A warning to South Africa’s big four banks – competition is coming

 ·10 Sep 2018

Auditing firm PwC has released its latest analysis of South Africa’s ‘big four’ banks, showing that, despite the tough economy that has put consumers under considerable pressure, their financials are looking quite healthy.

The report is based on the analysis of the financial results of the country’s biggest banks – Absa, Standard Bank, Nedbank and FNB – to the end of June 2018. The analysis identifies common trends and issues currently shaping the banking industry, building on previous PwC analyses over the last nine years.

According to PwC’s analysis, combined headline earnings from the four banks was up 0.5% since 2H17 (12.1% since 1H17), they had a combined ROE of 18.8% (18.6% in 2H17 and 17.9% in 1H17), a net interest margin of 4.36% in 1H18 (4.63% in 2H17 and 4.56% in 1H17) and cost-to-income ratio of 55.1% (55.7% in 2H17 and 55.5% in 1H17).

“SA’s major banks delivered a resilient set of financial results for the reporting period ended 30 June 2018, despite various operating and economic headwinds that characterised the period,” PwC said.

Despite the solid set of results, the banks were definitely impacted by movements within the industry as well as the wider economy, the group said.

A more competitive environment between the banks and the continued transition of customers to digital channels became increasingly visible on the combined major banks’ results, in the form of lower transactional fees and commissions in retail banking, competitive pressures in deposit pricing and depressed margins in the trading businesses, it said.

“At the same time, interest rate margins have been impacted by economic and regulatory factors leading to, on average, higher liquidity and funding related costs during the period. On a relative basis, the rand was stronger in the first six months of 2018, which partially offset the strong performance of many of the banks’ operations outside South Africa.”

Consumers under pressure

According to PwC, the banks’ results also show consumers under pressure, with a notable rise in level of debt counselling, as well as corporate credit demand outpacing retail generally continuing in the period.

Various domestic factors – including the increased VAT rate and higher fuel costs – negatively impacted discretionary spending during the period for both South African businesses and consumers, and this also manifested in relatively subdued overall loan growth for the period.

Stats SA reported in July that consumer price inflation increased from 4.4% year-on-year in May to 4.6% in June – attributed primarily with faster increases in the cost of transport. The latest inflation number is the highest reading since November 2017, but is in line with the median forecast of local economists.

The most recent SA GDP numbers released earlier this week confirms these pressures.

“Retail banks noted continuing increases in levels of debt counselling clients and impairments were increased due in part to the impact of time delays experienced when repossessing secured assets due to customers delaying repossession on legal grounds,” PwC said.

The banks managed to counteract some of the local gloom through successes in their ‘outside Africa’ operations, the group said.

Incoming competition

PwC noted that, while the big four are currently enjoying relative exclusivity in the retail space, competition is coming.

Notably, Discovery Bank announced that it will acquire FirstRand’s effective and economic interest in the Discovery Card loan book and has indicated it is expected to publically launch the bank in the fourth quarter of 2018.

In addition, indications are that TymeDigital, Bank Zero and the SA Post Bank are drawing closer to their public launches, having recently obtained banking license approvals, while African Bank also announced its intentions to move further into the transactional banking space.

At the same time, in recent weeks there has been growing interest in the banking market from non-bank financial services players, such as Old Mutual highlighting the growth it has achieved in the transactional accounts space and commented that there are opportunities to compete in the transactional banking market.

However, PwC said that the big four weren’t sitting idly either, noting that local banks may follow the global trend of “open banking” – which is the opening of internal bank data and processes to external parties via digital channels through regulatory initiatives.

“Although it is relatively early days, we have seen in these territories that the benefits of open banking to banks appear to be more data, better decisions, greater access and better services for their customers, while at the same time potentially increasing the competitive environment,” the group said.

The rise of digital

The big four banks have also put a stronger focus on their digital channels – something that PwC expects will continue as the technologies develop and expand.

“Strategically, the major banks continue to comment on many of the themes we have noted previously – including digitising and integrating legacy processes through robotic process automation efforts, and channel and product innovation to deliver richer customer experiences,” the group said.

“It is evident from the results of the major banks that they have continued to spend considerable time and cost on their digital strategies, refining and simplifying products and enhancing their loyalty programmes to continue to reward clients – all in a focused effort to attract a greater share of customer wallet.”

PwC said it maintains its view that the major banks will seek to continue to further integrate the use of ‘bots’, analytics and artificial intelligence to make their operations leaner and discover deeper insights that can improve the end-to-end customer experience.

Read: Discovery inches closer to bank opening

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