South Africa’s major banking groups, which include Barclays Africa, FirstRand Bank, Nedbank and Standard Bank, have produced a credible set of results for the first half of 2016 despite a challenging operating landscape, both globally and locally.

Although there were some differences in the performances of the individual banks, the four major banking groups posted combined headline earnings of R34.6-billion, up 5.7% from the comparable period last year.

“In many ways, this performance reflects the strength and resilience of their franchises and [the] clear diversification of earnings capacity that exists within their organisations,” PwC Africa financial services leader Johannes Grosskopf said on Wednesday.

PwC’s ‘South Africa Major Banks Analysis: Getting the balance right’ report analyses the results of South Africa’s major banking groups for the six months ended June 30.

It also identifies common trends and issues currently shaping the financial services industry, building on other PwC analyses of the last five years.

The report highlights challenges that the major banks face, such as the continued regulatory change agenda – specifically new capital rules, rules around risk data aggregation and developing new credit impairment methodologies to implement the new accounting impairment standard.

Banks’ business models and information technology infrastructure are also challenged by financial technology startups, a continued focus on customer-centric approaches and a relentless focus on costs.

“The macroeconomic situation globally, with Brexit uncertainty prevailing, commodity price volatility and the slow to negative domestic and African gross domestic product growth issues, adds to these challenges,” he noted.

While banks deal with these challenges, they are also focused on delivering value to shareholders.

One of the measures used to depict shareholder value created is the 'economic spread', which Grosskopf explained is the differential between the return on equity (RoE) and the cost of equity.

Using this measure, he stated, South Africa’s major banks’ performance compare favourably against their European counterparts.

He highlighted that the average economic spread amounted to 3.6%, marginally down on the second quarter of 2015, reflecting on increased cost of equity and lower RoE.

In comparison, the European global systematically important banks remained in negative territory in the -6% to -10% range.

“The most significant change from previous periods is the increase in the impairment charge, reflecting the difficulties in the underlying macroeconomic conditions. The major banks’ combined income statement impairment charge grew by 26.8% and 29.3% against the first half of 2015 and the second half of 2015, respectively,” he said, adding that this can largely be attributed to latent credit stresses within the major banks’ total credit portfolios.

For the first half of 2016, the combined nonperforming loans (NPLs) of the major banks increased 7.5% against the second half of 2015, but by a considerable 14.7% against the first half of 2015.

“Consistent with our previous analyses, retail NPLs continue to make up the majority of NPLs, constituting nearly 74% of total NPLs.”

The major banks’ combined loans and advances only grew 1.3%, compared with the second half of 2015 and 6.5% against the first of 2015.

He noted that this was consistent with the range of economic headwinds that had prevailed over these periods including lacklustre domestic growth, subdued business confidence levels and strained South African household balance sheets.

Net fees and commission grew 9.8% when compared to the first half of 2015.

“This growth is a remarkable achievement in the face of headwinds experienced in the form of lower interchange fees and the generally subdued macroeconomic environment,” added Grosskopf.

According to the report, net interest income growth of 15.9% benefited from a continued positive endowment impact, as the higher interest rate environment contributed to faster asset repricing relative to fixed-rate liabilities, equity and nonrate-sensitive funding sources.

At the same time, good margin growth has been reported in the current period with the combined net interest margin of the major banks increasing to almost 4.7%, compared with about 4.4% in both the first half of 2015 and the second half of 2015.

Although the major banks remain well capitalised, with total regulatory capital adequacy ratios comfortable and above required minimums, challenging earnings growth resulted in only a slight increase in the total capital adequacy ratio to 15.5% in the first half of 2016, when compared with 15.2% in the second half of 2015.

“Global growth patterns and expectations remain uncertain, uneven and subject to various headwinds. We expect a continued focus on strong cost and capital management, with the banks' diverse product franchises helping them remain resilient,” Grosskopf said.