Further demands for transparency on pricing of bank products

PricewaterhouseCoopers has released its tenth survey on banking in South Africa and continues to focus on the theme "Strategic and Emerging Issues in South African Banking".

Banks operating in South Africa highlighted the changing regulatory environment as one of the most important developments in the banking landscape and their view is that new regulatory requirements will continue to proliferate the financial services sector.

A majority of the banks surveyed also predicted demands for increased transparency, similar to those overseas, on pricing and product comparisons. Such a study has in fact been announced for the United Kingdom by their Office of Fair Trading (OFT) in March this year.  A landmark development is the Competition Commission's enquiry into competition in retail banking and the national payment system.  The consensus is that the enquiry will lead to greater transparency and itemised pricing together with more regulation, both external as well as self-regulation.

Another challenge is the National Credit Act of which the main requirements came into effect on 1 June 2007. Banks have cited the most pronounced impact of this new legislation will be on compliance costs, legal costs, and lending and credit extension, with many unknowns still to be addressed. Banks are also faced with the implementation requirements of Basel II, effective 1 January 2008, indicating they have made sound and steady progress in this regard, with the smaller local banks concerned with the significant resources which need to be devoted to the preparation process. The banks also need to continuously address the Financial Sector Charter requirements, with compliance returns now having to be audited for the first time.

The survey has been developed by PwC and researched and written by Dr Brian Metcalfe, associate professor in the Business School at Brock University, Ontario, Canada. It incorporates the viewpoints of 21 participants in the SA banking environment, both domestic (8) and foreign owned (13). 

Tom Winterboer, PwC Banking and Capital Markets Leader, says that an interesting contrast between the 2007 survey and the previous survey of 2005, is that banks now make no mention of the perceived cartel-like approach adopted by the big four retail banks in SA, being Absa, FNB, Nedbank and Standard. "The number of banks finding the SA banking market as overcrowded continues to decline. This time round, there was some focus on the perceived poor service levels in the retail banking sector. Banks are far more aware of widening demands from informed and sophisticated retail customers. They can see a rising tide of consumerism and their strategies now include differentiating themselves on customer service.  Favourable growth in retail is expected until at least 2010, but foreign banks have indicated they have had disappointing or negligible success from this sector."

Winterboer highlights that the foreign banks have voiced criticisms regarding capital adequacy and reserve requirements. "These players are concerned about their ability to generate adequate profits. The foreign participants have also expressed a view that they believe the large domestic banks are using high margins in their retail operations to cross-subsidise their corporate banking divisions. Foreign banks are expecting to continue their gains in market share in the merchant and investment banking sectors, but are less confident on making progress in retail banking. They have indicated that they may leave certain sectors of the banking market if the returns are not satisfactory."

Winterboer says that out of the six different market sectors surveyed in terms of competitiveness, the home mortgage market has now replaced the corporate banking sector (now in second place) as being the most competitive banking space. "A new priority, from a list of macro issues affecting bank's operations, coming out of this year's survey is that banks are now placing the issue of crime, followed by recruitment of good personnel, at the top of their lists", says Winterboer. "Banks reported that emigration and inhibiting immigration policies are constraining the availability of quality staff and at the same time they have to address the requirements of affirmative action and employment equity."

Foreign and local banks have different areas of focus, with foreign banks intent on driving revenue growth. They also indicate a far greater commitment to South Africa from their parent companies than a few years ago, but foreign exchange controls in the country remain a concern to them.

In contrast, local banks are placing emphasis on client retention, capital and risk management, and banking the unbanked through the presence of more physical branches and ATMs.

Banks are looking to sub-Saharan expansion, are addressing the opportunities coming from the growth of the black middle market and a resurgence in corporate credit demand, and note the recent growth trends in private equity and non-BEE leveraged buy-outs.

The survey also requests respondents to rank peers and competitors in various operating sectors. Standard Bank was rated first in several categories: Corporate banking, listings, foreign exchange trading, bonds and derivatives, money market, internet banking (joint first) and trade finance. However, the significance of Investec being rated first in private banking and commercial property and finance and Absas rating as first in mortgage and retail lending, which comprises 60% of its assets, should be recognised.

Winterboer says the PwC survey hopes to raise awareness of strategic issues facing banks in SA, establish data on SA trends, encourage debate on how to capitalise on these developments, and improve performance in the banking sector.