The financial results of South Africa’s four major banking groups (Barclays Africa Group Limited, FirstRand, Nedbank and Standard Bank) for the year ended 31 December 2013 have remained positive amidst the uncertain and volatile market.
Tom Winterboer, PwC Financial Services Leader for Africa, says, “Despite a sense of cautious optimism returning to international markets, the South African banking system has remained stable for the past five years in that the banks are well capitalised and are well regulated.”
Although there were differences in the performances of the individual banks, the four major banking groups posted combined headline earnings of R27.6bn, up 24.5% from 2012. This comes off the back of strong net interest income growth of 18.4%, solid non-interest income growth of 9% and impairment charges that have been reduced due to the bottoming out of the credit cycle. Core earnings also increased 10.9% to R50.3bn.
These are some of the highlights from PwC’s‘South Africa Major Banks Analysis: Executing on African ambitions’report. The report analyses the results of South Africa’s major banking groups for the year ended 31 December 2013. It also identifies common trends and issues currently shaping the financial services industry.
Johannes Grosskopf, Banking and Capital Markets Leader for PwC Africa, says, “Expansion into the rest of Africa continues to be a key trend, with all of the major banks focusing on growing their footprint across the continent. We have observed a strong performance from the banks’ trading operations in the rest of Africa, given the good economic growth being experienced in many African countries. While the relative contribution of these operations to the banks’ bottom line currently remains at moderate levels, it is expected to increase substantially as the banks continue to focus on, and increase the pace of execution, on their African ambitions.”
“Channel and product innovation remains high on the strategic agenda of the major banks, with most banks proposing plans for redesigning and repositioning their physical branch networks, as well as a focus on seamless migration of customers to electronic channels.”
From a lending perspective, the major banks reported combined gross loan growth of 4.3% for the first half of 2013 and 12.1% for the second half of the year. Lending by the major banks remains focused with some banks stating that they are prepared to lose market share in particular asset classes to ensure that loans are of an appropriate quality and margin.
Impairments decreased 15.2% against the comparable period, while some of the banks have commented on their expectations for an upward impairment trend as the turning interest rate cycle sets in.
Compared to the first half of 2013, banks’ operating expenses increased by 12.9%, while total operating income increased by 7.9%. Consequently their combined cost-to-income ratio deteriorated to 56.6% in the second half of 2013.
Cost containment strategies, which have been in place for a number of years, continue to be rigorously enforced as revenue growth remains subdued. Salaries continue to represent about half of the total expense bill at above inflation rates, which is also reflective of the increased variable cost element associated with the favourable results.
“Operating expenses also continue to be negatively impacted by the weak rand which is especially relevant for the banks given their increasing African footprint,” adds Grosskopf.
Winterboer concludes, “Most banks are cautiously optimistic about their prospects in the short to medium term. Investing for growth, while focusing on operating costs, remains a common theme among the major banks. With all of the banks commenting on their expectation of steady growth in markets beyond South Africa, important challenges – including infrastructure constraints and lower commodity prices impacting African growth rates – remain.”
As each of the banks seeks to realise strong growth across the continent, our view is that optimal utilisation of all elements of capital and effective execution across areas of specific focus, will be key differentiators.”