In a turbulent week for the banking sector, FirstRand came in with enviable results for its year to June 2003, troubled Nedcor announced the departure of CE Richard Laubscher and the shares of South Africa’s three top banks moved sharply in reaction.
By Wednesday Nedcor shares were down 7%, FirstRand up 6% and Stanbank up 4,5%.
Also unsettling banking investors is the uncertainty surrounding the looming financial services charter. And although officially on the back-burner, the hotly disputed Community Re-investment Bill, which aims to compel banks to move into the lower end of the home-loans market, is still having an effect.
Nedcor shareholders will have to lick their wounds as the group grapples with the biggest banking mergers since Absa was created in the early 1990s. Other recent difficulties in Nedcor include a 22% cost overrun on the BoE merger, troubled investment in Didata and unexpected losses on its micro-lending book.
JP Morgan analyst Jacques Badenhorst stressed: “This week’s events are the result of overall problems at Nedcor. A new CE will want to review the strategy and bring in his own key people. The resulting uncertainty will affect staff morale and shareholders’ confidence.”
By contrast, FirstRand shareholders could draw satisfaction from attributable earnings that were up 26%, headline earnings per share up by 28% and core operational earnings up by 21%.
FirstRand optimised the opportunities provided by the dramatic underperformance of Nedcor, a prime competitor. Likewise it has benefited opportunistically from the almost total wipe-out of South Africa’s second-tier banks last year and in 2000.
This year also saw FirstRand conquer the prevailing volatility in the financial markets, with high interest rates working in its favour to increase its margins.
At the operational level, the bank did some things differently. It generated spectacular productivity gains — the 2002 cost-to-income ratio was down to 57,6 from 60,9 the previous year. This was achieved by a greater throughput running on the back of relatively unchanged resources or inputs, which was good news in the South African context.
The cross-selling of wills to high net worth individuals at a rate of 50% means the bank will collect the 3,5% executor’s fee when those clients die and their vast collective deceased estates are distributed.
Cheque accounts are being sold to new home-loan customers at a rate of 24,5%.
Although small in the overall picture, First National Bank’s (FNB) hugely successful eBucks scheme saw the client base grow from 100 000 to 350 000. eBucks almost trebled its profits, while First Link Insurance Brokers grew profits by 170%, Outsurance by 81% and FNB home loans by 70%.
The figures for FNB retail, FNB Africa and Wesbank were more modest at 29%, 12% and 6% respectively.
The bank has finally initiated a programme to bring its core banking services to the 12-million or so under-banked South Africans, many of whom live in rural areas.
Not only will this make banking easier for private individuals, it will also have implications for rural small-business development. Banking is a fundamental infrastructural service if businesses are to take root and prosper in a geographical area.
The bank emphasised that the innovation would not have “unproductive” cost implications. Each new branch would act as a market-research tool to establish if a permanent branch could be justified on that site.
The new scheme is clearly a response to mounting government pressure on the banking sector. This has been evidenced not only by the charter initiative, but by a slew of new banking laws in the pipeline, including amendments to the Banks Act and the Financial Advisory and Intermediary Services Act.
The government’s banking sector watchers are also changing. Christo Wiese, the banks’ long-time ally at the Reserve Bank, has gone. The reputed mastermind behind much of the new banking legislation, National Treasury Deputy Director General Lesetja Kganyago, is the hot favourite as either the new registrar of banks or to replace Maria Ramos as Treasury director general.
It remains to be seen who will step into Wiese’s shoes at the central bank.
Whichever way it goes, the banking sector will have a new set of players to pilot it through the implementation of the financial services charter.
Analysts agree that the overriding issue for the sector is the financial services charter, but refuse to be drawn into speculating on its details. One dealer suggested that the apparently shelved Community Re-investment Bill was being used as a thinly veiled threat to prevail on the banks to beef up the charter’s empowerment provisions.
FNB’s Mike Jordaan was upbeat about the bank’s prospects for the coming year, saying lower interest rates had already set the home-loan and vehicle-financing markets on the boil. He noted that if rates were cut even further, the bank had covered itself for deposits it took at higher rates.
Jordaan said there was scope for further benefits from the strategic acquisitions. The bank was still cross-selling benefits to be had from selling credit cards to newly acquired clients.
He said FNB would focus on growing market share through aggressive sales and improved service levels. The strategy was to move away from internally focused “fixing strategies”.
Putting the role of eBucks and Outsurance in perspective, he said these were easy ventures to grow at speed. While retail operations generate vast profits each year, it is difficult to grow them dramatically. The greenfield operations would therefore be an earnings growth sweetener.
Predicting 3% economic growth, Jordaan said this would be good news for the banks as it would boost demand for credit. While the stronger rand was hurting exporters and therefore the banks, they were generally well hedged, he added.