Thriving through turbulence

SA’s major banks continued to demonstrate resilience against challenging operating conditions and a turbulent macroeconomic environment

Combined headline earnings growth of 16.8% against 1H22 to R55.8bn, combined ROE of 17.6% (1H22: 16.9%), net interest margin of 453 bps (1H22: 418 bps), credit loss ratio of 107 bps (1H22: 76 bps), cost-to-income ratio of 51.5% (1H22: 53.9%), common equity tier ratio of 13.2% (1H22: 13.6%)

South Africa’s major banks traversed familiar themes of uncertainty and market turbulence over the first half of 2023. Elevated inflation levels and interest rates, complex geopolitics, slow growth and volatile financial markets combined to create an operating backdrop more challenging than was anticipated at the start of the year. Globally, the banking industry faced acute scrutiny in the first quarter of the year driven by idiosyncratic events in the regional US banking sector, triggering resolution and other supervisory or market actions. While the South African banking sector was shielded from direct spillovers of these events, the interconnected nature of financial markets and banking in particular resulted in reflection and learnings for the industry as a whole.

Despite these challenging operating conditions, South Africa’s major banks drew on their experiences of navigating recent periods, their refined strategies and diversified strengths to deliver a robust financial performance. Commenting on the major banks’ results for 1H23, Rivaan Roopnarain, PwC Africa Banking and Capital Markets Partner, says: “What we see in this set of results reflects the outcomes of well crafted overall bank strategies that responded to challenging operating dynamics and economic conditions. Earnings growth was underpinned by the diversification of the major banks’ strong franchises, and the unrelenting focus on driving customer loyalty through better experiences and continued support.”

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

Revenue growth benefited from higher interest rates through positive endowment effects. At the same time, balance sheet growth and the focus of recent years on superior and increasingly digital customer experiences was leveraged, translating into higher transaction volumes.
Volatility in financial markets favoured trading revenues as customer demand for hedging and risk management products was strong, particularly in relation to foreign exchange, commodity and interest rate markets.
Driven by challenging macros, the cost of risk in the form of credit impairments increased across most lending portfolios. Heightened sovereign and currency risks in several key African territories, coupled with interest rate pressure and the adverse effects of load shedding on South African households and businesses, triggered increased impairments as credit models reacted to fraught conditions.
In spite of the amplified risk outlook, the major banks’ balance sheets remained resilient. Key prudential ratios across capital and liquidity continued to be maintained well above regulatory requirements, while balance sheet provisions reached unprecedented levels in anticipation of forecast risks.
Sub-saharan Africa continued on a significantly faster growth path than South Africa. Those banks with sizable operations across the continent saw the benefits of geographic diversity in the region, resulting in record contributions to earnings growth and a higher growth rate relative to their South African operations.
In spite of elevated inflationary pressures, the major banks’ deliberate approach to cost management and revenue growth translated into the lowest combined cost-to-income ratio observed in a decade. Consistent with recent periods, underlying franchise momentum resulted in revenue growth outweighing cost growth, creating positive operating leverage.
The digital transformation journeys of the major banks continue to mature and yield a range of positive benefits — both to them and their customers. At the same time, the retooling of legacy technology estates to be more modular, cloud-based and agile continues to create efficiency and productivity gains, enhanced customer experiences and helped position the major banks to be able to leverage future technology transformation. We see continued investment in fast emerging areas such as artificial intelligence.
The sustainability agenda is front and centre — driving a range of implications from emissions targets, reporting and disclosure, lending strategies and risk management. The major banks have all commented on the growth in their sustainable financing portfolios, their commitments in this area, and the balance between these initiatives and socio-economic development on the continent.
The outlook for the rest of the year is expected to remain challenging as economic conditions are forecast to weigh on consumer, business and corporate confidence. In South Africa, electricity supply constraints are expected to remain a clear and present risk to the local economy, while evidence increasingly emerges that the higher interest rate environment is placing significant pressure on consumers and consumer-facing industries.

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.

Costa Natsas, PwC Africa’s Financial Services Leader, says: “South Africa’s major banks deftly steered their diverse portfolios of businesses through challenging conditions in the first half of the year to register an enviable combined financial performance. Having reflected on their strengths and strategies through recent periods, the major banks continued to strike the balance between managing risk and supporting customers in a difficult operating environment.”

