Analysis by advisory services, Ernst & Young indicates that South Africa’s big four banks’ profit growth continued to slow in the first half of 2017, with investment banking being somewhat stronger, while retail and business banking were most affected by the very fragile consumer outlook.
Overall banking profit growth slowed to 5.7% in the first half of 2017, the slowest pace since the global financial crisis in 2009, EY said.
Over the long term, the relationship between GDP growth and banking sector earnings is 1:5 – meaning that for each one percentage point of growth, bank earnings typically rise 5%.
In 1H2017, Statistics SA shows that GDP grew 1.1% year-on-year. EY’s financial services leader for Africa, Andy Bates, said this illustrates that banks have performed in line with expectations and longer-term trends.
The weak profit growth is a result of weak revenue growth. Revenues rose by 3%, probably the lowest level of growth in 20 years, the financial services firm said.
“In real terms (adjusted for inflation), revenue growth is actually negative, whilst profit growth is barely positive. Advances growth is also growing negatively in real terms. Nominal advances growth for the four largest banks grew 2.6%, while year-on-year inflation in June stood at 5.4%, implying real advances growth of -2.8%,” Bates said.
The analysis showed that all of the major banks made specific reference to the very challenging circumstances during the recent reporting cycle. As a result, the banking sector has been very cautious in extending credit.
While banks have to take client affordability into account as part of the National Credit Act requirements, the weak economy has added an additional layer of concern for the sector.
A few years ago, personal loans and unsecured lending were highly lucrative, growing at annual rates of 20%+. The banking sector focused strongly on this product category, which raised some concerns in the market and unsecured lending growth was subsequently scaled back, EY said.
Since then, advances growth has slowed, falling to the weakest levels in more than 20 years.
“It is very difficult to grow revenue and profits when advances growth is in low single digit territory, which continued to be the case in the first half of 2017. Interest revenue was squeezed, which coupled with declining business volumes, also pressured fee income. Banks largely managed to offset this via strong cost containment, together with favourable impairment numbers,” said Bates.
The analysis further noted that:
- Banks largely maintained costs within a very narrow band.
- Impairments continued to slow, despite the tight economy.
- Tier 1 capital levels were noticeably stronger than they have been for a while.
- Returns on equity rose, despite revenue pressures and rising capital levels.
“Thus far South Africa’s large banks have managed to avoid reporting negative numbers – lower profits, lower revenues and lower returns. However, the pace of profit growth has been the slowest in seven years, and it could be argued that in real terms, the large banks are not growing.
“The latest GDP growth forecasts, indicate growth of 0.6% for the year as a whole, so we expect nominal growth in the second half but in real terms, revenue and profit decreases,” Bates said.
He said that corporate and investment banking will perform better, while the retail and business divisions will likely remain pressured.