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BANKING: SA Banks Well Positioned Despite Global Economic Uncertainty


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Combined headline earnings up 17,7%; average return on equity 16%; bad debt expenses down 14,8%; total income up 5,1%; operating expenses up 2,6%

The financial results of South AfricaÂ’s four major banksÂ’ (Absa, First Rand, Nedbank and Standard Bank) for the six months ended 31 December 2011 are a positive reflection of the financial health of the industry in that they show that the banks remain stable, despite the recent global economic uncertainty, according to a report issued today by Professional Services Firm PwC.

“Although the banks may have experienced tough operating conditions at the start of the global financial crisis when South Africa dipped into the recession, they have since strengthened their positions through a combination of increasing capital levels, changing funding strategies, reducing risk appetite and holding significantly more liquid assets,” says Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa.

New Basel 3 Regulations

The effect of new Basel 3 regulations on product and pricing decisions remains a cause of unease and the banks have all noted their uncertainty with regard to pricing on longer-term transactions, says Winterboer.

Despite these circumstances, the major banks reported aggregate return on equity of 16% for the year ended 31 December 2011, up 10,3% on the previous year, and up 13,2% for the six months ended 31 December 2010. Headline earnings grew to R39,9 billion, an increase of 17,7% from the previous financial year.

These are some of the highlights from PwCÂ’s South Africa Major Banks Analysis Survey. The report analyses the results of South AfricaÂ’s major banks for the six months ended 31 December 2011.

“These return on equity levels remain lower than levels prior to the financial crisis for the major banks, but are commendable given that they are holding additional capital buffers as they await final implementation guidance for Basel 3 in South Africa,” says Johannes Grosskopf, PwC Banking and Capital Markets Leader, SA.

Containment of Costs Key to Earnings Growth

Grosskopf says that the main driver of earnings growth has been the containment of costs, up only 2,6% from the previous year, and 1,6% up on the six months ended 31 December 2010, and more particularly the reduction in impairment charges of 14,8% for the year.

It is possible that the reduction in non-performing loans (down 15,2% from the previous year) means that impairment levels have now bottomed out and that the boost to earnings provided by the decline in impairment charges has come to an end, says Grosskopf. “This could see an increase in pressure on earnings growth targets for the 2012 financial year and beyond.”

Net interest income continues to be affected by the low interest rate environment, but loan growth, asset mix changes and repricing have contributed to year on year growth of 8,6 %. Despite uncertainty about the direction of interest rates and the excess liquidity carried by the banks, net interest income will continue to play a dominant role in the generation of revenue, but it will be interesting to see how banks defend margin levels, he says.

Looking at credit growth, gross loans and advances increased to 8,7% from the previous year. Grosskopf says this was largely driven by an increase in corporate demand for term funding and the major banks growing their presence in the unsecured lending market.

Deposit growth has benefited from the frugal conduct of both businesses and consumers. Deposits were up 11,2% from the previous year and 6,8% for the six months ended 31 December 2010. This has helped maintain margin levels as these kinds of deposits continue to provide the cheapest form of funding for credit growth and negate the effect of increases in wholesale funding costs. Grosskopf says this will be pleasing to the banks as they continue to debate the structural funding challenges of the South African market, with a view to implementing the net stable funding ratio proposed in Basel 3.

Non-interest revenue remains dominated by fee and commission income, which represents 64% of the total for the second half of 2011. In respect of retail customers, the local market remains focused on widening the net and banking the unbanked. In doing so, the banks are finding innovative ways to reach their clients.” He points out that this is shown by the fact that all the major banks reported customer gains, increases in access points such as ATMs, non-traditional branches and a continued focus on electronic and mobile channels.

Grosskopf says that containing or reducing costs will remain a priority for banks. “At the same time this will be affected by regulatory reform and continuing core banking IT enhancements. The focus therefore will be on operational effectiveness, simplifying processes and the rationalising of businesses to achieve more focussed strategic objectives.”

Winterboer says, “What remains interesting to observe is the differing strategies the major banks have adopted with regard to expansion in Africa. He points out that there is also competition in the market from new digital players. “The banks are embracing new electronic channels, such as mobile banking and the internet.”

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