South Africa’s major banks were impacted negatively by an “unprecedented operating environment” during the Covid-19 pandemic, reports professional services firm PwC in its 'Major Banks Analysis' for the 2020 financial year.
The analysis highlights key themes from the combined local currency results of Absa, FirstRand, Nedbank and Standard Bank.
Domestic banks' combined headline earnings a share declined by 48.4% in comparison to the 2019 financial year, while their combined return on equity fell from 17.8% in 2019, to 8.3% for 2020.
Their net interest margins also fell from 426 basis points (bps) in 2019, to 387 bps in 2020.
In terms of credit loss, South African banks experienced a loss ratio of 180 bps, up from the 80 bps of 2019. Their cost-to-income ratio was also up from 55.6% in 2019, to 56.4% in 2020.
PwC Africa banking and capital markets leader Francois Prinsloo says that while the major banks’ 2020 results are reflective of an intensely challenging operating environment, they also reveal their resilience.
“Contemplating how the pandemic and the associated uncertainty and risks may play out, it is clear that purposeful, technology-enabled and customer-centric strategies will feature prominently in the major banks’ areas of focus going forward.”
The analysis also points to the four banks' credit impairment charges rising relative to 2019, as forward-looking impairment models and post-model adjustments sought to capture the scale of the crisis on loan portfolios. The dramatic increase in impairments contributed as the primary factor to the steep fall in combined headline earnings and returns, which currently compare to 2012 levels.
Further, PwC finds that the robust capital and liquidity positions with which the major banks entered the crisis were maintained above regulatory required levels in 2020, providing risk capacity and supporting their ability to navigate turbulent operating conditions.
Meanwhile, the analysis also notes bank’s “undeniable” flight of customer to digital and mobile banking platforms – a trend that pre-dates the Covid-19 pandemic. As such, 2020 saw record volumes of banking transactions conducted through lower-cost digital channels across all customer segments.
However, PwC also notes that the major banks recognise that while the size, scope and configuration of the physical branch network will change, they will continue to play a central, albeit different, part in their overall channel and distribution strategies going forward.
Early in the crisis, PwC notes, the major banks shifted strategic focus from managing profitability and delivering stakeholder returns to managing operational stability and ensuring balance sheet resilience. These efforts resulted in both technology infrastructure and customer service levels holding up without major incident in spite of a sudden pivot to remote working and strong demands on systems.
Further, PwC says that demands on systems and information technology architecture came from both facilitating the business of the major banks, as work was conducted remotely, and in supporting higher digital transaction volumes.
PwC’s economics team expects the global economy to expand by 4.7% this year, a forecast heavily conditional on a successful deployment of effective Covid-19 vaccines and accommodative fiscal, financial and monetary conditions.
By the end of the year, or early 2022, PwC expects the global economy to trend to its pre-pandemic level of output. However, in South Africa, the firm says the situation appears “starkly different” as an uneven recovery pattern among South Africa’s key trading partners and geographic neighbours is likely.
At one end of the spectrum is China, states PwC, already larger than its pre-pandemic size, while on the other are advanced economies that are either service-based (such as the UK and France) or focused on exporting capital goods (such as Germany and Japan), which are unlikely to recover to their pre-crisis levels by 2021’s end.
As such, PwC expects that a return to pre-pandemic gross domestic product is at least a few years away.
PwC Africa banking partner Rivaan Roopnarain notes that while considerable uncertainty, both from a public health and from an economic standpoint is expected to prevail, the major banks have shown their ability to respond purposefully to crisis conditions.
“For the majority of the major banks’ management teams and their people, 2020 will have been the most difficult and complex year on record. With various outlook scenarios dependent on a range of variables, the common consensus is that of more uncertainty ahead.”