SA bank earnings unsustainable: BCG

The latest Boston Consulting Group (BCG) retail banking index (RBI) shows that South Africa’s banks have continued to boost revenues at rates higher than the country’s GDP – a position which is not sustainable, the group says.

BCG’s Retail Banking Index (RBI) is an analytical tool tracking the performance of South Africa’s main retail banks.

It is based on the financial results reported by the six leading retail banks in South Africa, includes the “Big Four” – Absa Bank, Standard Bank, First National Bank and Nedbank – as well as African Bank and Capitec.

2013’s RBI shows that it has been the second consecutive year in which SA bank revenues have grown faster than GDP – “a situation that is not sustainable as experiences in other emerging and maturing markets show,” the group said.

South African banks increased revenues by 14% in 2013, according to the group, ahead of nominal GDP growth of 6% – or real GDP growth of 1.9% (Stats SA).

“While all of the major players in the South African retail banking market have announced and introduced measures to slow down growth and de-risk portfolios in unsecured lending – more innovative approaches to drive revenue growth as well as strict measures in cost and risk management will be required should the muted economic environment persist.”

According to the group, South African banks saw growth in both net-interest income (17% growth) and non-interest income (10%).

41% of 2013’s total income was generated from non-interest income, while net-interest income’s growth was driven by both volume growth and increasing margins due to higher share of unsecured lending and the declining share of home loans in banks’ books.

High cost of technology

The group noted in a presentation that banking operating expenses grew by 14% in 2013, remaining high on the back of inflation, wage drift and technological investments.

In order to sustain growth, however, the consultation group said banks need to adapt to a changing banking environment – particularly in terms of technological innovations.

“In addition to regulatory challenges, the increasing proliferation of technology must be carefully considered in a retail banking context. This is to ensure steady growth and maintenance of market share,” the group said.

New technology and digitalisation provides a new platform to enhance the customer experience, the group said, while customer behaviour and demand is being moulded by new digital experiences which are placing pressure on businesses to adapt.

“Market disruptions are likely to occur when new business models shape the customer experience through new technology. Retail banks must be aware of these potential threats and ensure they are in a position to adapt.”

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SA bank earnings unsustainable: BCG