Here’s what you can expect from your bank this year as new digital banks enter the market

A new report conducted by PwC shows that South Africa’s major banks deliver sustained growth amidst difficult operating environment, while they continued to invest in tech and IT to further digitise their platforms.

Combined headline earnings up 5.1% since 1H18 (up 8.7% on an annualised basis since FY17), combined ROE of 18.9% (18.8% in 1H18), net interest margin of 4.38% (4.36% in 1H18) and cost-to-income ratio of 56.8% (55.1% in 1H18)

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

Domestically, the second half of 2018 saw the South African economy recover some of the weaknesses experienced in the first half, with modest annualised GDP growth of 0.8% recorded for the year off a low base.

Despite modestly increased consumer spending in the second half, household income growth remained subdued, while business and consumer confidence continued to be depressed as a consequence of, among other factors, higher fuel inflation, increased electricity and water tariffs and the effects of a higher VAT rate.

The 25 basis point interest rate cut in March was reversed in November as US fiscal tightening, the foreign exchange rate and oil price outlook threatened the SARB’s inflation target.

From a currency perspective, the ZAR reversed its strong position against major currencies in the first half of 2018, lessening the impact of FX movements upon conversion to local currency results.

Capital expenditure on the part of corporate SA, state-owned enterprises (SOEs) and government slowed over the second half, reflecting continued policy uncertainty over a number of key issues which remain unresolved.

This uncertainty was amplified as a result of significant strategic, operational and financial pressures within some SOEs, which weighed on wholesale credit appetite in key sectors.

While the sovereign credit rating was maintained at investment grade by Moody’s in 2018, the outlook and any ratings activity by the agency remains uncertain and will be closely followed by stakeholders.

Johannes Grosskopf, PwC Africa’s Financial Services Leader, said: “The major banks continued to deliver growth in spite of a challenging environment. They’ve benefitted from their broader African strategies which they have focused on and set in motion in prior periods.

“Another contribution is their ability to leverage enabling technologies and the execution of their digital strategies which now clearly support increased transaction volumes on digital platforms.

“This continued digital and customer-centric focus will make competition with more nimble new entrants into the local banking market especially interesting, with the customer as beneficiary through potentially richer service offerings and more competitive pricing.”

Highlights from the major banks results include:

  • Although there were unique performances between the individual banks, on a combined basis the four major banks posted full-year headline earnings of R82.75 billion, which grew 8.7% year on year (against FY17) and 5.1% against 1H18.
  • Transactional volume growth supported by a sharp focus on digital strategies and richer mobile capabilities led to non-interest revenue growth of 4.6% against 1H18 (6.3% against FY17).
  • From a capital adequacy perspective, the major banks remain robustly capitalised, comfortably above regulatory minima across all capital tiers, while generating commendable returns. Combined ROE grew 10bps to 18.9% against 1H18 (18.6% at FY17).
  • The aggregate loan book registered growth of 5.1% against 1H18 (and 13.4% against FY17).
  • A relentless focus on credit quality is another theme that continued in the current period, with the major banks reporting a resilient combined credit loss ratio of 0.65% and a total impairment coverage ratio of 73.5% (compared to 0.72% and 65.8% respectively at 1H18).
  • Cost management and a focus on optimisation initiatives remained top of the agenda of almost all bank management teams as they balanced investment with growth in 2018. In spite of this, the current period continued the theme of “negative jaws” (as total costs grew faster than operating income). At 2H18, the combined cost-to-income ratio was 56.8% (compared to 55.1% and 55.7% at 1H18 and FY17 respectively).
  • Staff costs comprise the majority of overall group costs, reflecting both the inflationary environment that persisted in 2018 as well as the demand for critical talent in response to increasing specialisation in the areas of risk, compliance and IT.

“We continue to see increases in IT costs as the banks invest in their applications and systems infrastructure towards further digitising their platforms,” the report’s authors said.

