SA’s major banks produced a solid set of financial results for the reporting period ended 31 December 2017, despite an operating environment marked by intense levels of policy and economic uncertainty.
Johannes Grosskopf, Financial Services Leader for PwC Africa says: “The major banks’ combined results have shown remarkable resilience and reflect a solid trajectory of performance which we have seen play out over a sustained period.”
PwC’s Major Banks Analysis presents the combined local currency results of Barclays Africa, FirstRand, Nedbank and Standard Bank. Investec and Capitec, the other major players in the South African banking market, have not been included due to their unique business mix and different reporting periods. The analysis identifies common trends and issues currently shaping the industry, building on previous PwC analyses over the last eight years.
Although there were differences in the performances of the individual banks, on a combined basis, the four major banks posted headline earnings of R76.1 billion at 31 December 2017, up 5.2% on an annualised basis and 11.6% from the first half of 2017, showing an improved trajectory over the last six months.
A notable contributor to the earnings trend for the year has been the impact of an 8.1% decline in the combined bad debts charge, largely due to lower portfolio impairments and the workout of legacy non-performing loans in CIB portfolios for some banks. Banks have commented that the decline in impairments is counter-intuitive given the political and economic context and therefore continue to maintain judgmental macro-economic provisions.
Holding for the effect of the bad debts experience in the current period and its positive impact on headline earnings, our analysis shows that pre-provision earnings improved by a more moderate 3.6% on an annualised basis, which reflects the difficulty in revenue generation for the year.
A resilient performance of the major banks’ franchises in the rest of Africa continues to diversify earnings geographically and supports their overall group results. However, this was offset in some countries by the effect of a stronger rand relative to local currencies and country-specific performances that varied from bank to bank.
Net interest income remains a key driver of earnings growth, and grew by 3.8% on an annualised basis. This growth is borne out in the combined net interest margin, which widened by 26 basis points from 4.42% at the first half of 2017 to 4.68% at 31 December 2017. Costa Natsas, Banking and Capital Markets Industry Leader for PwC Africa says: “This is a credible performance given challenging market conditions over the period and particularly in view of the elevated levels of term funding, liquidity costs, and competitive funding pressures seen during 2017.”
Given heightened political and economic uncertainty, low GDP growth and subdued household and business confidence in SA, the major banks’ aggregate credit growth was again muted for the period, growing 1.7% against the first half of 2017, and a modest 2.3% against 31 December 2016. The quality of assets remained reflective of the disciplined approach to origination the banks have adopted consistently over previous periods, with well-contained non-performing loan (NPL) growth of 0.1% against the first half of 2017 (2% against the second half of 2016) bearing testimony to this strategy.
Managing discretionary spend and focusing on cost optimisation initiatives remain high on the agenda of bank management teams in an effort to realise efficiency gains that can be invested in growth initiatives. In spite of this, the current period continued the theme of “negative jaws” (total costs grew faster than operating income) which we observed at 1H17, while the combined cost-to-income ratio increased to 55.8% at 31 December 2017 (compared to 55.6% at June 2017). This is the tenth consecutive reporting period in which the cost-to-income ratio remained in the 54%-56% range, illustrating the cost and revenue challenge facing the banks in the current environment. Banks are striking the balance between executing on their strategic priorities – which include ongoing investments in systems, risk solutions and data related spend, alongside their overall drive to succeed in the ‘digital race’ – and managing overall costs.
While the banks remain adequately capitalised, well above regulatory minima, the combined ROE grew by 72 basis points (bps) to 18.6% against the June 2017 (although remained flat against December 2016). At the same time, cost of equity decreased leading to a greater improvement in economic spread – the value created to shareholders.
The major banks continue to remain focused on many of the strategic themes we have commented on previously – including digitising legacy processes through robotic process automation efforts, replacing and upgrading legacy system architecture, and channel and product innovation with a view to delivering richer customer experiences. At the same time, they are also taking steps to get ahead of regulatory changes – including the implementation of IFRS 9 and IFRS 15 on 1 January 2018, and the package of prudential regulatory reforms issued by the Basel Committee on Banking Supervision in December 2017 for implementation in 2022 – collectively referred to as ‘Basel IV’ by the industry in recognition of the scale and extent of the changes.
IFRS 9 implementation efforts consumed large programmes of work for the banks during the year. We expect IFRS 9 impairment models to continue to be refined over the coming period.
The major banks remain focused on adapting their long-term strategies to reflect dynamic global and societal shifts – including a continued behavioural migration underway by banking customers toward digital channels. To this end, all of the major banks commented on strong competition for customers in the digital space, with some banks commenting on the fact that a greater and increasing proportion of customers are now actively using digital channels as their primary banking preference. Consequently, they are right-sizing their physical infrastructure and reducing branch floor space. At the same time, we continue to see efforts directed to rewards programmes, customer relationships and data analytics across segments to cross-sell financial services products to deliver more integrated financial solutions.
2018 has started with a revived sense of optimism and a faith that improving levels of business and consumer confidence can translate into meaningful economic gains – albeit off a low base. For the short term, the banks remain cautiously optimistic about their prospects. Throughout 2018, we can expect to see continued focus on cost management and ongoing investment in infrastructure, people and IT systems. We expect the banks will make greater use of ‘bots’ and artificial intelligence to make their operations more efficient and discover insights that can improve the end-to-end customer experience. Additionally, we expect to see our banks continuing to invest in cyber programmes in response to sophisticated threats and bolster their resilience.