Combined annualised headline earnings up 8.4%; annualised net interest margin of 4.61% and an average ROE of 17.9% for the calendar year 2016
South Africa’s major banking groups (Barclays Africa Group Limited, First Rand, Nedbank and Standard Bank) produced a credible set of results against various economic headwinds for the year ended 31 December 2016.
Johannes Grosskopf, Financial Services Leader for PwC Africa, says: “Although the operating environment for the major banks remained difficult on the back of macroeconomic uncertainty, the combined results for the current period continue to bear testimony to the strength of the South African banking sector and resilience of our banks’ ability to generate earnings.”
Although there are differences in the financial performance of the individual banks, the four major banking groups posted combined headline earnings of R72.3bn, up 8.4% on an annualised basis compared to 2015.
These are some of the findings from PwC’s South Africa Major Banks Analysis report entitled ‘Standing firm against headwinds.’ The report analyses the results of South Africa’s major banking groups for the year ended 31 December 2016 and identifies common trends and issues currently facing the financial services industry.
Globally and domestically, the banking industry continues to respond to multiple headwinds. “Rapidly developing financial and regulatory technology, competition from non-traditional players, advances in big data, cloud computing, artificial intelligence and ongoing innovation of core banking activities all offer the prospect of significant opportunity.
“Within these dynamics, the major banks will find themselves increasingly busy. Key operational priorities include the implementation of emerging technology to replace legacy systems, a sharp focus on cyber and IT resilience, and the digitisation of front and back-office operations; all while ensuring electronic channels keep pace with customer expectations,” Grosskopf says.
From a lending perspective, the major banks reported moderate growth in combined gross loans and advances of 0.7% against the first half of 2016 and 2.1% against 2015. Combined credit growth for the major banks remains driven by corporate rather than retail demand.
Total non-performing loans (NPLs) continue to reflect a mixed picture across the individual banks. On a combined basis, total NPLs decreased 2.8% against the first half of 2016 but increased 4.5% against 2015.
Net interest income remains a key revenue driver contributing to the earning growth of the major banks. NIR grew by a robust 12.8% for the 2016 calendar year, while the combined net interest margin grew by 22 basis points to 4.61% from 31 December 2015 to 31 December 2016.
Non-interest revenue (NIR) continues to be supported by growth in fee and commission income, which represents 73% of total NIR revenue for the second half of 2016. On an annualised basis, combined NIR grew 5.4% compared to the calendar year 2015.
Cost containment remains an important focus for the banks, while they continue to invest in processes and initiatives to enhance their IT capabilities to respond to customer demand, regulatory requirements and cyber programmes in order to mitigate the threat of cyber risk. More than 55.5% of the major banks’ total operating expenses at the second half of the year related to staff costs. Overall, operating expenses grew 9.2% on an annualised basis compared to the 2015 calendar year.
Costa Natsas, Banking & Capital Markets Industry Leader for PwC South Africa, notes: “The major banks focused on their cost containment strategies over the current period, which resulted in a relatively stable cost-to-income ratio.”
On the back of resilient earnings, combined return on equity (ROE) grew to a healthy 18.6% in the second half of 2016. Additionally, the total capital adequacy ratio of the major banks strengthened from 15.2% in 2015 to 16% in 2016. This is well above the South African regulatory minimum of 9.75% (excluding bank-specific capital add-ons and the Basel III buffers currently being phased in).
“Most banks are cautiously optimistic about their prospects in the short-term. Investing for growth and continuing to expand across the African continent, while focusing on operating costs, remains a common theme for most banks."
“In our view, leading banks will be those that are considered and disciplined in thinking through and setting strategy with the right balance of flexibility and patience – ensuring that responding to short-term pressures does not come at the expense of, or distract from, longer-term value creation,” Natsas comments.
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