Three of our big banks have reported interim results over the past couple of weeks. They’ve had very differing fortunes. And their results say as much about the fortunes of SA’s economy, and of its neighbours across the African continent, as they do about the positioning and managements of the banks themselves.
At headline level, Nedbank reported an earnings increase of 11% and Standard Bank upped earnings by a hefty 35%, but Absa came in with an increase of just 2%.
The contrast is marked, too, at the level of their pre-provision profits, before they set aside provisions for bad debts. At that level, Standard lifted profits by 41% against Nedbank’s 22% and Absa’s 16%.
Interest rates were always going to be a big theme at this stage of the cycle. The Reserve Bank has hiked interest rates much more steeply and much faster than anyone had expected a year ago, and they’re expected to stay high for longer than expected.
Higher interest rates benefit a banks because of the so-called endowment effect of the higher interest they earn on their capital and deposits. Up to a point, that benefit outweighs the cost to the banks of the higher provisions for bad debt they have to set aside as their customers get into arrears and loans go bad.
These days, accounting standards require them not only to provide for the bad debts they’re already seeing in their loan books but for those they expect to materialise in future given the outlook for the economy and interest rates. They have to take a view on the macroeconomic future and its impact on their balance sheets. And with interest rates expected to stay high for a while yet and SA consumers taking particular strain, it’s reaching that stage in the cycle where the hikes in bad debt provision are catching up to those “endowment” benefits.
The results for the six months show the banks are still ahead on interest rates, to different extents, though their interest margins have narrowed. But their very different pre-provision profit growth and provisioning reflects the differences in the way their balance sheets are positioned as well as in the mix of their businesses and indeed in their views on the economic outlook. It also reflects divergences in the way they’ve granted credit — any bank that was chasing market share aggressively when interest rates and the cost of living were rising was bound to pay the price in higher arrears later on.
If interest rates and credit “impairments” were one theme of the results, Africa was another. Nedbank tends to be more domestically focused but Standard and Absa have large footprints in the rest of Africa. And these banks’ financials in the latest six months highlighted just how far SA’s economy is falling behind those of its neighbours — and how far their businesses outside SA are pulling ahead of their home base. SA’s economy is growing at less than 1% and though all the bankers expressed hopes for growth-boosting reforms, none realistically expects growth at home to reach the 3%-5% growth rate typical of economies in the rest of Africa any time soon.
Without its Africa regional operations, Absa wouldn’t have managed a headline earnings increase at all — earnings in its SA banking operations actually declined by 17%, but its Africa regions almost doubled their earnings, with strong performances in its 11 other markets. They now for the first time account for a third of Absa’s earnings, and the group is working to sustain or increase that level over time.
Standard Bank has been banking across Africa for much longer than Absa, after it bought ANZ Grindlays in the early 1990s, and its footprint is much larger. It’s in 20 countries across the continent. It does retail and personal banking in many markets and it’s now the largest corporate and investment bank in Africa. Its Africa regions delivered a full 44% of the group’s earnings. And that could well increase over time as the group, sensibly, allocates more capital to those markets where the growth is. It still has plenty of scope to increase its penetration of the markets it’s already in and it’s always on the lookout for acquisitions, so the rest of Africa’s share could climb.
Meanwhile, though its SA banking operations did well for the group, upping customers and activity levels and certainly outshining those of some of its competitors.
One encouraging theme from all three banks was the extent to which they are bankrolling their clients, corporate and household, to invest in renewable energy. Collectively they have thousands of new green megawatts on their books. There at least, there’s some chance SA’s growth can be boosted.
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