SA’s major banks remain resilient
The financial results of South Africa’s four major banks (Absa, FirstRand, Nedbank and Standard Bank) for the year ended 31 December 2012 have remained resilient amidst the recent global economic turmoil, according to a report issued by professional services firm PwC today.
Tom Winterboer, PwC Financial Services Leader for Africa and Southern Africa, says: “Despite having weathered the economic uncertainty, the major banks will find it difficult to return to previous levels of profitability as a result of regulatory challenges, such as compliance with revised Basel II.5 rules that have been phased in from 1 January 2012 and two of the major credit agencies revising the country’s outlook from stable to negative.
“However, South African banks still have some of the strongest capital levels worldwide and we expect the major banks to remain resilient and continue to produce solid financial results in the coming quarter.”
After two years of higher range double-digit profit growth, underlying aggregate earnings rose by 11.3% to R47 billion during 2012 (2011: R43 bn). “In contrast to previous years, the major banks’ results varied significantly this year, as each bank faces its own set of challenges and focused strategies begin to play out,” says Winterboer.
These are some of the highlights from PwC’s South Africa Major Banks Analysis Report: Growing in an uncertain world. The report analyses the results of South Africa’s major banks for the year ended 31 December 2012.
Good credit growth has resulted in an increase in net interest income of 11% (R105 bn) year-on-year, and continues to contribute significantly to the bottom line. “Banks have managed to continue growing their net interest margin, despite the stable, low interest rate environment and changes made to the composition of the balance sheet.”
Growth in earnings during 2012 was further enhanced by increased non-interest revenue (NIR) of 13.7% (R102 bn). NIR is largely driven by fee and commission income, which represents 70% of the total for the second half of 2012, up from 68% in the first half of the year. “This remains a highly competitive area in which the major banks are focused on widening the net and banking the unbanked. In so doing, the banks are finding innovative ways to reach their customers.
“We have also observed a strong trading performance from the banks’ African trading operations, given the strong economic growth being experienced in many of the rest of African countries,” comments Winterboer.
Fair value income continued to remain volatile and was down 16% on the first half of the year. Banks’ concerns about the European sovereign debt and a fiscal eruption in the US, as well as concerns about fluctuations in equities and commodities markets had an effect on trading conditions, states the report.
Looking at credit growth, gross loans and advances increased by 5.7% from the previous period. All of the major banks reported robust credit growth, with total growth in card lending for 2012 amounting to 27.4% (2011:2%), while other unsecured lending grew 19% (2011: 12.4%).
Combined total advances growth for the year of 5.7% was supplemented by a 9.5% decline in total non-performing loans (NPLSs). This was largely driven by a continued improvement in the retail credit experience of the major banks.
Not much growth has taken place in home loans (up 0.4% to R833 bn) and corporate and investment banking lending portfolios (up 4% to R882bn). Banks have commented on their strategies in these two sectors with the new capital and liquidity ratios introduced by Basel III having a significant influence.
Credit loss ratios continued to reflect heightened stress in the retail market as the overall combined ratio deteriorated slightly to 1.2% at the end of 2012 (2011:0.9%) as a result of a 36% increase in income statement impairments.
Compared to the prior period, banks’ operating expenses increased by 11% (R119 bn), while total operating income increased by 12.4% (R207 bn). Consequently, their combined cost-to-income ratio remained relatively flat at 56.5% for the second half of the year. Salaries, which continue to represent roughly half of the total expense bill, grew at a rate of 10.6% annually. Winterboer says that tight headcount management remains a priority for management teams, although this continues to be balanced with the need for ongoing investment in human resources in the rest of Africa. “IT spend also continues to be on the increase as banks seek to implement new systems replacing legacy systems”.
The major banks reported aggregate return on equity (ROE) of 15.8% in 2012 (2011: 16%). “Banks’ ROE’s are transcending to an era in which 15-18% is considered the upper band for South Africa, says Winterboer. Combined headline earnings grew to R43 billion, an increase of 8.9%, from the previous financial year (R40 bn).
All of the major banks continued on the positive path of increasing total qualifying capital and reserve funds. Overall, the major banks have all indicated that the transition to the higher capital requirements of Basel III, effective from 1 January 2013, should take place without significant deterioration in regulatory capital levels. “This well-capitalised status is a long-standing credit to the South African banking sector, both for the banks’ overall prudent capital management practices as well as for the strong regulatory capital regime adopted by the regulator over the years.”
On the positive side, South Africa’s large banks are strong, well capitalised and performed soundly with good revenue growth. “However, containing or reducing costs will remain a priority for banks. This will also be affected by the cost of regulatory challenges and continuing core banking IT enhancements,” says Winterboer.
“The focus on Africa is starting to pay off, but it is coupled with significant executive management attention and investments being made. Execution will continue to be the differentiating factor, both with regard to strategy and the optimal utilisation of capital – not only in the form of financial resources, but also human capital.”
SA – the Good News via PWC