Major banks analysis

Resilient despite headwinds

Against a challenging economic and operating context, and although there were divergent performances between the individual banks, on a combined basis the four major banks registered headline earnings of R40.4bn for the period to June 2018, which grew 12.1% year on year (against 1H17) and 0.5% against 2H17.

Overview

The SA Major Banks Analysis presents the combined results of South Africa’s major banks (Absa, FirstRand, Nedbank and Standard Bank), with a view to identifying common trends currently shaping the financial services landscape. Investec and Capitec, the other major players in the South African banking market, are not included due to their unique business mix and different reporting periods.

Against a challenging economic and operating context, and although there were divergent performances between the individual banks, on a combined basis the four major banks registered headline earnings of R40.4bn, which grew 12.1% year on year (against 1H17) and 0.5% against 2H17. The contribution from the major banks' operations in key markets on the continent, outside South Africa, continues to be notable – with the contribution to earnings from the banks’ African businesses outside South Africa now making up a significant proportion of overall group results, up to a third of total earnings in some cases. 

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Key findings

Headline earnings

Against a challenging economic and operating context, and although there were divergent performances between the individual banks, on a combined basis the four major banks registered headline earnings of R40.4bn, which grew 12.1% year on year (against 1H17) and 0.5% against 2H17.

Analysing the major banks results year-on-year (against 1H17) and period-on-period (2H17) presents a tale of two halves - which is borne out in starkly different pictures and reflects a number of factors that adversely influenced the combined financial performance in the first six months of 2018. Key among these factors was a reduction in net interest income of 0.5%, slower noninterest revenue growth of 2.4% and an increase in the impairment charge of 3.7% against 2H17.

At the same time, the contribution from the operations of the major banks in key markets on the continent, outside South Africa, continues to be notable – with the contribution to earnings from the banks’ African businesses outside South African now making up a significant proportion of overall group results, up to a third of total earnings in some cases – in spite of the relatively stronger rand offsetting some of the gains.

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Efficiency

Disciplined cost control and a sharp focus on optimisation initiatives remained high on the agenda of management teams in a slower revenue-generation environment. In spite of this, the current period continued the theme of ‘negative jaws’ (as total costs grew faster than operating income) which we observed at both 1H17 and 2H17. Reflecting the banks’ focus on cost management, the combined cost-to-income ratio dipped to 55.1% at June 2018 (compared to 55.8% and 55.5% at December and June 2017 respectively), highlighting strong cost discipline on the part of all of the major banks – a trend which we expect to continue with increasing focus.

Since we began our Major banks analysis report in South Africa nine years ago, the combined cost-to-income ratio has remained in the 54%-56% range, illustrating the structural challenge in moving the needle on this important ratio. This highlights the balance that the banks need to strike between executing on their strategic priorities while managing overall group costs. Strategic spend includes ongoing investments in system architecture, digitising internal and customer experiences, shoring up cyber defences in an age of heightened cyber risk, broad enterprise risk management solutions to cater to a new breed of emerging risks and data related spend.

While all banks commented on the high strategic priority of migrating customers to digital channels, an area of cost focus is likely to be the rightsizing of physical infrastructure and branch networks to achieve efficiencies, particularly as the strategic focus on digital channels accelerates. 

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Return on equity

While all major banks remain adequately capitalised well above regulatory minima, the combined ROE grew by a resilient 15bps to 18.8% (2H17: 18.6%).

Consistent with our previous observations, while the ROE experience of individual banks reflects their different experiences and strategies, their return profile continues to reflect a healthy balance between risk and return. At the same time, we continue to observe a focus on managing the ‘economic spread’ – ROE less cost of equity, i.e. the value created for shareholders.

Overall, the major banks’ double-digit ROE levels remain significantly above those of their global peers and continue to benefit from diversified franchises and strong management teams.

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Non-interest revenue

We continue to observe that the factors driving non-interest revenue growth (5.4% and 2.4% against 2H17 and 1H17 respectively) remain largely consistent, with fee and commission income remaining the most significant driver of non-interest revenue.

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Costa Natsas
Partner
Tel: +27 (0)11 797 4105
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Rivaan Roopnarain
Associate Director
Tel: +27 (0)11 287 0915
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