South Africa - Major Banks Analysis | September 2024

Overview

South Africa’s major banks demonstrated a durable financial performance in the first half of 2024 amid complex operating conditions and elevated levels of uncertainty —with combined headline earnings growth of 2.5% against 1H23.

PwC’s Major Banks Analysis highlights key themes from the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank. The analysis also identifies common trends shaping the banking industry across all major players and builds on previous PwC analyses for a period of over a decade. 

Key themes observed from this reporting period include:

• Measured balance sheet growth across lending and deposit-taking activities continued to provide the foundation for the major banks to do more with customers. Accordingly, earnings in 1H24 were supported by resilient revenue growth across both interest income and non-interest revenue, aided by improved credit trends relative to recent periods. 

• Intense strategic focus on the rest of Africa outside South Africa continues to provide strong levels of diversity to overall performance. The scale and competitiveness of operations in high-growth African markets — and their earnings contributions — have emerged as a clear area of distinction for many of the major banks. However, balancing market-specific and sovereign risks with group-wide efficiencies was complicated in this period due to significant factors such as increased cash reserving requirements and currency volatility in certain key territories. This currency volatility resulted in the major banks’ combined foreign currency translation reserves reaching record levels, depressing group results. 

• The consistent theme of the major banks’ robust resilience metrics continued, with robust capital and liquidity levels and risk coverage. Regulatory requirements regarding capital and liquidity remained comfortably maintained, while model-driven balance sheet provisions responded to credit risks in specific geographies, sectors and portfolios. 

• Moderated impairment charges, particularly in South African retail lending portfolios, drove down the combined credit loss ratio to 100 bps (1H23: 110 bps). Improved credit trends in South Africa were supported by slower inflows into early arrears due to, inter alia, proactive customer assistance programmes and enhanced collection processes implemented by the major banks. However, higher impairments were generally evident within corporate lending portfolios. These were driven by counterparty and industry-specific risks, and in continuation of our previous observations, they were within sovereign asset portfolios beyond South Africa, given the fiscal issues facing several African countries. On a combined average basis, the major banks’ credit loss ratio remains at the upper end of their average ‘through-the-cycle’ range. 

• The major banks’ combined strategic target of a 50% cost-to-income ratio was challenged in the current period by elevated inflation levels and volatile exchange rates. With a continued focus on disciplined cost management evident in this period of results, the major banks’ cost base remains reflective of investments in talent, technology, and their corporate brands through marketing and sponsorships. Concurrently, strategic priorities in software spending and cloud and technology-related costs reflect contractual increases and subscription costs, which are often paid in foreign currency.

• The migration of customers to digital banking platforms and channels, while leveraging data as a strategic asset, has moved from theme to certainty. South Africa’s major banks have consistently grown their number of digitally-active clients every reporting period since 2H19 to approximately 20 million. The optimal combination of digitally charged businesses with complementary physical presence remains a focus area for management teams. This is driven by the need to keep pace with customer expectations and accelerate transaction processing.

• Closely watched non-financial banking industry trends are coalescing around the fast-moving areas of technology change, including the impact of generative AI and climate transition. Bank management teams continue to view these areas as presenting both opportunities and risks while being aware of the need to customise for the context of the local environments in which they operate. The major banks’ sustainable financing targets and reporting against them are increasingly more clearly calibrated and prominent. 

• While prospects for the rest of 2024 remain complex and uncertain, consensus expectations for interest rate cuts across several territories provide a basis for optimism. Globally, economic sentiment is likely to be consequentially influenced by the combination of the US election, inflationary readings and tense geopolitics. However, the major banks’ GDP growth expectations in both South Africa and various other African countries in which they are present remain cautiously optimistic. This will influence their scenario planning and the positioning of their balance sheets in response to developments in the operating environment. 

The major banks have noted their focus remains on executing their carefully calibrated strategies, which include their African operations outside South Africa, unlocking efficiencies, further enhancing customer experiences and leveraging their balance sheets to support sustainable financing in localised contexts. 

Replicating the operating momentum of a strong 2023 and a resilient performance in the first half of 2024 will remain front and centre for management teams amidst acute levels of uncertainty.