The four largest banks in South Africa – Absa, FirstRand, Nedbank and Standard Bank – remain resilient, with healthy, stable and above regulatory minimum liquidity and coverage.
Their results were also buoyed by underlying business momentum and risk profiles performing better than expected, advisory, assurance and tax services multinational PwC Africa's 'Major Banks Analysis 2021' report shows.
The major banks' liquidity management strategy was resilient, and this came through in their results, PwC South Africa Banking and Capital Markets partner Rivaan Roopnarain said during a briefing to discuss the report on September 17.
Combined headline earnings of R40.6-billion to the end of June increased by 177% compared with the first half of 2020, while combined return on equity returned to double digits at 15.4%, compared with 5.4% during the first half of the previous year.
Net interest margin was 403 basis points, versus 392 basis points during comparable period in the prior year. The credit loss ratio moderated to a more reasonable 82 basis points from 232 basis points during the first half of 2020.
Banks indicated that the credit loss ratios were likely to stabilise closer to the long-term average range during 2021 and 2022, said Roopnarain.
The decline in credit impairment compared with the impairments in 2020 was a significant driving force behind the headline earnings growth, he said.
During 2020, banks significantly increased their impairment levels to meet International Financial Reporting Standards 9, which require forward-looking assumptions. The banks took impairments early based on the incorporation of these assumptions and the impairments were less than expected and below the pre-provisioning level, PwC South Africa Banking and Capital Markets Industry leader Francois Prinsloo pointed out.
Meanwhile, operating expenses grew by 3.7% compared with the same period in 2020, which is below consumer price inflation of 4.9% for the same period. This means that banks are able to manage costs below inflation and the primary drivers of cost increases were in staff costs and technology costs, said Roopnarain.
Further, the deposit portfolio grew by an aggregate of 1%, although a lot of this growth seems to be in short-term products, such as current and savings accounts. This indicates that the level of uncertainty is driving corporate customers and households to manage their liquidity carefully and focus more on short-term access. This growth in the deposit portfolio remains heavily influenced by economic conditions, he added.
From a broader Africa perspective, banking operations in commodity-led economies benefited from higher prices, but that was offset by volatility in the exchange rate, while challenges persisted in tourism-led economies, said Prinsloo.
Further, about 35% of the major banks' revenue came from operations outside South Africa and this diversification in earnings is serving them well in the current environment, he said.
NEW BANK STRATEGIES
However, bank delivery models are evolving and, in PwC's view, there is a blurring of lines between traditional financial service providers and emerging players, said Prinsloo.
Various operating models have begun to emerge, including providing end-to-end services alongside underlying financial transactions, to creating ecosystems by connecting customers with partners, financial technology companies and other providers through open architecture, and outsourcing some aspects of the delivery model to strategic delivery partners.
"To deliver this, banks need a future-proof workforce. They need different skills to deliver on the new business model and access to skills is central. Supporting new business models is where banks are pointing their spending towards now," said Prinsloo.
Additionally, active digital customers accelerated further during the lockdown period as customer behaviour changed. Active digital customers grew, most branches saw transaction volumes decrease and smart phone application and Internet-based transaction volumes increased.
"Importantly, several banks clearly indicated that soft skills remain equally important to technical skills, as they strive to increase their customer relevance and provide clients with personalised services at any time through any preferred touch points and using a combination of technology and human service delivery," noted Prinsloo.
Meanwhile, banks saw a reduction in headcount of 3.4%, which is within the scope of natural attrition in the staffing pool, said Roopnarain.
Further, technology costs showed only modest growth, but this may be masked by the changes in technology spending in line with banks' investments in cloud, artificial intelligence platforms and data and analytics capabilities, he said.
"This means the information technology sub-line item total cost is masking the fact that a lot of technology spending is now of a different nature, with some being staff costs, such as to hire data scientists. However, all-in-all, technology spending as a proportion of total spending is increasing in line with banks' strategic ambitions," added Roopnarain.
However, developing digital platforms present some challenges, particularly on the regulatory side. Regulators will need to consider the evolving risks, cybersecurity requirements and the cross-border nature of digital platforms, said Prinsloo.
The opportunities and risks presented by the digitalisation of banking should keep banking executives and regulators focused, and provide exciting offerings and services for customers and consumers, he noted.