Major banks analysis - March 2024

Combined headline earnings growth of 13.8% against FY22 to R113.2bn, combined ROE of 17.6% (FY22: 17.1%), net interest margin of 458 bps (FY22: 430 bps), credit loss ratio of 102 bps (FY22: 82 bps), cost-to-income ratio of 52.2% (FY22: 53%), common equity tier ratio of 13.2% (FY22: 13.5%)

Despite difficult trading conditions and the challenging macroeconomic environment that prevailed globally, regionally and domestically in 2023, South Africa’s major banks exhibited solid operating foundations and continued the performance trajectory observed in the first half of the year.

Commenting on the major banks’ results for FY23, Rivaan Roopnarain, PwC South Africa Banking and Capital Markets Partner, says: “The formation of these results — which are enviable by global measures — coupled with solid growth momentum continues to demonstrate the underlying franchise strength of South Africa’s major banks. These results demonstrably reflect the positive portfolio effects of a diverse mix of businesses, together with the outcomes of considered strategic decisions taken and refined by management teams within a challenging operating context.”

Key themes observed from PwC’s Major Banks Analysis include:

• The combination of larger balance sheets, higher interest rates, strong levels of customer activity and transaction volumes underpinned robust revenue growth. In previous reports we highlighted that the favourable endowment effects on interest margins would continue, which materialised in the major banks’ FY23 results as market interest rates remained elevated in response to inflation levels.
• Financial market volatility increased on the back of elevated sovereign risks, significant movements in African currencies and severe geopolitical tensions. This combination of events sustained resilient demand for risk management products as corporate customers sought to hedge against turbulent foreign exchange, commodity and interest rate markets. Accordingly, the Global Markets’ business units of the major banks benefited from these events.
• Balance sheet growth — across both loans and deposits — continued on a purposeful path to record levels, reflecting the many strategic efforts and product decisions by management teams to offer customers convenience and competitive pricing. These include focused efforts to attract new customers, cross-sell and upsell across the full range of financial services products, while generating more opportunities for customer activity through increasingly frictionless digital channels.
• The major banks’ key balance sheet metrics remained resilient, as management teams steered their portfolio of businesses to respond to market and operating dynamics. Prudential measures across capital and liquidity were maintained comfortably in relation to regulatory requirements, while balance sheet provisions grew in response to elevated credit risks in specific sectors and loan portfolios.
• Risk costs in the form of credit impairment charges increased, driven by the current economic environment and informed by forward-looking risks in certain rate-sensitive loan portfolios such as home loans. In South Africa, credit impairments increased on a combined basis to the upper ends of “through-the-cycle” levels as credit models reacted to low growth, consumer pressure and the adverse effects of load shedding on South African households and businesses. Beyond South Africa, challenging fiscal positions and sovereign risks intensified in several other African territories in which the major banks operate, generating higher sovereign related risk costs.
• The benefits of geographic diversity continued to benefit the major banks through their operations on the continent. The theme observed at 1H23 of record contributions from their foreign operations continued, considerably uplifting group earnings relative to their South African operations. However, the nuances of doing business on the continent were also more acutely visible as political, fiscal, sovereign and currency risks were amplified in several African territories in 2023.
• In a year of elevated inflationary pressures, a disciplined approach to cost control translated into a new record for the combined cost-to-income ratio of 52.2% (FY22: 53%). Key investments continue in talent retention and technology related spend — consistent with the major banks’ strategic initiatives to enhance and digitise customer experiences. At the same time, volatile currencies in key African countries played out in translation effects while higher foreign-currency denominated costs in technology and other areas drove higher operating expenses.
• 2023 was the inaugural year of application of IFRS 17, the new accounting standard dealing with the measurement of insurance contracts which required the restatement of results. While the overall quantitative impact of the standard was largely insignificant on the net asset value of the major banks, the operational and technical effort to implement its requirements were demanding.
• Emerging and rapidly advancing topics such as generative AI, climate change and complex socio-economic and geopolitical trends all continue to exercise the minds of bank management teams. These areas present both opportunities and risks, with the major banks generally adopting a responsive posture in each of these areas, while maintaining a cautious eye on their varied risk management implications on overall bank strategy.
• The outlook for 2024 is uncertain and complex. With a majority of the global population in an election year, the range of outcomes and implications for the global economy, policy decisions and societal impacts are wide. Scenario planning and the need to quickly position their businesses for the effects of global change was highlighted as a key area of focus by management teams in a highly complex and uncertain macro environment.

Major banks’ results highlights: PwC’s Major Banks Analysis highlights key themes from the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank, and provides reflections from the common strategic themes within the other South African banks.

