5 big new banks you can expect to see in South Africa this year

While South Africa’s biggest banks faced a difficult 2017 thanks to a flat economy, increasing competition will present fresh challenges in 2018 with the need for greater spending to build digital platforms likely to be a top priority as five new banks prepare to enter the market.

This is according to the latest EY Banking Results Analysis released on Tuesday, which details the overall performance of the country’s top six banks in the past year.

The report shows that the six largest lenders experienced their weakest credit and headline earnings growth in 10 years in 2017, a year characterised by low GDP growth, weak retail and consumer confidence, low return on equity and other challenges which plagued the wider economy.

Headline earnings across all six banks grew by 5.7% in 2017, down from 6.6% the year prior. Such low growth rates were last seen in 2009, at the peak of the global economic crisis, the group said.

“Based on the data available for a 12 month period and in line with respective financial year-end results, EY found that most of the key industry metrics grew in low single digit territory, as a result of weak credit demand and low consumer and business sentiment,” EY said.

“Although growth recovered strongly in the 2nd half of 2017, the weak first half of the year had a strong and visible effect on the banking sector’s overall results.”

Despite this, the banks have remained profitable and well capitalised, demonstrating the robustness of the banking sector, it said.

Fortunately, growth prospects for 2018 look much healthier thanks to a shift in sentiment, and positive moves from government to spur economic growth.

“From a growth perspective, the stronger confidence will spur growth and lending is likely to increase, although it will not reach double digit territory just yet,” EY said.

Competition is coming

But it won’t be all smooth sailing, EY warned.

One of the biggest things the local banks will need to look out for in 2018 is the introduction of five new banking options entering into the South African market – three entirely new, while two established brands are relaunching.

The new entrants include two digital-only banks – TYME Digital and Michael Jordaan’s BankZero – as well as a full service bank in the form of Discovery Bank. Postbank and African Bank, meanwhile, will relaunch with retail banking services.

Bank Zero has been granted a provisional licence by the South African Reserve Bank and is set to launch in the fourth quarter of 2018.

TymeDigital by Commonwealth Bank SA,said it hopes to be operational by the second quarter, while Discovery has begun live-testing its banking capabilities, testing “system infrastructure, operating processes and regulatory engagement”.

The insurer will launch its proposed banking offering to the public during 2018, it said.

These banks will be able to offer a fresh take on banking, EY said, without the cumbersome and costly legacy systems carried by the established banks – which will be a pressure point in the next 12 to 24 months.

Because of this, EY said the big six covered in its report will need to keep developing their digital platforms, and work on their efficiency ratios, as consumers move to a more digital-first approach to banking.

“The shift to digital channels is competitive and growing fast, and requires major investment costs. It is a critical component of any bank’s strategy and provides opportunities both from an operational enhancement perspective as well as improving the customer experience,” EY said.

In its analysis of efficiency at the big banks, the advisory group noted that IT and associated amortisation charges are accounting for a rising share of costs, while shrinking physical networks are reducing headcount and staff costs.

However, there is a greater need to launch and refine digital platforms which is driving spend, while the need for IT investment and rising regulatory compliance “will not disappear any time soon”.

To stay ahead of the game, and to efficiently take on any new disrupters (of which fintech is noted to be a big risk as well as an opportunity) the big banks should be prepared to pay upfront expenses, which will be necessary in the battle ahead.

Read: All the South African banks that have failed in the last 30 years