SUNDAY TIMES - SA banks manage to raise earnings despite poor economic growth
Sunday Times Business By DINEO TSAMELA, 2017-03-12 00:00:00.0

SA banks manage to raise earnings despite poor economic growth

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Low GDP growth last year did not stop South African banks from growing headline earnings by 6.6% in the 2016 financial year.

Total revenue growth across the banks was 9% compared to 2015's 8.8%.

The impact of the drought, which affected economic activity across all sectors, and low credit and investment growth meant the banks were under immense pressure in 2016.

"Under these circumstances, these results were not bad, but if anything they demonstrate how resilient the banks were in the face of a very difficult operating environment," said Andy Bates, financial services Africa leader at EY.

It was the weakest headline earnings growth for South African banks since 2009, following the global financial crisis, which caused headline earnings to drop by 21%. In 2015, banks enjoyed a high of 16.5% in headline earnings growth.

Africa's largest economies - those of Nigeria, Angola and South Africa - are all facing headwinds of a different kind. "What was interesting about 2016 was that for the first time in a decade or longer, you actually saw that Africa's profits didn't contribute to any significant growth ," said Graham Thompson, Africa knowledge leader at EY. "That's been one very different result."

Exposure to Kenya and Nigeria resulted in a significant drop in lending by South African banks outside South Africa. Thompson said economic conditions and regulatory changes in these markets had a fundamental impact on credit growth. "You had your big rest-of-Africa markets taking strain and therefore not contributing meaningfully to profits in 2016," he said.

This sentiment was echoed by Arqaam Capital, which expects earnings per share to be affected by new legislation in countries such as Kenya.

Nigeria's currency valuation woes are also likely to affect Standard Bank and Nedbank through Ecobank, which would weigh heavily on returns, said the Arqaam report.

Back home, banks exercised more caution in extending finance, particularly on the retail banking side. Impairment ratios remained flat, a result of bank prudence, consumer caution about taking on more debt, and the cost of credit - which was reflected in the 2% decline in credit card earnings across the big four banks. While bad debt did not worsen, impairment costs rose by 12.1%.

"I think banks became a lot more careful about how they were lending," said Bates. "Demand for lending was probably lower considering the state of the economy." Impairments on personal loans remained high at 6.1%, with card impairments at 4.5%.

Banks' mortgage books had the lowest credit impairment figures at 0.31%. This was a clear indicator that consumers were taking care of their secured lending obligations.

Impairments from African regional operations came in at 2.6%.

Arqaam said that while household indebtedness might improve, banks were unlikely to ease up on "lending standards until real GDP improves".

Corporate investment banking, on the other hand, had better returns, a sign that investment by companies is slowly picking up. Business banking was up 11.7% from the previous reporting period.

Overall costs were still quite high, and are expected to continue at these levels. IT spend across the big four lenders was up 18.2%, with Barclays Africa, FirstRand and Nedbank up 17%, 16% and 13% respectively. Standard Bank kept costs at 2%.

Bates and Arqaam expect Twin Peaks - the new regulatory framework for the financial services sector - and other regulatory pressure to add to the cost burden, but also to reassure consumers that operations are watched closely, especially given the Competition Commission's investigation into currency collusion by banks.

Analysts also said that although some risks from 2016 were still in the picture - for instance, a credit downgrade still looms - consumer confidence could pick up in 2017 as the Reserve Bank is expected to cut interest rates and inflation is expected to hit the 4% mark by the end of the year, from 6.5% now.

Thompson, who predicted that the Reserve Bank was likely to start a cycle of lowering interest rates, said: "They're holding pretty firm at the moment, just ready to see whether the rand will hold its value at the current level because the volatility of the currency plays a big role in determining that."

While lowering interest rates would benefit consumers, Bates said it would be undesirable for banks. "You still have a backdrop where interest rates have been stable for nine or 12 months, which doesn't really help the banks. Interest rates going up helps the banks' margins."