SA’s major banks post a credible set of financial results

Combined headline earnings up 3.8%, combined ROE of 17.9%; and net interest margin of 4.42%

SA’s major banks (Barclays Africa, FirstRand, Nedbank and Standard Bank) produced a credible set of results for the first half of 2017 within a turbulent and challenging operating environment.

Johannes Grosskopf, Financial Services Leader for PwC Africa, says: “Despite the range of challenges and the degree of economic uncertainty currently facing the market, the domestic banking system remains profitable, well managed, robustly capitalised and regulated in line with international best practice.

“Although there were some differences in the performances of the individual banks, the four major banks posted combined headline earnings of R35.9 billion, up 3.8% from the comparable period last year, but decreasing 4.6% against the second half of 2016.”

These are the highlights from PwC South Africa’s Major Banks Analysis – ‘Balancing resilience and growth’ released today. The report analyses the results of South Africa’s major banks for the six months ended 30 June 2017. It also identifies common trends and issues currently shaping the financial services industry, as it builds on previous PwC analyses over the last seven years.

Although macroeconomic headwinds are not new, their scale and volatility in the latest reporting period were significant. Globally and domestically, the banking industry is navigating an increasingly complex world of decisions, risks and opportunities as well as regulatory demands, amid technological advances that are unprecedented in their speed and impact. Business leaders are focusing on the potential impact of technological innovation, in particular artificial intelligence (AI) and robotic process automation (RPA) on their workforce and organisational strategies.

The major banks remain focused on many of the strategic themes we have commented on previously, including digitising legacy processes, investing in data management and data analytics capabilities, replacing and retooling legacy system architecture, and channel and product innovation with a view to attracting new customers and enhancing customer experiences through digital platforms.

From a lending perspective, the major banks reported marginal growth in combined gross loans and advances of 0.9% against the second half of 2016 (from R3,477 million to R3,510 million) and 0.7% against the first half of 2016.

On a combined basis, total non-performing loans (NPLs) fell moderately by 0.5% compared to the first half of 2016 (from R107.4 million to R106.9 million), and rose slightly by 1.9% against the second half of 2016. Balance sheet provisions followed this directional trend, falling marginally by 0.6% against the first half of 2016 (from R71.3 million to R70.9 million), while showing slight growth of 0.9% against the second half of 2016, resulting in a total credit coverage ratio of 66.5%, which is slightly lower than the 67% reported in the comparable period. This moderate decline in the coverage ratio is largely a function of individual banks taking nuanced stances in their portfolio provisioning strategies, given their different experiences within the credit cycle, and some releasing certain previously raised provisions for event risks that did not manifest as negatively as expected in their portfolios (primarily the impact of the downturn in commodity prices seen previously).

The net interest income line also showed the challenges of the current operating environment, staying largely flat against the second half of 2016 and showing moderate growth of 2% against the first half of 2016. On a positive note, the major banks continue to maintain a healthy net interest margin of 4.42%, which showed a 5 basis points (bps) expansion against the first half of 2016 while expanding more moderately (3bps) against the second half of 2016. “This continues to reflect the banks’ efforts to appropriately price for risk in their portfolios, and is an admirable achievement in the current climate,” comments Costa Natsas Banking & Capital Markets Industry Leader for PwC Africa. Maintaining this level of margin is also indicative of the impact of the foreign currency sovereign downgrade being priced in the market prior to its occurrence, minimising a spike in funding costs.

Non-interest revenue (NIR) continues to be supported by growth in fee and commission income, which represents 71% of total NIR for the first half of 2017. Combined NIR grew 1.7% compared to the first half of 2016 (from R66.9 million to R68.1 million), largely due to growth in fees and commissions of 2.4%. 

This growth remains a significant achievement given the operating environment in the current reporting period, which also saw more customers transacting within fixed-rate bundles.

Costa Natsas

Cost containment remains an important focus for the banks, in particular managing discretionary spend, while managing structural cost programmes to realise efficiency gains that can be invested in growth initiatives. This is the ninth consecutive reporting period in which the combined cost-to-income ratio remained in the 54%-56% range, highlighting the challenge to further contain costs in the current climate. Just over half of the major banks’ total operating expenses (57%) for the first half of 2017 relate to staff costs. The major banks continue to make significant investments in their IT and data systems to meet regulatory requirements, strengthen IT resilience and meet heightened customer expectations for seamless transactional banking and digital solutions. “We expect the IT and data related cost trends to continue in the short term, as specialist and skilled resources are employed to assist the banks with their large-scale IT and data transformation programmes and to help meet evolving regulatory and compliance requirements,” Natsas adds.

Combined return on equity (ROE) grew by 25bps against the first half of 2016 (from 17.6% to 17.9%), but contracted 73bps against the second half of 2016, further evidencing the earnings challenge experienced by the major banks over the first six months of 2017. The ROE experience of the individual banks is reflective of different experiences their lending portfolios demonstrate at different points in the credit cycle. Additionally, the impact that the major banks’ operations in the rest of Africa had on their earnings continues to be significant, but reflects the particular effects of challenges in some markets which some banks experienced offset by a positive growth trajectory in others. Overall, the major banks’ double-digit ROE levels remains significantly above those of their global peers.

“In the short term the major banks remain cautiously optimistic about their prospects. However, focusing on innovation, investment in technological advances, and executing on their strategies will be critical for the banks to ensure they can mitigate forecast risk and contend with the difficult conditions that are likely to continue for the remainder of 2017,” Grosskopf concludes. 

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