SA’s major banks post solid results reflecting strength and resilience of the financial services industry
Combined headline earnings up 5.7%; total operating income up by 13.3%; operating expenses up 12.6% against 1H15
South Africa’s major banking groups (Barclays Africa Group Limited, FirstRand, Nedbank and Standard Bank) have produced a credible set of results for the first half of 2016 despite a challenging operating landscape, both globally and locally.
Johannes Grosskopf, Financial Services Industry Leader for PwC Africa, says: “Although there were some differences in the performances of the individual banks, the four major banking groups posted combined headline earnings of R34.6bn, up 5.7% from the comparable period last year. In many ways, this performance reflects the strength and resilience of their franchises and clear diversification of earnings capacity that exists within their organisations.”
These are some of the highlights from PwC’s ‘South Africa Major Banks Analysis: Getting the balance right’. The report analyses the results of South Africa’s major banking groups for the six months ended 30 June 2016. It also identifies common trends and issues currently shaping the financial services industry, as it builds on previous PwC analyses over the last five years.
Banks are dealing with many challenges and opportunities to stay relevant which we summarise below:
- The challenges referred to above include the continued regulatory change agenda, specifically new capital rules, rules around risk data aggregation and developing new credit impairment methodologies to implement the new accounting impairment standard, IFRS 9.
- Banks’ business models and IT infrastructure are challenged by Fintech start ups, continued focus on customer centric approaches and a relentless focus on costs.
- The macro economic situation globally with Brexit uncertainty prevailing, commodity price volatility and the slow to negative domestic and African GDP growth issues add to these challenges.
While they deal with these they are also focused on delivering value to shareholders. One of the measures used to depict shareholder value created is the economic spread which is the differential between the return on equity and the cost of equity. Using this measure, our major banks’ performance compares very favourably against their European counterparts.
The average economic spread amounted to 3.6% which is marginally down on 2H15 reflecting on increased cost of equity and lower ROE. In comparison, the European G-SIBs remained in negative territory in the -6% to -10% range.
The most significant change from previous periods, is the increase in the impairment charge, reflecting the difficulties in the underlying macro-economic conditions. The major banks’ combined income statement impairment charge grew by 26.8% and 29.3% against the first half of 2015 and the second half of 2015, respectively. This can largely be attributed to latent credit stresses, both realised and unrealised, within the major banks’ total credit portfolios.
For the first half of 2016, the combined NPLs of the major banks increased 7.5% against the second half of 2015, but by a considerable 14.7% against the first half of 2015. Consistent with our previous analysis, retail NPLs continue to make up the majority of NPLs, constituting nearly 74% of total NPLs.
The major banks’ combined loans and advances grew 1.3% only, compared to the second half of 2015 and 6.5% against the first of 2015. In many ways, this is consistent with the range of economic headwinds that have prevailed over these periods including lacklustre domestic growth, subdued business confidence levels and strained South African household balance sheets.
Net fee and commission grew 9.8% when compared to the first of 2015. “This growth is a remarkable achievement in the face of headwinds experienced in the form of lower interchange fees and the generally subdued macroeconomic environment,” adds Grosskopf.
Net interest income growth of 15.9% benefitted from a continued positive endowment impact as the higher interest rate environment contributed to faster asset repricing relative to fixed-rate liabilities, equity and non-rate sensitive funding sources. At the same time, good margin growth has been reported in the current period with the combined net interest margin of the major banks increasing to almost 4.7% compared to approximately 4.4% at both the first half of 2015 and the second half of 2015.
Almost 57% of the total operating expenses of the major banks relate to staff costs, which represents a slight increase on the contribution of 56.3% on the first half of 2015. “We expect this increasing staff cost trend to continue as specialist and skilled resources are employed to assist the banks with the IT transformation to help meet the heightened levels of regulatory compliance required,” Grosskopf adds.
Although the major banks remain well capitalised, with total regulatory capital adequacy ratios comfortable, above required minimums, challenging earnings growth resulted in only a slight increase in the total capital adequacy ratio to 15.5% in the first half of 2016, when compared to 15.2% in the second half of 2015. As noted earlier the combined return on equity (ROE) of the major banks fell slightly 17.6% for the first half of 2016, compared to 18.2% for the first half of 2015.
Grosskopf concludes: “Global growth patterns and expectations remain uncertain, uneven and subject to various headwinds. We expect a continued focus on strong cost and capital management with the banks diverse product franchises helping them remain resilient. We also expect banks’ focus will be on the intersection of a range of factors including navigating a difficult global and domestic economic environment, continued prudential regulatory reform, growing focus on culture, conduct and consumer protection regulation, and enhancing resilience to increasing cyber threats.”