SA major bank analysis, March 2020

SA’s major banks steer through difficult economic conditions to generate growth 

Combined headline earnings up 2.1% against FY18, combined ROE of 17.8% (18.8% at FY18), net interest margin of 4.26% (4.38% at FY18), credit loss ratio of 80 bps (66 bps at FY18) and cost-to-income ratio of 55.6% (55.9% at FY18) 

In reflecting on the decade since we produced our first SA Major Banks Analysis, it becomes clear that the industry is always in the midst of change. Outlined below are 10 central themes and trends that have shaped the industry and the major banks over this period: 

  1. The mobile banking app emerges as the channel of choice as how customers interact with banking has irreversibly changed. 
  2. Earnings contribution from regional African operations grows in prominence and offsets weak banking conditions domestically, accounting for up to a third of group results for some banks. 
  3. Cost-to-income ratios remain in a narrow band (53-58%) reflecting a persistent cost base despite efforts to reduce costs. 
  4. Capital and liquidity ratios maintained well above regulatory required levels reflecting discipline and resilient balance sheets. 
  5. ROEs enviable and above global peers (ranging between 15-23%) benefitting from diversified franchises, product mix and regional presence. 
  6. The rise of ‘return on customer experience’ as changing customer needs and evolving expectations influence product innovation and strategic decisions resulting in the major banks broadening their offerings across the breadth of financial services to core customers. 
  7. Dedicated focus on refreshing their IT stacks triggers large-scale changes in response to security risks, unlocking efficiencies and digitising customer experiences. 
  8. Risk landscape evolves with the emergence of cyber risks, third party and vendor risks, climate and sustainability risks, among others. We also note sustainability risks influencing credit policies and shareholder activism. Meanwhile, regulatory change continues including migration to Basel III, IFRS 9 implementation and establishment of Twin Peaks. 
  9. Competition in the domestic banking market intensifies with unprecedented number of new licence applications and the launch of 3 digital banks. Transaction fees decline over this time while deposit rates are on the rise. 
  10. Rapid technological change gives rise to in-house innovation efforts and external partnerships with niche fintech players in areas ranging from Artificial Intelligence, Robotic Process Automation, Cloud Computing and Application Programming Interfaces (APIs), amongst others. 

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. 

Overview and external environment

2019 in South Africa ended with similar features as it began - with persistent electricity supply constraints serving as the backdrop to a lacklustre domestic economy, undermining growth prospects and translating into depressed business and consumer confidence levels. Recessionary-like conditions were confirmed, as Stats SA reported that the South African economy contracted by 1.4% in Q4-19, resulting in a second technical recession in less than two years. Expectations of a sovereign rating downgrade now appear to be priced into credit spreads and market commentary. 

This set of bank results should be analysed against the challenging conditions within which they were achieved. South African economic activity in 2019 slowed to 0.2%, the lowest level since the global financial crisis. In the first five years of the past decade, real GDP growth averaged roughly 2%. For the past five years it averaged around 1% and has slowed every year since 2013. 

These conditions render meaningful progress to addressing South Africa’s unemployment levels difficult to achieve and, from a banking perspective slow transactional activity, result in heightened credit risk indicators and negatively impact on real flows. Bureau information from the National Credit Regulator notes that the number of consumers with impaired credit records increased by 5.6% year-on-year as at the end of Q3-19 (by 567,939 to 10.8 million).

The global landscape in 2019 was characterised by risk sentiment amidst concerns of a global recession - before adjusting for the (un)expected impacts of the COVID-19 outbreak, recent volatility in oil prices and resulting market stresses. Weak demand across developed nations coupled with geopolitical risks and protracted US-China trade disputes dampened growth prospects. 

Regionally, 2019 Sub-Saharan Africa’s growth forecasts were consecutively revised downwards. Growth in East Africa remained somewhat buoyant - aiding banking group earnings for those with strong regional diversification - and a modest recovery in Nigeria supported West African growth. Given weak demand, inflation rates trended downwards - with the exception of the hyperinflationary environment in Zimbabwe which negatively impacted bank results - providing scope for interest rate cuts in Ghana, Nigeria, Mozambique and Namibia. South African inflation ended 2019 at 4%. 

