SA’s major banks grew their earnings substantially in the past financial year, despite subdued economic growth, higher interest rates, drought and a volatile exchange rate.
|||Johannesburg - South Africa’s major banks grew their earnings substantially in the past financial year, despite subdued economic growth, higher interest rates, drought and a volatile exchange rate.
Professional services group PwC said yesterday that its analysis of the country’s major banks – Barclays Africa Group, First Rand, Nedbank and Standard Bank – showed a combined increase in headline earnings to 12.5 percent in the financial year end to December 2015 compared with December 2014.
The group said the bank’s net income grew 8.4 percent during the period.
PwC Africa banking and capital markets leader, Johannes Grosskopf, said the banks’ average 17.9 percent return on equity was high “in global terms”. Grosskopf said compared with the first six months of 2015, the banks saw a 4.8 percent increase in gross loans and advances.
“This is a credit to the strength of the major banks’ franchises and the resilience and diversity within their income streams to withstand economic headwinds while delivering growth at the group level,” Grosskopf said.
According to the PwC analysis, headline earnings from the rest of Africa contributed 27.9 percent to Standard Bank’s headline earnings in 2015, while 16.2 percent of Barclays Africa’s headline earnings were from the rest of Africa.
PwC said Barclays Africa’s rest of Africa strategy would be “interesting” given Barclays’ decision to sell down its 62.3 percent in Barclays Africa.
Grosskopf declined to speculate on the fate of Barclays’ African assets. “I cannot speculate on who is going to buy those assets,” he said.
Nitrogen Fund Managers director Rowan Williams said that the banks performed well because of a combination of tighter credit granting criteria, focus on cost containment and growth in transactional revenue.
He said the local banking sector was well regulated and not overly competitive due to the fewer number of larger banks operating in the South African market.
“The banks are conservatively run with strong balance sheets and high capital adequacy ratios. Their loan exposure is also well diversified with limited systematic risk due to balanced exposure to a number of sectors through their loan books. Return on equity is also high, indicative of well run operations,” he said.
“In certain cases, some diversification through foreign operations and foreign earnings has also assisted in earning growth. The overall growth in revenue and earnings has slowed considerably from previous years, which is evidence of the slow economic growth that we are experiencing,” Williams said.
He said the banks had fared favourably compared with their European and emerging markets counterparts. However, he warned that the threat of a sovereign debt downgrade was a key risk facing local banks as this would directly increase the cost of funding to the banks and the cost of capital.
Williams said a downgrade would also raise the perceived risk of South African banks to foreign investors. “This is weighing heavily on banks’ ratings at the moment.”
He added: “The poor outlook for economic growth in the domestic economy is also a risk as this could lead to a greater degree of bad debts and we are in a low point in the cycle in terms of bad debt experience.”
Williams said the rest of Africa still provided local banks with an opportunity to diversify. “They remain well placed to provide their service offerings into a nascent financial sector. In particular, the east African region represents an attractive opportunity as this region is less reliant on commodities.”
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