Combined headline earnings up 0.2% since 2H18 (up 5.3% against 1H18), combined ROE of 18.5% (19.0% in 2H18), net interest margin of 4.32% (4.36% in 2H18) and cost-to-income ratio of 55.1% (56.8% in 2H18)
PwC’s Major Banks Analysis presents the highlights of the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank. The analysis identifies common trends shaping the banking industry, building on previous PwC analyses for a period of over a decade.
An analysis of the results of the major banks for the period ended 30 June 2019 reveals a picture of a domestic economy under stress in a low growth environment and restrained as a result of the slow pace of structural reforms. Banks are, by virtue of their role as financial intermediaries, sensitive to stresses in the domestic economy. Current lacklustre economic conditions translated into heightened credit risks and subdued client activity across all customer segments, and contributed to earnings pressure over 1H19.
Other major players in the local banking market have launched extensive transactional banking marketing campaigns over the last six months, focusing relentlessly on differentiated digital offerings and offering attractive interest rates on savings products - in an effort to capture wallet share of the South African consumer.
We also see a continued focus on product design, digital channels and innovation strategies, including by new entrants to the market, to provide easier and wider access to digital banking, differentiated loyalty and rewards programmes, more competitive pricing and, ultimately, holistic financial services offerings. This backdrop of increased competitiveness in the domestic banking market presents exciting opportunities for the South African customer, who stands to benefit from more frequent, customised and fit-for-purpose innovations.
Taking a look at the global economic backdrop, it is clear that a year can be a long time in macroeconomics. Twelve months ago, the Federal Reserve, the US central bank, was raising interest rates regularly; the Eurozone was enjoying a multi-year boom; and the global economy was witnessing its fastest period of growth for a decade. Since then, trade tensions between the US and China have increased, European growth has slipped from above to below trend and recoveries in several major emerging markets have faltered.
These developments adversely affected global trade volumes, and manifest in weaker conditions in most commodity-exporting developing economies, including those in Sub-Saharan Africa, as a result of stagnant commodity prices.
Domestically, the South African economy encountered a range of challenges in early 2019, including poor rainfall in parts of the country affecting the agricultural sectors and, notably, large-scale electricity supply shortages and load-shedding which adversely impacted key export-oriented sectors.
Increased unemployment levels, rising fuel prices and stagnant to slowing personal income growth combined to erode household purchasing power, while inflation drifted slightly higher.
On a positive note, Statistics South Africa released the latest GDP data, which showed that the South African economy expanded in the last quarter. The largest contributor to the quarterly GDP recovery was a rebound in mining activity.
Reflecting on the major banks results for the period to 30 June 2019 against a challenging backdrop, Costa Natsas, PwC Africa's Financial Services Leader noted, “Despite a challenging economic context, the major banks continue to report earnings growth, which remains a testament to the credibility and diversity of their franchises, product sets and management teams.”
Highlights from the major banks results include:
Francois Prinsloo, Banking and Capital Markets Leader for PwC Africa says: “Overall, the major banks diversification strategies across franchises, regions and portfolios has been central to their ability to achieve growth against difficult trading conditions. We continue to expect the banks to be acutely focused on the continued build-out, ongoing refinement and customer-centric digital strategies, particularly in the context of new and emerging technologies.”
All of the major banks commented, in a clear chorus, on the significance of the structural challenges currently facing South Africa, the implications these have on further sovereign downgrades and the extent to which the domestic economy is constrained as a result. Consequently, they highlighted the need for urgency in structural and economic reform, including policy certainty in reforming state-owned entities, land reform and mining rights, as well as energy supply.
Against what is expected to be a challenging medium term operating environment, subdued domestic economic growth and a risk-on macroeconomic outlook at the global level, the major banks continue to remain sharply focused on executing on their key strategic initiatives. These include continuing to build-out their diversified franchises and their African operations outside South Africa to leverage the green shoots of improving economic activity in key Sub-Saharan economies, optimising business models, fine-tuning their product mix, retaining and attracting key skills, and driving greater opportunities for seamless cross-sell and up-sell of intersecting banking and insurance products across their platforms.
In a challenging South African economic context and a vigorous competitive environment, we see leading banks as being those that calibrate banking product features, pricing structures and their overall touchpoints with customers, across all channels, in a highly differentiated manner.
Key to the realisation of this nuanced approach to banking will be the effective accumulation, enrichment and leverage of customer data that resides within the banks, and those that can seamlessly harness this data to underpin personalised customer engagement and overall bank strategy.
Senior Manager, Media Relations, PwC South Africa
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