- Growth in the South African banking operations remain thttp://epid whilst earnings from African operations grew strongly
- Impairment charges and impairment ratios continued the downward trend
- The corporate sector in South Africa remains subdued
- ROE across the industry remains robust
Although GDP growth in 2018 remained weak (at 0.8% for the second year consecutively), South Africa’s banks reported double-digit profits growth, and the highest returns (ROE’s) since the global financial crisis. This is according to EY’s banking sector analysis Sustainable growth? Accelerated growth?, an analysis of South Africa’s banking sector financials, released today.
The analysis of South Africa’s six largest listed banks, based on their latest available 12-month reporting period, found that most key industry metrics held up relatively well, despite continued low consumer and business sentiment. In addition, and despite sustained weak growth, advances were somewhat stronger in 2018.
Ernest van Rooyen, Financial Services Africa Partner at EY says: “Headline earnings growth achieved double digits in 2018, the first time in a while. This was attributable to a number of factors, notably continued falling impairment charges, coupled with a recovery in rest-of-Africa operations. As a result of this stronger profits growth, returns (as measured by Return on Equity (“ROE”) reached levels last seen prior to the global financial crisis, reaching 20.5%.”
He adds, “South African banks operated in a difficult environment, including a subdued South African economy which dampened revenue growth, increased competition from new entrants into the market, and above inflation cost growth. The banks achieved a robust Return on Equity despite the challenging operating environment.”
The report also finds that cost management remains critical for the banking sector. 2018 saw operating costs increasing faster than revenue, causing the ‘operating jaws’ to turn negative, and the efficiency ratio to rise again. Staffing and IT costs are particularly challenging, while property costs are falling over the medium term.
Van Rooyen notes that banks have little option when it comes to technology costs. “There is a strong likelihood that banks will continue facing pressures going forward, given the need to build appropriate IT platforms, both for growth and regulatory needs. On the one hand, banks are increasingly required to compete in the digital age, and investment in suitable infrastructure is critical to achieving that. In addition, regulators have growing demands from a reporting and compliance perspective. That also requires significant costs to ensure those needs are met.”
Van Rooyen also points out that the diversification strategies implemented by the banks have supported earnings during the past 12 months. This was especially the case for banks with extensive African operations. He says, “Growth across most of sub-Saharan Africa exceeded that of South Africa quite visibly. Even Nigeria, which was under strain after oil prices started falling five years ago, has recovered healthily, and this has supported bank earnings. In East Africa, sustained strong growth in excess of 5% per annum has seen continued healthy earnings in that region.”
Taking a segmental view of the banks performance, Corporate and Investment bank earnings struggled during the year under review. Van Rooyen points out that this is a reflection of the low investment appetite that the country has experienced for a while now.
“With the upcoming election, the corporate sector remains in a ‘wait-and-see’ mode, which is keeping demand for banking products flat.” In the Retail & Business banking segment, there was a mixed performance, with the Mortgage and Card product lines performing well, whilst Instalment Finance earnings were down overall. Van Rooyen comments that “Car sales struggled during the year, and that fed directly through to demand for vehicle finance. The stronger Mortgage earnings reflect the industry’s long term focus on pricing and credit risk.”
He adds, “What is really interesting is that in the transactional banking space, earnings were only marginally up (2%). This illustrates real underlying economic activity, and difficulty in pushing through price increases to consumers.”
The report concludes with an outlook on critical drivers for the sector. A combination of new competitive forces and geopolitical influences will directly impact the future of the banking sector. In the medium term, banks are gearing up for the digital era. They will do so in an environment which becomes increasingly fluid, and which requires agility and flexibility to compete effectively.
For more information, please contact the EY Africa Media Relations Team:
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