The economy is more resilient than generally thought if the "big four" are anything to go by.
South Africa's big four banks are in the best shape they have been in years – despite an emerging market crisis and an increase in the domestic interest rate.
A healthier consumer, thanks to low interest rates set by the Reserve Bank, is one reason. The number of bad debts has dropped significantly and major banks are writing off less than they did in previous years. The banks also have their costs under control, despite inflationary and exchange rate pressures.
Money continues to roll in despite banking fees having been increased by very little, if at all. But the banks' consumer base is expanding with the help of loyalty programmes, continued corporate lending and new business from the rest of the continent.
The sector is not without its challenges but PwC's latest analysis of the banks, released against a background of economic pessimism, suggests there is more resilience in the economy than generally believed.
The analysis compared the normalised results of Barclays Africa, First Rand, Nedbank and Standard Bank for the second half of 2013 and found the four continued to flourish and deliver increasingly strong performances over recent years.
The so-called big four reported collective headline earnings of R27.6-billion in the second half of 2013, up 14.5% on the first half of 2013 and 24.5% higher than in the second half of 2012. Core earnings, which strip out impairments, increased by 10.9% to R50.3-billion in the second half of 2013. And combined return on equity for the banks grew at 17.5% in the second half of 2013; it was 16.2% in the first.
"All four have had a positive six or 12 months," Johannes Grosskopf, PwC's banking and capital markets leader for Southern Africa, said.
"I think it's just the cycle. They have gone through this cycle and we are now at a turning point in the cycle. Over time, they changed their asset mix to better priced loans."
Banks have all done better globally, he said, and, although consumers are not in great shape, there is a bit of volume in the system.
Lower impairment charges have also helped the banks' bottom line but they are expecting the cycle to turn as the repo rate – the rate at which the Reserve Banks lends money to the banks – begins an upward trend. The combined net interest margin has gone up almost 100 basis points over the past five years.
Bad debts were down 15.2% in the second half of 2013 compared with the first half, with impairment charges dropping to R11.9-billion from 15.9-billion.
The coverage ratio (the provision for bad debt) was 48% for 2013 and the collective credit loss ratio, as reported by PwC, was 0.9% compared with 1.2% in the first half of 2013 and the second half of 2012.
"These trends clearly reflect the more focused recovery and legal process efforts being applied by the major banks," the report stated. "Credit growth continues to be focused to ensure that loans generated are of appropriate quality and generate acceptable margins under the new capital and funding regimes."
All the banks have said they are taking a measured approach to scale back on unsecured lending. "This remains a segment of the market where the major banks have found it difficult to achieve significant growth while balancing this growth against risk appetite levels".
According to the report, "general consensus among the banks is that we have now seen the bottom end of this cycle, with expectations for current credit pressure, particularly among the retail segment, to materialise over the short term as the impact of the current interest rate cycle sets in."
Still, impairments aside, the banks are performing well.
Grosskopf said: "Core earnings strip out impairments and shows that, even though they have had the benefit of reduction in impairments, they are still healthy without that number."
The analysis shows loan portfolios are no longer dominated by mortgage loans as in 2010. In 2013, they are in position number two, behind corporate and investment banking loans. Part of this is attributable to the banks' expansion into Africa.
All the banks are expanding their footprint on the continent and the contributions of these operations to headline earnings are moving up, and are expected to keep growing.
"We have also observed a strong trading performance from the banks' trading operations in the rest of Africa, given the strong economic growth being experienced in many African countries."
Although there is not enough publicly available data to quantify their contribution to the earnings of the big four banks, Grosskopf said it was certainly "meaningful".
Standard Bank's results for the year ended December 31 2013, for example, showed that the African contribution to group revenue was 26%.
Infrastructure and resource-related development on the continent is the key driver.
The banks have seen corporate and wholesale advances portfolios contributing to larger credit growth.
"Some of this growth most certainly comes from the renewable energy programme as well as the good traction obtained by the banks of the African continent, where large infrastructure and mining-related deals are written in US dollars," the PwC report said. "Given the dollar nature of these loans, some of the growth seen would naturally arise from exchange rate differences, which would indicate that growth in a stable currency environment would be less than reported."
Meanwhile, the cost of expanding into Africa has been exacerbated by the exchange rate because business is often conducted in dollars.
The new liquidity coverage ratio, as a result of the Basel III regulations, is expected to come into effect in 2015 and has prompted banks to look for new sources of funding – and in their sights is the average Joe's bank deposits.
Currently, the combined loan-to-deposit ratio of the major banks decreased to 95.6% in the second half of last year from 96.2% in the first. This, the PwC report said, highlights an ongoing and competitive search for retail funding by all the major banks.
The desirability of these deposits lies in the fact that retail funding is cheaper than wholesale funding, Grosskopf said. "Obviously it's good for the country, too, if people are saving more."
As a result the banks have launched an initiative, which includes loyalty programmes and competitive rates, to get their clients to deposit their money with them rather than in a money market fund.
"That money market fund has to put their money somewhere and you would find they put a large proportion back with the banks. But then it comes in as a wholesale deposit – your retail deposit comes into banks as wholesale – [which] from a liquidity perspective is not desirable."
Industry deposits, which are largely wholesale and corporate, amount to 62.5%, followed by households at less than 26.5%.
"Deposits grew only 2.8% in the second half but full-year growth of 9.9% is commendable given the pressures consumers continue to face."
But net fee and commission income grew by 9% compared to the first half of 2013 despite low with zero inflationary increases on bank charges as banks focus of expanding their customer base.
This, PwC said, is "remarkable given the lower income-generating effect of innovative pricing packages introduced by banks … Of significant interest is the continuation of the trend of an increase in electronic banking fees as clients migrate to new lower-cost, higher-volume distribution channels."