The party the South African banks have enjoyed over the past three years may have reached heady heights, but looks to be far from over. Figures released by FirstRand last week, and the boundless optimism expressed by the likes of Investec, suggest that good times lie ahead for a while yet.
In the period between September 2002 and close of market on Wednesday, the FTSE/JSE Banks index rose 157%, from 10 395 to 26 739.
The party has been fuelled by a buoyant economy, purchase by foreigners and rumours of purchase by foreigners. The rally has seen banks such as Absa double market capitalisation, from R30-billion to R60-billion, on the back of its proposed purchase by Barclays, while Standard Bank, once a takeover target, pushed its market cap past the R100-billion mark.
Last week, FirstRand released figures that show broad-ranging growth, well ahead of all market segments, with departing CEO Laurie Dippenaar expressing confidence that a lot of the growth can be replicated.
The group grew headline earnings by 32% to R7,6-billion and offered a return on equity of 26,7%. The figures also showed the need for innovation to cater for a new customer base of the black middle class and to penetrate the low-income earners.
FNB Home Loans grew by 91% compared to market growth of 57%. Rand Merchant Bank private advances grew by 41%, ahead of market growth of up to 25%.
WesBank, the asset finance division in which it is also a market leader, grew new business by 32%, while the market grew by 24%. WesBank CEO Ronnie Watson raves about the black middle class, not as part of the story, but as the story itself. At the result announcement, and at a recent investor seminar, he reiterated the belief that the class is ‘not emerging, but has emerged”. Watson notes that there is no reason why buoyant spending cannot continue ‘for 15 years, like Australia”. His division reached a milestone by recording new business worth R4-billion for the month of June for the first time, a level that has been maintained since. His next milestone is 2010, by which time he expects the motor industry to be selling more than 900 000 cars, almost double last year’s 482 000 units.
In credit cards, FNB Card advances grew new business by 32%, while the market grew 30%. The market leader in card lending, Standard Bank, grew its advances by 47%, from R7-billion to R10-billion.
FirstRand’s response to catching up to its peer includes offering credit cards to a new client base through its healthcare subsidiary, Discovery. But in that period, Standard Bank has retained credit card clients it obtained through a joint venture with Barclays and is about to offer credit through a joint venture with Edgars.
Through Discovery and Outsurance, FirstRand has some innovative players in the healthcare and insurance space.
But the boom will also feel squeezed in a number of areas. An example is the property boom that is showing signs of a slowdown.
The Absa House Price index shows that house prices this year have grown by 19%, compared to 32% last year. The bank, a leader in the home-loan space, also had to cancel a development that failed to meet its presales target for the first time in these heady days. Absa CEO Steve Booysen said that the boom will have a soft landing, as long as interest rates remain steady.
Further signs of a slowdown were shown last week. Building statistics figures were described by Absa economist John Loos as poor overall, with pockets of potential value in commercial building construction.
There are good times ahead, but exploiting them will take imagination.