South African banks seem to have been taken by surprise by the extent of the growth of the emerging market sector, according to new research.
A review of the sector by PwC shows that the South African banking sector has evolved rapidly since the last survey in 2011, with a generally strong return on equity (ROE) compared to its global counterparts.
The industry foresees an average ROE of 14.85% for 12 months, and 16.95% over three to five years. Although banks are positive about ROEs, they warn that they do not expect these returns to recover to pre-crisis levels.
A concern raised by the researchers who conducted the study is that, over the medium term, cost containment is regarded as the most important driver facilitating improvements in ROE and return on assets (ROA).
This includes containing staff numbers (with only a 2% increase expected until 2016 and prompted, it seems, in part by a lack of the required talent in the banking sector) and reducing traditional branches by 21%.
This would be accompanied by increased automation. The majority of respondents said they would reduce operating expenses by a further 5% in the next 12 months and by a similar percentage over the next three to five years.
Focus on new markets
The survey interviewed 22 participants, including the big-four banks — Standard Bank, Absa, First National Bank and Nedbank — and Investec.
A focus on new markets is seen as the second most important factor in driving returns on investment, but banks have been slow to take advantage of growth on the continent, with Standard Bank still leading the way.
In terms of the potential for growth, most domestic banks rated emerging markets at 4.1 (with five being the highest ranking), but they gave themselves only 2.9% for preparedness.
Tom Winterboer, the financial services leader for PwC South Africa and Africa, said the banking environment was characterised by rapid change and chief executives were well aware of the challenges they faced.
"These trends could either contribute to or detract from the banks' ability to achieve sustainable revenue growth," he said.
Johannes Grosskopf, the banking and capital markets leader at PwC Africa, said chief executives had adapted their strategies to regulatory change, global and economic pressure, change in customer behaviour and opportunities in Africa.
Expectations
The research found that banks expected that partnerships between banks and nonfinancial institutions, such as retailers and telecom companies, would become more prevalent as banks broadened their reach to take in unbanked populations, Grosskoft said.
The survey found that, as technological innovation increased, banks were struggling to decide where to focus their investment and what technology to use.
The majority of the banks said they would invest substantially in technology, with the big four saying that they would invest between R3-billion and R5-billion in the next five years.
An interesting factor that emerged is the move by banks to customise products to suit individual needs.
"They are analysing data to identify the needs of customers and to inform more granular price decisions," Grosskopf said.
Corporate banking, foreign exchange and rates and business banking were seen as the most important wholesale market segments, whereas retail banking, electronic banking and personal banking were the most important retail market segments.
Retail banking
Retail banking — deposit taking and transactional banking — is considered to be the most competitive market segment, in which banks believe a fundamental change in strategy and position is required.
Three out of the four big banks operate their corporate and investment banking segments as one business, which they believe makes it easier for them to provide a more holistic service.
Unsecured lending is seen both as the second major development in the sector, with returns of between 10% to 20%, and the second biggest weakness in the banking sector.
Increased government interest in the sector was listed as the third most important development. Banks are being encouraged to facilitate major infrastructure projects, such as the funding of rapid urbanisation and renewable energy projects.
In emerging markets, nearly half of the participants expected 10% to 15% of their after-tax profit to come from the sub-Saharan region (excluding South Africa) in the medium term. Nigeria, Ghana and Kenya are regarded as key territories for growth.