South Africa’s major banks delivered a strong financial performance in 2021, with the operating environment in the period more familiar, professional services firm PwC’s ‘Major bank Analysis’ finds.

Combined headline earnings of R86.8-billion increased by 99% against the previous year, while the combined return on equity (ROE) was 15.9%, the net interest margin was 408 basis points, credit loss ratio was 74 basis points and the cost-to-income ratio was 55.8%.

Learnings from navigating the extreme uncertainty during earlier phases of the pandemic, coupled with shifts to new ways of working and delivering financial services, aided the major banks’ abilities to navigate 2021 with a focus on stability, innovation and digitally-led operational excellence, PwC says.

Against more supportive conditions, the major banks delivered strong results on the back of a rebound in economic activity, increased client engagement levels and gains made through the execution of their digitally-centric strategies.

PwC Africa banking partner Rivaan Roopnarain says that, after consecutive periods of significant uncertainty, the major banks are optimistic that the rebound in economic activity and consumer confidence will gather momentum.

“Further embedment of digital innovation and environment, social and governance- (ESG-) related metrics into reporting and performance measures are likely to remain important elements of overall bank strategy.”

Key themes observed from PwC’s analysis include that supportive economic conditions and an improved credit cycle provided the basis for an unwind in risk provisions across loan portfolios.

Credit impairment charges decreased by 59.6% year-on-year, underpinning an acceleration in headline earnings to the region of pre-pandemic levels. However, some risk provisions remain to cater for macro risks and the still uncertain path of the pandemic.

While the major banks' results for the period largely reflect positive credit performance, underlying franchise momentum and heightened client transactional activity combined to result in resilient pre-provision operating profit growth of 6.2% year-on-year, the analysis finds.

Notably, revenue pools from the delivery of broader financial services – including from insurance activities and asset and investment management – represents a growing contribution to non-interest revenue.

Deliberate risk appetite management and disciplined approaches to credit origination remained observable, while the low-interest-rate environment, pent-up consumer demand and favourable buy-side property market dynamics supported credit growth.

Credit quality has improved, evidenced by the decrease in the stock of non-performing loans. This reflects a combination of collections efforts, client repayments and credit migration into lower risk bands, the analysis indicates.

Continued focus on, and investments into, further building out digital banking capabilities resulted in positive client satisfaction scores and experience sentiment.

While these efforts made for a more competitive banking environment, they also translated into client acquisition gains in some cases and a higher proportion of digitally-active clients, who grew by 8% against 2020.

Key metrics across capital, liquidity and provisioning were consistently maintained and further bolstered in 2021, reflecting the stability and resilience of the major banks’ balance sheets, the analysis states.

Tight cost control continued, with expense growth managed below consumer price index growth for the period.

As the major banks double-down on embedding their digitally-led strategies, PwC expects that the next wave of cost reduction will mostly come from productivity improvements, digitisation and reshaping enterprise priorities as opposed to more traditional measures such as reducing discretionary expenditure or optimising headcount.

The analysis indicates that changes in the scope and delivery of financial services is unrelenting, particularly across the African continent.

Data is now clearly seen as a strategic asset, informing product innovation, the scaling of new businesses and investments in a new range of skills – from data scientists to engineers. 

The analysis also found accelerating cloud adoption and use of emerging technologies.

Responding to evolving social and regulatory expectations around climate risk and ESG-related topics is also a high priority.

OUTLOOK
“Our analysis has consistently revealed a truism of South African banking – that bank performance is in many ways connected to the broader economic context and prevailing operating conditions,” PwC says.

While the major banks expressed cautious optimism in their outlooks, a level of macro-related uncertainty exists in two key areas, it points out, namely, the domestic economic context, and global geopolitical tensions.

PwC says the resolve to reimagine the future of financial services will continue to be at the forefront of overall bank strategy.

It expects key themes to include integrating climate-related risks into lending policies and pricing strategies, existing enterprise risk management and external reporting frameworks.

Moreover, there would be accelerating ‘trust-building’ activities generated over the course of the pandemic as a result of actively supporting clients and communities.

There is also optimising the business/service mix and aligning incentives to help clients navigate the financial aspects of climate-related risks and energy transition.

Lastly, an unrelenting focus on digital innovation across channels, platforms and products remains central to structuring differentiated competitive propositions, PwC notes.