Headline earnings: Building on the record levels of headline earnings seen in the previous reporting period, geographic diversity, balance sheet growth and the underlying momentum of the major banks’ franchises contributed to 16.8% growth in earnings. A key earnings growth driver included the positive effect on net interest margins brought about by a high interest rate environment. Non-interest revenues, in the form of fees and commissions, benefited from increased transactional volumes, particularly across digital banking channels.
Asset growth: Loan demand remained resilient, with combined gross loans and advances growing 9.1%. The particular loan portfolios driving growth varied between the major banks, tilted to their areas and geographies of strategic focus and risk appetite. According to Bureau information from the National Credit Regulator, as of March 2023 the number of credit-active consumers in South Africa increased by approximately 600,000 year-on-year, to a total of 27.1 million (1H22: 26.5 million).
Credit quality: Higher interest rates drove up instalments and dampened affordability, as South African households felt the burden of larger debt repayments, less disposable income and higher debt-to-income ratios. This consumer distress 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 (measured as the income statement impairment charge divided by average advances) deteriorated to 107 bps (1H22: 76 bps) as the income statement impairment charge increased 59.5%. Total non-performing loans increased 23%, now comprising 5.2% of gross loans and advances (1H22: 4.6%).
Costs: Consumer price inflation remained outside the SARB’s target band of 3 - 6% for most of the first half of the year, but began a slight downward drift since Q2-23. Against the context of heightened inflation in all markets of the major banks operations, the combined operating expenses of the major banks grew 13.3%. Key cost contributors remained staff costs, including incentive awards given favourable financial performances, and the previously observed trend of an evolving cost base towards digital and technology-related spend.
ROE and capital: On the back of strong earnings growth, combined ROE grew 75 bps to 17.6% (1H22 16.9%). Having fully surpassed pre-pandemic levels in the previous reporting period, the combined regulatory capital of the major banks was strengthened further on the back of robust earnings and prudent capital management. The combined total capital adequacy ratio amounted to 20.2% (1H22: 17.1%), supporting dividend payout ratios in the period.

Francois Prinsloo, PwC Africa’s Banking and Capital Markets Leader, says: “Despite difficult trading conditions, South Africa’s major banks continue to evidence the enduring resilience of their franchises. The strong financial performance in the period was underpinned by a combination of robust operational momentum in their businesses, the increasing benefits of their digitalisation strategies and disciplined cost control.”

Outlook: A consensus view among economists, analysts and bank management teams is that downside risks to global and domestic growth remain present. Accordingly, a deterioration in outlook relative to forecasts at the start of the year is generally anticipated, with the challenging operating and economic environment experienced in 1H23 expected to prevail throughout 2023, and possibly into the early parts of 2024.

In South Africa, some commentators have observed that a weaker rand is expected to persist, adversely affecting import inflation. The resolution of currency volatility is broadly contingent on GDP growth, which in turn is dependent on the sustained and successful execution of a range of structural reforms — including those relating to logistics, electricity supply and employment — to unlock the country’s economic potential. Positively, in July, CEOs of over 115 leading corporations — including the major banks — pledged their commitment to the aim of helping to achieve sustainable, inclusive economic growth in South Africa.

On average, the major banks forecast that South Africa’s GDP will grow by a tepid 0.6% in 2023. While headline inflation is expected to abate, and to undulate within the mid to higher end of the central bank’s target range, interest rate cuts are expected to be modest and measured. 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) remains more favourable than South Africa, with the International Monetary Fund forecasting 3.6% growth for SSA before predicting a rebound to 4.2% in 2024 in line with a global recovery, subsiding inflation, and a gradual wind-down in monetary policy tightening. However, the rapid tightening of global monetary policy has raised borrowing costs for SSA countries both on domestic and international markets, posing debt sustainability and currency challenges in certain territories. Although downside risks remain regionally, green shoots are evident as some key economies embark on policy reforms to ensure higher and more sustainable growth over the longer term.

In the short to medium term, the acute societal and corporate focus on sustainability, climate change and renewable energy is expected to create significant opportunities for balance sheet growth and innovative sustainable financing solutions for both businesses and consumers.

Looking ahead, we continue to envisage a period of uncertainty and volatility. For the major banks, and indeed for all banks, the balance between managing day-to-day operations, enhancing customer experiences alongside broader programmes of change, is expected to continue to seize the focus of bank management teams. Fast moving market forces — ranging from persistent technological disruption, new cryptologic asset classes, competition from non-traditional players and geopolitical complexities — will present far-reaching implications to overall bank strategy.