SA banks perform well, despite economic turmoil

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Growth in headline earnings

Johannes Grosskopf, banking and capital markets leader for PricewaterhouseCoopers (PwC) Africa, says: “Overall, the major banks reported combined growth in headline earnings of 12.5% against the comparable period to December 2014 to reach R33.8bn. This is a credit to the strength of the major banks’ franchises and the resilience and diversity within their income streams to withstand economic headwinds while delivering growth at the group level.”

The growth in headline earnings remains underpinned by solid operating drivers, with net income growth of 8.4% and non-interest revenue growth of 5.2% against the comparable period.

These are some of the highlights from PwC’s South Africa Major Banks Analysis report entitled ‘Growing in turbulent times’. The report analyses the results of South Africa’s major banking groups for the year ended 31 December 2015 and identifies common trends and issues currently shaping the financial services industry.

Challenges of a changing world

While the macroeconomic landscape remains highly volatile and subject to a range of persistent challenges at the global and domestic level, the banking industry finds itself in the grasp of an increasingly changing world.

“The combination of technological change, regulatory challenges, and customer and social expectations is daunting, while the stakes are enormous. In addition, criminality and technology risk are increasingly becoming concerns of banks given the rise in new competitors who are challenging traditional ways of doing things and operate using more nimble systems and lower overheads,” says Grosskopf.

Focus on debt restructuring

From a lending perspective, the major banks reported combined gross loans and advances growth of 4.8% against the first half of 2015. Growth in gross loans and advances continues to be stronger in the corporate and investment banking sector than the retail sector.

At the same time, an ongoing focus on debt restructuring and tighter collection strategies, has resulted in combined credit impairment charges marginally declining by 1.9% compared against the period to June 2014, but the increased risk in the system is evidenced by the increase of 10.8% against the comparable period.

Human capital and IT investment

Cost containment continues to be an important focus for the banks, while they continue to invest in human capital and enhance their IT capabilities to respond to customer demand, mounting concern over cybercrime, and regulatory requirements.

The major banks continue with plans to invest in the rest of Africa, where significant investment is being made in infrastructure/IT systems. Salary costs remain the most significant contributor to the cost line at 56% of total costs.

“We expect this increasing staff cost to continue as specialist and skilled resources are employed to assist the banks with the IT transformation and to help meet the heightened levels of regulatory compliance required,” says Grosskopf.

Cautiously optimistic

“In spite of difficult economic conditions, South Africa’s major banks continue to produce laudable financial results. Looking ahead, the outlook remains cautiously optimistic given the level of uncertainty and challenges facing the domestic and global economy."

“Balance sheet resilience, a sustained focus on proactive risk management and overall bank strategy, including diversification in earnings profiles and income streams will all continue to be key for the major banks to ensure that they can navigate the heightened levels of forecast risk and map their paths through the headwinds that are likely to persist throughout the rest of 2016,” Grosskopf concludes.