South African banks shrug off economic storm

It may seem like dark days for the local and global economy, but it is blue skies for South Africa’s big four banks, which have managed to grow earnings impressively and raked in more than R200-million a day in profits.

In the second half of 2015, they reported a combined increase in headline earnings of 12.5%, an increase of 6.9% in total operating income, and an average return on equity (a measure of profitability) of 17.9%. Operating income for 2015 was R277-billion and profits totalled R73.8-billion, or R200-million a day, in spite of weak global and domestic growth and increasing regulatory burdens.

This is according to the latest PWC Major Bank’s Analysis, released this week. It aggregates the results of the big four ­– Barclays Africa, FirstRand, Nedbank and Standard Bank – to identify common trends and issues currently shaping financial services.

The macroeconomic context in which they achieved their “commendable” results remains highly volatile and subject to persistent challenges.

The analysis identified global risks as slowing growth in China, a strengthening United States dollar and weakening emerging market currencies, and a sustained cycle of low commodity prices.

Domestically, on-going weaknesses associated with the rand, electricity tariff increases and the impact of the recent drought on food prices are expected to balance out the positive effect of lower oil prices on local consumers and businesses.

It’s against this background that the banks have produced commendable results for the second half of 2015, said PWC, a multinational auditing firm, in its report.

In aggregate, the four major banks reported combined growth in headline earnings of 12.5% in the second half of 2015 to reach R33.8-billion. Over the same period, net interest income grew by 7.8% and non-interest revenue increased 7%. This growth, PWC said, is a credit to the strength of the banks’ franchises and the resilience and diversity within their profit pools to withstand economic headwinds while delivering growth at the group level.

Net interest income growth came on the back of healthy growth in average loans and advances and benefited from higher interest rates.

Meanwhile, noninterest revenue growth continues to be supported by growth in net fee and commission income in absolute terms, as well as a very healthy growth in trading revenue, the analysis said.

But it’s not all good news as credit impairments have continued to grow – 10.8% since the second half of 2014 – as “a result of latent credit stresses, both realised and unrealised, that remain within the banks’ total credit portfolios as a consequence of highly challenging macroeconomic considerations that weigh heavily on specific industry sectors such as the mining and agricultural sectors,” the report said.

At the same time, a focus on debt restructuring and tighter collection strategies has resulted in credit impairment charges falling marginally by 1.9% for the period to June 2015.

Gross loans and advances continued to experience resilient growth of 13.5% for the six months to December 2015, and remain driven by corporate and investment banking demand that continues to outpace retail and instalment credit growth.

“In response to growing concerns about the credit quality of their portfolios, all of the major banks continue to emphasise their application of conservative judgments in relation to credit provisioning strategies, evident in the sizeable increase of 13.7% in their unidentified (or general) credit provisions.”

Growth in nonperforming loans was much stronger over the past six months, pointing to the economic challenges faced, PWC said.

Operating costs grew by 7.6% in part because of dollar-based costs for those banks with large physical presences in the rest of Africa.

Information technology spending continues to increase, the report said, in response to the threat of cybercrime and greater regulatory requirements. South Africa has the highest rate of cybercrime in Africa.

In recent days, for instance, FNB and MTN have come under fire for a scam in which customers claim money has been illegally withdrawn from their accounts.

“Each of the four major banks continued to be impacted by different growth stories and individual operating circumstances over the period,” the report said.

“As regulatory requirements become more onerous, it is expected that they may change the shape of banks’ balance sheets, increase their costs, both direct and indirect, of regulatory compliance, and influence their strategic direction.”

Regulatory requirements, specifically more stringent capital requirements, were the reason for Barclays Plc’s recently announced decision to sell its 62.3% stake in Barclays Africa.

There is a great deal of uncertainty over whether the banks will be able to remain as resilient as they are if the economic outlook continues to deteriorate.

Regarding their performance outlook over the short-to-medium term, the PWC analysis said most banks have noted that the risks in the current environment remain elevated, which make it more difficult to formulate guidance for performance.

Globally, sluggish growth and inflation below target levels has seen some central banks adopting negative interest rates – “a historically unprecedented stance and one that highlights the scale of the challenge associated with low growth conditions”, the report said.

How this and other complex, interconnected economic dynamics play out will have material implications for the global economy, and in particular for emerging economies dependent on foreign capital flows to support growth and fund domestic deficits, like South Africa, PWC said.

The repercussions of the hike in US interest rates need to be watched, as businesses and households exposed to dollar-denominated debt will come under pressure because of funding costs.

“Economies such as Chile, Turkey and Russia could be particularly impacted due to their relatively high levels of US dollar debt,” the analysis said.

“In contrast to these emerging economies, however, South Africa’s foreign currency-denominated debt levels, particularly debt denominated in dollars, are lower.”

Domestically, if the forecasts of the South African Reserve Bank are correct, economic growth in South Africa for 2016, expected to be only 0.9%, will be the weakest in nearly a decade, the report said.

South Africa has been subjected to several shocks because of the decline in commodity prices, worsened by the drought, and electricity supply constraints, which are affecting domestic economic activity.

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