency risks in several key African territories, coupled with interest rate pressure and the adverse effects of load shedding on South African households and businesses, triggered increased impairments as credit models reacted to fraught conditions.
- In spite of the amplified risk outlook, the major banks’ balance sheets remained resilient. Key prudential ratios across capital and liquidity continued to be maintained well above regulatory requirements, while balance sheet provisions reached unprecedented levels in anticipation of forecast risks.
- Sub-saharan Africa continued on a significantly faster growth path than South Africa. Those banks with sizable operations across the continent saw the benefits of geographic diversity in the region, resulting in record contributions to earnings growth and a higher growth rate relative to their South African operations.
- In spite of elevated inflationary pressures, the major banks’ deliberate approach to cost management and revenue growth translated into the lowest combined cost-to-income ratio observed in a decade. Consistent with recent periods, underlying franchise momentum resulted in revenue growth outweighing cost growth, creating positive operating leverage.
- The digital transformation journeys of the major banks continue to mature and yield a range of positive benefits — both to them and their customers. At the same time, the retooling of legacy technology estates to be more modular, cloud-based and agile continues to create efficiency and productivity gains, enhanced customer experiences and helped position the major banks to be able to leverage future technology transformation. We see continued investment in fast emerging areas such as artificial intelligence.
- The sustainability agenda is front and centre — driving a range of implications from emissions targets, reporting and disclosure, lending strategies and risk management. The major banks have all commented on the growth in their sustainable financing portfolios, their commitments in this area, and the balance between these initiatives and socio-economic development on the continent.
- The outlook for the rest of the year is expected to remain challenging as economic conditions are forecast to weigh on consumer, business and corporate confidence. In South Africa, electricity supply constraints are expected to remain a clear and present risk to the local economy, while evidence increasingly emerges that the higher interest rate environment is placing significant pressure on consumers and consumer-facing industries.

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