Financial results of SA’s major banks remain resilient despite a challenging and volatile operating environment: PwC Banks Analysis

Johannes Grosskopf, Banking & Capital Markets Leader, PwC Africa.

Combined headline earnings up 17.7%; average ROE of 18.2%; bad debt expenses down 2.4%; total operating income up 8%; operating expenses up 9% against 1H14.

South Africa’s major banks have performed well despite a challenging, complex and volatile operating environment.

Johannes Grosskopf, Banking & Capital Markets Leader, PwC Africa, says: “Overall the major banks continued to produce a strong set of results within a significantly challenging operating environment, attesting to the resilience and diversification of their revenue pools and their strong, established franchises.”

Although there are nuances in the financial performances of the individual banks, the four major banking groups (Barclays Africa Group, FirstRand, Nedbank and Standard Bank) posted combined headline earnings of R32.8bn, up 17.7% from the comparable period in 2014. Against this period, the banks’ total operating income increased by 8%, while operating expenses increased 9%.

These are some of the findings from PwC’s ‘South Africa Major Banks Analysis: Resilient through challenging times’. The report analyses the results of South Africa’s major banking groups for the six months ended 30 June 2015. It also identifies common trends and issues currently shaping the financial services industry, as it builds on previous PwC analyses over the last five years.

Grosskopf says: “Expansion into the rest of Africa continues to be a key strategic objective, while all of the major banks focus their efforts on initiatives to invest on IT, infrastructure, systems and processes.

“Channel and product innovation remains high on the strategic agenda of the major banks. The banks are making significant investment into IT systems to meet increased regulatory requirements and heightened customer expectations of seamless transactional banking and digital solutions. At the same time, specific areas receiving attention includes the banks’ responses to the rising threat of cyber risk and overall readiness for new regulation impacting risk data.

“Furthermore, technological forces have had a profound impact on the financial services landscape. Almost all of the major banks indicated that they now have dedicated innovation resources and teams who tap expertise across the organisations to embed innovation as a business-as-usual priority.”

Growth in net fee and commission grew by 6.2% when compared to the first half of 2014. “This is a remarkable achievement despite economic headwinds faced during the period and regulatory changes which include lower interchange fees, effective March 2015, and the continued migration of customers to cheaper digital channels,” adds Grosskopf.

Net interest income growth of 9% benefitted from a continued positive endowment impact as the higher interest rate environment contributed to faster asset repricing relative to fixed-rate liabilities, equity and non-rate sensitive funding sources. In spite of net interest income growth, an important theme that emerged in the current period is the relative compression experienced in the major banks’ combined net interest margin, which reduced by 13 and 30 basis points against the comparable period and the six-month period ended December 2014, respectively.

Banks’ operating expenses increased by 9%, while total operating income increased by 8% to R134bn. Consequently, the combined cost-to-income ratio deteriorated to 54.9% for the first half of 2015 (54.7%:1H14).Cost containment continues to be a focus area for the banks as they continue to invest in talent and undergo enhancement of their IT and technological capabilities to respond to changing customer demands and increasing regulatory requirements that call for enhanced risk data capabilities.

Combined loans and advances grew by 8.4% in 1H15 compared to 2H14 and by a healthy 11.6% against 1H14. A key factor driving rates of growth in the major banks’ gross loans and advances has been robust demand for bank intermediated funding by the corporate sector during the first half of 2015. However, from a retail perspective, growth continues to be lacklustre. Combined non-performing loans (NPLs) fell slightly by 0.3% against the comparable period, but grew by 2.2% when compared to the six months to December 2014.

In line with expectations, the implications of higher capital requirements being phased in under Basel III has continued to influence regulatory capital levels. The combined total capital adequacy ratio of the major banks remained flat against the comparable period at 15.4% (15.3%:2H14) and remains underpinned by strong earnings growth, solid capital buffers and a consistently prudent approach to capital management.

Despite a difficult trading environment, the aggregated ROE of the major banks grew by 108 basis points. “This is a significant achievement that reflects the extent of resilience within the banks’ earnings profiles and the strengths of their franchises,” adds Grosskopf.

Grosskopf concludes: “In the short term the major banks remain cautiously optimistic about their prospects. However, focusing on innovation, strategy, proactive risk management and, importantly, their execution, will be critical for banks to ensure that they can mitigate forecast risk and navigate the headwinds and challenging conditions that are likely to prevail for the rest of 2015.”