15 March 2012
South Africa’s banks remain well positioned despite global economic uncertainty, are trading profitably, and boast some of the highest capital levels in the world, well in excess of the minimum Basel 3 rules, according to a survey by professional services company PricewaterhouseCoopers.
PwC’s latest annual survey of South Africa’s major banks was released on Wednesday.
According to the survey, the financial results of South Africa’s four major banks – Absa, First Rand, Nedbank and Standard Bank – for the six months ended 31 December are a positive reflection of the financial health of the local industry, show that the banks have weathered the recent global economic uncertainty well.
“Although the banks may have experienced tough operating conditions at the start of the global financial crisis, when South Africa dipped into the recession, they have since strengthened their positions through a combination of increasing capital levels, changing funding strategies, reducing risk appetite and holding significantly more liquid assets,” PwC’s Tom Winterboer said in a statement.
Good returns on equity, additional capital buffers
Absa, First Rand, Nedbank and Standard Bank reported aggregate return on equity of 16% for the year ended 31 December, up 10.3% on the previous year and up 13.2% for the six months ended 31 December 2010. Headline earnings grew to R39.9-billion, an increase of 17.7% from the previous financial year.
“These return on equity levels remain lower than levels prior to the financial crisis for the major banks, but are commendable given that they are holding additional capital buffers as they await final implementation guidance for Basel 3 in South Africa,” said PwC’s Johannes Grosskopf.
Containment of costs
Grosskopf said the four banks’ main driver of earnings growth had been the containment of costs, up only 2.6% from the previous year and 1.6% up on the six months ended 31 December 2010, and more particularly the reduction in impairment charges of 14.8% for the year.
It was possible that the reduction in non-performing loans – down 15.2% from the previous year – meant that impairment levels had now bottomed out and that the boost to earnings provided by the decline in impairment charges had come to an end, Grosskopf noted.
“This could see an increase in pressure on earnings growth targets for the 2012 financial year and beyond.”
According to the survey, the four banks’ deposit growth had benefited from the frugal conduct of both businesses and consumers. Deposits were up 11.2% from the previous year and 6.8% for the six months ended 31 December 2010.
This had helped maintain margin levels, as these kinds of deposits continue to provide the cheapest form of funding for credit growth and negate the effect of increases in wholesale funding costs.
Grosskopf said this would be pleasing to the banks as they continued to debate the structural funding challenges of the South African market, with a view to implementing the net stable funding ratio proposed in Basel 3.
Widening the retail net
In respect of retail customers, the South African market remained focused on widening the net and banking the unbanked, PwC found.
“In doing so, the banks are finding innovative ways to reach their clients,” Grosskopf said, noting that all four banks reported customer gains, increases in access points such as ATMs, non-traditional branches and a continued focus on electronic and mobile channels.
Grosskopf said that containing or reducing costs would remain a priority for South Africa’s banks.
“At the same time, this will be affected by regulatory reform and continuing core banking IT enhancements. The focus therefore will be on operational effectiveness, simplifying processes and the rationalising of businesses to achieve more focused strategic objectives.”
Winterboer pointed out that there was also competition in the South African market from new digital players. “The banks are embracing new electronic channels, such as mobile banking and the internet.”