The deep and rapid impact that technological progress is set to have on the global banking industry cannot be understated. Globally and domestically, banks are becoming more strategically focused and technologically advanced to respond to customer expectations while deploying defensive strategies to protect market share against traditional competitors and new entrants.

As such, the importance of product and channel innovation and developing new solutions that take advantage of this progress – in data, advanced analytics, digital and new delivery platforms – has never been more important.

Key trends  PwC said it expects to see the major banks continue to focus on in 2019 include:

  • Highly customised experiences for more granular sub-sets of customers based on common characteristics that leverage data-driven insights (for example common spend characteristics).
  • A greater number of global regulators are embracing efforts towards “Open Banking” – which implies the ability to securely share data with third parties based on customer consent – through democratising account and payment data through secure application programming interfaces (APIs).

As this happens, customers stand to have greater freedom and control in how they interact with their financial service providers, leading to even greater innovation from non- traditional players and increased personalisation, PwC said. “This is arguably one of the most compelling prospects on the horizon as banks seek to leverage their skills, resources and trusted social status to strategically respond to this new competitive environment.”

As The Banker described in an opinion earlier this year, “With the arrival of open banking and the challenge of fintechs, banks need to up their game. Welcome to the idea of the self-driving bank account that uses artificial intelligence (AI) to predict when and in what format a customer will need funds; that takes care of routine financial transactions; that finds interest-earning opportunities for cash balances left idle for even the shortest time; and that adjusts loan rates to changing circumstances.

“In some scenarios, the self-driving account starts listening and talking, advising on investment opportunities, the cheapest airline seats, the best supermarket deals and so on.”

  • These changes are not limited in their impact to retail banking. For corporate clients, it might be using bank data to provide proactive insights to support strategic planning, or cash flow analysis that feeds into working capital and broader treasury management solutions.
  • Beyond cost discipline, we expect to see relentless focus on optimising operational efficiencies within banks, as they continue to rationalise their IT architectures, standardise and simplify core banking operations and reduce operational complexity. Advancements in robotic process automation will have an increasing role to play on the process optimisation imperative.
  • Meanwhile, a strong focus on further strengthening cyber risk monitoring and mitigation capabilities are likely to persist in 2019, as banks face a growing volume and sophistication of cyber threats against their systems and data.

“Ultimately, leading banks will be those who harness technological and digital change to better anticipate and manage emerging risks within a rapidly evolving risk landscape,” the report said.

Competitive landscape

According to the report, 2019, in South African banking, may be heralded as the ‘year of the customer’: a year in which the industry anticipates the launch of three retail banking operations – TymeDigital, Discovery Bank and Bank Zero – following the granting of new banking licenses (a mutual banking licence in the case of Bank Zero) after more than a decade.

At the same time, other major players including African Bank, SASFIN and Bidvest Bank have also recently highlighted their intent to focus on broader retail transactional banking offerings.

In the business and corporate banking sectors, Capitec closed out 2018 with its deal to acquire a majority stake in Mercantile Bank, while Investec outlined ambitions to reinvigorate its corporate banking offering. “Across the retail and wholesale banking sectors, the customer is poised to benefit from greater choice and increased competition in the domestic banking market,” PwC said.

“The South African customer, both banked and unbanked, across the LSM scale, and clients spanning households, small businesses and corporates, are expected to be targeted through the business model and strategic choices which these new entrants intend to focus on.

“While the unique customer segments they target – at least initially – will be varied, the common characteristic that they all share is a distinct and laser-sharp focus on being truly ‘digital’ in their product and channel innovation strategies.”

This change in landscape will hopefully provide customers with easier access to digital banking, greater choice in choosing preferred providers and ultimately greater value – which could take the form of greater and different types of rewards, more competitive pricing and holistic financial services offerings, the report said.

Read: New banks will drive down the cost of banking for everyone in South Africa: PwC

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Here’s what you can expect from your bank this year as new digital banks enter the market