Results highlights

 Reflecting on the major banks results for the period to 31 December 2019, Costa Natsas, PwC Africa's Financial Services Leader noted:

“Against difficult trading conditions over the past year, both domestically and at the macro level, we continue to observe the major banks remaining focused on making strategic and operational progress in their efforts to put customer experience at the centre of their strategies in a competitive environment.” 

Highlights from the major banks’ results include:

  • Notwithstanding the challenging operating environment that prevailed over 2019, the major banks reported combined annual growth in headline earnings of 2.1%, underpinned by resilient balance sheet growth and positive operating leverage. 
  • Gross loans and advances increased 6.4% compared to FY18, while deposits grew 7.7% for the same period. On an annual basis, net interest income grew 7.6% but margin levels compressed to 4.26% (4.38% at FY18). 
  • Driven by a migration to digital channels which aided transaction volumes, fee and commission income supported overall annual growth in non-interest revenue of 2.4%. 
  • As a consequence of a declining economic environment, once-off large impairment provisions were taken in wholesale lending portfolios and pressures on consumer disposable income levels resulted in increased impairments in certain retail portfolios. The combined credit loss ratio increased 14bps to 80bps (FY19 66bps). 
  • Annual cost growth of 4.5% remained well-managed relative to inflation. Cost management was supported by a push to self-service digital offerings, branch reconfigurations and tight corporate cost control. The combined annualised cost-to-income ratio amounted to 55.6% (FY18 55.9%). 
  • Continued investments in technology, reskilling of staff to support evolving business models and making data-driven decisions are purposefully directed at improving customer experiences and broadening the offering to core customers. 
  • We also observe ongoing focus on optimising business models which include focusing on being leaner and more agile in terms of structure and IT architecture, launches of low-cost and no-cost digital transactional accounts and partnering with technology companies to speed up innovation cycles and develop faster, broader and more personalised financial services.

Francois Prinsloo, Banking and Capital Markets Leader for PwC Africa says: 

“Overall, the major banks continue to work on combining technological change and adapting their workforces to be future-ready. These efforts are premised on the core of their strategies to create distinctive customer experiences. In an environment of constant change and ‘always-on’ expectations, they recognise that stability of their operations is key and that customer perception is only as good as their last experience.” 


The consensus among the major banks’ management teams from their 2H19 results presentations is reflective of a macroeconomic outlook - globally, regionally and domestically - expected to remain uncertain, translating into operating conditions fraught with downside risks. The common theme in their medium-term expectations is that conditions are expected to remain difficult, regulatory and technological changes are set to stay, and competition will continue to intensify. While there were some positive governance developments in 2019 to address the ailing fiscal condition of state-owned enterprises, policy uncertainty and needed structural reforms remain areas where the banks and markets continue to expect tangible progress. 

Growth expectations in the major economies, meanwhile, are being re-measured in light of downside risks and in particular the impacts of the COVID-19 outbreak which is expected to severely disrupt supply chains and aggregate global demand. The extent of this concern is reflected in central bank actions, in particular the US Federal Reserve’s implementation of an emergency rate cut between monetary policy meetings to halt rising risk sentiment. Even before global internet searches about the outbreak accelerated in January, PwC research cautioned that 2020 would be a year of challenging trade dynamics. We suggested globalisation may give way to ‘slowbalisation’, i.e. continued integration of the global economy via trade, financial and other flows, but at a significantly slower pace. These dynamics could further challenge recent commodity price volatility which has direct implications on the credit portfolios of the major banks exposed to susceptible industry sectors. 

Our latest PwC Global Economy Watch indicates that, according to the UN, in 2020 the world’s population is expected to reach 7.7 billion, roughly a 10% increase compared to a decade ago. China, India and Sub-Saharan Africa are expected to drive around half of the world’s annual population increase. At the same time, the number of people above the age of 60 globally is expected to surpass the one billion mark. While global policymakers respond to this trend in terms of how to fund future health and social care, the African continent stands to benefit from a relatively younger populace and favourable demographic trends. In a challenging economic context and an increasingly competitive domestic banking market, we maintain our view that leading banks will be those that dynamically calibrate their strategies in a customer-centric manner, responsive to demographic shifts, rapid technological change and evolving customer expectations. 


Contact us

 Rianté Padayachee

Rianté Padayachee

Media and Communications Specialist, PwC South Africa

Tel: +27 (0) 11 797 5727

Verena Koobair

Verena Koobair

Integrated Content Lead, PwC South Africa

Tel: +27 (0) 11 797 4873

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