Major banks analysis

A positive path

Against an external environment characterised by significant economic and policy uncertainty in South Africa, alongside currency fluctuations, low GDP growth and subdued business confidence, the major banks’ combined results have shown remarkable resilience and reflect a solid trajectory of performance, which we have seen play out over a sustained period.


This analysis presents the combined local currency results of Barclays Africa, FirstRand, Nedbank and Standard Bank. Investec and Capitec, the other major players in the South African banking market, have not been included due to their unique business mix and different reporting periods.

Given heightened political and economic uncertainty, low GDP growth and subdued household and business confidence in SA, aggregate credit growth was again muted for the period, particularly in certain retail portfolios with strong sensitivity to the economic cycle.

Current macroeconomic environment, high funding costs and disciplined pricing of financial resources continued to place pressure on corporate portfolios, specifically in the investment grade segment.

The major banks remain focused on many of the strategic themes noted previously -including digitising legacy processes through robotic process automation efforts, replacing and upgrading legacy system architecture, and channel and product innovation with a view to delivering richer customer experiences.



Key findings

Headline earnings

Despite a challenging macro and domestic context, the major banks produced a solid set of results at 2H17, with earnings growth of 11.6% and 6.4% against 1H17 and 2H16 respectively. On an annualised basis, headline earnings grew by a resilient 5.2% against FY16.

A notable contributor of the earnings trend for this period has been the impact a 10.6% decline (against 1H17) in the combined bad debts charge as a result of lower portfolio impairments and the workout of legacy non-performing loans in CIB portfolios for some banks.

Despite the positive effect of the better bad debts experience and its impact on headline earnings, our analysis shows that core earnings (total operating income less operating expenses) improved by a moderate 1.7% against 1H17 (3.6% on an annualised basis) and is more reflective of the challenging operating environment over this period. 

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Credit growth

Given elevated levels of political and economic uncertainty, low GDP growth and subdued levels of household and business confidence, the major banks’ aggregate credit growth was muted for the period, growing only 1.7% against 1H17 and a modest 2.3% against 2H16.

As expected, retail asset-led businesses - including instalment sale and vehicle finance - which are traditionally more cyclical and sensitive to the economic environment, showed strain in achieving meaningful loan growth, and weighed down on growth in the overall retail portfolio, which stayed largely flat at 0.4% against 2H16.

Corporate credit demand, while also showing modest growth of 2.6% against 1H17, reflects some of the challenges faced by corporate South Africa and declined 1.4% over 2H17 when compared against 2H16.  

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Asset quality

The overall credit experience of the major banks continued to reflect the disciplined approach to origination that they have adopted consistently over previous periods, with well-contained non-performing loan (NPL) growth of 0.1% against 1H17 (2% against 2H16) bearing testimony to this strategy.

The stickiness of NPLs and late-stage arrears in some cyclical and economically-sensitive portfolios, such as instalment sale finance, have however weighed moderately on further reductions in aggregate NPL stocks.

In addition, some banks have commented on the growing trend of client legal activity in arrears portfolios, which implies that these exposures stay on balance sheets for longer than would otherwise be the case.

From a provisioning perspective, combined balance sheet provisions decreased 0.4% (but increased moderately by 0.5% against 2H16), driven by releases of macro or portfolio provisions raised in prior periods for event risks (lower commodity price expectations, for example) that have subsequently receded.

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Net interest income (NII)

Combined net interest income (NII) of the major banks grew by a healthy 5.8% period on period (5.6% against 2H16) and by 3.8% on an annualised basis against FY16 - an impressive performance considering the challenging market conditions over the period.

Equally positive given the operating context, the major banks continue to lift the combined net interest margin, which widened by a strong 26bps from 4.42% at 1H17 to 4.68% at 2H17, which reflects how the banks continue to appropriately price for risk in their portfolios.

Narrowing of the prime/JIBAR spreads in 2017 against 2016, continued volatility due to political uncertainty and the sovereign credit rating downgrades led to a negative impact on wholesale with the cost of new term funding increasing.

However, solid lending margins on the book of prior period advances, together with changes in the funding mix, helped to offset heightened funding costs during the period. There is no doubt that the major banks will continue to place liquidity management high on their agendas in the coming period as they seek to optimise funding profiles within the context of structural and regulatory constraints.

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The combined cost-to-income ratio further weakened to 55.8% at 2H17 (55.4% at 1H17, 55.6% at 2H16 and 54.8% at 1H16), reflecting the challenges associated with disciplined cost containment in the current environment while balancing execution of strategic priorities. This is the tenth consecutive reporting period in which the cost-to-income ratio remained in the 54%- 56% range, highlighting the challenge to further contain costs in the current environment.

In spite of disciplined cost management efforts, the current period continued the negative-jaws trend we observed at 1H17 in which total costs grew faster than operating income (6.4% compared to 5.8%). It is notable that included in the operating expenses line are increasing contributions of amortisation charges for some banks, as intense efforts over previous periods on IT infrastructure development move into the rollout phase.

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 return on equity (ROE) grew by a robust 72bps to 18.6% against 1H17 (although it remained flat against 2H16).

Consistent with our previous observations, while the ROE trajectory of individual banks reflects varied experiences which their asset portfolios demonstrate at different points in the credit and economic cycle, their return profile continues to reflect disciplined, strategic choices and proactive focus on their portfolio mix. At the same time, we continue to observe an improvement in economic spread - which is the value created to shareholders.

Overall, the major banks’ healthy double-digit ROE levels remain significantly above those of their global peers and continues to benefit from the earnings profile of their businesses in some markets in the rest of Africa. 

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Costa Natsas
Tel: +27 (0)11 797 4105

Rivaan Roopnarain
Senior Manager
Tel: +27 (0)11 287 0915

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