More than 20-million South Africans now use digital platforms to do their banking and SA’s big banks continue to invest heavily in enhancing their digital offering to customers, as well as in newer technologies such as artificial intelligence.
But with interest rates having stayed higher for longer than originally expected, the banks have also increased their focus on proactive customer assistance programmes, and on enhanced collections, says PwC in its latest analysis of the major banks’ results for the six months to end-June.
“They are becoming very effective and efficient in collecting,” PwC Africa’s banking and capital markets leader Francois Prinsloo said. And though the credit loss ratio for the sector is still at the upper end of the range it is starting to come down and the banks’ credit performance has been relatively good despite tough economic circumstances.
PwC’s analysis was released on Friday after the last of SA’s big four banking groups, FirstRand, reported its end-June financial results. The PwC study calculates aggregate numbers for the big four on a six-monthly basis, as well as distilling general themes from all the big banks, some of which have different year-ends.
The latest analysis shows the big four posted combined earnings growth of 2.5% to R56.8bn for the six months, and a combined return on equity of 16.9% at end-June, down from 17.4% a year previously, but still strong.
“Within an environment shaped by complex macroeconomic conditions and elevated levels of uncertainty, SA’s major banks continued to demonstrate the durability of their businesses,” PwC SA banking and capital markets partner Rivaan Roopnarain said.
Though growth in the banks’ balance sheet was relatively muted in the six months, it was still positive, Prinsloo said, with deposits up 3.6% and lending growing 3.7%, indicating customer appetite was still there. The banks saw good top-line growth, with operating income up almost 5%, and those banks with operations in the rest of Africa saw strong contributions from these, even though results were offset by volatile currencies.
But with the banks’ combined operating expenses increasing by 7.9%, the sector recorded negative “jaws”, as the banks call it, where cost growth exceeds revenue growth. The combined cost to income ratio increased to 53.3% for the six months, from 51.5% in the previous period.
“The major banks’ combined strategic target of a 50% cost to income ratio was challenged in the current period by elevated inflation levels and volatile exchange rates,” PwC said.
There was still good cost management, Prinsloo said, but the banks were investing in areas such as cloud-based software as well as in security and in talent. Banks were exploring how best to deploy newer technologies such as AI, especially in data harvesting in compliance, call centres and collections. And getting more digitally active customers was a big focus for all the banks.
The migration of customers to digital banking platforms and channels, while leveraging data as a strategic asset, had moved from theme to certainty, the report said.
The big four’s combined credit loss ratio declined from 110 basis points to 100 basis points. The through-the-cycle target range is generally in the region of 70 to 100 basis points, depending on each bank’s risk appetite and portfolio mix.
But Prinsloo noted that there was a forward-looking element in the banks’ credit modelling, with the European Central Bank having already cut rates, and the US Federal Reserve and the SA Reserve Bank expected to do so this week.
Consumers have proved quite resilient and some big corporate restructurings have been completed, and with a slight improvement in interest rates it is expected that more capital will be deployed and the economy’s prospects will improve, all of which should benefit consumers.
The banks’ intense strategic focus on operations outside SA has provided diversity to their performance, with banks such as Standard Bank deriving more than 40% of its earnings from its Africa regions.
“The scale and competitiveness of operations in high growth African markets ... has emerged as a clear area of distinction for many of the major banks. However, balancing market specific and sovereign risks with group-wide efficiencies was complicated in their period due to significant factors such as increased cash reserving requirements and currency volatility in certain key territories,” the report said.
“Africa is a nuanced picture, with significant opportunities but also some risk,” Prinsloo said.
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