Here’s what you can expect from your bank in 2018

A new report from PwC finds that South Africa’s major banks produced a solid set of financial results for the reporting period ended 31 December 2017, despite an operating environment marked by intense levels of policy and economic uncertainty.

PwC’s Major Banks Analysis presents the combined local currency results of Barclays Africa (Absa), FirstRand, Nedbank and Standard Bank.

Investec and Capitec, the other major players in the South African banking market, have not been included due to their unique business mix and different reporting periods.

The analysis identifies common trends and issues currently shaping the industry, building on previous PwC analyses over the last eight years.

2018 and beyond

The major banks continue to focus on digitising legacy processes through robotic process automation efforts, replacing and upgrading legacy system architecture, and channel and product innovation with a view to delivering richer customer experiences.

The major banks remain focused on adapting their long-term strategies to reflect dynamic global and societal shifts – including a continued behavioural migration underway by banking customers toward digital channels.

“To this end, all of the major banks commented on strong competition for customers in the digital space, with some banks commenting on the fact that a greater and increasing proportion of customers are now actively using digital channels as their primary banking preference,” PwC said.

It said that the banks are are right-sizing their physical infrastructure and reducing branch floor space. “At the same time, we continue to see efforts directed to rewards programmes, customer relationships and data analytics across segments to cross-sell financial services products to deliver more integrated financial solutions.”

By way of an example, Standard Bank noted the following in its results presentation on Thursday:

“As our journey to digitise the group and deliver an always-on experience to customers continues to progress, PBB (personal & business banking) SA’s staff complement declined by 1%, while the total square meterage of the branch network declined by a further 3% to 375,000 square metres.

“This footprint has been reduced by more than 15% since 2010, without a material change in the numberof branches. PBB SA now has almost 2.2 million unique customers actively using digital channels as their preference, with more of these choosing to use our mobile banking offering than internet banking.

“Mobile banking transactions processed were 32% higher than in 2016. By contrast, teller and enquiry volumes in branches declined by 14% and 13% respectively.”

PwC said that 2018 has started with a revived sense of optimism and a faith that improving levels of business and consumer confidence can translate into meaningful economic gains – albeit off a low base.

“Throughout 2018, we can expect to see continued focus on cost management and ongoing investment in infrastructure, people and IT systems.

“We expect the banks will make greater use of ‘bots’ and artificial intelligence to make their operations more efficient and discover insights that can improve the end-to-end customer experience. Additionally, we expect to see our banks continuing to invest in cyber programmes in response to sophisticated threats and bolster their resilience.”

Financial results

Although there were differences in the performances of the individual banks, on a combined basis the four major banks posted headline earnings of R76.1 billion at 31 December 2017, up 5.2% on an annualised basis and 11.6% from the first half of 2017, showing an improved trajectory over the last six months, PwC said.

A notable contributor to the earnings trend for the year has been the impact of an 8.1% decline in the combined bad debts charge, largely due to lower portfolio impairments and the workout of legacy non-performing loans in CIB portfolios for some banks, the advisory firm said.

Banks have commented that the decline in impairments is counter-intuitive given the political and economic context and therefore continue to maintain judgmental macro-economic provisions, PwC said.

“Holding for the effect of the bad debts experience in the current period and its positive impact on headline earnings, our analysis shows that pre-provision earnings improved by a more moderate 3.6% on an annualised basis, which reflects the difficulty in revenue generation for the year.”

A resilient performance of the major banks’ franchises in the rest of Africa continues to diversify earnings geographically and supports their overall group results. “However, this was offset in some countries by the effect of a stronger rand relative to local currencies and country-specific performances that varied from bank to bank,” PwC said.

Net interest income remains a key driver of earnings growth, and grew by 3.8% on an annualised basis. This growth is borne out in the combined net interest margin, which widened by 26 basis points from 4.42% at the first half of 2017 to 4.68% at 31 December 2017.

Costa Natsas, banking and capital markets industry leader for PwC Africa said: “This is a credible performance given challenging market conditions over the period and particularly in view of the elevated levels of term funding, liquidity costs, and competitive funding pressures seen during 2017.”

Given heightened political and economic uncertainty, low GDP growth and subdued household and business confidence in SA, the major banks’ aggregate credit growth was again muted for the period, growing 1.7% against the first half of 2017, and a modest 2.3% against 31 December 2016, Natsas said.

Banks are striking the balance between executing on their strategic priorities – which include ongoing investments in systems, risk solutions and data related spend, alongside their overall drive to succeed in the ‘digital race’ – and managing overall costs, PwC said.

Read: Nedbank profit climbs, lifts dividend

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Here’s what you can expect from your bank in 2018