• Headline earnings: Steady momentum in the major banks’ earnings growth observed at 1H23 continued, taking earnings to a combined record level of R113.2 billion. This growth remained underpinned by the strong operating franchises and high levels of brand resonance and customer trust engendered by the major banks in their markets of operation consistently over time. As we previously anticipated, the challenging domestic environment weighed on the results of their South African operations, offset by robust transaction volume growth, strong cost control and the portfolio effects of their geographically diverse businesses.
• Asset growth: Loan production remained resilient, with combined gross loans and advances growing 6.6% in FY22. However, individual loan portfolios driving this growth were differentiated between the major banks, based on their strategic focus and risk appetite. According to Bureau information from the National Credit Regulator, as of September 2023 the number of credit-active consumers in South Africa increased by 767,188 year-on-year, to a total of 27.4 million (September 2022: 26.6 million).
• Credit quality: We previously highlighted the interrelationship between interest rates and impairments — where higher interest rates eventually manifest into higher impairments. Higher interest rates on the back of elevated inflation levels placed pressure on South African households and businesses as the combination of larger repayments, less disposable income and higher debt-to-income ratios weighed on both customer balance sheets and sentiment. This combination of events increased the cost of risk — particularly in home loans, vehicle and asset finance and personal loan portfolios — while consumer-facing corporate sectors and sovereign risks in certain territories amplified credit risks across portfolios. The combined credit loss ratio (the income statement impairment charge divided by average advances) increased to 102 bps (FY22: 82 bps) as the income statement credit risk charge increased 26.6% (from R42.5 billion in FY23 to R52.8 billion in FY22). Total non-performing loans increased 21%, comprising 5.4% of gross loans and advances (FY22: 4.7%). 
• Costs: In 2023, consumer price inflation in South Africa oscillated at or above the upper end of the SARB’s target inflation band of 3 - 6% for most of the year, and remained elevated both regionally and globally. Against this backdrop, the combined operating expenses of the major banks increased 12.6% against FY22. The primary cost contributors remained staff costs, including incentive and performance-related awards, together with notable technology and cloud investments. Combined revenues also grew to offset the impact of higher cost growth, resulting in the cost-to-income ratio improving to 52.2% (FY22: 53%).
• ROE and capital: Driven by organic capital (earnings) growth, the major banks combined ROE grew 56 bps to a commendable 17.6% (FY22: 17.1%), above their average cost of equity of 14.8%. While their combined common equity tier 1 capital ratio reduced to 13.2% (FY22: 13.5%), the major banks remained comfortably capitalised to support future opportunities, emerging risks and maintaining 2023 dividend payout ratios at or around analyst expectations. 

Outlook: 2024 appears on track to be a year of considerable complexity and uncertainty. In commenting on their expectations of the outlook for the operating environment, the major banks struck a collective tone of measured optimism.

On one hand, the late-cycle effects of the elevated interest rate environment that prevailed over 2023 is expected to result in the major banks maintaining a carefully calibrated credit and market risk posture. In South Africa, the risk environment remains amplified by the significant structural constraints and high levels of unemployment constraining the domestic economy. Additionally, populations and countries responsible for generating more than half of global GDP are in an election year in 2024, giving rise to a variety of complex scenarios in the operating environment to be modelled, measured and manoeuvred.

More broadly, concerns over weak global growth prospects were echoed in PwC's 27th Annual Global CEO Survey. Approximately 45% of global business leaders surveyed expect world economic growth to decelerate in 2024 compared to the preceding year.

On the other hand, opportunities abound. From sustainable financing initiatives to alleviate concerns associated with high carbon economies to the significant infrastructure investments required to support Africa’s economic and population growth expectations, the major banks are acutely aware of their unique positions to extract and provide value within these and other industry-defining opportunities.

With active conflicts in Eastern Europe and the Middle East continuing, lifting regional and global geopolitical tensions, their implications to global economic prospects remain uncertain and complex. At the same time, economic consensus on the inflation path remains mixed and volatile given several global factors. Expectations for interest rate cuts are anticipated to continue to be modest and measured.

On a combined basis, the major banks forecast that South Africa’s GDP will grow by a lukewarm 1.1% in 2023, below the growth levels necessary to lift the unemployment rate and the country’s economic prospects. Elevated interest rates will therefore continue to pressure consumer and business balance sheets, sustaining a heightened credit risk posture for the major banks.

Regionally, the outlook for sub-Saharan Africa (SSA) continues to be more favourable than South Africa, with real GDP growth in SSA expected to accelerate from 3.3% to 3.8% as higher levels of growth in East Africa offsets lower growth expectations in the large economies of Nigeria and South Africa.

Our expectation remains that, in the short to medium term, the strong societal and corporate awareness on sustainability, climate change and renewable energy paths will continue to create significant opportunities for balance sheet growth and sustainable financing solutions.

Overall, replicating the base effects of a strong 2023 financial performance will occupy the minds of bank management teams amidst an uncertain and complex year ahead. We continue to expect heightened focus on cost management, balanced against the investments needed to maintain competitiveness and innovation. Between expectations for a moderately lower interest rate environment and tight cost control, revenue growth and cost growth may overlap, challenging 2023’s earnings momentum in 2024.

Finally, the end of the 2023 reporting period also came with the planned departures of two of South Africa’s major bank CEOs, Mike Brown (Nedbank) and Alan Pullinger (FirstRand), who have made important contributions to the banking industry over a lengthy period. Although the South African banking industry will miss their direct contribution going forward, both outgoing CEOs have commented on the depth and quality of their people. We bid these CEOs all the best in their future endeavours.