With the changing climate in local banking Jacques Magliolo looks at which banks are likely to come out tops
South Africa’s four major banks have girded their loins to face a tough future as interest rate rises squeeze their margins.
Brian Feldtman, banking analyst at stockbrokers EW Balderson, says that Amalgamated Banks of South Africa (Absa), Standard Bank Investment Corporation (Stanbic), Nedcor and First National Bank (FNB) have all positioned themselves for the challenges ahead.
“The bank which succeeds in efficiently bridging the gap between first and third world sectors, is likely to emerge as market leader,” says Feldtman. He believes the bank which achieves this will move to an “entirely diferent and higher earning growth curve and, thereby, offer superior investment returns.”
Feldtman suggests that FNB will be at the forefront of South African banking. His argument is that, while Nedcor is the most efficient bank, with the lowest cost structure, in South Africa, FNB is the most profitable.
Latest statistics reveal that, on a pre-tax profit per employee, Nedcor scores R63 000 per employee, while Stanbic R46 000, FNB R38 000 and Absa R31 000. A similar pattern is displayed in terms of assets per employee: Nedcor R3,5-million, Stanbic R2,6-million, Absa R2,4-million and FNB R2,1-million.
However, profit statistics show that FNB surpasses the others. According to figures, FNB betters the other major banks with a Return on Assets of 1,25 percent. Stanbic achieved the same figure, but Nedcor shows a 1,15 percent return and Absa 0,75 percent. On a Return on Equity basis, FNB achieves a 20,9 percent return, while Nedcor has a 19,7 percent, Stanbic 17,6 percent and Absa 12,3 percent.
“FNB has maintained a superior and significant market capitalisation to shareholders funds ratio among the Big Four,” he says. Not all analysts agree.
Sentiment in the market place is that ultimate success in South Africa will depend entirely on general banking and technological market trends over the next three years and not on which bank is efficient or profitable.
Graham Baillie, banking analyst at stockbrokers Martin & Co, believes that Nedcor’s efficient and low cost structure makes it perfect for the future. “If technological trends in South Africa move towards some type of Smart Card technology, then Nedcor is best situated for the future,” he says. Smart Cards have a microchip embedded in them, allowing the user to be credited with a certain amount of money — much like the telephone cards that Telkom issues.
Nedcor has already displayed its intentions of making aggressive moves into the consumer card market. It recently announced the launch of the Nedbank Advantage Card for South African Breweries’ retailing interests and it also announced plans to start an insurance company to further promote and secure this source of income.
Feldtman disagrees: “With market growth opportunities in Smart Cards, insurance, home loans, funds management and private label cards, FNB is a must buy for all balanced portfolios.
“With the technology and infrastructure that FNB has at its command, this is the banking share of the future as far as providing competitive banking products that meet the needs of the emerging markets while still accommodating its existing markets.”
While some analysts continue to quibble over which bank will ultimately succeed, some say it is pointless to assess banks under present conditions.
If multinationals do enter our market, they are unlikely to even try to compete with our banks for consumer business. Analysts assert that the cost of setting up a client-based infrastructure would be prohibitive.
“International companies will probably compete in money and capital markets, in project and trade finance and not in the retail market.”
The present upward trend in interest rates should not materially affect the big four as in recent years they have been moving to increase their non-interest income.
This means that, during a climate of rising interest rates, banks’ financial margins are squeezed and they have to rely more on income derived from foreign exchange commissions, service fees, dividend income and gains made on trading equities.
Surprisingly, the proportion of interest to non-interest income in South Africa has become quite close in recent years. Latest figures show that the banks’ interest to non-interest income ratio for FNB was 57:43, Nedcor 60:40, Standard 61:39 and Absa 67:33.
“These banks will continue to perform due to their changing focus to more non-interest income business and in meeting the banking needs of the black population,” says Feldtman.